-----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, Dz6EiJ63Iol3t1N0CwrketCEdl91ZIaKZBsXrT4nBv7BU10hJjSkxNmj9zG7kOln KaZfUwQfklejGO/J3JPJEw== 0000912057-96-008759.txt : 19960510 0000912057-96-008759.hdr.sgml : 19960510 ACCESSION NUMBER: 0000912057-96-008759 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 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: 96558750 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 March 31, 1996 Commission file number 1-6214 ----------------------- WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 415-477-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding April 30, 1996 ------------------ Common stock, $5 par value 95,901,593 FORM 10-Q TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements 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 ................................................ 7 Overview .............................................................. 8 Merger with First Interstate Bancorp .................................. 9 Line of Business Results .............................................. 12 Earnings Performance .................................................. 15 Net Interest Income .............................................. 15 Noninterest Income ............................................... 17 Noninterest Expense .............................................. 19 Income Taxes ..................................................... 20 Balance Sheet Analysis ................................................ 21 Investment Securities ............................................ 21 Loan Portfolio ................................................... 24 Commercial real estate ...................................... 24 Nonaccrual and Restructured Loans and Other Assets ............... 25 Changes in total nonaccrual loans ........................... 26 Changes in nonaccrual loans by loan category ................ 26 Changes in foreclosed assets ................................ 29 Loans 90 days past due and still accruing ................... 29 Allowance for Loan Losses ........................................ 30 Other Assets ..................................................... 32 Deposits ......................................................... 33 Capital Adequacy/Ratios .......................................... 33 Asset/Liability Management ....................................... 35 Derivative Financial Instruments ................................. 36 Liquidity Management ............................................. 37 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders .............. 38 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 1995 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- ----------------------------------------------------------------- - ----------------------------------------------------------------- Quarter ended March 31, --------------- (in millions) 1996 1995 - ----------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 2 $ 1 Investment securities 128 165 Loans 875 858 Other 1 1 ------ ------ Total interest income 1,006 1,025 ------ ------ INTEREST EXPENSE Deposits 241 242 Federal funds purchased and securities sold under repurchase agreements 36 56 Commercial paper and other short-term borrowings 5 10 Senior and subordinated debt 48 52 ------ ------ Total interest expense 330 360 ------ ------ NET INTEREST INCOME 676 665 Provision for loan losses -- -- ------ ------ Net interest income after provision for loan losses 676 665 ------ ------ NONINTEREST INCOME Service charges on deposit accounts 122 118 Fees and commissions 118 101 Trust and investment services income 59 55 Investment securities gains (losses) -- (15) Other 55 (17) ------ ------ Total noninterest income 354 242 ------ ------ NONINTEREST EXPENSE Salaries 181 172 Incentive compensation 32 27 Employee benefits 54 53 Equipment 55 47 Net occupancy 53 53 Federal deposit insurance 1 24 Other 191 161 ------ ------ Total noninterest expense 567 537 ------ ------ INCOME BEFORE INCOME TAX EXPENSE 463 370 Income tax expense 199 137 ------ ------ NET INCOME $ 264 $ 233 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 254 $ 223 ------ ------ ------ ------ PER COMMON SHARE Net income $ 5.39 $ 4.41 ------ ------ ------ ------ Dividends declared $ 1.30 $ 1.15 ------ ------ ------ ------ Average common shares outstanding 47.0 50.5 ------ ------ ------ ------ - ----------------------------------------------------------------- - -----------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1996 1995 1995 - --------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,721 $ 3,375 $ 2,708 Federal funds sold and securities purchased under resale agreements 49 177 39 Investment securities: At fair value 8,435 8,920 2,403 At cost (estimated fair value $7,928) -- -- 8,173 ------- ------- -------- Total investment securities 8,435 8,920 10,576 Mortgage loans held for sale -- -- 3,940 Loans 35,167 35,582 32,737 Allowance for loan losses 1,681 1,794 2,017 ------- ------- -------- Net loans 33,486 33,788 30,720 ------- ------- -------- Due from customers on acceptances 79 98 74 Accrued interest receivable 316 308 316 Premises and equipment, net 859 862 892 Goodwill 373 382 408 Other assets 2,660 2,406 2,651 ------- ------- -------- Total assets $48,978 $50,316 $52,324 ------- ------- -------- ------- ------- -------- LIABILITIES Noninterest-bearing deposits $ 9,740 $10,391 $ 9,431 Interest-bearing deposits 28,066 28,591 29,566 ------- ------- -------- Total deposits 37,806 38,982 38,997 Federal funds purchased and securities sold under repurchase agreements 2,243 2,781 4,770 Commercial paper and other short-term borrowings 225 195 526 Acceptances outstanding 79 98 74 Accrued interest payable 110 85 105 Other liabilities 1,166 1,071 1,074 Senior debt 1,881 1,783 1,454 Subordinated debt 1,266 1,266 1,484 ------- ------- -------- Total liabilities 44,776 46,261 48,484 ------- ------- -------- STOCKHOLDERS' EQUITY Preferred stock 489 489 489 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 46,999,455 shares, 46,973,319 shares and 49,579,908 shares 235 235 248 Additional paid-in capital 1,136 1,135 590 Retained earnings 2,366 2,174 2,572 Cumulative foreign currency translation adjustments (4) (4) (4) Investment securities valuation allowance (20) 26 (55) ------- ------- -------- Total stockholders' equity 4,202 4,055 3,840 ------- ------- -------- Total liabilities and stockholders' equity $48,978 $50,316 $52,324 ------- ------- -------- ------- ------- -------- - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Quarter ended March 31, (in millions) 1996 1995 - --------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning and end of quarter $ 489 $ 489 ------ ------ COMMON STOCK Balance, beginning of quarter 235 256 Common stock issued under employee benefit and dividend reinvestment plans -- 3 Common stock repurchased -- (11) ------ ------ Balance, end of quarter 235 248 ------ ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of quarter 1,135 871 Common stock issued under employee benefit and dividend reinvestment plans 7 34 Common stock repurchased (6) (315) ------ ------ Balance, end of quarter 1,136 590 ------ ------ RETAINED EARNINGS Balance, beginning of quarter 2,174 2,409 Net income 264 233 Preferred stock dividends (10) (10) Common stock dividends (62) (60) ------ ------ Balance, end of quarter 2,366 2,572 ------ ------ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning and end of quarter (4) (4) ------ ------ INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of quarter 26 (110) Change in unrealized net gain (loss), after applicable taxes (46) 55 ------ ------ Balance, end of quarter (20) (55) ------ ------ Total stockholders' equity $4,202 $3,840 ------ ------ ------ ------ - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Quarter ended March 31, (in millions) 1996 1995 - --------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 264 $ 233 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- -- Depreciation and amortization 71 63 Deferred income tax benefit -- (44) Increase in net deferred loan fees 1 -- Net (increase) decrease in accrued interest receivable (8) 12 Write-down of mortgage loans held for sale -- 83 Net increase in accrued interest payable 25 45 Other, net 75 23 ------- ------- Net cash provided by operating activities 428 415 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At cost: Proceeds from prepayments and maturities -- 470 Purchases -- (24) At fair value: Proceeds from sales -- 670 Proceeds from prepayments and maturities 419 52 Purchases (14) (57) Net (increase) decrease in loans resulting from originations and collections 258 (589) Proceeds from sales (including participations) of loans 51 191 Purchases (including participations) of loans (37) (109) Proceeds from sales of foreclosed assets 21 43 Net decrease in federal funds sold and securities purchased under resale agreements 128 221 Other, net (245) (71) ------- ------- Net cash provided by investing activities 581 797 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (1,176) (3,335) Net increase (decrease) in short-term borrowings (508) 2,085 Proceeds from issuance of senior debt 100 500 Repayment of senior debt -- (440) Proceeds from issuance of common stock 7 37 Repurchase of common stock (6) (326) Payment of cash dividends on preferred stock (10) (20) Payment of cash dividends on common stock (62) (60) Other, net (8) 81 ------- ------- Net cash used by financing activities (1,663) (1,478) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (654) (266) Cash and cash equivalents at beginning of quarter 3,375 2,974 ------- ------- CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 2,721 $ 2,708 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the quarter for: Interest $ 305 $ 315 ------- ------- ------- ------- Income taxes $ 75 $ 49 ------- ------- ------- ------- Noncash investing activities: Transfers from loans to foreclosed assets $ 35 $ 42 ------- ------- ------- ------- Transfer from loans to mortgage loans held for sale $ -- $ 4,023 ------- ------- ------- ------- - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
5 [THIS PAGE INTENTIONALLY LEFT BLANK] FINANCIAL REVIEW SUMMARY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ % Change Quarter ended March 31, 1996 from ------------------------------------- ------------------- MARCH 31, Dec. 31, March 31, Dec. 31, March 31, (in millions) 1996 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------------------ FOR THE QUARTER Net income $ 264 $ 306 $ 233 (14)% 13% Per common share Net income $ 5.39 $ 6.29 $ 4.41 (14) 22 Dividends declared 1.30 1.15 1.15 13 13 Average common shares outstanding 47.0 47.0 50.5 -- (7) Profitability ratios (annualized) Net income to average total assets (ROA) 2.16% 2.47% 1.80% (13) 20 Net income applicable to common stock to average common stockholders' equity (ROE) 28.34 34.98 26.89 (19) 5 Efficiency ratio (1) 55.1% 51.1% 59.1% 8 (7) Average loans $ 35,025 $ 34,423 $ 36,334 2 (4) Average assets 49,134 49,169 52,390 -- (6) Average core deposits 36,819 36,943 36,699 -- -- Net interest margin 6.18% 6.08% 5.59% 2 11 Average staff (full-time equivalent) 19,120 19,535 19,493 (2) (2) AT QUARTER END Investment securities $ 8,435 $ 8,920 $ 10,576 (5) (20) Loans (2) 35,167 35,582 32,737 (1) 7 Allowance for loan losses 1,681 1,794 2,017 (6) (17) Assets 48,978 50,316 52,324 (3) (6) Core deposits 37,414 37,858 36,975 (1) 1 Common stockholders' equity 3,713 3,566 3,351 4 11 Stockholders' equity 4,202 4,055 3,840 4 9 Tier 1 capital (3) 3,856 3,635 3,437 6 12 Total capital (Tiers 1 and 2) (3) 5,353 5,141 5,034 4 6 Capital ratios Common stockholders' equity to assets 7.58% 7.09% 6.40% 7 18 Stockholders' equity to assets 8.58 8.06 7.34 6 17 Risk-based capital (3) Tier 1 capital 9.40 8.81 8.73 7 8 Total capital 13.04 12.46 12.78 5 2 Leverage (3) 7.91 7.46 6.61 6 20 Book value per common share $ 79.01 $ 75.93 $ 67.59 4 17 COMMON STOCK PRICE High $ 261-1/4 $ 229 $ 160-5/8 14 63 Low 203-1/8 190 143-3/8 7 42 Quarter end 261-1/4 216 156-3/8 21 67 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(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 at March 31, 1995 of $3,940 million. (3) See the Capital Adequacy/Ratios section for additional information. 7 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 first quarter of 1996 was $264 million, compared with $233 million in the first quarter of 1995, an increase of 13%. Per share earnings for the first quarter of 1996 were $5.39 per share, compared with $4.41 per share in the first quarter of 1995, an increase of 22%. First quarter 1996 results were higher than a year ago, reflecting an increase in noninterest income of $112 million, partially offset by an increase in income taxes. Return on average assets (ROA) was 2.16% and return on average common equity (ROE) was 28.34% in the first quarter of 1996, compared with 1.80% and 26.89%, respectively, in the same quarter of 1995. Net interest income on a taxable-equivalent basis was $676 million and $665 million in the first quarter of 1996 and 1995, respectively. The Company's net interest margin for the first quarter of 1996 was 6.18%, compared with 5.59% in the same quarter of 1995. The increase in the margin was substantially attributable to a favorable change in the mix of earning assets, including reduced levels of lower-yielding securities and single family loans, partially offset by increased rates on consumer deposits. Noninterest income in the first quarter of 1996 was $354 million, compared with $242 million in the same quarter of 1995, an increase of 46%. The increase was largely due to an $83 million write-down to lower of cost or estimated market in 1995 for certain product types within the real estate 1-4 family first mortgage portfolio that were reclassified to mortgage loans held for sale. Noninterest expense in the first quarter of 1996 was $567 million, up 6% from $537 million. The increase was primarily due to higher expenses for contract services as well as higher salary levels and equipment expense, largely offset by a reduction in federal deposit insurance expense. During the first quarter of 1996, net charge-offs totaled $113 million, or 1.30% of average loans (annualized). This compared with $78 million, or .90%, during the fourth quarter of 1995 and $65 million, or .72%, during the first quarter of 1995. The allowance for loan losses was 4.78% of total loans at March 31, 1996, compared with 5.04% at December 31, 1995 and 6.16% (excluding mortgage loans held for sale) at March 31, 1995. Total nonaccrual and restructured loans were $537 million at March 31, 1996, compared with $552 million at December 31, 1995 and $581 million at March 31, 1995. Foreclosed assets amounted to $198 million at March 31, 1996, $186 million at December 31, 1995 and $273 million at March 31, 1995. 8 The Company's effective tax rate for the first quarter of 1996 was 43%, compared with 37% for the first quarter of 1995. The increase in the effective tax rate was due to a $22 million reduction of income tax expense in 1995 related to the settlement with the Internal Revenue Service of certain audit issues pertaining to auto leases. Common stockholders' equity to total assets was 7.58% at March 31, 1996, compared with 7.09% and 6.40% at December 31, 1995 and March 31, 1995, respectively. The Company's total risk-based capital ratio at March 31, 1996 was 13.04% and its Tier 1 risk-based capital ratio was 9.40%, 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 December 31, 1995, these risk-based capital ratios were 12.46% and 8.81%, respectively; at March 31, 1995, these ratios were 12.78% and 8.73%, respectively. The Company's leverage ratios were 7.91%, 7.46% and 6.61% at March 31, 1996, December 31, 1995 and March 31, 1995, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline of 5% for banks. MERGER WITH FIRST INTERSTATE BANCORP On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp, creating the eighth largest bank holding company in the United States based on total assets as of March 31, 1996. The purchase price of the transaction was approximately $11 billion based on Wells Fargo's share price on January 19, the last trading day before Wells Fargo and First Interstate agreed on an exchange ratio. First Interstate shareholders received two-thirds of a share of Wells Fargo common stock for each share of common stock owned. The merger is being accounted for as a purchase transaction. Accordingly, the results of operations of First Interstate will be included with that of the Company for periods subsequent to the date of the merger (i.e., the first quarter 1996 financial information included in this Form 10-Q excludes First Interstate). The name of the newly combined company is Wells Fargo & Company. The combined company has assets of approximately $111 billion, loans of $71 billion and deposits of $85 billion. As a condition of the merger, Wells Fargo was required by regulatory agencies to divest 61 First Interstate branches in California. In the first quarter of 1996, the Company entered into a contract with Home Savings of America, principal subsidiary of H.F. Ahmanson & Company, to sell the 61 First Interstate branches with aggregate deposits of about $2.5 billion and loans of about $1.3 billion. The selling price of the divested branches represents a premium of 8.11% on the deposits. The transaction is expected to close during the third quarter of 1996. The impact of the divestitures has not been included in the pro forma financial data presented on the next page. 9 The following pro forma combined financial data shows the pro forma effects of the merger. The pro forma combined summary of income gives effect to the combination as if the merger was consummated on January 1, 1995 and the selected pro forma combined balance sheet data gives effect to the merger as if it was consummated on March 31, 1996. The pro forma amounts in the table below are presented for informational purposes and are not necessarily indicative of the financial position or the results of operations of the combined company for the periods presented. The pro forma amounts are also not necessarily indicative of the future financial position or future results of operations of the combined company. In particular, the Company expects to achieve significant operating cost savings as a result of the merger, which have not been included in the pro forma amounts. PRO FORMA COMBINED FINANCIAL DATA
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Quarter ended March 31, ---------------------- (in millions, except per share data) 1996 1995 - ------------------------------------------------------------------------------- SUMMARY OF INCOME Net interest income $ 1,287 $ 1,295 Provision for loan losses -- -- Noninterest income 659 510 Noninterest expense (1) 1,242 1,213 Net income (1) 394 349 PER COMMON SHARE Net income (1) $ 3.84 $ 3.29 Dividends declared 1.30 1.15 AVERAGE COMMON SHARES OUTSTANDING 98.0 100.5 SELECTED BALANCE SHEET DATA (AT QUARTER END) Investment securities $ 16,088 Loans 70,850 Assets 111,387 Deposits 85,251 Senior and subordinated debt 4,372 Stockholders' equity 15,850 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Noninterest expense for the quarter ended March 31, 1996 excludes $251 million ($245 million after tax) of nonrecurring merger-related expenses recorded by First Interstate. The pro forma combined net income of $394 million consists of first quarter 1996 net income of the Company of $264 million and a net loss of First Interstate of $(23) million, plus pro forma expense adjustments of $153 million. The pro forma combined net income of $349 million consists of first quarter 1995 net income of the Company of $233 million and First Interstate of $212 million, less pro forma expense adjustments of $96 million. The pro forma expense adjustments for both periods include amortization of $66 million relating to a 10 preliminary estimate of approximately $6,600 million excess purchase price over fair value of First Interstate's net assets acquired (goodwill). It is anticipated that the Company will incur merger-related costs of about $700 million related to premises, severance and other costs. To the extent these costs relate to First Interstate's premises, employees and operations, they will affect the final amount of goodwill as of the consummation of the merger. The remaining costs relating to the Company's premises, employees and operations as well as all costs relating to systems conversions and other indirect, integration costs will be expensed, either upon consummation of the merger or as incurred. With respect to timing, it is assumed that the integration would be completed and that such costs would be incurred not later than 18 months after the closing of the merger. No adjustment has been included in the pro forma amounts for these merger-related costs. The foregoing estimate is based on the assumption that the equivalent of approximately 85% (or 350) of First Interstate's California branches will be consolidated (by closing or divesting both First Interstate and Wells Fargo branches) following consummation of the merger. The following discussions included in the Line of Business Results, Earnings Performance and Balance Sheet Analysis sections of this report do not reflect the expected impact of the Company's merger with First Interstate. 11 LINE OF BUSINESS RESULTS (ESTIMATED)
- -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- (income/expense in millions, average balances in billions) - -------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 1996 1995 --------------------- ----------------- ---------------- Retail Business Distribution Banking Investment Group Group Group ------------------------------------------------------------------ Net interest income (1) $ 109 $ 108 $ 96 $ 87 $ 99 $ 119 Provision for loan losses (2) -- -- 11 8 -- -- Noninterest income (3) 163 159 44 32 65 73 Noninterest expense (3) 267 228 72 65 89 112 ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 5 39 57 46 75 80 Income tax expense (benefit) (4) 3 18 25 20 33 35 ----- ----- ----- ----- ----- ----- Net income $ 2 $ 21 $ 32 $ 26 $ 42 $ 45 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Average loans $ -- $ -- $ 3.0 $ 2.1 $ .5 $ .5 Average assets .9 1.2 4.2 3.3 .9 1.0 Average core deposits 9.1 9.7 6.4 6.4 18.3 18.1 Return on equity (5) 3% 43% 34% 34% 39% 42% Risk-adjusted efficiency ratio (6) 102% 89% 69% 71% 67% 69% - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ (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 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) The 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 $50 million and $48 million in the first quarter of 1996 and 1995, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. The line of business results show financial performance of the major business units comparing the first quarter of 1996 with the first quarter of 1995. 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 in the first quarter of 1996 decreased $19 million, or 90%. Noninterest expense increased substantially due to higher expenditures on alternative distribution channels, including supermarket branches and banking centers. A significant portion of the increase was offset by cost savings from branch closures and the reduction of FDIC expense. The Business Banking Group's net income in the first quarter of 1996 increased $6 million, or 23%. Net interest income increased substantially due to higher balances and spreads on commercial loans, of which a major portion was offset by narrower spreads on core deposits. 12
- --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Quarter ended March 31, - --------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 -------------- -------------- -------------- ------------- ------------- Wholesale Real Estate Products Consumer Consolidated Group Group Lending Other Company - --------------------------------------------------------------------------------------------------- $ 67 $ 58 $ 106 $ 99 $ 184 $ 148 $ 15 $ 46 $ 676 $ 665 8 7 10 10 63 50 (92) (75) -- -- 24 7 38 45 58 47 (38) (121) 354 242 22 14 50 46 75 72 (8) -- 567 537 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 61 44 84 88 104 73 77 -- 463 370 26 19 36 37 44 31 32 (23) 199 137 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- $ 35 $ 25 $ 48 $ 51 $ 60 $ 42 $ 45 $ 23 $ 264 $ 233 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- $ 7.0 $ 6.4 $ 8.9 $ 8.7 $11.8 $10.1 $ 3.8 $ 8.5 $35.0 $36.3 7.5 6.8 9.8 9.5 12.2 10.3 13.6 19.7 49.1 52.4 .2 .1 2.5 2.2 .3 .2 -- -- 36.8 36.7 19 % 16 % 27 % 29 % 31 % 25 % -- % -- % 28 % 27 % 68 % 77 % 62 % 60 % 63 % 72 % -- % -- % -- % -- % - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
(4) 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. (5) 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. (6) 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. Noninterest income increased substantially due to the recognition of a gain resulting from the Card Establishment Services (CES) alliance, higher sweep account balances and activity, and increased fees from mass market loan products. Noninterest expense increased largely due to higher expenses associated with increased mass market lending volumes, a significant portion of which was offset by the reduction in FDIC expense. The Investment Group's net income in the first quarter of 1996 decreased $3 million, or 7%. Net interest income decreased due to narrower spreads on core deposits, partially offset by higher deposit balances. The decrease in noninterest income was substantially due to income received in 1995 from the joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) and the MasterWorks division (which were sold in December 1995) and lower fixed annuity sales. A major portion of this decrease was offset by higher management fees on higher assets under management. Noninterest expense decreased mostly from the reduction of FDIC expense and expenses related to WFNIA and MasterWorks. 13 The Real Estate Group's net income in the first quarter of 1996 increased $10 million, or 40%. Net interest income increased primarily due to higher loan balances in the Real Estate Capital Markets Group. Noninterest income increased substantially due to gains on the sale of cost method equity investments. Noninterest expense increased substantially due to lower foreclosed asset gains on sales and the expansion of the Real Estate Capital Markets Group. The Wholesale Products Group's net income in the first quarter of 1996 decreased $3 million, or 6%. Net interest income increased primarily due to recoveries on loans where interest had been previously applied to principal. Noninterest income reflected lower gains from loan sales. The increase in noninterest expense was primarily related to the Wells Fargo HSBC Trade Bank which was established in October 1995. Consumer Lending's net income in the first quarter of 1996 increased $18 million, or 43%. The increase in net interest income was largely due to higher credit card, auto lease and consumer loan balances. Noninterest income increased primarily due to higher credit card fee income. Noninterest expense increased substantially due to the cost of servicing a higher number of open accounts. Consumer Lending has assumed the responsibility for servicing the Company's remaining 1-4 family first mortgage loan portfolio and mortgage loans owned by third parties (previously included in the Mortgage Business Group), contributing net income of $1 million in the first quarter for both years. This organizational change is due to the Company exiting the 1- 4 family first mortgage loan origination business in October 1995, and is reflected in both current and prior periods. The Other category includes the Company's 1-4 family first mortgage portfolio (previously included in the Mortgage Business Group), the investment securities portfolio, the difference between the normalized provision for the line groups and the Company provision for loan losses, 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 in first quarter of 1996 increased $22 million, or 96%. The increase was due to the write-down of first mortgages booked in the first quarter of 1995 and a higher loan loss provision credit. Net interest income decreased predominantly due to lower investment securities and lower first mortgage balances, of which a major portion was offset by lower funding costs and higher hedging income. Tax expense was higher due to the reduction in 1995 tax expense related to the settlement with the Internal Revenue Service of certain audit issues pertaining to auto leases. 14 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $676 million in the first quarter of 1996, compared with $665 million in the first quarter of 1995. The Company's net interest margin was 6.18% for the first quarter of 1996, compared with 5.59% for the first quarter of 1995. The increase in the margin reflected a change in the mix of average earning assets, including reduced levels of lower-yielding securities and single family loans, partially offset by increased rates on consumer deposits. Interest income included hedging income of $10 million in the first quarter of 1996, compared with $1 million in the first quarter of 1995. Interest expense included hedging income of $1 million in the same quarters of 1996 and 1995. Individual components of net interest income and net interest margin are presented in the rate/yield table on page 16. Loans averaged $35.0 billion in the first quarter of 1996, a 4% decrease from $36.3 billion in the first quarter of 1995. The decrease was substantially in real estate 1-4 family first mortgage loans due to the Company's decision at year-end 1994 to cease the origination of first mortgages. A major portion of this decrease was offset by a $1.3 billion increase in commercial loans, primarily due to increased small business loans resulting from ongoing marketing efforts. Investment securities averaged $8.7 billion during the first quarter of 1996, a 22% decrease from $11.1 billion in the first quarter of 1995. The decrease was due to the maturity of investment securities. Cash received from future maturities of investment securities is expected to be used to fund loan growth. Average core deposits were $36.8 billion and $36.7 billion in the first quarters of 1996 and 1995, respectively, and funded 75% and 70% of the Company's average total assets in the same quarters of 1996 and 1995, respectively. 15
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------------------------------------------------------- 1996 1995 ------------------------------------------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - -------------------------------------------------------------------------------------------- EARNING ASSETS (3) Federal funds sold and securities purchased under resale agreements $ 125 5.68% $ 2 $ 48 5.58% $ 1 Investment securities: At fair value (4): U.S. Treasury securities 1,356 5.52 18 385 6.69 6 Securities of U.S. government agencies and corporations 4,991 5.95 75 1,211 5.75 18 Private collateralized mortgage obligations 2,078 6.05 31 1,090 6.35 20 Other securities 225 7.70 4 65 14.56 1 ------- ------ ------- ------ Total investment securities at fair value 8,650 5.95 128 2,751 6.24 45 At cost: U.S. Treasury securities -- -- -- 1,647 4.83 20 Securities of U.S. government agencies and corporations -- -- -- 5,234 6.03 78 Private collateralized mortgage obligations -- -- -- 1,285 5.92 19 Other securities -- -- -- 164 6.67 3 ------- ------ ------- ------ Total investment securities at cost -- -- -- 8,330 5.79 120 ------- ------ ------- ------ Total investment securities 8,650 5.95 128 11,081 5.90 165 Loans: Commercial 9,308 9.96 231 8,055 9.77 194 Real estate 1-4 family first mortgage 4,400 7.56 83 9,042 7.12 161 Other real estate mortgage 8,197 9.23 188 8,123 9.59 192 Real estate construction 1,327 9.98 33 1,019 10.17 26 Consumer: Real estate 1-4 family junior lien mortgage 3,334 8.50 71 3,323 8.65 72 Credit card 3,933 15.56 153 3,125 15.78 123 Other revolving credit and monthly payment 2,598 11.19 71 2,268 10.42 59 ------- ------ ------- ------ Total consumer 9,865 12.02 295 8,716 11.67 254 Lease financing 1,897 9.20 44 1,351 9.17 31 Foreign 31 6.96 1 28 -- -- ------- ------ ------- ------ Total loans 35,025 10.03 875 36,334 9.51 858 Other 69 6.34 1 58 5.60 1 ------- ------ ------- ------ Total earning assets $43,869 9.21 1,006 $47,521 8.65 1,025 ------- ------ ------- ------ ------- ------- FUNDING SOURCES Interest-bearing liabilities: Deposits: Interest-bearing checking (5) $ 856 .99 2 $4,365 1.00 11 Market rate and other savings (5) 17,991 2.52 113 16,121 2.56 101 Savings certificates 8,636 5.24 113 7,346 4.89 89 Other time deposits 341 7.26 6 358 2.45 2 Deposits in foreign offices 524 5.42 7 2,665 5.87 39 ------- ------ ------- ------ Total interest-bearing deposits 28,348 3.41 241 30,855 3.18 242 Federal funds purchased and securities sold under repurchase agreements 2,706 5.36 36 3,887 5.82 56 Commercial paper and other short-term borrowings 405 5.27 5 687 5.89 10 Senior debt 1,710 6.26 26 1,640 6.93 28 Subordinated debt 1,266 6.85 22 1,469 6.60 24 ------- ------ ------- ------ Total interest-bearing liabilities 34,435 3.86 330 38,538 3.78 360 Portion of noninterest-bearing funding sources 9,434 -- -- 8,983 -- -- ------- ------ ------- ------ Total funding sources $43,869 3.03 330 $47,521 3.06 360 ------- ------ ------- ------ ------- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 6.18% $ 676 5.59% $ 665 ----- ------ ----- ------ ----- ------ ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,873 $ 2,587 Other 2,392 2,282 ------- ------- Total noninterest-earning assets $ 5,265 $ 4,869 ------- ------- ------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,336 $ 8,867 Other liabilities 1,277 1,141 Preferred stockholders' equity 489 489 Common stockholders' equity 3,597 3,355 Noninterest-bearing funding sources used to fund earning assets (9,434) (8,983) ------- ------- Net noninterest-bearing funding sources $ 5,265 $ 4,869 ------- ------- ------- ------- TOTAL ASSETS $49,134 $52,390 ------- ------- ------- ------- - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.33% and 8.83% for the quarters ended March 31, 1996 and 1995, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.40% and 6.29% for the same quarters, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liabilities categories. (3) There was no average balance or related interest income on Mortgage Loans Held for Sale as they were reclassified from Loans on March 31, 1995 and subsequently sold by year-end 1995. (4) Yields are based on amortized cost balances. The average amortized cost balances for investment securities at fair value totaled $8,614 million and $2,880 million for the quarters ended March 31, 1996 and 1995, respectively. (5) Due to the limited transaction activity on existing NOW (negotiable order withdrawal) account customers, $3.4 billion of interest-bearing checking deposits at December 31, 1995 was reclassified to market rate and other savings deposits. (6) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for the quarters ended March 31, 1996 and 1995. 16 NONINTEREST INCOME
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Quarter ended March 31, --------------- % (in millions) 1996 1995 Change - -------------------------------------------------------------------------------- Service charges on deposit accounts $122 $118 3% Fees and commissions: Credit card membership and other credit card fees 26 19 37 Charges and fees on loans 17 11 55 Debit and credit card merchant fees 15 14 7 Shared ATM network fees 13 12 8 Mutual fund and annuity sales fees 8 10 (20) All other 39 35 11 ---- ---- Total fees and commissions 118 101 17 Trust and investment services income: Asset management and custody fees 35 31 13 Mutual fund management fees 21 14 50 All other 3 10 (70) ---- ---- Total trust and investment services income 59 55 7 Investment securities gains (losses) -- (15) 100 Income from equity investments accounted for by the: Cost method 35 19 84 Equity method 2 8 (75) Check printing charges 9 11 (18) Gains (losses) from dispositions of operations 5 (1) -- Gains (losses) on sales of loans 4 (67) -- All other -- 13 (100) ---- ---- Total $354 $242 46% ---- ---- --- ---- ---- --- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The overall increase in noninterest income reflected a broad-based increase in revenue from the Company's core products and services. The increase in credit card membership and other credit card fees for the first quarter of 1996 compared with the same period of 1995 was predominantly due to late fees and other transaction fees incurred by customers. "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 $16 million and $10 million for the first quarter of 1996 and 1995, respectively. The related amortization expense was $11 million and $6 million for the same periods, respectively. The balance of purchased mortgage servicing rights was $170 million and $127 million at March 31, 1996 and 1995, respectively. The purchased mortgage loan servicing portfolio totaled $16 billion at March 31, 1996, compared with $11 billion at March 31, 1995. The increase in trust and investment services income for the first quarter ended March 31, 1996 was primarily due to greater mutual fund investment management fees, reflecting the overall growth in the fund families' net assets. The Company managed 16 of the Stagecoach family of funds consisting of $7.5 billion of assets at March 31, 1996, compared with 28 funds 17 consisting of $7.6 billion at March 31, 1995. For the first quarter of 1995, the Stagecoach family consisted of both retail and institutional funds. The retail funds are primarily distributed through the branch network. The institutional funds were offered primarily to selected groups of investors and certain corporations, partnerships and other business entities. As a result of the sale of the Company's joint venture interest in WFNIA and the sale of the MasterWorks division at year-end 1995, $.5 billion of the retail funds and all the institutional funds were no longer under the Company's management at March 31, 1996. The Overland Express family of 12 funds, which is sold nationwide through brokers, had $3.9 billion of assets under management at March 31, 1996, compared with 12 funds consisting of $3.1 billion at March 31, 1995. In addition to managing Overland Express Funds and the funds in the Stagecoach family, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $52.2 billion at March 31, 1996, compared with $48.9 billion at March 31, 1995. The Company's joint venture interest in WFNIA was accounted for as an equity investment under the equity method in 1995. The income from the equity investment in WFNIA included in noninterest income was $5 million in the first quarter of 1995. For the first quarter of 1996, income from cost method equity investments reflected both net gains on the sales of and distributions from nonmarketable equity investments. Income from cost method equity investments in the first quarter of 1996 reflected a $16 million gain on the sale of an investment. At December 31, 1995, the Company had a liability of $83 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with scheduled branch closures. Of this amount, $13 million represented a third quarter 1995 accrual for the closures of 21 branches scheduled for March 1996. The remaining amount consisted of a fourth quarter accrual for the closures of 120 branches which were expected to be completed by year-end 1996. However, due to the merger with First Interstate, the completion of the 120 branch closures is expected to be delayed until the first quarter of 1997. The liability associated with branch closures at March 31, 1996 was $74 million. Additional accruals may be made in 1996 for branch closures or relocations as the Company continues to open more supermarket branches and banking centers. In the first quarter of 1995, gains and losses on sales of loans included an estimated $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. This write-down was partially offset by gains on sales of two loans, resulting from the assumption of the borrowers' loans by third parties. "All Other" noninterest income in the first quarter of 1995 included $8 million of interest income recorded as a result of a settlement with the Internal Revenue Service of certain audit issues pertaining to auto leases for the years 1987 through 1992. 18
NONINTEREST EXPENSE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Quarter ended March 31, --------------- % (in millions) 1996 1995 Change - -------------------------------------------------------------------------------- Salaries $181 $172 5% Incentive compensation 32 27 19 Employee benefits 54 53 2 Equipment 55 47 17 Net occupancy 53 53 -- Contract services 42 25 68 Telecommunications 16 13 23 Postage 15 12 25 Operating losses 14 15 (7) Advertising and promotion 13 14 (7) Outside professional services 13 10 30 Certain identifiable intangibles 12 14 (14) Stationery and supplies 10 9 11 Goodwill 9 9 -- Travel and entertainment 9 7 29 Check printing 7 7 -- Security 6 5 20 Escrow and collection agency fees 4 4 -- Outside data processing 3 3 -- Foreclosed assets 2 (4) -- Federal deposit insurance 1 24 (96) All other 16 18 (11) ---- ---- Total $567 $537 6% ---- ---- --- ---- ---- --- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The increase in salaries expense in the first quarter of 1996 reflects increased temporary help expense and higher salary levels. The Company's full-time equivalent staff, including hourly employees, averaged approximately 19,120 in the first quarter of 1996, compared with approximately 19,493 in the first quarter of 1995. Increases in equipment expense in the first quarter of 1996 compared with the same quarter of 1995 was substantially 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 increase in contract services for the first quarter 1996 compared with the same period of 1995 was largely due to new product development and marketing initiatives. The decrease in federal deposit insurance for the first quarter 1996 compared with the same period of 1995 was predominantly due to the FDIC's reduction of deposit insurance premiums. Effective January 1, 1996, the best-rated institutions insured by the Bank Insurance Fund pay the statutory minimum annual assessment of $2,000. 19 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. In accordance with FAS 123, the Company has decided to continue to apply the accounting provisions of APB 25 in determining net income; however, it will apply the disclosure requirements in the 1996 Annual Report. INCOME TAXES The Company's effective tax rate for the first quarter of 1996 was 43%, compared with 37% for the first quarter of 1995. The increase in the effective tax rate 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. 20 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ MARCH 31, December 31, March 31, 1996 1995 1995 ------------------ ------------------ ------------------ ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ------------------------------------------------------------------------------------------------------------------------ AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $1,347 $1,350 $1,347 $1,357 $ 422 $ 421 Securities of U.S. government agencies and corporations (1) 4,866 4,823 5,218 5,223 1,040 984 Private collateralized mortgage obligations (2) 2,056 2,032 2,121 2,122 996 937 Other 170 180 169 181 25 35 ------ ------ ------ ------ ------ ------ Total debt securities 8,439 8,385 8,855 8,883 2,483 2,377 Marketable equity securities 29 50 18 37 16 26 ------ ------ ------ ------ ------ ------ Total $8,468 $8,435 $8,873 $8,920 $2,499 $2,403 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $ -- $ -- $ -- $ -- $1,572 $1,543 Securities of U.S. government agencies and corporations (1) -- -- -- -- 5,163 4,997 Private collateralized mortgage obligations (2) -- -- -- -- 1,275 1,224 Other -- -- -- -- 163 164 ------ ------ ------ ------ ------ ------ Total debt securities $ -- $ -- $ -- $ -- $8,173 $7,928 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(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. In November 1995, the FASB permitted a one-time opportunity for companies to reassess by December 31, 1995 their classification of securities under FAS 115, Accounting for Certain Investments in Debt and Equity Securities. As a result, on November 30, 1995, the Company reclassified all of its held-to maturity securities at cost portfolio of $6.5 billion to the available-for-sale securities at fair value portfolio in order to provide increased liquidity flexibility to meet anticipated loan growth. The available-for-sale portfolio includes both debt and marketable equity securities. At March 31, 1996, the available-for-sale securities portfolio had an unrealized net loss of $33 million, or less than 1% of the cost of the portfolio, comprised of unrealized gross losses of $95 million and unrealized gross gains of $62 million. At December 31, 1995, the available-for-sale securities portfolio had an unrealized net gain of $47 million, comprised of unrealized gross gains of $88 million and unrealized gross losses of $41 million. At March 31, 1995, the available-for-sale securities portfolio had an unrealized net loss of $96 million, comprised of unrealized gross losses of $124 million and unrealized gross gains of $28 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 March 31, 1996, the valuation allowance 21 amounted to an unrealized net loss of $20 million, compared with an unrealized net gain of $26 million at December 31, 1995 and an unrealized net loss of $55 million at March 31, 1995. At March 31, 1995, the held-to-maturity securities portfolio had an estimated unrealized net loss of $245 million (which reflected estimated unrealized gross gains of $7 million). The unrealized net loss in the available-for-sale portfolio at March 31, 1996 was primarily due to investments in mortgage-backed securities. This unrealized net loss reflected current interest rates that were higher than those at the time the investments were purchased. The decline in the fair value of the investment securities portfolio is not considered to be an other-than-temporary impairment. The Company may decide to sell certain of the available-for-sale securities to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities). There were no sales of available-for-sale securities in the first quarter of 1996. In the first quarter of 1995, the Company sold $397 million of securities of U.S. government agencies and corporations and $288 million of private collateralized mortgage obligations from the available-for-sale portfolio for asset/liability management purposes. These sales resulted in realized losses of $15 million (realized gross gains were zero). Cash received from future maturities of investment securities is expected to be used to fund loan growth. 22 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- March 31, 1996 ----------------------------------------------------------------------------------------------------------- Expected remaining principal maturity ----------------------------------------------------------------------------------------------------------- Weighted average expected remaining After one year After five years Weighted maturity Within one year through five years through ten years After ten years Total average (in yrs. ---------------- ------------------ ----------------- ---------------- (in millions) amount yield -mos.). Amount Yield Amount Yield Amount Yield Amount Yield - ----------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $1,347 5.51% 1-1 $ 899 5.14% $448 6.25% $ -- --% $ -- --% Securities of U.S. government agencies and corporations 4,866 6.06 2-3 1,537 5.76 2,831 5.96 433 7.48 65 7.84 Private collateralized mortgage obligations 2,056 6.29 2-5 550 6.03 1,343 6.24 153 6.63 10 21.38 Other 170 8.72 2-3 50 5.99 118 9.90 -- -- 2 6.37 ------ ------ ------ ----- ---- TOTAL COST OF DEBT SECURITIES $8,439 6.08% 2-1 $3,036 5.63% $4,740 6.17% $ 586 7.26% $ 77 9.56% ------ ---- ---- ------ ---- ------ ---- ----- ---- ---- ---- ------ ---- ---- ------ ---- ------ ---- ----- ---- ---- ---- ESTIMATED FAIR VALUE $8,385 $3,019 $4,700 $ 587 $ 79 ------ ------ ------ ----- ---- ------ ------ ------ ----- ---- - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(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 1 month at March 31, 1996, compared with 2 years and 1 month at December 31, 1995 and 2 years and 10 months at March 31, 1995. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At March 31, 1996, mortgage-backed securities included in Securities of U.S. government agencies and corporations primarily consisted of pass-through securities and collateralized mortgage obligations (CMOs) and substantially all were issued or backed by federal agencies. These securities, along with the Private CMOs, represented $6,855 million, or 81% of the Company's investment securities portfolio at March 31, 1996. The CMO securities held by the Company (including the private issues) are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. As an indication of interest rate risk, the Company has estimated the impact of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on this rate scenario, mortgage-backed securities would decrease in fair value from $6,855 million to $6,543 million and the expected remaining maturity of these securities would increase from 2 years and 3 months to 2 years and 7 months. 23 LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- % Change Mar. 31, 1996 from ----------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------------------------------- Commercial (1)(2) $ 9,393 $ 9,750 $ 8,348 (4)% 13 % Real estate 1-4 family first mortgage (3) 4,346 4,448 5,025 (2) (14) Other real estate mortgage (4) 8,274 8,263 8,078 -- 2 Real estate construction 1,312 1,366 1,036 (4) 27 Consumer: Real estate 1-4 family junior lien mortgage 3,303 3,358 3,312 (2) -- Credit card 3,928 4,001 3,220 (2) 22 Other revolving credit and monthly payment 2,590 2,576 2,305 1 12 ------- ------- ------- Total consumer 9,821 9,935 8,837 (1) 11 Lease financing 1,991 1,789 1,382 11 44 Foreign 30 31 31 (3) (3) ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $504, $463 and $375) $35,167 $35,582 $32,737 (1)% 7 % ------- ------- ------- --- --- ------- ------- ------- --- --- - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
(1) Includes loans to real estate developers of $576 million, $700 million and $519 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $927 million, $1,029 million and $721 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. (3) Excludes mortgage loans held for sale at March 31, 1995 of $3,940 million, net of an estimated $83 million write-down to the lower of cost or estimated market. (4) Includes agricultural loans that are secured by real estate of $252 million, $250 million and $256 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. The increase in the credit card loan portfolio for the first quarter of 1996 as compared to the same period of 1995 was due to new accounts resulting from nationwide direct mail campaigns, originations in retail outlets and increased loan balances from the Company's existing cardholders. The table below presents comparative period-end commercial real estate loans.
- -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- % Change Mar. 31, 1996 from ---------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 1995 1995 - -------------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers (1) $ 576 $ 700 $ 519 (18)% 11 % Other real estate mortgage 8,274 8,263 8,078 -- 2 Real estate construction 1,312 1,366 1,036 (4) 27 ------- ------- ------ Total $10,162 $10,329 $9,633 (2)% 5 % ------- ------- ------ --- --- ------- ------- ------ --- --- Nonaccrual loans $ 349 $ 371 $ 429 (6)% (19)% ------- ------- ------ --- --- ------- ------- ------ --- --- Nonaccrual loans as a % of total 3.4% 3.6% 4.5% ------- ------- ------ ------- ------- ------ - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 24 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 - ------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial (2)(3) $ 120 $ 112 $ 79 Real estate 1-4 family first mortgage 61 64 71 Other real estate mortgage (4) 289 307 324 Real estate construction 44 46 77 Consumer: Real estate 1-4 family junior lien mortgage 11 8 12 Other revolving credit and monthly payment -- 1 3 ----- ----- ----- Total nonaccrual loans (5) 525 538 566 Restructured loans (6) 12 14 15 ----- ----- ----- Nonaccrual and restructured loans 537 552 581 As a percentage of total loans (7) 1.5% 1.6% 1.8% Foreclosed assets (8) 198 186 273 Real estate investments (9) 7 12 17 ----- ----- ----- Total nonaccrual and restructured loans and other assets $ 742 $ 750 $ 871 ----- ----- ----- ----- ----- ----- - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but 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. (2) Includes loans to real estate developers of $16 million, $18 million and $28 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. (3) Includes agricultural loans of $6 million or less for all periods presented. (4) Includes agricultural loans secured by real estate of $3 million or less for all periods presented. (5) Of the total nonaccrual loans, $392 million, $408 million and $442 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (6) In addition to originated loans that were subsequently restructured, there were loans of $50 million, $50 million and none at March 31, 1996, December 31, 1995 and March 31, 1995, respectively, that were purchased at a steep discount whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. Of the total restructured loans and loans purchased at a steep discount, $50 million, $50 million and none were considered impaired under FAS 114 at March 31, 1996, December 31, 1995 and March 31, 1995. (7) Total loans exclude mortgage loans held for sale at March 31, 1995. (8) Includes agricultural properties of $23 million or less for all periods presented. (9) 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 $115 million, $95 million and $64 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. 25 The table below summarizes the changes in total nonaccrual loans.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $538 $586 $567 New loans placed on nonaccrual 113 106 127 Loans purchased -- -- 13 Charge-offs (9) (27) (28) Payments (54) (71) (55) Transfers to foreclosed assets (30) (22) (36) Loans returned to accrual (33) (34) (24) Other additions -- -- 2 ---- ---- ---- BALANCE, END OF QUARTER $525 $538 $566 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The table below summarizes the changes in nonaccrual loans by loan category for the quarters ended March 31, 1996 and December 31, 1995.
- ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Real estate 1-4 family Other real first estate Real estate (in millions) Commercial mortgage mortgage construction Consumer Total - ----------------------------------------------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1996 BALANCE, BEGINNING OF QUARTER $112 $ 64 $307 $ 46 $ 9 $538 New loans placed on nonaccrual (1) (2) 30 27 51 -- 5 113 Charge-offs (6) (1) (1) (1) -- (9) Payments: Principal (11) (4) (27) (1) (2) (45) Interest applied to principal (3) -- (6) -- -- (9) Transfers to foreclosed assets -- (15) (14) -- (1) (30) Loans returned to accrual (2) (10) (21) -- -- (33) ---- ---- ---- ---- --- ---- BALANCE, END OF QUARTER $120 $ 61 $289 $ 44 $11 $525 ---- ---- ---- ---- --- ---- ---- ---- ---- ---- --- ---- QUARTER ENDED DECEMBER 31, 1995 Balance, beginning of quarter $128 $ 56 $335 $ 55 $12 $586 New loans placed on nonaccrual (1) (2) 35 28 41 -- 2 106 Charge-offs (18) (1) (2) (6) -- (27) Payments: Principal (29) (4) (22) (3) (3) (61) Interest applied to principal (3) -- (7) -- -- (10) Transfers to foreclosed assets -- (9) (12) -- (1) (22) Loans returned to accrual (1) (6) (26) -- (1) (34) ---- ---- ---- ---- --- ---- Balance, end of quarter $112 $ 64 $307 $ 46 $ 9 $538 ---- ---- ---- ---- --- ---- ---- ---- ---- ---- --- ---- - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) No commercial loan placed on nonaccrual status during the first quarter of 1996 and fourth quarter of 1995 exceeded $13 million. (2) Of the other real estate mortgage loans placed on nonaccrual status in the first quarter of 1996, $45 million related to a single loan located in Southern California. For the fourth quarter of 1995, no other real estate mortgage loan placed on nonaccrual status exceeded $13 million. 26 Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan, as amended by FAS 118 (collectively referred to as FAS 114). These Statements address the accounting treatment of certain impaired loans and amend FASB Statement Nos. 5 and 15. However, these Statements do not address the overall adequacy of the allowance for loan losses and do not apply to large groups of smaller-balance homogeneous loans, such as most consumer, real estate 1-4 family first mortgage and small business loans, unless they have been involved in a restructuring. The adoption of FAS 114 has not affected the Company's policy for placing loans on nonaccrual status. The Company generally identifies loans to be evaluated for impairment when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 150 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. Not all impaired loans are necessarily placed on nonaccrual status. That is, restructured loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered by this Statement, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. 27 The table below shows the recorded investment in impaired loans by loan category at March 31, 1996, December 31, 1995 and March 31, 1995:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- Commercial $ 81 $ 77 $ 56 Real estate 1-4 family first mortgage 3 2 7 Other real estate mortgage (1) 314 330 299 Real estate construction 44 46 77 Other -- 3 3 ----- ----- ----- Total (2) $ 442 $ 458 $ 442 ----- ----- ----- ----- ----- ----- Impairment measurement based on: Collateral value method $ 355 $ 374 $ 314 Discounted cash flow method 70 66 106 Historical loss factors 17 18 22 ----- ----- ----- $ 442 $ 458 $ 442 ----- ----- ----- ----- ----- ----- Average recorded investment $ 439 $ 446 $ 432 Interest income recognized (3) $ 4 $ 2 $ 4 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
(1) Includes accruing loans of $50 million, $50 million and none purchased at a steep discount at March 31, 1996, December 31, 1995 and March 31, 1995, respectively, whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $21 million, $22 million and $23 million of impaired loans with a related FAS 114 allowance of $2 million, $3 million and $4 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. (3) Interest income recognized was primarily recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. 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. 28 The table below summarizes the changes in foreclosed assets.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $186 $214 $272 Additions 35 24 42 Sales (18) (49) (29) Charge-offs (3) (2) (2) Write-downs (1) (1) (3) Other deductions (1) -- (7) ---- ---- ---- BALANCE, END OF QUARTER $198 $186 $273 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Approximately 75% of the foreclosed assets at March 31, 1996 have been in the Company's portfolio three years or less. 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 (generally, 180 days). Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 150 days of becoming past due and are excluded from the following table.
- ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in millions) 1996 1995 1995 - ------------------------------------------------------------------------------------------ Commercial $ 10 $ 12 $9 Real estate 1-4 family first mortgage 8 8 14 Other real estate mortgage 3 24 58 Real estate construction -- -- 1 Consumer: Real estate 1-4 family junior lien mortgage 3 4 4 Credit card 97 95 46 Other revolving credit and monthly payment 1 1 -- ---- ---- ---- Total consumer 101 100 50 ---- ---- ---- Total $122 $144 $132 ---- ---- ---- ---- ---- ---- - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
29 ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Quarter ended -------------------------------- MARCH 31, Dec. 31, March 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $1,794 $1,872 $2,082 Loan charge-offs: Commercial (1) (13) (23) (7) Real estate 1-4 family first mortgage (4) (3) (3) Other real estate mortgage (3) (3) (22) Real estate construction (1) (5) (2) Consumer: Real estate 1-4 family junior lien mortgage (4) (4) (3) Credit card (86) (69) (38) Other revolving credit and monthly payment (20) (17) (10) ------ ------ ------ Total consumer (110) (90) (51) Lease financing (6) (4) (4) ------ ------ ------ Total loan charge-offs (137) (128) (89) ------ ------ ------ Loan recoveries: Commercial (2) 5 7 9 Real estate 1-4 family first mortgage 3 -- 1 Other real estate mortgage 4 33 6 Real estate construction 1 -- -- Consumer: Real estate 1-4 family junior lien mortgage 1 1 1 Credit card 5 3 3 Other revolving credit and monthly payment 3 5 2 ------ ------ ------ Total consumer 9 9 6 Lease financing 2 1 2 ------ ------ ------ Total loan recoveries 24 50 24 ------ ------ ------ Total net loan charge-offs (113) (78) (65) ------ ------ ------ BALANCE, END OF QUARTER $1,681 $1,794 $2,017 ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) (3) 1.30% .90% .72% ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans (3) 4.78% 5.04% 6.16% ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) There were no charge-offs of loans to real estate developers for all periods presented. (2) Includes recoveries from loans to real estate developers of $1 million, $1 million and none in the quarters ended March 31, 1996, December 31, 1995 and March 31, 1995, respectively. (3) Average and total loans exclude first mortgage loans that were reclassified to a held-for-sale category on March 31, 1995 and subsequently sold by year-end 1995. 30 The table below presents net charge-offs by loan category.
- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Quarter ended --------------------------------------------------------- MARCH 31, 1996 December 31, 1995 March 31, 1995 --------------- ----------------- ---------------- % OF % of % of AVERAGE average average (in millions) AMOUNT LOANS(1) Amount loans(1) Amount loans(1) - ----------------------------------------------------------------------------------------------------- Commercial $ 8 .34% $ 16 .66% $ (2) (.12)% Real estate 1-4 family first mortgage 1 .10 3 .27 2 .10 Other real estate mortgage (1) (.05) (30) (1.52) 16 .82 Real estate construction -- -- 5 1.59 2 .90 Consumer: Real estate 1-4 family junior lien mortgage 3 .41 3 .41 2 .26 Credit card 81 8.25 66 6.63 35 4.52 Other revolving credit and monthly payment 17 2.64 12 2.15 8 1.40 ---- ---- ---- Total consumer 101 4.12 81 3.33 45 2.08 Lease financing 4 .93 3 .73 2 .43 ---- ---- ---- Total net loan charge-offs $113 1.30% $ 78 .90% $ 65 .72% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. The largest category of net charge-offs in the first quarter of 1996 was credit card loans, comprising more than 70% of total net charge-offs. During the first half of 1995, the Company grew its credit card loan portfolio through nationwide direct mail campaigns as well as through retail outlets. The objective of the direct mail campaigns was higher yielding loans to higher- risk cardholders. As these loans continue to mature, the total amount of credit card charge-offs and the percentage of net charge-offs to average credit card loans is expected to continue at a level higher than experienced in the past. The Company continuously evaluates and monitors its selection criteria for direct mail campaigns and other account acquisition methods to accomplish the desired risk/customer mix within the credit card portfolio. The Company considers the allowance for loan losses of $1,681 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at March 31, 1996. 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 quarter of 1996 or during 1995. However, as loan growth continues, the Company anticipates that it will resume making a provision in the latter part of 1996. 31 OTHER ASSETS
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- Net deferred tax asset (1) $ 879 $ 854 $1,002 Nonmarketable equity investments 424 428 400 Certain identifiable intangible assets 392 386 404 Foreclosed assets 198 186 273 Other 767 552 572 ------ ------ ------ Total other assets $2,660 $2,406 $2,651 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Net of a valuation allowance of none, none and $2 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. The Company estimates that approximately $764 million of the $879 million net deferred tax asset at March 31, 1996 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 $115 million relates to approximately $1.7 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 $1.3 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. On October 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 122 (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 with servicing rights retained, the right to service those loans be recognized as a separate asset, similar to purchased mortgage servicing rights. This Statement also requires that capitalized mortgage servicing rights be assessed for impairment based on the fair value of those rights. Mortgage servicing rights purchased during first quarter 1996, fourth quarter 1995 and first quarter 1995 were $25 million, $7 million and $37 million, respectively, and no originated mortgage servicing rights were capitalized during the same periods. Purchased mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Amortization expense, recorded in noninterest income, totaled $11 million, $11 million and $6 million for the quarters ended March 31, 1996, December 31, 1995 and March 31, 1995, respectively. Purchased mortgage servicing rights included in certain identifiable intangible assets were $170 million, $152 million and $127 million at March 31, 1996, December 31, 1995 and March 31, 1995, respectively. Other 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 $24 million, $25 million and $21 million for the quarters ended March 31, 1996, December 31, 1995 and March 31, 1995, respectively. 32 DEPOSITS
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1996 1995 1995 - -------------------------------------------------------------------------------- Noninterest-bearing $ 9,740 $ 10,391 $ 9,431 Interest-bearing checking (1) 745 887 4,372 Market rate and other savings (1) 18,260 17,944 15,584 Savings certificates 8,669 8,636 7,588 -------- -------- -------- Core deposits 37,414 37,858 36,975 Other time deposits 245 248 262 Deposits in foreign offices (2) 147 876 1,760 -------- -------- -------- Total deposits $ 37,806 $ 38,982 $ 38,997 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Due to the limited transaction activity of existing NOW (negotiable order of withdrawal) account customers, $3.4 billion of interest-bearing checking deposits at December 31, 1995 was reclassified to market rate and other savings deposits. (2) 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 increase in the Company's RBC and leverage ratios at March 31, 1996 compared with December 31, 1995 and March 31, 1995 resulted from an increase in retained earnings and from the cessation of the common stock repurchase program after the October 1995 announcement of the proposed merger with First Interstate Bancorp. Common stock repurchases for the first and fourth quarters of 1995 were 2.1 million shares and .5 million shares, respectively. The program resumed in late March. 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 March 31, 1996, the Bank had a Tier 1 RBC ratio of 10.13%, a combined Tier 1 and Tier 2 ratio of 13.24% and a leverage ratio of 7.83%. 33 The table below presents the Company's risk-based capital and leverage ratios.
- --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in billions) 1996 1995 1995 - --------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $ 3.7 $ 3.6 $ 3.4 Preferred stock .5 .5 .5 Less goodwill and other deductions (1) (.3) (.5) (.5) ------- ------- ------- Total Tier 1 capital 3.9 3.6 3.4 ------- ------- ------- Tier 2: Mandatory convertible debt -- -- .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 1.5 1.6 ------- ------- ------- Total risk-based capital $ 5.4 $ 5.1 $ 5.0 ------- ------- ------- ------- ------- ------- Risk-weighted balance sheet assets $ 38.9 $ 39.2 $ 38.4 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 2.8 2.7 2.0 Standby letters of credit .6 .7 .6 Other .3 .4 .4 ------- ------- ------- Total risk-weighted off-balance sheet items 3.7 3.8 3.0 ------- ------- ------- Goodwill and other deductions (1) (.4) (.5) (.5) Allowance for loan losses not included in Tier 2 (1.2) (1.3) (1.5) ------- ------- ------- Total risk-weighted assets $ 41.0 $ 41.2 $ 39.4 ------- ------- ------- ------- ------- ------- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 9.40% 8.81% 8.73% Total capital (8% minimum requirement) 13.04 12.46 12.78 Leverage ratio (3% minimum requirement) (2) 7.91% 7.46% 6.61% - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
(1) Other deductions include the unrealized net gain (loss) on available-for- sale investment securities carried at fair value. (2) Tier 1 capital divided by quarterly average total assets (excluding goodwill and other items which were deducted to arrive at Tier 1 capital). 34 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuation 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 negative impact on the net interest margin from an increasing rate environment. At March 31, 1996, the under-one-year cumulative gap was a $258 million (0.5% of total assets) net liability position, compared with a net liability position of $394 million (0.8% of total assets) at December 31, 1995. The decrease in the net liability position was largely due to a decrease in foreign deposits and short-term borrowings, a major portion of which was offset by an increase in market rate savings deposits and a decrease in commercial loans. 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, savings deposits and Wells Extra Savings (included in market rate savings) from 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 $4.7 billion and $8.7 billion at March 31, 1996 and December 31, 1995, respectively. 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 35 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 Company is not a dealer in these instruments and does not use them speculatively. The Company offers contracts to its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The contracts that are used primarily to hedge mismatches in interest rate maturities serve to reduce rather than increase the Company's exposure to movements in interest rates. 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, interest rate cap contracts written and foreign exchange option 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. 36 The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at March 31, 1996 and December 31, 1995.
- ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ MARCH 31, 1996 December 31, 1995 ----------------------------------------- ----------------------------------------- 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 $ 5,475 $ -- $ -- $ 5,372 $ -- $ -- Floors purchased (1) 15,324 87 87 15,522 206 206 Caps purchased (1) 486 3 3 391 1 1 Swap contracts (1) 6,481 85 57 6,314 185 175 Foreign exchange contracts: Forward contracts (1) 25 -- -- 25 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 13 -- -- 23 -- -- Floors written 156 -- (1) 105 -- (1) Caps written 1,518 -- (7) 1,170 -- (4) Floors purchased (1) 156 1 1 105 1 1 Caps purchased (1) 1,506 7 7 1,139 4 4 Swap contracts (1) 1,681 10 1 1,518 5 1 Foreign exchange contracts: (2) Forward and spot contracts (1) 1,057 8 1 909 10 1 Option contracts purchased (1) 32 -- -- 29 -- -- Option contracts written 25 -- -- 23 -- -- - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Company has immaterial trading positions in these contracts. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. LIQUIDITY MANAGEMENT Liquidity for the Parent Company and its subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, and through dividends from subsidiaries and lines of credit. A shelf registration statement filed in 1995 with the Securities and Exchange Commission allows the issuance of up to $2.3 billion of senior or subordinated debt or preferred stock. The proceeds from the sale of any securities will be used for general corporate purposes. At March 31, 1996, $1.8 billion of securities remained unissued. In April 1996, the Company issued $.5 billion of subordinated debt under this shelf registration. 37 PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders I. (a) The Special Meeting of Shareholders was held on March 28, 1996. (b) The Agreement and Plan of Merger (Merger Agreement) dated as of January 23, 1996, by and between Wells Fargo and First Interstate Bancorp, as amended, was adopted, and the transactions contemplated thereby were approved. Against For or Withheld Abstentions ---------- ----------- ----------- (1) Adoption of Merger Agreement and approval of transactions contemplated thereby 36,340,003 144,347 126,464 II. (a) The Annual Meeting of Shareholders was held on April 16, 1996. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected; the increase in authorized common stock was approved; the adoption of the new employee stock purchase plan was approved; and the selection of KPMG Peat Marwick LLP as the Company's independent auditors for 1996 was ratified. The following are the voting results on each of the matters: Against For or Withheld Abstentions ---------- ----------- ----------- (1) ELECTION OF DIRECTORS H. Jesse Arnelle 39,786,386 136,085 -- Edward M. Carson 39,793,451 129,020 -- William S. Davila 39,792,331 130,140 -- Rayburn S. Dezember 39,801,428 121,043 -- Myron Du Bain 39,788,664 133,807 -- Don C. Frisbee 39,776,520 145,951 -- Paul Hazen 39,804,272 118,199 -- Robert K. Jaedicke 39,790,773 131,698 -- Thomas L. Lee 39,791,238 131,233 -- William F. Miller 39,786,687 135,784 -- Ellen M. Newman 39,795,239 127,232 -- Philip J. Quigley 39,795,925 126,546 -- Carl E. Reichardt 39,799,134 123,337 -- Donald B. Rice 39,802,378 120,093 -- Richard J. Stegemeier 39,792,499 129,972 -- Susan G. Swenson 39,784,759 137,712 -- Daniel M. Tellep 39,789,501 132,970 -- Chang-Lin Tien 39,789,042 133,429 -- John A. Young 39,793,120 129,351 -- William F. Zuendt 39,802,318 120,153 -- 38 Against For or Withheld Abstentions ---------- ----------- ----------- (2) Increase in Authorized Common Stock 31,818,390 7,955,278 148,803 (3) Approval of the new Employee Stock Purchase Plan 39,108,798 631,373 182,300 (4) Ratification of KPMG Peat Marwick LLP as independent auditors for 1996. 39,777,729 50,785 93,957 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(i) Articles of Incorporation 3(ii) By-Laws 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. 10 1996 Employee Stock Purchase Plan, incorporated by reference to Exhibit A of the Proxy statement dated March 13, 1996. 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 2.33 and 1.98 for the quarters ended March 31, 1996 and 1995, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.32 and 3.74 for the quarters ended March 31, 1996 and 1995, respectively. 99(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 2.21 and 1.90 for the quarters ended March 31, 1996 and 1995, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.55 and 3.34 for the quarters ended March 31, 1996 and 1995, respectively. (b) The Company filed the following reports on Form 8-K during the first quarter of 1996 and through the date hereof: (1) January 16, 1996 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter and year ended December 31, 1995 and the increase in the Company's common stock dividend 39 (2) January 24, 1996 under Item 5, containing the January 24 Press Release that announced that the Company and First Interstate Bancorp have reached a definitive agreement to merge the two companies (3) January 31, 1996 under Item 5, containing the Agreement and Plan of Merger with First Interstate Bancorp, pursuant to which First Interstate will merge with and into the Company (4) February 29, 1996 under Item 5, containing the February 28 Press Release that announced that the joint proxy statement of the Company and First Interstate Bancorp had been declared effective by the Securities and Exchange Commission and that the Company had reached agreement with the Department of Justice and the Office of the Attorney General for California regarding divestitures (5) April 1, 1996 under Item 5, containing the April 1 Press Release that announced that Wells Fargo & Company had completed its acquisition of First Interstate Bancorp (6) April 5, 1996 under Item 7, containing unaudited pro forma combined financial information of the Company and First Interstate Bancorp for 1995, the Consent of Independent Accountants for First Interstate and audited financial statements of First Interstate Bancorp as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 (7) April 10, 1996 under Items 2 and 7, describing the Company's acquisition of First Interstate Bancorp in accordance with the terms of the Merger Agreement and containing the unaudited pro forma combined financial information of the Company and First Interstate Bancorp for 1995 and audited financial statements of First Interstate Bancorp as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 (8) April 16, 1996 under Item 5, containing the Press Releases that announced the Company's financial results for the quarter ended March 31, 1996, the Company's share repurchase program and the quarterly common stock dividend 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 May 9, 1996. WELLS FARGO & COMPANY By:/s/ FRANK A. MOESLEIN ---------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 40 EX-3.(II) 2 EXHIBIT 3(II) By-Laws of WELLS FARGO & COMPANY (a Delaware Corporation), As amended April 16, 1996 --------------- ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders of Wells Fargo & Company (the "corporation") shall be held on the third Tuesday of April in each year at such time of day as may be fixed by the Board of Directors, at the principal office of the corporation, if not a bank holiday, and if a bank holiday then on the next succeeding business day at the same hour and place, or at such other time, date or place, within or without the State of Delaware, as may be determined by the Board of Directors. At such meeting, Directors shall be elected, reports of the affairs of the corporation may be considered, and any other proper business may be transacted. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders, unless otherwise regulated by statute, for any purpose or purposes whatsoever, may be called at any time by the Board of Directors, the Chairman of the Board, the President, the Chief Executive Officer (if other than the Chairman of the Board or the President), or one or more stockholders holding not less than 10 percent of the voting power of the corporation. Such meetings may be held at any place within or without the State of Delaware designated by the Board of Directors of the corporation. SECTION 3. NOTICE OF MEETINGS. Notice of all meetings of the stockholders, both annual and special, shall be given by the Secretary in writing to stockholders entitled to vote. A notice may be given either personally or by mail or other means of written communication, charges prepaid, addressed to any stockholder at his address appearing on the books of the corporation or at the address given by such stockholder to the corporation for the purpose of notice. Notice of any meeting of stockholders shall be sent to each stockholder entitled thereto not less than 10 nor more than 60 days prior to such meeting. Such notice shall state the place, date and hour of the meeting and shall also state (i) in the case of a special meeting, the general nature of the business to be transacted and that no other business may be transacted, (ii) in the case of an annual meeting, those matters which the Board of Directors intends at the time of the mailing of the notice to present for stockholder action and that any other proper matter may be presented for stockholder action to the meeting, and (iii) in the case of any meeting at which Directors are to be elected, the names of the nominees which the management intends at the time of the mailing of the notice to present for election. SECTION 4. QUORUM. Except as otherwise provided by law, the presence of the holders of a majority of the stock issued and outstanding present in person or represented by proxy and entitled to vote is requisite and shall constitute a quorum for the transaction of business at all meetings of the stockholders, and the vote of a majority of such stock present and voting at a duly held meeting at which there is a quorum present shall decide any question brought before such meeting. SECTION 5. VOTING. Unless otherwise provided in the Certificate of Incorporation, every stockholder shall be entitled to one vote for every share of stock standing in his name on the books of the corporation, and may vote either in person or by proxy. ARTICLE II DIRECTORS SECTION 1. NUMBER, TERM. The property, business and affairs of the corporation shall be managed and all corporate power shall be exercised by or under the direction of the Board of Directors as from time to time constituted. The number of Directors of this corporation shall be not less than 10 nor more than 2l, the exact number within the limits so specified to be fixed from time to time by a By-Law adopted by the stockholders or by the Board of Directors. Until some other number is so fixed, the number of Directors shall be 21. The term of office of each Director shall be from the time of his election until the annual meeting next succeeding his election and until his successor shall have been duly elected, or until his death, resignation or lawful removal pursuant to the provisions of the General Corporation Law of Delaware. -2- SECTION 2. POWERS. In addition to the powers expressly conferred by these By-Laws, the Board of Directors may exercise all corporate powers and do such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or approved by the stockholders. SECTION 3. COMPENSATION. Directors and Advisory Directors (as provided in Section 12 of this Article) as such may receive such compensation, if any, as the Board of Directors by resolution may direct, including salary or a fixed sum plus expenses, if any, for attendance at meetings of the Board of Directors or of its committees. SECTION 4. ORGANIZATIONAL MEETING. An organizational meeting of the Board of Directors shall be held each year on the day of the annual meeting of stockholders of the corporation for the purpose of electing officers, the members of the Formal Committees provided in Section 11 of this Article and the Advisory Directors provided in Section 12 of this Article, and for the transaction of any other business. Said organizational meeting shall be held without any notice other than this By-Law. SECTION 5. PLACE OF MEETINGS. The Board of Directors shall hold its meetings at the main office of the corporation or at such other place as may from time to time be designated by the Board of Directors or by the chief executive officer. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors will be held on the third Tuesday of each month (except for the months of August and December) at the later of the following times: (i) 10:30 a.m. or (ii) immediately following the adjournment of any regular meeting of the Board of Directors of Wells Fargo Bank, National Association, held on the same day. If the day of any regular meeting shall fall upon a bank holiday, the meeting shall be held at the same hour on the first day following which is not a bank holiday. No call or notice of a regular meeting need be given unless the meeting is to be held at a place other than the main office of the corporation. SECTION 7. SPECIAL MEETINGS. Special meetings shall be held when called by the chief executive officer or at the written request of four Directors. SECTION 8. QUORUM; ADJOURNED MEETINGS. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. A majority of the Directors -3- present, whether or not a quorum, may adjourn any meeting to another time and place, provided that, if the meeting is adjourned for more than 30 days, notice of the adjournment shall be given in accordance with these By-Laws. SECTION 9. NOTICE, WAIVERS OF NOTICE. Notice of special meetings and notice of regular meetings held at a place other than the head office of the corporation shall be given to each Director, and notice of the adjournment of a meeting adjourned for more than 30 days shall be given prior to the adjourned meeting to all Directors not present at the time of the adjournment. No such notice need specify the purpose of the meeting. Such notice shall be given four days prior to the meeting if given by mail or on the day preceding the day of the meeting if delivered personally or by telephone, facsimile, telex or telegram. Such notice shall be addressed or delivered to each Director at such Director's address as shown upon the records of the corporation or as may have been given to the corporation by the Director for the purposes of notice. Notice need not be given to any Director who signs a waiver of notice (whether before or after the meeting) or who attends the meeting without protesting the lack of notice prior to its commencement. All such waivers shall be filed with and made a part of the minutes of the meeting. SECTION 10. TELEPHONIC MEETINGS. A meeting of the Board of Directors or of any Committee thereof may be held through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in such a meeting shall constitute presence at such meeting. SECTION 11. WRITTEN CONSENTS. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as the unanimous vote of the Directors. SECTION 12. RESIGNATIONS. Any Director may resign his position as such at any time by giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. Such resignation shall take effect as of the time such notice is given or as of any later time specified therein and the acceptance thereof shall not be necessary to make it effective. -4- SECTION 13. VACANCIES. Vacancies in the membership of the Board of Directors shall be deemed to exist (i) in case of the death, resignation or removal of any Director, (ii) if the authorized number of Directors is increased, or (iii) if the stockholders fail, at a meeting of stockholders at which Directors are elected, to elect the full authorized number of Directors to be elected at that meeting. Vacancies in the membership of the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The stockholders may elect a Director at any time to fill any vacancy not filled by the Directors. SECTION 14. COMMITTEES OF THE BOARD OF DIRECTORS. By resolution adopted by a majority of the authorized number of Directors, the Board of Directors may designate one or more Committees to act as or on behalf of the Board of Directors. Each such Committee shall consist of one or more Directors designated by the Board of Directors to serve on such Committee at the pleasure of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any Committee, which alternate members may replace any absent member at any meeting of such Committee. In the absence or disqualification of a member of a Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any Committee, to the extent provided in the resolution of the Board of Directors, these By-Laws or the Certificate of Incorporation, may have all the authority of the Board of Directors, except with respect to: (i) amending the Certificate of Incorporation (except that a Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommending to the stockholders the sale, -5- lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amending these By-Laws. Included among the Committees shall be the following: (a) EXECUTIVE COMMITTEE. There shall be an Executive Committee consisting of the Chairman of the Board, presiding, and not less than seven additional Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. Subject to such limitations as may from time to time be imposed by the Board of Directors or as are imposed by these By-Laws, the Executive Committee shall have the fullest authority to act for and on behalf of the corporation, and it shall have all of the powers of the Board of Directors which, under the law, it is possible for a Board of Directors to delegate to such a committee, including the supervision of the general management, direction and superintendence of the business and affairs of the corporation and the power to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. (b) COMMITTEE ON EXAMINATIONS AND AUDITS. There shall be a Committee on Examinations and Audits consisting of not less than three Directors who are not officers of the corporation and who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of this Committee (i) to make, or cause to be made, in accordance with the procedures from time to time approved by the Board of Directors, internal examinations and audits of the affairs of the corporation and the affairs of any subsidiary which by resolution of its board of directors has authorized the Committee on Examinations and Audits to act hereunder, (ii) to make recommendations to the Board of Directors of the corporation and of each such subsidiary with respect to the selection of and scope of work for the independent auditors for the corporation and for each subsidiary, (iii) to review, or cause to be reviewed in accordance with procedures from time to time approved by the Board of Directors, all reports of internal examinations and audits, all audit-related reports made by the independent auditors for the corporation and each such subsidiary and all reports of examination of the corporation and of any subsidiary made by regulatory authorities, (iv) from time to time, to review and discuss with the management, and independently with the General Auditor, the Risk Control Officer and the independent auditors, the accounting and reporting principles, policies and -6- practices employed by the corporation and its subsidiaries and the adequacy of their accounting, financial, operating and administrative controls, including the review and approval of any policy statements relating thereto, and (v) to perform such other duties as the Board of Directors may from time to time assign to it. The Committee on Examinations and Audits shall submit reports of its findings, conclusions and recommendations, if any, to the Board of Directors. (c) MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE. There shall be a Management Development and Compensation Committee consisting of not less than six directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise and none of whom shall be eligible to participate in either the Wells Fargo & Company Stock Appreciation Rights Plan, the Wells Fargo & Company Stock Option Plan the Wells Fargo & Company Employee Stock Purchase Plan or any similar employee stock plan (or shall have been so eligible within the year next preceding the date of becoming a member of the Management Development and Compensation Committee). It shall be the duty of the Management Development and Compensation Committee, and it shall have authority, (i) to advise the Chief Executive Officer concerning the corporation's salary policies, (ii) to administer such compensation programs as from time to time are delegated to it by the Board of Directors, (iii) to accept or reject the recommendations of the Chief Executive Officer with respect to all salaries in excess of such dollar amount or of officers of such grade or grades as the Board of Directors may from time to time by resolution determine to be appropriate and (iv) upon the request of any subsidiary which by resolution of its board of directors has authorized the Management Development and Compensation Committee to act hereunder, to advise its chief executive officer concerning such subsidiary's salary policies and compensation programs. (d) NOMINATING COMMITTEE. There shall be a Nominating Committee consisting of not less than three Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of the Nominating Committee, annually and in the event of vacancies on the Board of Directors, to nominate candidates for election to the Board of Directors. Each Committee member shall serve until the organizational meeting of the Board of Directors held on the day of the annual meeting of stockholders in the year next following his or her election and until his or her successor shall have been elected, but any such member may be removed at any time by -7- the Board of Directors. Vacancies in any of said committees, however created, shall be filled by the Board of Directors. A majority of the members of any such committee shall be necessary to constitute a quorum and sufficient for the transaction of business, and any act of a majority present at a meeting of any such committee at which there is a quorum present shall be the act of such committee. Subject to these By-Laws and the authority of the Board of Directors, each committee shall have the power to determine the form of its organization. The provisions of these By-Laws governing the calling, notice and place of special meetings of the Board of Directors shall apply to all meetings of any Committee unless such committee fixes a time and place for regular meetings, in which case notice for such meeting shall be unnecessary. The provisions of these By-Laws regarding actions taken by the Board of Directors, however called or noticed, shall apply to all meetings of any Committee. Each committee shall cause to be kept a full and complete record of its proceedings, which shall be available for inspection by any Director. There shall be presented at each meeting of the Board of Directors a summary of the minutes of all proceedings of each committee since the preceding meeting of the Board of Directors. ARTICLE III OFFICERS SECTION 1. ELECTION OF EXECUTIVE OFFICERS. The corporation shall have (i) a Chairman of the Board, (ii) a President, (iii) a Secretary and (iv) a Chief Financial Officer. The Corporation also may have a Vice Chairman of the Board, one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Controller, a Treasurer, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant Secretaries, a General Auditor, a Risk Control Officer, and such other officers as the Board of Directors, or the Chief Executive Officer or any officer or committee whom he may authorize to perform this duty, may from time to time deem necessary or expedient for the proper conduct of business by the corporation. The Chairman of the Board, the Vice Chairman of the Board, if any, and the President shall be elected from among the members of the Board of Directors. The following offices shall be filled only pursuant to election by the Board of Directors: Chairman of the Board, Vice Chairman of the Board, President, Vice Chairman, Executive Vice President, Senior Vice President, Secretary, Controller, Treasurer, General Auditor and Risk Control Officer. -8- Other officers may be appointed by the Chief Executive Officer or by any officer or committee whom he may authorize to perform this duty. All officers shall hold office at will, at the pleasure of the Board of Directors, the Chief Executive Officer, the officer or committee having the authority to appoint such officers, and the officer or committee authorized by the Chief Executive Officer to remove such officers, and may be removed at any time, with or without notice and with or without cause. No authorization by the Chief Executive Officer to perform such duty of appointment or removal shall be effective unless done in writing and signed by the Chief Executive Officer. Two or more offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the corporation. As Chief Executive Officer, he shall (i) exercise, and be responsible to the Board of Directors for, the general supervision of the property, affairs and business of the corporation, (ii) report at each meeting of the Board of Directors upon all matters within his knowledge which the interests of the corporation may require to be brought to its notice, (iii) prescribe, or to the extent he may deem appropriate designate an officer or committee to prescribe, the duties, authority and signing power of all other officers and employees of the corporation and (iv) exercise, subject to these By-Laws, such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, subject to these By-Laws, exercise such powers and perform such duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board and the President, the Vice Chairman of the Board shall preside over the meetings of the stockholders and the Board of Directors. SECTION 4. PRESIDENT. The President shall, subject to these By-Laws, be the Chief Operating Officer of the corporation and shall exercise such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board, the President shall preside over the meetings of the stockholders and the Board of Directors. SECTION 5. ABSENCE OR DISABILITY OF CHIEF EXECUTIVE OFFICER. In the absence or disability of the Chairman of the -9- Board, the President shall act as Chief Executive Officer. In the absence or the disability of both the Chairman of the Board and the President, the Vice Chairman of the Board shall act as Chief Executive Officer. In the absence of the Chairman of the Board, the President and the Vice Chairman of the Board, the officer designated by the Board of Directors, or if there be no such designation the officer designated by the Chairman of the Board, shall act as Chief Executive Officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as Chief Executive Officer in his absence or disability and in the absence or disability of the President and the Vice Chairman of the Board. SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of the financial condition of the corporation. In general, he shall perform all duties ordinarily incident to the office of a chief financial officer of a corporation, and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. -10- SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries by public accounting firms and, in connection therewith, he shall determine whether the internal auditing functions being performed within the subsidiaries are adequate. He shall also perform such other duties as the Chief Executive Officer may prescribe, and shall report to the Chief Executive Officer on all matters concerning the safety of the operations of the corporation and of any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. ARTICLE IV INDEMNIFICATION SECTION 1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person -11- who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an Agent (as hereinafter defined) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding, or any appeal therein, if the Agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the Agent did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that his or her conduct was unlawful. For purposes of this Article, an "Agent" shall be any director, officer or employee of the corporation, or any person who, being or having been such a director, officer or employee, is or was serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of -12- the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. DETERMINATION OF RIGHT OF INDEMNIFICATION OR CONTRIBUTION. Unless otherwise ordered by a court, any indemnification under Section 1 or 2, and any contribution under Section 6, of this Article shall be made by the corporation to an Agent unless a determination is reasonably and promptly made, either (i) by the Board of Directors acting by a majority vote of a quorum consisting of Directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or if obtainable and such quorum so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such Agent acted in bad faith and in a manner that such Agent did not believe to be in or not opposed to the best interests of the corporation or, with respect to any criminal proceeding, that such Agent believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 4. ADVANCES OF EXPENSES. Except as limited by Section 5 of this Article, costs, charges and expenses (including attorneys' fees) incurred by an Agent in defense of any action, suit, proceeding or investigation of the nature referred to in Section 1 or 2 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter; provided, however, that if the General Corporation Law of Delaware then so requires, such payment shall be made only if the Agent shall undertake to reimburse the corporation for such payment in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. SECTION 5. RIGHT OF AGENT TO INDEMNIFICATION OR ADVANCE UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Section 1 or 2, or advance under Section 4, of this Article shall be made promptly and in any event within 90 days, upon the written request of the Agent, unless with respect to an application under said Sections 1 or 2 an adverse determination is reasonably and promptly made pursuant to Section 3 of this Article or unless with respect to an application under said Section 4 an adverse determination is made pursuant to said Section 4. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction if the Board of Directors or independent legal counsel improperly denies the claim, in whole or in part, or if no disposition of such claim is made within 90 days. It shall be a defense to any such action -13- (other than an action brought to enforce a claim for expenses incurred in defending any action, suit or proceeding in advance of its final disposition where any required undertaking has been tendered to the corporation) that the Agent has not met the standards of conduct which would require the corporation to indemnify or advance the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including the Board of Directors, independent legal counsel and the stockholders) to have made a determination prior to the commencement of such action that indemnification of the Agent is proper in the circumstances because he or she has met the applicable standard of conduct, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel and the stockholders) that the Agent had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Agent had not met the applicable standard of conduct. The Agent's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation. SECTION 6. CONTRIBUTION. In the event that the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an Agent in whole or in part, then in respect of any threatened, pending or completed action, suit or proceeding in which the corporation is jointly liable with the Agent (or would be if joined in such action, suit or proceeding), to the extent permitted by the General Corporation Law of Delaware the corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the corporation on the one hand and the Agent on the other from the transaction from which such action, suit or proceeding arose and (ii) the relative fault of the corporation on the one hand and of the Agent on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the corporation on the one hand and of the Agent on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. SECTION 7. OTHER RIGHTS AND REMEDIES. Indemnification under this Article shall be provided regardless of when the -14- events alleged to underlie any action, suit or proceeding may have occurred, shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification and advancement of expenses under this Article shall be deemed to be provided by a contract between the corporation and the Agent who serves as such at any time while these By-Laws and other relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. SECTION 8. INSURANCE. Upon resolution passed by the Board of Directors, the corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would have the power to indemnify such person against such liability under the provisions of this Article. The corporation may create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 9. CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the corporation" include all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer or employee of such a constituent corporation or who, being or having been such a director, officer or employee, is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity. SECTION 10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprise" in Sections 1 and 9 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service by an Agent as director, officer, employee, trustee or agent of the corporation which -15- imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" for purposes of this Article. SECTION 11. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees, judgments, fines and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by the applicable portion of this Article that shall not have been invalidated, or by any other applicable law. SECTION 12. ACTIONS INITIATED BY AGENT. Anything to the contrary in this Article notwithstanding, the corporation shall indemnify any Agent in connection with an action, suit or proceeding initiated by such Agent (other than actions, suits, or proceedings commenced pursuant to Section 5 of this Article) only if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INDEMNIFICATION. Notwithstanding any other provision of this Article, the corporation shall indemnify any Agent and advance expenses incurred by such Agent in any action, suit or proceeding of the nature referred to in Section 1 or 2 of this Article to the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, except that no amount shall be paid pursuant to this Article in the event of an adverse determination pursuant to Section 3 of this Article or in respect of remuneration to the extent that it shall be determined to have been paid in violation of law or in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, -16- both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may also provide indemnification and advancement of expenses to other persons or entities to the extent deemed appropriate. ARTICLE V MISCELLANEOUS SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year. SECTION 2. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate representing the number of shares of the stock of the corporation owned by such stockholder and the class or series of such shares. Each certificate shall be signed in the name of the corporation by (i) the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and (ii) the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. Any of the signatures on the certificate may be facsimile. Prior to due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner for any share of stock of the corporation shall be treated as the person exclusively entitled to vote, to receive notice, and to exercise all other rights and receive all other entitlements of a stockholder with respect to such share, except as may be provided otherwise by law. SECTION 3. EXECUTION OF WRITTEN INSTRUMENTS. All written instruments shall be binding upon the corporation if signed on its behalf by (i) any two of the following officers: the Chairman of the Board, the President, the Vice Chairman of the Board, the Vice Chairmen or the Executive Vice Presidents; or (ii) any one of the foregoing officers signing jointly with any Senior Vice President. Whenever any other officer or person shall be authorized to execute any agreement, document or instrument by resolution of the Board of Directors, or by the Chief Executive Officer, or by any two of the officers identified in the immediately preceding sentence, such execution by such other officer or person shall be equally binding upon the corporation. SECTION 4. SUBSIDIARY. As used in these By-Laws the term "subsidiary" or "subsidiaries" means any corporation 25 percent or more of whose voting shares is directly or indirectly -17- owned or controlled by the corporation, or any other affiliate of the corporation designated in writing as a subsidiary of the corporation by the Chief Executive Officer of the corporation. All such written designations shall be filed with the Secretary of the corporation. SECTION 5. AMENDMENTS. These By-Laws may be altered, amended or repealed by a vote of the stockholders entitled to exercise a majority of the voting power of the corporation, by written consent of such stockholders or by the Board of Directors. SECTION 6. ANNUAL REPORT. The Board of Directors shall cause an annual report to be sent to the stockholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of stockholders to be held during the ensuing fiscal year. SECTION 7. CONSTRUCTION. Unless the context clearly requires it, nothing in these By-Laws shall be construed as a limitation on any powers or rights of the corporation, its Directors or its officers provided by the General Corporation Law of Delaware. Unless the context otherwise requires, the General Corporation Law of Delaware shall govern the construction of these By-Laws. SECTION 8. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors or any committee thereof, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors or such committee shall approve, including, without limitation, a pledge of shares of stock of the corporation. This Section shall not be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. SECTION 9. NOTICES; WAIVERS. Whenever, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such provision shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the -18- corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile, telex or telegram. A waiver in writing of any such required notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. -19- EX-11 3 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Quarter ended March 31, ------------------ (in millions) 1996 1995 - ------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 264 $ 233 Less preferred dividends 10 10 -------- -------- Net income for calculating primary earnings per common share $ 254 $ 223 -------- -------- -------- -------- Average common shares outstanding 47.0 50.5 -------- -------- -------- -------- PRIMARY EARNINGS PER COMMON SHARE $ 5.39 $ 4.41 -------- -------- -------- -------- FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 264 $ 233 Less preferred dividends 10 10 -------- -------- Net income for calculating fully diluted earnings per common share $ 254 $ 223 -------- -------- -------- -------- Average common shares outstanding 47.0 50.5 Add exercise of options, warrants and share rights, reduced by the number of shares that could have been purchased with the proceeds from such exercise 1.3 1.1 -------- -------- Average common shares outstanding as adjusted 48.3 51.6 -------- -------- -------- -------- FULLY DILUTED EARNINGS PER COMMON SHARE $ 5.24 $ 4.31 -------- -------- -------- -------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(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 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q DATED MAY 9, 1996 FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 2,721 0 49 0 8,435 0 0 35,167 1,681 48,978 37,806 2,468 1,276 3,147 0 489 235 3,478 48,978 875 128 3 1,006 241 330 676 0 0 567 463 264 0 0 264 5.39 5.24 6.18 525 122 12 0 1,794 137 24 1,681 0 0 0
EX-99.(A) 5 EXHIBIT 99(A) EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Quarter ended March 31, ---------------------- (in millions) 1996 1995 - ------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 462 $ 370 Fixed charges 348 377 ------- ------- $ 810 $ 747 ------- ------- ------- ------- Fixed charges (1): Interest expense $ 330 $ 360 Estimated interest component of net rental expense 18 17 ------- ------- $ 348 $ 377 ------- ------- ------- ------- Ratio of earnings to fixed charges (2) 2.33 1.98 ------- ------- ------- ------- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 462 $ 370 Fixed charges 107 135 ------- ------- $ 569 $ 505 ------- ------- ------- ------- Fixed charges: Interest expense $ 330 $ 360 Less interest on deposits (241) (242) Estimated interest component of net rental expense 18 17 ------- ------- $ 107 $ 135 ------- ------- ------- ------- Ratio of earnings to fixed charges (2) 5.32 3.74 ------- ------- ------- ------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.(B) 6 EXHIBIT 99(B) EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Quarter ended March 31, (in millions) 1996 1995 - ------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 462 $ 370 Fixed charges 348 377 -------- ------- $ 810 $ 747 -------- ------- -------- ------- Preferred dividend requirement $ 10 $ 10 Ratio of income before income tax expense to net income 1.75 1.59 -------- ------- Preferred dividends (2) $ 18 $ 16 -------- ------- Fixed charges (1): Interest expense 330 360 Estimated interest component of net rental expense 18 17 -------- ------- 348 377 -------- ------- Fixed charges and preferred dividends $ 366 $ 393 -------- ------- -------- ------- Ratio of earnings to fixed charges and preferred dividends (3) 2.21 1.90 -------- ------- -------- ------- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 462 $ 370 Fixed charges 107 135 -------- ------- $ 569 $ 505 -------- ------- -------- ------- Preferred dividends (2) $ 18 $ 16 -------- ------- Fixed charges (1): Interest expense 330 360 Less interest on deposits (241) (242) Estimated interest component of net rental expense 18 17 -------- ------- 107 135 -------- ------- Fixed charges and preferred dividends $ 125 $ 151 -------- ------- -------- ------- Ratio of earnings to fixed charges and preferred dividends (3) 4.55 3.34 -------- ------- -------- ------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(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. -----END PRIVACY-ENHANCED MESSAGE-----