-----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, RoDSPht6MvzOjPhRC+f9l6detlx2qjUZifTJTihboz++gX+KHG6ZQCrcOrDeORSU lHKQaqRutZttWJgafzChaw== 0000912057-97-008888.txt : 19970317 0000912057-97-008888.hdr.sgml : 19970317 ACCESSION NUMBER: 0000912057-97-008888 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06214 FILM NUMBER: 97557004 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-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1996 Commission file number 1-6214 ------------------------------- WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware No. 13-2553920 (State of incorporation) (I.R.S. Employer Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (415) 477-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange Title of Each Class on Which Registered - ------------------ ----------------------- Common Stock, par value $5 New York Stock Exchange Pacific Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange 8 7/8% Preferred Stock, Series D New York Stock Exchange 9% Preferred Stock, Series G New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained herein, or will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No ----- ----- As of February 14, 1997 (the latest practicable date), 90,869,162 shares of common stock were outstanding. On the same date, the aggregate market value of common stock held by nonaffiliates was approximately $28,366 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Shareholders - Incorporated into Parts I, II and IV. Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders - Incorporated into Part III. FORM 10-K CROSS-REFERENCE INDEX
Page -------------------------------------------- FORM Annual Proxy 10-K Report (1) Statement (2) ---- ------ --------- PART I Item 1. Business Description of Business 2-5 6-76 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 6 12-15 -- Investment Portfolio 7 17-18, 41-42, 47-48 -- Loan Portfolio 7-11 19-24, 42-43, 48-51 -- Summary of Loan Loss Experience 11-13 24-25, 43, 50 -- Deposits 13 14-15, 26, 53 -- Return on Equity and Assets -- 6-7 -- Short-Term Borrowings 14 53 -- Item 2. Properties 14 -- -- Item 3. Legal Proceedings -- 68 -- Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1996) (3) -- -- -- Executive Officers of the Registrant 15 -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16 36, 46 -- Item 6. Selected Financial Data -- 8 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- 6-36 -- Item 8. Financial Statements and Supplementary Data -- 37-76 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant 15 -- 8-11 Item 11. Executive Compensation -- -- 4-5, 12-17 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 6-7 Item 13. Certain Relationships and Related Transactions -- -- 20-22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16-18 37-76 -- SIGNATURES 19-20 -- -- - --------------------------------------------------------------------------------------------------------------
(1) The 1996 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) The Proxy Statement dated March 11, 1997 for the 1997 Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K. (3) None. DESCRIPTION OF BUSINESS GENERAL Wells Fargo & Company (Parent) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Based on assets as of December 31, 1996, it was the eighth largest bank holding company in the United States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank), the fifth largest bank in the U.S. Wells Fargo & Company and its subsidiaries are hereinafter referred to as the Company. THE BANK HISTORY AND GROWTH The Bank is the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. The California banking business was separated from the express business in 1905 and was merged in 1960 with American Trust Company, another of the oldest banks in the Western United States. The Bank became Wells Fargo Bank, N.A., a national banking association, in 1968. Its head office is located in San Francisco, California. In 1986, the Company acquired from Midland Bank plc all the common stock of Crocker National Corporation, a bank holding company whose principal subsidiary was Crocker National Bank, the 17th largest bank in the U.S. at the time. In 1988, the Company acquired Barclays Bank of California with assets of $1.3 billion. In 1990 and 1991, the Company completed the two-phase purchase of the 130-branch California network of Great American Bank (GA), a Federal Savings Bank. The Company acquired assets with a GA book value of $5.8 billion. Also during 1990, the Company completed the acquisition of four California banking companies with combined assets of $1.9 billion: Valley National Bank of Glendale, Central Pacific Corporation of Bakersfield, the Torrey Pines Group of Solana Beach and Citizens Holdings and its two banking subsidiaries in Orange County. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate). The Company acquired assets with a First Interstate book value of approximately $55 billion. The purchase price was approximately $11.3 billion. The Merger was accounted for as a purchase transaction. Accordingly, the results of operations and assets/liabilities of First Interstate are included with those of the Company for periods subsequent to the date of the Merger (i.e., the financial information for periods prior to April 1, 1996 included in this 10-K exclude First Interstate). The Merger is discussed in the 1996 Annual Report to Shareholders. For further information, see the Line of Business Results section of the 1996 Annual Report to Shareholders. The following table shows selected information for the Bank:
- ------------------------------------------------------------------------------------------------------ December 31, ------------------------------------------------------ (dollars in billions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ Investment securities $12.3 $ 8.5 $11.2 $12.7 $ 9.0 Loans $61.5 $34.6 $35.7 $32.4 $36.0 Assets $98.7 $48.6 $51.9 $50.7 $50.7 Deposits $75.9 $39.0 $42.4 $42.4 $43.1 Staff (active, full-time equivalent) 34,948 18,129 19,117 19,324 21,102 Retail outlets (all domestic) 1,816 974 634 624 626 - ------------------------------------------------------------------------------------------------------
OTHER BANK SUBSIDIARIES In 1995, the Company formed Wells Fargo Bank (Arizona), N.A., a national bank subsidiary, to operate the Company's credit card business. The Company also has a majority ownership interest in the Wells Fargo HSBC Trade Bank, N.A. established in 1995 that provides trade financing, letters of credit and collection services. On April 1, 1996, the California bank of First Interstate merged into the Bank. In June 1996, the Company merged former First Interstate bank subsidiaries in six states (Idaho, Nevada, New Mexico, Oregon, Utah and Washington) into the Bank. In September 1996, Wells Fargo Bank of Arizona, N.A. (formerly First Interstate Bank of Arizona, N.A.) merged into the Bank. Each of these states has opted-in early under the interstate branching provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act). In addition, the Company completed the sales of the First Interstate banks in Wyoming, Montana and Alaska in the fourth quarter of 1996. Each bank had three branches. The three banks had aggregate assets of approximately $.6 billion and aggregate deposits of approximately $.5 billion. Banks in the other states retained by the Company are expected to merge into the Bank as soon as permitted by applicable state laws (i.e., Colorado in June 1997; Texas not earlier than September 1999). NONBANK SUBSIDIARIES The Company has wholly-owned subsidiaries that provide various banking-related services. In the aggregate, these subsidiaries are not material to the Company's assets or net income. COMPETITION The Company competes for deposits, loans and other banking services in its principal geographic market in the Western United States, as well as in selected national markets as opportunities arise. The banking business is highly competitive and has become increasingly so in recent years; the industry continues to consolidate and strong, unregulated competitors have entered core banking markets with focused products targeted at highly profitable customer segments. These unregulated competitors, such as investment companies, specialized lenders and multinational financial services companies, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue. Within the banking industry, ongoing consolidation has increased pressure on the Company from its most significant competitor in California, Bank of America, the third largest bank holding company in the United States based on assets as of December 31, 1996. Moreover, federal and state legislation adopted in recent years has increased competition by allowing banking organizations from other parts of the country to enter the Company's core geographic market (see "Supervision and Regulation" for further discussion of such legislation and the competitive environment in which the Company operates). Among commercial banks, the Bank is presently the second largest holder of customer deposits in California. There is no meaningful measure of overall market share within the broadly defined financial services industry. MONETARY POLICY The earnings of the Company are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities in the U.S. and abroad. In particular, the Federal Reserve System exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. SUPERVISION AND REGULATION Under the Bank Holding Company Act, the Company is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Further, the Act restricts the activities in which the Company may engage and the nature of any company in which the Parent may own more than 5% of any class of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks, and activities so closely related to banking as determined by the Board of Governors to be proper incidents thereto. Under the Act, the acquisition of substantially all of the assets of any domestic bank or savings association or the ownership or control of more than 5% of its voting shares by a bank holding company is subject to prior approval by the Board of Governors. Under the Riegle-Neal Act, bank holding companies which are adequately capitalized and adequately managed are now permitted to make interstate acquisitions of banks without regard to state law restrictions. Effective June 1, 1997, or earlier if authorized by state legislation, the merger of commonly owned banks in different states will also be permitted, except in states which have passed legislation to prohibit such mergers. The statute will also permit banks to establish branches outside their home state in states which pass legislation to permit such interstate branching. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the terms of transactions between the Bank and its affiliates and on any extension of credit to its affiliates. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency are limited by a formula. For more information regarding restrictions on loans and dividends by the Bank to its affiliates, see Note 3 to the Financial Statements in the 1996 Annual Report to Shareholders. There are various requirements and restrictions in the laws of the U.S. and California affecting the Bank and its operations, including restrictions on the amount of its loans and the nature and amount of its investments, its activities as an underwriter of securities, its opening of branches and its acquisition of other banks or savings associations. The Bank, as a national bank, is subject to regulation and examination by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the FDIC. Major regulatory changes affecting the Bank, banking and the financial services industry in general have occurred in the last several years and can be expected to occur increasingly in the future. Federal banking legislation since 1980 has deregulated interest rate ceilings on deposits at banks and thrift institutions and has increased the types of accounts that can be offered. Generally, federal banking legislation has narrowed the functional distinctions among financial institutions. The consumer and commercial banking powers of thrift institutions have expanded, and state-chartered banks are authorized to engage in all activities which are permissible for national banks and in certain cases may, with approval of the FDIC, engage in activities, such as insurance underwriting, which are not authorized for national banks. Non-depository institutions can be expected to increase the extent to which they act as financial intermediaries, particularly in the area of consumer credit services. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system. Furthermore, the geographic constraints on portions of the financial services industry can be expected to continue to erode. These changes create significant opportunities for the Company, as well as the financial services industry, to compete in financial markets on a less-regulated basis. They also suggest that the Company and, particularly, the Bank will face new and major competitors in geographic and product markets in which their operations historically have been protected by banking laws and regulations. ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------------------------- 1996 OVER 1995 1995 Over 1994 ---------------------------------- -------------------------------- (in millions) VOLUME RATE TOTAL Volume Rate Total - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Federal funds sold and securities purchased under resale agreements $ 25 $ -- $ 25 $ (6) $ 3 $ (3) Investment securities: At fair value: U.S. Treasury Securities 114 (3) 111 19 (1) 18 Securities of U.S. government agencies and corporations 344 10 354 (8) (4) (12) Private collateralized mortgage obligations 101 2 103 (10) 1 (9) Other securities 33 (16) 17 1 4 5 At cost (1): U.S. Treasury securities (61) -- (61) (54) 2 (52) Securities of U.S. government agencies and corporations (269) -- (269) (89) 1 (88) Private collateralized mortgage obligations (66) -- (66) (7) 2 (5) Other securities (10) -- (10) 1 1 2 Mortgage loans held for sale (76) -- (76) 76 -- 76 Loans: Commercial 728 (80) 648 149 52 201 Real estate 1-4 family first mortgage 277 4 281 (190) 41 (149) Other real estate mortgage 319 (16) 303 (2) 67 65 Real estate construction 99 3 102 16 9 25 Consumer: Real estate 1-4 family junior lien mortgage 223 17 240 (3) 29 26 Credit card 209 (27) 182 131 5 136 Other revolving credit and monthly payment 473 (29) 444 39 24 63 Lease financing 94 (6) 88 21 1 22 Foreign 8 -- 8 -- -- -- Other 23 1 24 -- -- -- ----- ------ ----- ---- ---- ---- Total increase (decrease) in interest income 2,588 (140) 2,448 84 237 321 ----- ------ ----- ---- ---- ---- Increase (decrease) in interest expense: Deposits: Interest-bearing checking 3 11 14 (7) 1 (6) Market rate and other savings 367 5 372 (84) 47 (37) Savings certificates 315 (27) 288 49 74 123 Other time deposits -- 3 3 6 (4) 2 Deposits in foreign offices (76) (12) (88) 48 13 61 Federal funds purchased and securities sold under repurchase agreements (88) (19) (107) 63 37 100 Commercial paper and other short-term borrowings (8) (8) (16) 17 5 22 Senior debt 38 (9) 29 (18) 23 5 Subordinated debt 64 6 70 (3) 9 6 Guaranteed preferred beneficial interests in Company's subordinated debentures 6 -- 6 -- -- -- ----- ------ ----- ---- ---- ---- Total increase (decrease) in interest expense 621 (50) 571 71 205 276 ----- ------ ----- ---- ---- ---- Increase (decrease) in net interest income on a taxable-equivalent basis $1,967 $ (90) $1,877 $ 13 $ 32 $ 45 ----- ------ ----- ----- ---- ----- ----- ------ ----- ----- ---- ----- - -------------------------------------------------------------------------------------------------------------------------------
(1) As investment securities at cost were reclassified to the at-fair-value portfolio on November 30, 1995, the decrease in net interest income for 1996 over 1995 was entirely due to volume. INVESTMENT SECURITIES At December 31, 1996, there were no investment securities issued by a single issuer (excluding the U.S. government and its agencies and corporations) that exceeded 10% of stockholders' equity. LOAN PORTFOLIO The following table presents the remaining contractual principal maturities of selected loan categories at December 31, 1996 and a summary of the major categories of loans outstanding at the end of the last five years. At December 31, 1996, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- ------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 ----------------------------------------------------------------------------------- OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ------------------ --------------------- FLOATING FLOATING OR OR ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE (in millions) OR LESS RATE RATE RATE RATE TOTAL - ------------------------------------------------------------------------------------------------------------------------ Selected loan maturities: Commercial $10,343 $ 789 $ 6,439 $ 371 $1,573 $19,515 Real estate 1-4 family first mortgage (1) 1,761 302 123 5,802 2,437 10,425 Other real estate mortgage 1,827 1,592 3,885 2,139 2,417 11,860 Real estate construction 1,162 87 829 86 139 2,303 Foreign 81 -- 70 -- 18 169 ------ ----- ------ ----- ------ ------ Total selected loan maturities $15,174 $2,770 $11,346 $8,398 $6,584 44,272 ------ ----- ------ ----- ------ ------ ------ ----- ------ ----- ------ ------ Other loan categories: Real estate 1-4 family junior lien mortgage 6,278 Credit card 5,462 Other revolving credit and monthly payment 8,374 ------- Total consumer 20,114 Lease financing 3,003 ------- Total loans $67,389 ------- ------- DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------ Selected loan maturities: Commercial $ 9,750 $ 8,162 $ 6,912 $ 8,214 Real estate 1-4 family first mortgage (1) 4,448 9,050 7,458 6,836 Other real estate mortgage 8,263 8,079 8,286 10,128 Real estate construction 1,366 1,013 1,110 1,600 Foreign 31 27 18 5 ------ ------ ------ ------ Total selected loan maturities 23,858 26,331 23,784 26,783 ------ ------ ------ ------ Other loan categories: Real estate 1-4 family junior lien mortgage 3,358 3,332 3,583 4,157 Credit card 4,001 3,125 2,600 2,807 Other revolving credit and monthly payment 2,576 2,229 1,920 1,979 ------ ------ ------ ------ Total consumer 9,935 8,686 8,103 8,943 Lease financing 1,789 1,330 1,212 1,177 ------ ------ ------ ------ Total loans $35,582 $36,347 $33,099 $36,903 ------ ------ ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------------------------
(1) Includes approximately $1 billion of fixed-initial-rate mortgage (FIRM) loans in the over 5 year fixed rate category. FIRM loans carry fixed rates during the first 3, 5, 7 or 10 years (based on the period selected by the borrower) of the loan term and carry adjustable rates thereafter. UNDERWRITING POLICIES AND PRACTICES It is the policy of the Company to grant credit in accordance with the principles of sound risk management and the Company's business strategy. The Company obtains and analyzes sufficient information to ensure that the purpose of a credit extension is lawful and productive and that the borrower is able to repay as scheduled. Credit is structured in a manner consistent with such supporting analysis and is monitored to detect changes in quality. The Company's credit policies establish the fundamental credit principles which guide the Company in granting loans, leases, lines of credit, standby and commercial letters of credit, acceptances and commitments ("direct credit") to customers on an unsecured, partially secured or fully secured basis. The credit product line for both businesses and individuals includes standardized products as well as customized, individual accommodations. In addition, the Company provides products and services which could become direct credit exposure unless such products are offered on a "cash only" basis. These include: automated clearing house services, controlled disbursement, wire services, foreign exchange services, interest rate protection products, Federal fund lines to banks, cash letters and deposit accounts which create exposure by allowing use of funds advanced/uncollected funds ("operating credit"). Standardized documentation and underwriting and a study of the requirements of the secondary market are an explicit consideration in credit product development. The Company requires some degree of background check into character and credit history of all its credit customers. Extensions of credit must be supported by current financial information on the borrower (and guarantor) which is appropriate to the size and type of credit being offered; such information can denote any material which serves to inform the Company about the financial health of its credit customers. An accompanying credit analysis includes, at a minimum, an evaluation of the customer's financial strength and probability of repayment, with due consideration given to the negative factors which may affect the borrower's ability to meet repayment schedules. Collateral is valued in accordance with Company appraisal standards and, where applicable, appraisal regulations issued under FIRREA and other applicable law. For commercial real estate transactions, the recommending officer reviews and evaluates the key assumptions supporting the appraised value. In addition to a broad range of laws and regulations and the Company's credit policies, the Company has established minimum underwriting standards which delineate criteria for sources of repayment, financial strength and enhancements such as guarantees. The primary source of repayment will be recurring cash flow of the borrower or cash flow from the real estate project being financed. Underwriting standards include: minimum financial condition and cash flow hurdles for unsecured credit; maximum loan to collateral value ratios for secured products; minimum cash flow coverage of debt service, or debt to income ratios, for term products; minimum liquidity and maximum financial leverage requirements when lending to highly leveraged borrowers; and, for certain products, a description of any credit scoring criteria and methodology employed. Prudent credit practice will permit credit extensions which are an exception to the minimum underwriting standards; procedures for approval of exceptions are included in Company policy; and certain exceptions are reported to the Board of Directors. Generally, the Company's minimum underwriting standards for commercial real estate include various maximum loan-to-value ("LTV") ratios ranging from 50% to 80% depending on the type of collateral and the size and purpose of the loan; minimum debt service (stabilized net income divided by debt service cost) ranging from 1.10 to 1.30 depending on the type of property financed; and maximum terms ranging from 2 to 15 years for certain commercial property loans depending on the same loan/collateral characteristics. For example, a typical owner-occupied commercial real estate loan would most often have a maximum LTV of 80%, debt service coverage of 1.25 and a term of 4 to 15 years. For community reinvestment projects, the Company applies special underwriting criteria to its financing of construction of affordable multi-family housing in California built by non-profit as well as for-profit developers. The Company has devoted a limited portion of its commercial real estate portfolio to higher-risk loans, for which a commensurate return is expected. Such transactions include purchases of performing or distressed real estate loans at a discount, acquisition of rated and unrated tranches of commercial mortgage obligations, loan acquisition financing, mezzanine financing and origination of single assets for securitization. Many of the higher-yielding transactions may contain non-recourse provisions. In general, this business is more "opportunistic" in nature, as opposed to representing a highly defined lending program. As such, higher LTVs (up to 90% or 95%) will be underwritten on occasion, particularly in the case of junior and senior participating debt. Generally, commercial loan categories include unsecured loans and lines of credit with minimum debt service coverage (earnings before interest, taxes, depreciation and amortization divided by debt service cost) of 1.50 or higher depending on the specific credit analysis. Common forms of collateral pledged to secure commercial credit accommodations include accounts receivable, inventories, equipment, agricultural crops or livestock, marketable securities and cash or cash equivalent. Most transactions have minimum debt service requirements of 1.50, maximum terms of 1 to 7 years and/or LTVs in the range of 65% to 85%, based on an analysis of the collateral pledged. Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit, foreign exchange services and collection services, generally uses the same underwriting guidelines as the Company has established for its commercial lending functions. The Company also allocates a small percentage of its commercial loan portfolio to the origination of asset-based loans secured by "hard assets" (accounts receivable, inventory, equipment and/or real estate). In contrast to traditional commercial lending, asset-based borrowers generally do not have the ability to repay their debts through cash flow; therefore, such loans are fully secured and tailored to the growth and turnover of the borrower's self- liquidating asset base. Maximum LTVs are generally in the range of 65% to 85%, with specialized collateral monitoring and control procedures in place to mitigate risk exposure. The Company has devoted a focused product group to providing a full range of credit products to small businesses with annual sales of up to $10 million and in which the owner of the business is also the principal financial decision maker. Credit products include lines of credit, receivables and inventory financing, equipment loans and leases, real estate financing and SBA financing. The group utilizes automated credit decision methods, in conjunction with more traditional credit analysis in some cases, to approve or decline requests for credit. An evaluation of the soundness and desirability of collateral, if any, is also required before an extension of credit will be made. Loan-to-value, debt service coverage and maximum loan term underwriting guidelines employed are, in general, similar to those described earlier for commercial and commercial real estate loan products. The Company is an active participant in the national transportation finance market, underwriting primarily consumer leases, sales finance contracts, direct (branch-originated) loans and indirect auto, marine, and recreational vehicles by employing a business strategy which emanated from a seasoned California practice. Most applicants for these credit products are assigned a credit score which is indicative of their relative probability of repayment. The credit scoring models are validated as to their predictive power on a periodic basis. The lending group includes in its credit decisioning criteria other judgmental factors, such as advance rate and debt to income ratio, which are used to augment this credit score. However, all credit decisions made contrary to an established cut-off score must be supported and documented by a credit officer with the appropriate approval authority. In a similar fashion, the Company offers credit cards and consumer loans and lines of credit on a national basis, although the majority of the customer base resides in California. The credit review process includes initial screens to ensure that applicants meet minimum age and income level requirements for the product requested. Fraud screens are also completed. Credit bureau reports are used to calculate the debt-to-income ratios and credit scores on which an evaluation of creditworthiness is based. If accepted by the credit score, applicants with major derogatory bureau information, minimal credit references or high debt ratios are reviewed by an analyst for possible overrides, with income verification and/or collateral verification required for certain products and loan amounts. The Company offers first mortgage loan products to customers through two joint ventures. Wells Resource Mortgage Services, a joint venture with Norwest Mortgage, Inc., offers such products to primarily California customers, while Wells Resource Real Estate Services, a joint venture with PHH Mortgage Services, offers these products to customers in the Western United States, other than California. The loan products offered through these entities are underwritten and funded by the joint venture partners (i.e., Norwest Mortgage, Inc. and PHH Mortgage Services), who package the loans for sale in the secondary mortgage markets. A limited number of these loans are purchased by the Company, typically for community lending purposes or other client accommodations. The Company continues to provide second mortgage loans and lines of credit secured by first and second deeds of trust directly to its customers. The Company relies on cash flow as the primary source of repayment for these equity products. The nature of the credit review which is conducted depends on the product, but typically consists of an evaluation of the applicant's debt ratios and credit history, either judgmentally or using a credit score, along with a review of the collateral. Maximum combined LTVs will range from 50% to 100% depending on the nature, amount and term of the loan. The above underwriting practices are general standards that are subject to change; the actual terms and conditions of a specific credit transaction are dependent on an analysis of the specific transaction. CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ----------------------------------------------------------------------- (in millions) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $1,794 $2,082 $2,122 $2,067 $1,646 Allowance of First Interstate 770 -- -- -- -- Sale of former First Interstate banks (11) -- -- -- -- Provision for loan losses 105 -- 200 550 1,215 Loan charge-offs: Commercial (140) (55) (54) (110) (238) Real estate 1-4 family first mortgage (18) (13) (18) (25) (17) Other real estate mortgage (40) (52) (66) (197) (290) Real estate construction (13) (10) (19) (68) (93) Consumer: Real estate 1-4 family junior lien mortgage (28) (16) (24) (28) (28) Credit card (404) (208) (138) (177) (189) Other revolving credit and monthly payment (186) (53) (36) (41) (41) ------ ------ ------ ------ ------ Total consumer (618) (277) (198) (246) (258) Lease financing (31) (15) (14) (18) (19) ------ ------ ------ ------ ------ Total loan charge-offs (860) (422) (369) (664) (915) ------ ------ ------ ------ ------ Loan recoveries: Commercial 54 38 37 71 59 Real estate 1-4 family first mortgage 8 3 6 2 2 Other real estate mortgage 47 53 22 47 9 Real estate construction 11 1 15 4 3 Consumer: Real estate 1-4 family junior lien mortgage 9 3 4 3 1 Credit card 36 13 18 21 21 Other revolving credit and monthly payment 47 12 11 12 12 ------ ------ ------ ------ ------ Total consumer 92 28 33 36 34 Lease financing 8 11 16 9 9 Foreign -- -- -- -- 1 ------ ------ ------ ------ ------ Total loan recoveries 220 134 129 169 117 ------ ------ ------ ------ ------ Total net loan charge-offs (640) (288) (240) (495) (798) Recoveries on the sale or swap of developing country loans -- -- -- -- 4 ------ ------ ------ ------ ------ BALANCE, END OF YEAR $2,018 $1,794 $2,082 $2,122 $2,067 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average total loans 1.05% .83% .70% 1.44% 1.97% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 3.00% 5.04% 5.73% 6.41% 5.60% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - -----------------------------------------------------------------------------------------------------------------------------
The Securities and Exchange Commission requires the Company to present the ratio of the allowance for loan losses to total nonaccrual loans. This ratio was 283% and 333% at December 31, 1996 and 1995, respectively. This ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, the prospects of borrowers and the value and marketability of collateral as well as, for the nonaccrual portfolio taken as a whole, wide variances from period to period in terms of delinquency and relationship of book to contractual principal balance. Classification of a loan as nonaccrual does not necessarily indicate that the principal of a loan is uncollectible in whole or in part. Consequently, the ratio of the allowance for loan losses to nonaccrual loans, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan losses. Indicators of the credit quality of the Company's loan portfolio and the method of determining the allowance for loan losses are discussed in the 1996 Annual Report to Shareholders. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table on the following page provides a breakdown of the allowance for loan losses by loan category. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to FAS 114) and loans analyzed on a pool basis. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. The Company has deemed it prudent, when reviewing the overall allowance, to maintain a total allowance in excess of projected losses. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - ----------------------------------------------------------------------------------------------------------------------------------- December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996(1) 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial $ 277 $ 148 $ 109 $ 152 $ 373 Real estate 1-4 family first mortgage 29 46 41 39 37 Other real estate mortgage 232 165 212 357 589 Real estate construction 40 49 45 92 181 Consumer: Credit card (2) 401 332 87 96 107 Other consumer 206 87 70 87 58 -------- ------- ------- ------- ------- Total consumer 607 419 157 183 165 Lease financing 33 28 21 19 17 Foreign 2 -- -- -- -- -------- ------- ------- ------- ------- Total allocated 1,220 855 585 842 1,362 Unallocated component of the allowance (3) 798 939 1,497 1,280 705 -------- ------- ------- ------- ------- Total $2,018 $1,794 $2,082 $2,122 $2,067 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- December 31, -------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------------------------------------------------------------- ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry AS % AS % as % as % as % as % as % as % as % as % OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total CATGRY LOANS catgry loans catgry loans catgry loans catgry loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial 1.42% 30% 1.52% 27% 1.34% 22% 2.20% 21% 4.54% 22% Real estate 1-4 family first mortgage .28 15 1.03 13 .45 25 .52 23 .54 19 Other real estate mortgage 1.96 18 2.00 23 2.62 22 4.31 25 5.82 27 Real estate construction 1.74 3 3.59 4 4.44 3 8.29 3 11.31 4 Consumer: Credit card (2) 7.34 8 8.30 11 2.78 9 3.69 8 3.81 8 Other consumer 1.41 22 1.47 17 1.26 15 1.58 16 .95 17 ---- ---- --- --- --- Total consumer 3.02 30 4.22 28 1.81 24 2.26 24 1.85 25 Lease financing 1.10 4 1.57 5 1.58 4 1.57 4 1.44 3 Foreign 1.18 -- -- -- -- -- -- -- -- -- ---- ---- --- --- --- Total allocated 1.81 100% 2.40 100% 1.61 100% 2.54 100% 3.69 100% Unallocated component of the allowance (3) 1.19 2.64 4.12 3.87 1.91 ---- ---- ---- ---- ---- Total 3.00% 5.04% 5.73% 6.41% 5.60% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------
(1) In 1996, the methods used for the allocation of the allowance for loan losses for all loan categories were modified. For example, the modification of the method for determining the allocation for real estate 1-4 family first mortgage loans (and "other consumer" loans) generally reduced the number of months of projected losses covered compared with the method used in prior years. The new methodology provided approximately 13 months coverage of projected loan losses for the real estate 1-4 family first mortgage loans in 1996, compared with approximately 40 months coverage in 1995. (2) The allocation for credit card loans in 1996 and 1995 approximated 12 months of projected losses, compared with 7 months in 1992 to 1994. (3) This amount and any unabsorbed portion of the allocated allowance are also available for any of the above listed loan categories. DEPOSITS At December 31, 1996, the contractual principal maturities of domestic time certificates of deposit and other time deposits issued in amounts of $100,000 or more were as follows (based on time remaining until maturity): $1,636 million maturing in 3 months or less; $819 million over 3 through 6 months; $684 million over 6 through 12 months and $356 million over 12 months. SHORT-TERM BORROWINGS The following table shows selected information for short-term borrowings: - ------------------------------------------------------------------------------- Year ended December 31, --------------------------------------- (in millions) 1996 1995 1994 - ------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (1) Average amount outstanding $1,769 $3,401 $2,223 Daily average rate 5.22% 5.84% 4.45% Highest month-end balance $3,048 $5,468 $3,887 Year-end balance $2,029 $2,781 $3,022 Weighted average rate on outstandings at year end 5.04% 5.43% 5.24% - -------------------------------------------------------------------------------- (1) These borrowings generally mature in less than 30 days. PROPERTIES The Company occupied 1,444 premises, consisting of traditional branches and administrative buildings, in 10 western states as of December 31, 1996. On that date, 783 premises were owned, 629 premises were leased and 32 premises were owned in part and leased in part. The leases are generally for terms not exceeding 25 years. The Company owns its 12-story headquarters building in San Francisco, California and four data processing and operation centers totaling approximately 1,100,000 square feet in California, Arizona and Nevada. The Company is also a joint venture partner in two office buildings in downtown Los Angeles, of which approximately 500,000 square feet is occupied by administrative staff and 100,000 square feet is sublet. In addition, the Company leases approximately 3,100,000 square feet of office space for data processing support and various administrative departments in major locations in California, Texas, Arizona and Oregon. At December 31, 1996, the Company had 1,947 retail outlets, comprised of 1,274 traditional branches, 298 supermarket branches and 375 banking centers, in 10 western states. In 1996, the Company and Safeway Inc. signed an agreement in principle that would allow the Company to open as many as 450 new retail outlets (banking centers and branches) in Safeway stores in the Western United States. EXECUTIVE OFFICERS OF THE REGISTRANT Date from Name Office held which held Age - --------------- ---------------------- ------------ --- Paul Hazen Chairman of the Board and January 1995 55 Chief Executive Officer William F. Zuendt President and Chief January 1995 50 Operating Officer Michael J. Gillfillan Vice Chairman and January 1992 48 Chief Credit Officer Rodney L. Jacobs Vice Chairman and Chief January 1990 56 Financial Officer Terri A. Dial Vice Chairman March 1996 47 Charles M. Johnson Vice Chairman January 1992 55 Clyde W. Ostler Vice Chairman January 1990 50 Paul M. Watson Vice Chairman March 1996 57 Leslie L. Altick Executive Vice President and July 1995 46 Director of Investor Relations Patricia R. Callahan Executive Vice President March 1993 43 and Personnel Director Ross J. Kari Executive Vice President January 1995 38 and General Auditor Frank A. Moeslein Executive Vice President May 1990 53 and Controller Guy Rounsaville, Jr. Executive Vice President, March 1985 53 Chief Counsel and Secretary Eric D. Shand Executive Vice President and July 1995 44 Chief Loan Examiner The principal occupation of each of the executive officers during the past five years has been in the position reported above or in other positions as an officer with the Company, except for Eric D. Shand, who has been with the Company since 1993; prior to that, he was San Francisco Regional Director of the Office of Thrift Supervision. There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. RECENT SALES OF UNREGISTERED SECURITIES During the fourth quarter of 1996, the Company, through subsidiary trusts, sold in private placements a total of $750 million in three series of capital securities ("Capital Securities"). On November 20, 1996, Wells Fargo Capital A sold 300,000 8.13% Capital Securities to Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., CS First Boston Corporation and Lehman Brothers Inc. (collectively, the "Capital A Initial Purchasers") at an aggregate offering price of $300 million. On November 21, 1996, Wells Fargo Capital B sold 200,000 7.95% Capital Securities to Morgan Stanley & Co. Incorporated, CS First Boston Corporation and Salomon Brothers Inc. (collectively, the "Capital B Initial Purchasers") at an aggregate offering price of $200 million. On November 25, 1996, Wells Fargo Capital C sold 250,000 7.73% Capital Securities to Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC (collectively, the "Capital C Initial Purchasers") at an aggregate offering price of $250 million. As compensation, the Capital A Initial Purchasers, Capital B Initial Purchasers and Capital C Initial Purchasers received in the aggregate $3.0 million, $2.0 million and $2.4 million, respectively. The Capital Securities were sold by the Initial Purchasers to qualified institutional buyers. The sales were exempt from registration in reliance on Rule 144A of the Securities Act of 1933, as amended. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits: (1) The consolidated financial statements and related notes, the independent auditors' report thereon and supplementary data that appear on pages 37 through 76 of the 1996 Annual Report to Shareholders are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because the conditions requiring their filing do not exist. (3) Exhibits: Exhibit number Description ------ ----------- 2 Agreement and Plan of Merger, dated as of January 23, 1996, by and between Wells Fargo & Company and First Interstate Bancorp, as amended as of February 23, 1996, excluding all annexes and schedules, incorporated by reference to Appendix A to the Joint Proxy Statement of Wells Fargo & Company and First Interstate Bancorp and the Prospectus of Wells Fargo & Company dated February 27, 1996. The omitted annexes and schedules will be furnished supplementally to the Securities and Exchange Commission upon request. 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) of Form 10-K filed March 21, 1994 (b) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Adjustable Rate Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(c) of Form 10-K filed March 21, 1994 (c) Form of Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the 9% Preferred Stock, Series G, incorporated by reference to Exhibit 99.18 to Form S-4 (Registration Statement No. 33-64575), effective February 27, 1996 (d) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H, incorporated by reference to Exhibit 4(a) of Form 8-K/A filed September 23, 1996 (e) By-Laws 4(a) The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. Exhibit number Description ------ ----------- (b) Deposit Agreement dated as of May 29, 1992, between First Interstate Bancorp and First Interstate Bank of California, as depository, relating to the 9% Preferred Stock, Series G, incorporated by reference to Exhibit 4.4 to Form S-3 (Registration Statement No. 33-47174), effective May 15, 1992 10(a) Benefits Restoration Program, as amended through April 18, 1995, incorporated by reference to Exhibit 10(a) of Form 10- K for the year ended December 31, 1995 (b) Deferral Plan for Directors, as amended through November 19, 1991, incorporated by reference to Exhibit 10(b) of Form 10- K for the year ended December 31, 1991, SEC File No. 1-6214 (c) 1990 Director Option Plan, as amended through November 19, 1991, incorporated by reference to Exhibit 10(c) of Form 10- K for the year ended December 31, 1991, SEC File No. 1-6214 (d) 1987 Director Option Plan, as amended through February 21, 1995, incorporated by reference to Exhibit A to the Company's Proxy Statement filed March 10, 1995 (e) Director Retirement Plan, incorporated by reference to Exhibit 10(e) of Form 10-K for the year ended December 31, 1993 (f) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) of Form 10-K for the year ended December 31, 1995 (g) 1982 Equity Incentive Plan, as amended through November 15, 1988, incorporated by reference to Exhibit 10(g) of Form 10- K for the year ended December 31, 1993 (h) Executive Incentive Pay Plan, incorporated by reference to Exhibit 10(h) of Form 10-K for the year ended December 31, 1995 (i) Executive Loan Plan, incorporated by reference to Exhibit 10(i) of Form 10-K for the year ended December 31, 1994 (j) Long-Term Incentive Plan, incorporated by reference to Exhibit A of the Proxy Statement filed March 14, 1994 Exhibit number Description ------ ----------- 10(k) Senior Executive Performance Plan, incorporated by reference to Exhibit B of the Proxy Statement filed March 14, 1994 11 Computation of Earnings Per Common Share 12(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.93, 2.19, 2.20, 1.90 and 1.33 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.64, 4.56, 5.04, 4.53 and 2.56 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 1.82, 2.09, 2.07, 1.77 and 1.26 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.78, 3.99, 4.18, 3.51 and 2.02 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. 13 1996 Annual Report to Shareholders -- only those sections of the Annual Report to Shareholders referenced in the index on page 1 are incorporated in the Form 10-K. 21 Subsidiaries of the Registrant -- Wells Fargo & Company's only significant subsidiary, as defined, is Wells Fargo Bank, N.A. 23 Consent of Independent Accountants 27 Financial Data Schedule (b) The Company filed the following reports on Form 8-K during the fourth quarter of 1996 and through the date hereof in 1997: (1) October 15, 1996 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1996 (2) November 15, 1996 under Item 7, containing the unaudited pro forma combined financial information of the Company and First Interstate Bancorp for the nine months ended September 30, 1996 and the year ended December 31, 1995 (3) January 21, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter and year ended December 31, 1996 STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 1996, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents prior to January 1, 1997 filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 14, 1997. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN ----------------------------------------- Frank A. Moeslein (Executive Vice President and Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 1997: Signature Capacity --------- -------- PAUL HAZEN Chairman of the Board and - ------------------------ Chief Executive Officer (Paul Hazen) (Principal Executive Officer) RODNEY L. JACOBS Vice Chairman and Chief - ------------------------ Financial Officer (Principal (Rodney L. Jacobs) Financial Officer) FRANK A. MOESLEIN Executive Vice President and - ------------------------ Controller (Principal (Frank A. Moeslein) Accounting Officer) H. JESSE ARNELLE Director - ------------------------ (H. Jesse Arnelle) MICHAEL R. BOWLIN Director - ------------------------ (Michael R. Bowlin) EDWARD M. CARSON Director - ------------------------ (Edward M. Carson) WILLIAM S. DAVILA Director - ------------------------ (William S. Davila) RAYBURN S. DEZEMBER Director - ------------------------ (Rayburn S. Dezember) MYRON DU BAIN Director - ------------------------ (Myron Du Bain) DON C. FRISBEE Director - ------------------------ (Don C. Frisbee) Director - ------------------------ (Robert K. Jaedicke) THOMAS L. LEE Director - ------------------------ (Thomas L. Lee) Signature Capacity --------- -------- Director - ------------------------ (William F. Miller) ELLEN M. NEWMAN Director - ------------------------ (Ellen M. Newman) PHILIP J. QUIGLEY Director - ------------------------ (Philip J. Quigley) Director - ------------------------ (Carl E. Reichardt) Director - ------------------------ (Donald B. Rice) RICHARD J. STEGEMEIER Director - ------------------------ (Richard J. Stegemeier) Director - ------------------------ (Susan G. Swenson) DANIEL M. TELLEP Director - ------------------------ (Daniel M. Tellep) CHANG-LIN TIEN Director - ------------------------ (Chang-Lin Tien) JOHN A. YOUNG Director - ------------------------ (John A. Young) WILLIAM F. ZUENDT Director - ------------------------ (William F. Zuendt) EX-3.(E) 2 EXHIBIT 3(E) BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED OCTOBER 15, 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. 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 2 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 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. 3 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. 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 4 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, 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: 5 (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 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. 6 (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 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 7 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. 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. 8 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 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. 9 SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of the financial condition of the corporation. In general, he shall perform all duties ordinarily incident to the office of a chief financial officer of a corporation, and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries 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 10 any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. ARTICLE IV INDEMNIFICATION SECTION 1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an 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 11 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: (i) any director, officer or employee of the corporation; (ii) any person who, being or having been such a director, officer or employee, is or was serving on behalf of the corporation at the request of an authorized officer of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise; or (iii) any person who is or was serving on behalf of the corporation at the request of the Chairman of the Board or the President of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to 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 12 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 (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 13 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 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 14 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 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 15 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: (i) in the event of an adverse determination pursuant to Section 3 of this Article; (ii) in respect of remuneration to the extent that it shall be determined to have been paid in violation of law; (iii) in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934; or (iv) in contravention of any federal law or applicable regulation of any federal bank regulatory agency. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may 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 16 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 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 17 Corporation Law of Delaware shall govern the construction of these By-Laws. SECTION 8. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors or any committee thereof, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors or such committee shall approve, including, without limitation, a pledge of shares of stock of the corporation. This Section shall not be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. SECTION 9. NOTICES; WAIVERS. Whenever, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such provision shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile, telex or telegram. A waiver in writing of any such required notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 18 EX-11 3 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------ Year ended December 31, -------------------------------------- (in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------ PRIMARY EARNINGS PER COMMON SHARE Net income $1,071 $1,032 $ 841 Less preferred dividends 67 42 43 ------- ------- ------- Net income for calculating primary earnings per common share $1,004 $ 990 $ 798 ------- ------- ------- ------- ------- ------- Average common shares outstanding 82.2 48.6 53.9 ------- ------- ------- ------- ------- ------- PRIMARY EARNINGS PER COMMON SHARE $12.21 $20.37 $14.78 ------- ------- ------- ------- ------- ------- FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $1,071 $1,032 $ 841 Less preferred dividends 67 42 43 ------- ------- ------- Net income for calculating fully diluted earnings per common share $1,004 $ 990 $ 798 ------- ------- ------- ------- ------- ------- Average common shares outstanding 82.2 48.6 53.9 Add exercise of options, warrants and share rights, reduced by the number of shares that could have been purchased with the proceeds from such exercise 1.6 1.2 1.4 ------- ------- ------- Average common shares outstanding, as adjusted 83.8 49.8 55.3 ------- ------- ------- ------- ------- ------- FULLY DILUTED EARNINGS PER COMMON SHARE $11.98 $19.90 $14.42 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------------
(1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K. This presentation is not required by APB Opinion No. 15, because it results in dilution of less than 3%. EX-12 4 EXHIBIT 12
EXHIBIT 12(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------------------------------------- (in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $1,979 $1,777 $1,454 $1,038 $ 500 Fixed charges 2,130 1,496 1,214 1,157 1,505 ------- ------- ------- ------- ------- $4,109 $3,273 $2,668 $2,195 $2,005 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges (1): Interest expense $2,002 $1,431 $1,155 $1,104 $1,454 Estimated interest component of net rental expense 128 65 59 53 51 ------- ------- ------- ------- ------- $2,130 $1,496 $1,214 $1,157 $1,505 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges (2) 1.93 2.19 2.20 1.90 1.33 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $1,979 $1,777 $1,454 $1,038 $ 500 Fixed charges 544 499 360 294 320 ------- ------- ------- ------- ------- $2,523 $2,276 $1,814 $1,332 $ 820 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges: Interest expense $2,002 $1,431 $1,155 $1,104 $1,454 Less interest on deposits 1,586 997 854 863 1,185 Estimated interest component of net rental expense 128 65 59 53 51 ------- ------- ------- ------- ------- $ 544 $ 499 $ 360 $ 294 $ 320 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges (2) 4.64 4.56 5.04 4.53 2.56 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------------------------------------------
(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.
EXHIBIT 12(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------------------------- (in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $1,979 $1,777 $1,454 $1,038 $ 500 Fixed charges 2,130 1,496 1,214 1,157 1,505 ------- ------- ------- ------- ------- $4,109 $3,273 $2,668 $2,195 $2,005 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Preferred dividend requirement $ 67 $ 42 $ 43 $ 50 $ 48 Ratio of income before income tax expense to net income 1.85 1.72 1.73 1.70 1.77 ------- ------- ------- ------- ------- Preferred dividends (2) $ 124 $ 72 $ 74 $ 85 $ 85 ------- ------- ------- ------- ------- Fixed charges (1): Interest expense 2,002 1,431 1,155 1,104 1,454 Estimated interest component of net rental expense 128 65 59 53 51 -------- ------- ------- ------- ------- 2,130 1,496 1,214 1,157 1,505 -------- ------- ------- ------- ------- Fixed charges and preferred dividends $2,254 $1,568 $1,288 $1,242 $1,590 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges and preferred dividends (3) 1.82 2.09 2.07 1.77 1.26 ------- ------- ------- ------- ------- ------- ------- ------- ------- - ------- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $1,979 $1,777 $1,454 $1,038 $ 500 Fixed charges 544 499 360 294 320 ------- ------- ------- ------- ------- $2,523 $2,276 $1,814 $1,332 $ 820 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Preferred dividends (2) $ 124 $ 72 $ 74 $ 85 $ 85 ------- ------- ------- ------- ------- Fixed charges: Interest expense 2,002 1,431 1,155 1,104 1,454 Less interest on deposits 1,586 997 854 863 1,185 Estimated interest component of net rental expense 128 65 59 53 51 ------- ------- ------- ------- ------- 544 499 360 294 320 ------- ------- ------- ------- ------- Fixed charges and preferred dividends $ 668 $ 571 $ 434 $ 379 $ 405 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges and preferred dividends (3) 3.78 3.99 4.18 3.51 2.02 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-13 5 EXHIBIT 13 WELLS FARGO & COMPANY AND SUBSIDIARIES FINANCIAL REVIEW OVERVIEW - -------------------------------------------------------------------------------- Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Annual Report, Wells Fargo & Company and its subsidiaries are referred to as the Company. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate), which is being accounted for as a purchase business combination. As a result, the financial information presented in this Annual Report for the year ended December 31, 1996 reflects the effects of the acquisition subsequent to the Merger's consummation. Since the Company's results of operations subsequent to April 1, 1996 reflect amounts recognized from the combined operations, they cannot be divided between or attributed directly to either of the two former entities nor can they be directly compared with prior periods. In substantially all of the Company's income and expense categories, the increases in the amounts reported for the year ended December 31, 1996 compared to the amounts reported in the corresponding period in 1995 resulted from the Merger. The increases in substantially all of the categories of the Company's balance sheet between amounts reported at December 31, 1996 and those reported at December 31, 1995 also resulted from the Merger. Other significant factors affecting the Company's results of operations and financial position are described in the applicable sections below. RETURN ON AVERAGE TOTAL ASSETS (ROA) (%) [LINE GRAPH] RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) (%) [LINE GRAPH] Net income in 1996 was $1,071 million, compared with $1,032 million in 1995, an increase of 4%. Net income per share was $12.21, compared with $20.37 in 1995, a decrease of 40%. The increase in earnings from a year ago reflected the results of the Merger, substantially offset by a $163 million ($94 million after tax) gain resulting from the sale of the Company's joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) in 1995 and a $105 million loan loss provision in 1996 compared with none in 1995. Return on average assets (ROA) was 1.15% and return on average common equity (ROE) was 8.83% in 1996, compared with 2.03% and 29.70%, respectively, in 1995. Earnings before the amortization of goodwill and nonqualifying core deposit intangible (CDI) ("cash" or "tangible" earnings) for the year ended December 31, 1996 were $16.74 per share, compared with $21.08 per share for the year ended December 31, 1995. This decrease is substantially due to the estimated expenses related to the First Interstate integration of about $440 million and a loan loss provision of $105 million. On the same basis, ROA was 1.66% and ROE was 28.46% in 1996, compared with 2.12% and 34.92%, respectively, in 1995. Following the Merger, "cash" earnings, as well as "cash" ROA and ROE, are the measures of performance which will be most comparable with prior periods. They are also the most relevant measures of financial performance for shareholders because they measure the Company's ability to support growth, pay dividends and repurchase stock. (See page 17 for additional information.) Net interest income on a taxable-equivalent basis was $4,532 million in 1996, compared with $2,655 million a year ago. The Company's net interest margin was 6.11% for 1996, compared with 5.80% in 1995. The increase in the margin was primarily due to the mix of funding sources due to the Merger, as core deposits replaced more expensive short-term borrowings. Noninterest income increased from $1,324 million in 1995 to $2,200 million in 1996, an increase of 66%. In addition to the effects of the Merger, the increase reflects the loss on sale in 1995 of certain product types within the real estate 1-4 family first mortgage portfolio. The increase in 6 1996 was partially offset by the 1995 sale of the Company's joint venture interest in WFNIA. Noninterest expense increased from $2,201 million in 1995 to $4,637 million in 1996. In addition to the effect of combining operations of First Interstate with the Company, the increase reflected goodwill and nonqualifying CDI amortization, severance for Wells Fargo employees and other integration expenditures. There was a provision for loan losses of $105 million in 1996, compared with no provision in 1995. During 1996, net charge-offs were $640 million, or 1.05% of average total loans, compared with $288 million, or .83%, during 1995. The allowance for loan losses was $2,018 million, or 3.00% of total loans, at December 31, 1996, compared with $1,794 million, or 5.04%, at December 31, 1995. At December 31, 1996, total nonaccrual and restructured loans were $724 million, or 1.1% of total loans, compared with $552 million, or 1.6%, at December 31, 1995. Foreclosed assets were $219 million at December 31, 1996, compared with $186 million at December 31, 1995. At December 31, 1996, the ratio of common stockholders' equity to total assets was 12.41%, compared with 7.09% at December 31, 1995. The Company's total risk-based capital (RBC) ratio at December 31, 1996 was 11.70% and its Tier 1 RBC ratio was 7.68%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. The Company's ratios at December 31, 1995 were 12.46% and 8.81%, respectively. The Company's leverage ratios were 6.65% and 7.46% at December 31, 1996 and 1995, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline for banks of 5%. A discussion of RBC and leverage ratio guidelines is in the Capital Adequacy/Ratios section. The Company has bought in the past, and will continue to buy, shares to offset stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in April 1996 the repurchase of up to 9.6 million shares of the Company's outstanding common stock. The Company repurchased a total of 8.4 million shares of common stock during 1996, compared with 5.0 million shares in 1995. The Company currently expects to repurchase approximately 1.5 million shares per quarter in 1997. This Annual Report includes forward-looking statements that involve inherent risks and uncertainties. The Company cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the progress of integrating First Interstate, economic conditions and competition in the geographic and business areas in which the Company conducts its operations. TABLE 1 RATIOS AND PER COMMON SHARE DATA - ------------------------------------------------------------------------------- Year ended December 31, --------------------------------- 1996 1995 1994 PROFITABILITY RATIOS Net income to average total assets (ROA) 1.15% 2.03% 1.62% Net income applicable to common stock to average common stockholders' equity (ROE) 8.83 29.70 22.41 Net income to average stockholders' equity 8.81 26.99 20.61 EFFICIENCY RATIO (1) 69.0% 55.3% 56.6% CAPITAL RATIOS At year end: Common stockholders' equity to assets 12.41% 7.09% 6.41% Stockholders' equity to assets 12.96 8.06 7.33 Risk-based capital (2) Tier 1 capital 7.68 8.81 9.09 Total capital 11.70 12.46 13.16 Leverage (2) 6.65 7.46 6.89 Average balances: Common stockholders' equity to assets 12.17 6.57 6.86 Stockholders' equity to assets 13.01 7.53 7.87 NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (3) Net income applicable to common stock $ 1,376 $ 1,025 $ 833 Net income per common share 16.74 21.08 15.45 ROA 1.66% 2.12% 1.71% ROE 28.46 34.92 26.88 Efficiency ratio 62.2 54.5 55.7 PER COMMON SHARE DATA Dividend payout (4) 43% 23% 27% Book value $147.72 $ 75.93 $ 66.77 Market prices (5): High $289.88 $229.00 $160.38 Low 203.13 143.38 127.63 Year end 269.75 216.00 145.00 - ------------------------------------------------------------------------------- (1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) See the Capital Adequacy/Ratios section for additional information. (3) Nonqualifying CDI amortization and average balance excluded from these calculations are, with the exception of the efficiency ratio, net of applicable taxes. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $122 million and $922 million, respectively, for the year ended December 31, 1996. Goodwill amortization and average balance (which are not tax effected) were $250 million and $5,614 million, respectively, for the year ended December 31, 1996. See page 17 for additional information. (4) Dividends declared per common share as a percentage of net income per common share. (5) Based on daily closing prices reported on the New York Stock Exchange Composite Transaction Reporting System. 7 TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------ (in millions) 1996 1995 1994 1993 1992 1991 % Change Five-year 1996/ compound 1995 growth rate INCOME STATEMENT Net interest income $ 4,521 $ 2,654 $ 2,610 $ 2,657 $ 2,691 $ 2,520 70 % 12 % Provision for loan losses 105 - 200 550 1,215 1,335 - (40) Noninterest income 2,200 1,324 1,200 1,093 1,059 889 66 20 Noninterest expense 4,637 2,201 2,156 2,162 2,035 2,020 111 18 Net income 1,071 1,032 841 612 283 21 4 120 PER COMMON SHARE Net income $ 12.21 $ 20.37 $ 14.78 $ 10.10 $ 4.44 $ .04 (40) 214 Dividends declared 5.20 4.60 4.00 2.25 1.50 3.50 13 8 BALANCE SHEET (at year end) Investment securities $ 13,505 $ 8,920 $11,608 $13,058 $ 9,338 $ 3,833 51 % 29 % Loans 67,389 35,582 36,347 33,099 36,903 44,099 89 9 Allowance for loan losses 2,018 1,794 2,082 2,122 2,067 1,646 12 4 Goodwill 7,322 382 416 477 523 559 - 67 Assets 108,888 50,316 53,374 52,513 52,537 53,547 116 15 Core deposits 81,581 37,858 38,508 41,291 41,879 42,941 115 14 Common stockholders' equity 13,512 3,566 3,422 3,676 3,170 2,808 279 37 Stockholders' equity 14,112 4,055 3,911 4,315 3,809 3,271 248 34 Tier 1 capital 6,565 3,635 3,562 3,776 3,287 2,714 81 19 Total capital 10,000 5,141 5,157 5,446 5,255 4,784 95 16 - -----------------------------------------------------------------------------------------------------------------------------------
MERGER WITH FIRST INTERSTATE BANCORP - -------------------------------------------------------------------------------- On April 1, 1996, the Company completed its acquisition of First Interstate. As a condition of the Merger, the Company was required by regulatory agencies to divest 61 First Interstate branches in California. In September, the Company completed the required divestiture of 61 branches to Home Savings of America. These branches had aggregate deposits of approximately $1.9 billion and loans of approximately $1.1 billion. The selling price of the divested branches represented a premium of 8.11% on the deposits. As of the acquisition date, the California bank of First Interstate merged into Wells Fargo Bank, N.A. In June 1996, the Company merged former First Interstate bank subsidiaries in six states (Idaho, Nevada, New Mexico, Oregon, Utah and Washington) into Wells Fargo Bank, N.A. In September 1996, Wells Fargo Bank of Arizona, N.A. (formerly First Interstate Bank of Arizona, N.A.) merged into Wells Fargo Bank, N.A. Each of these states has opted-in early under the interstate branching provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. In addition, the Company completed the sales of the First Interstate banks in Wyoming, Montana and Alaska in the fourth quarter of 1996. Each bank had three branches. The three banks had aggregate assets of approximately $.6 billion and aggregate deposits of approximately $.5 billion. Banks in the other states retained by the Company are expected to merge into Wells Fargo Bank, N.A. as soon as permitted by applicable state laws (i.e., Colorado in June 1997; Texas not earlier than September 1999). The Company expects to meet its pre-merger objective of realizing annual cost savings of $800 million not later than 18 months after the date of the Merger. About 50% ($100 million, or $400 million annualized) of the cost savings is anticipated to be realized in the first quarter of 1997. The full impact of revenue losses due to the Merger is expected to be recognized by the first quarter of 1997, with revenue growth resuming in the second quarter of 1997. For additional discussion of the Company's plan for branch closures and consolidations and for pro forma information, see Note 2 to the Financial Statements. 8 LINE OF BUSINESS RESULTS - -------------------------------------------------------------------------------- The Company has identified six distinct lines of business for the purposes of management reporting, as shown in Table 3. The line of business results show the financial performance of the major business units. Line of business results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible business unit. This process is dynamic and somewhat subjective. Unlike financial accounting, there is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the business lines based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. First Interstate results prior to April 1, 1996 are not included and, therefore, the year 1996 is not comparable to 1995. The results incorporate estimates of cost allocations, transfers and assignments reflecting management's current understanding of the First Interstate businesses. The cost allocations are based on estimates of the steady state level of expenses. 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 (and have been) restated to allow comparability from one period to the next. The Company believes that cash earnings is the most relevant measure of financial performance for shareholders. For this reason, goodwill and nonqualifying core deposit intangible have not been allocated to the business units in this presentation and are reported in "Other." Internal expense allocations are independently negotiated between business units and, where possible, service and price is measured against comparable services available in the external marketplace. The following describes the six major business units. THE RETAIL DISTRIBUTION GROUP sells and services a complete line of retail financial products for consumers and small businesses. In addition to the 24-hour Telephone Banking Centers and Wells Fargo's Online Financial Services (the Company's personal computer banking services), the Group encompasses Physical Distribution's network of traditional branches, in-store branches, banking centers and ATMs. Retail Distribution also includes the consumer checking business, which primarily uses the network as a source of new customers. In 1996, the Retail Distribution Group completed the integration of First Interstate into Wells Fargo with the consolidation of the two banks' physical distribution networks. This consolidation consisted of the sale and closure of traditional branches as well as the continued opening of in-store branches and banking centers. The Company closed 107 traditional Wells Fargo branches and 176 traditional former First Interstate branches. The Company also divested 61 traditional former First Interstate branches to Home Savings of America and sold the former First Interstate banks, including nine traditional branches, in Alaska, Montana and Wyoming. The new in-store branches and banking centers are part of the ongoing effort to provide higher-convenience, lower-cost service to customers. The in-store banking centers (modularly designed kiosks equipped with an ATM, a customer service telephone and staffed by a banking manager) are capable of providing substantially all consumer services. As of December 31, 1996, there were 673 in-store branches and banking centers. The number of ATM locations continued to increase in 1996, reaching a total of 2,672 at December 31, 1996 (including 1,295 former First Interstate ATM locations). Average consumer checking core deposits for 1996 were $15.8 billion, compared with $9.2 billion in 1995. THE BUSINESS BANKING GROUP provides a full range of credit products and financial services to small businesses and their owners. These include lines of credit, receivables and inventory financing, equipment loans and leases, real estate financing, SBA financing, cash management, deposit and investment accounts, payroll services, retirement plans and credit and debit card processing. Business Banking customers are small businesses with annual sales up to $10 million in which the owner is also the principal financial decision maker. Core deposits for 1996 averaged $11.2 billion, compared with $6.4 billion in 1995. Loans averaged $4.3 billion, compared with $2.4 billion in 1995. Business Banking distributes credit products through national direct marketing and 135 commercial loan specialists in small business lending offices in 22 markets in the western United States. Business Banking jointly owns with First Data Corp. a merchant card processing alliance, which acquires customers through a 125-person sales force. Business Banking provides access to customers through a wide range of channels. These include Business Banking Officers who are relationship managers for the premier segment of small business customers, as well as Wells Fargo's extensive network of traditional and in-store branches, 9 TABLE 3 LINE OF BUSINESS RESULTS (ESTIMATED)
- -------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Group Banking Group Investment Group ------------------- -------------------- -------------------- 1996 1995 1996 1995 1996 1995 Net interest income (1) $ 836 $463 $ 612 $372 $ 745 $ 472 Provision for loan losses (2) 10 1 99 55 4 1 Noninterest income (3) 1,046 560 265 144 475 464 Noninterest expense (3) 1,858 961 428 276 626 425 ------ ---- ----- ---- ----- ----- Income before income tax expense (benefit) 14 61 350 185 590 510 Income tax expense (benefit) (4) 6 26 144 79 243 216 ------ ---- ----- ---- ----- ----- Net income (loss) $ 8 $ 35 $ 206 $106 $ 347 $ 294 ------ ---- ----- ---- ----- ----- ------ ---- ----- ---- ----- ----- Average loans $ - $ - $ 4.3 $2.4 $ 1.6 $ 0.5 Average assets 1.9 1.0 6.4 3.6 2.3 0.8 Average core deposits 16.2 9.4 11.2 6.4 32.2 18.0 Return on equity (5) 1% 7% 28% 28% 50% 66% Risk-adjusted efficiency ratio (6) 109% 103% 73% 75% 62% 54% - --------------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups for 1996 and 1995 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) 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 $392 million and $206 million for 1996 and 1995, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. banking centers, ATMs and, starting in 1997, business branches. Business Banking also serves customers through its National Business Banking Center, a 24-hour telephone center dedicated to the small business customer, and through Business Gateway, a personal computer banking service exclusively for the small business customer. THE INVESTMENT GROUP is responsible for the sales and management of savings and investment products, investment management and fiduciary and brokerage services to institutions, retail customers and high net worth individuals. This includes the Stagecoach and Overland Express families of mutual funds as well as personal trust, employee benefit trust and agency assets. It also includes product management for market rate accounts, savings deposits, Individual Retirement Accounts (IRAs) and time deposits. Within this Group, Private Client Services operates as a fully integrated financial services organization focusing on banking/credit, trust services, investment management and full service and discount brokerage. Significant integration activities in 1996 included the merger of the Stagecoach and Pacifica families of mutual funds, the merger of personal trust funds and the consolidation of investment management and private banking operations. In addition, the Bank entered into an agreement with The Bank of New York to sell the Corporate and Municipal Bond Administration (Corporate Trust) business. The sale is scheduled to close during the first quarter of 1997. The Corporate Trust business had net income for 1996 of approximately $4 million. Assets under management at December 31, 1996 were $57.3 billion, compared with $34.2 billion in 1995. For 1996, average loans were $1.6 billion and average core deposits were $32.2 billion, compared with average loans of $.5 billion and average core deposits of $18.0 billion in 1995. THE REAL ESTATE GROUP provides a complete line of services supporting the commercial real estate market. Products and services include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Real Estate Capital Markets Group. Its business includes purchasing distressed loans at a discount, mezzanine financing, acquisition financing, origination of permanent loans for securitization, syndications, commercial real estate loan servicing and real estate pension fund advisory services. The Merger added lending offices in Portland, Houston, San Diego and Phoenix. Integration activities completed 10
- ----------------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Wholesale average balances in billions) Real Estate Group Products Group Consumer Lending Other Consolidated Company ----------------- --------------- ---------------- -------------- -------------------- 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 Net interest income (1) $ 382 $242 $ 771 $ 396 $1,062 $ 641 $ 113 $ 68 $4,521 $2,654 Provision for loan losses (2) 42 29 71 41 454 262 (575) (389) 105 - Noninterest income (3) 86 35 278 143 294 218 (244) (240) 2,200 1,324 Noninterest expense (3) 113 82 433 202 495 298 684 (43) 4,637 2,201 ----- ---- ----- ----- ------ ----- ----- ----- ------ ------ Income before income tax expense (benefit) 313 166 545 296 407 299 (240) 260 1,979 1,777 Income tax expense (benefit) (4) 129 71 224 125 167 127 (5) 101 908 745 ----- ---- ----- ----- ------ ----- ----- ----- ------ ------ Net income (loss) $ 184 $ 95 $ 321 $ 171 $ 240 $ 172 $(235) $ 159 $1,071 $1,032 ----- ---- ----- ----- ------ ----- ----- ----- ------ ------ ----- ---- ----- ----- ------ ----- ----- ----- ------ ------ Average loans $ 9.4 $6.3 $15.9 $ 9.1 $ 21.4 $10.8 $ 8.0 $ 5.4 $ 60.6 $ 34.5 Average assets 10.0 6.8 19.9 10.2 22.1 11.2 30.8 17.2 93.4 50.8 Average core deposits 0.2 0.1 9.3 2.2 0.4 0.2 1.4 0.3 70.9 36.6 Return on equity (5) 20% 15% 21% 22% 18% 24% -% -% 9% 30% Risk-adjusted efficiency ratio (6) 68% 83% 74% 70% 84% 73% -% -% -% -% - ------------------------------------------------------------------------------------------------------------------------------------
(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 rate 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. in 1996 included operation and office consolidations. The Real Estate Group's loans averaged $9.4 billion in 1996, compared with $6.3 billion in 1995. THE WHOLESALE PRODUCTS GROUP serves businesses with annual sales in excess of $5 million and maintains relationships with major corporations throughout the United States. The Group is responsible for soliciting and maintaining credit and noncredit relationships with businesses by offering a variety of products and services, including traditional commercial loans and lines, letters of credit, international trade facilities, foreign exchange services, cash management and electronic products. The Group includes the majority ownership interest in the Wells Fargo HSBC Trade Bank established in October 1995 that provides trade financing, letters of credit and collection services. Middle market commercial banking distribution capability was enhanced through the Merger with the addition of offices in the Pacific Northwest, Southwest and Texas. The Merger also provided additional cash management and electronic products market penetration, especially in the large corporate segment. Integration activities completed in 1996 were the consolidations of the regional commercial banking offices, cash management service centers and commercial loan service centers. The Wholesale Products Group's loans averaged $15.9 billion in 1996, compared with $9.1 billion in 1995, and average core deposits were $9.3 billion, compared with $2.2 billion in 1995. CONSUMER LENDING offers a full array of consumer loan products, including credit cards, transportation (auto, recreational vehicle, marine) financing and leases, home equity lines and loans, lines of credit and installment loans. The loan portfolio for 1996 averaged $21.4 billion, consisting of $4.9 billion in credit cards, $10.6 billion in equity/unsecured loans and $5.9 billion in transportation financing. This compares with $3.5 billion in credit cards, $5.3 billion in equity/unsecured loans and $2.0 billion in transportation financing in 1995. THE OTHER category includes the Company's 1-4 family first mortgage portfolio, the investment securities portfolio, goodwill and the nonqualifying core deposit intangible, 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. 11 EARNINGS PERFORMANCE - ------------------------------------------------------------------------------- The Bank generated net income of $1,006 million and $1,105 million in 1996 and 1995, respectively. The Parent (excluding its equity in earnings of subsidiaries) and its other bank and nonbank subsidiaries had net income (loss) of $65 million and $(73) million in 1996 and 1995, respectively. NET INTEREST INCOME - -------------------------------------------------------------------------------- Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable-equivalent basis was $4,532 million in 1996, compared with $2,655 million in 1995. Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. For 1996, the net interest margin was 6.11%, compared with 5.80% in 1995. Table 5 presents the individual components of net interest income and net interest margin. The increase in the margin in 1996 compared with 1995 was primarily attributable to the mix of funding sources due to the Merger, as core deposits replaced more expensive short-term borrowings. The increase in net interest income for 1996 compared with 1995 was primarily due to an increase in average earning assets as a result of the Merger. Interest income included hedging income of $81 million in 1996, compared with $4 million in 1995. Interest expense included hedging income of $3 million in 1996, compared with $15 million in 1995. The increase of $65 million in NET INTEREST MARGIN % [LINE GRAPH] hedging income resulted primarily from the swap hedges put in place to hedge floating-rate loans and fixed-rate deposits, partially offset by lower gains from futures used to hedge deposits. Net interest income and the net interest margin are expected to increase in 1997, assuming both loan growth and investment securities runoff and there is no significant change in deposit rates. NONINTEREST INCOME - -------------------------------------------------------------------------------- Table 4 shows the major components of noninterest income. TABLE 4 NONINTEREST INCOME - --------------------------------------------------------------------- (in millions) Year ended December 31, % Change ---------------------- ------------ 1996 1995 1994 1996/ 1995/ 1995 1994 Service charges on deposit accounts $ 868 $ 478 $ 473 82 % 1 % Fees and commissions: Credit card membership and other credit card fees 116 95 64 22 48 Debit and credit card merchant fees 112 65 55 72 18 Charges and fees on loans 112 52 42 115 24 Shared ATM network fees 102 51 43 100 19 Mutual fund and annuity sales fees 61 33 64 85 (48) All other 237 137 119 73 15 ------ ------ ------ Total fees and commissions 740 433 387 71 12 Trust and investment services income: Asset management and custody fees 214 129 124 66 4 Mutual fund management fees 129 71 46 82 54 All other 34 41 33 (17) 24 ------ ------ ------ Total trust and investment services income 377 241 203 56 19 Investment securities gains (losses) 10 (17) 8 - - Sale of joint venture interest - 163 - (100) - Income from equity investments accounted for by the: Cost method 137 58 31 136 87 Equity method 24 39 31 (38) 26 Check printing charges 61 39 40 56 (3) Gains (losses) on sales of loans 22 (40) 4 - - Losses from dispositions of operations (95) (89) (5) 7 - Losses on dispositions of premises and equipment (46) (31) (12) 48 158 All other 102 50 40 104 25 ------ ------ ------ Total $2,200 $1,324 $1,200 66 % 10 % ------ ------ ------ --- --- ------ ------ ------ --- --- - --------------------------------------------------------------------- 12 The overall increase in noninterest income in 1996 compared with 1995 reflected the impact of the Merger. "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 $82 million and $55 million in 1996 and 1995, respectively. The related amortization expense was $63 million and $39 million in 1996 and 1995, respectively. The balance of purchased mortgage servicing rights was $257 million and $152 million at December 31, 1996 and 1995, respectively. The purchased mortgage loan servicing portfolio totaled $22 billion at December 31, 1996, compared with $13 billion at December 31, 1995. A major portion of the increase in trust and investment services income for 1996 was due to greater mutual fund management fees, reflecting the overall growth in the fund families' net assets, including the Pacifica funds previously managed by First Interstate. In September 1996, the Pacifica funds, totaling $5.3 billion, were merged into the Stagecoach family of mutual funds. The Company managed 28 of the Stagecoach family of mutual funds consisting of $14.2 billion of assets at December 31, 1996, compared with 15 mutual funds consisting of $7.0 billion of assets at December 31, 1995. Of the merged Pacifica funds, $2.4 billion was added to the Stagecoach institutional funds with the remaining $2.9 billion merged into the Stagecoach retail funds. The Company also manages the Overland Express family of 14 mutual funds, which had $5.1 billion of assets under management at December 31, 1996, compared with 12 mutual funds consisting of $3.7 billion at December 31, 1995, and is sold through brokers around the country. In addition to managing Stagecoach and Overland Express Funds, the Company also managed or maintained personal trust, corporate trust, employee benefit trust and agency assets of approximately $300 billion (including $245 billion from First Interstate) and $51 billion at December 31, 1996 and 1995, respectively. In addition, the increase in asset management and custody fees was predominantly due to the Merger. The MasterWorks division along with the Company's joint venture interest in Wells Fargo Nikko Investment Advisors were sold at year-end 1995, resulting in a reduction of $.5 billion of the retail funds and the entire $1.8 billion in institutional funds. Income from cost method equity investments in both 1996 and 1995 reflected net gains on the sales of and distribution from nonmarketable equity investments. 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 dispositions. Of this amount, $13 million represented a third quarter 1995 accrual for the closure of 21 branches, of which 19 were closed in March 1996. The remaining amount consisted of a fourth quarter 1995 accrual for the disposition of 120 branches, of which 88 branches were closed in the third quarter of 1996. In 1996, the 1995 accrual was increased by approximately $7 million based on revised estimates of premise disposition and severance expenses. In October 1996, the Company entered into definitive agreements with seven institutions to sell 12 traditional branches, including deposits, of Wells Fargo located in California. The sales, which had been included in the fourth quarter 1995 accrual (and which are in addition to 20 former First Interstate California branches being sold), closed in the first quarter of 1997. In the fourth quarter, the Company evaluated the remaining 22 scheduled branch dispositions and decided to retain 11 branches. Of the other 11 branches, 10 were closed in the first quarter of 1997 and 1 is expected to be sold in the third quarter of 1997. The liability at December 31, 1996 for the remaining 11 branches was $14.8 million. In addition, an expense accrual of $96 million was made in the fourth quarter of 1996, representing disposition of premises and, to a lesser extent, severance and communication expenses associated with the disposition of another 137 traditional branches in California in 1997. At December 31, 1996, the Company had 1,947 retail outlets, comprised of 1,274 traditional branches, 298 supermarket branches and 375 banking centers, in 10 western states. In 1996, the Company and Safeway Inc. signed an agreement in principle that would allow the Company to open as many as 450 new retail outlets (banking centers and branches) in Safeway stores in the western United States. During 1995, gains and losses on sales of loans included an estimated $83 million write-down to the lower of cost or estimated market due to 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. 13
TABLE 5 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 ------------------------------ ------------------------------- AVERAGE YIELDS/ INTEREST Average Yields/ Interest BALANCE RATES INCOME/ balance rates income/ EXPENSE expense EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 522 5.55% $ 29 $ 69 5.94% $ 4 Investment securities: At fair value (3): U.S. Treasury securities 2,460 5.77 142 499 6.34 31 Securities of U.S. government agencies and corporations 6,980 6.20 435 1,426 5.55 81 Private collateralized mortgage obligations 2,691 6.39 174 1,095 6.24 71 Other securities 455 6.84 28 81 19.69 11 -------- ------ ------- ------ Total investment securities at fair value 12,586 6.18 779 3,101 6.17 194 At cost: U.S. Treasury securities - - - 1,246 4.88 61 Securities of U.S. government agencies and corporations - - - 4,428 6.07 269 Private collateralized mortgage obligations - - - 1,124 5.87 66 Other securities - - - 145 6.90 10 -------- ------ ------- ------ Total investment securities at cost - - - 6,943 5.84 406 At lower of cost or market - - - - - - -------- ------ ------- ------ Total investment securities 12,586 6.18 779 10,044 5.94 600 Mortgage loans held for sale (3) - - - 1,002 7.48 76 Loans: Commercial 16,640 9.02 1,501 8,635 9.88 853 Real estate 1-4 family first mortgage 9,601 7.43 713 5,867 7.36 432 Other real estate mortgage 11,470 9.31 1,068 8,046 9.50 765 Real estate construction 2,093 10.43 218 1,146 10.16 116 Consumer: Real estate 1-4 family junior lien mortgage 5,801 9.09 528 3,349 8.61 288 Credit card 4,938 14.87 734 3,547 15.59 552 Other revolving credit and monthly payment 7,329 9.57 701 2,397 10.68 257 -------- ------ ------- ------ Total consumer 18,068 10.87 1,963 9,293 11.81 1,097 Lease financing 2,557 8.82 226 1,498 9.22 138 Foreign 145 6.62 10 23 7.54 2 -------- ------ ------- ------ Total loans (4)(5) 60,574 9.41 5,699 34,508 9.86 3,403 Other 432 6.29 27 62 5.47 3 -------- ------ ------- ------ Total earning assets $ 74,114 8.81 6,534 $45,685 8.93 4,086 -------- ------ ------- ------ -------- ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 4,236 1.26 53 $ 3,907 1.00 39 Market rate and other savings 29,482 2.64 777 15,552 2.61 405 Savings certificates 14,433 4.93 712 8,080 5.25 424 Other time deposits 385 6.64 27 385 6.14 24 Deposits in foreign offices 336 5.19 17 1,771 5.91 105 -------- ------ ------- ------ Total interest-bearing deposits 48,872 3.25 1,586 29,695 3.36 997 Federal funds purchased and securities sold under repurchase agreements 1,769 5.22 92 3,401 5.84 199 Commercial paper and other short-term borrowings 369 4.13 16 544 5.82 32 Senior debt 2,213 6.13 136 1,618 6.67 107 Subordinated debt 2,403 6.93 166 1,459 6.55 96 Guaranteed preferred beneficial interests in Company's subordinated debentures 82 7.82 6 - - - -------- ------ ------- ------ Total interest-bearing liabilities 55,708 3.59 2,002 36,717 3.90 1,431 Portion of noninterest-bearing funding sources 18,406 - - 8,968 - - -------- ------ ------- ------ Total funding sources $ 74,114 2.70 2,002 $45,685 3.13 1,431 -------- ------ ------- ------ -------- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 6.11% $4,532 5.80% $2,655 ----- ------- ----- ------ ----- ------- ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 7,977 $ 2,681 Goodwill 5,614 399 Other 5,687 2,002 -------- ------- Total noninterest-earning assets $ 19,278 $ 5,082 -------- ------- -------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 22,739 $ 9,085 Other liabilities 2,796 1,142 Preferred stockholders' equity 779 489 Common stockholders' equity 11,370 3,334 Noninterest-bearing funding sources used to fund earning assets (18,406) (8,968) -------- ------- Net noninterest-bearing funding sources $ 19,278 $ 5,082 -------- ------- -------- ------- TOTAL ASSETS $ 93,392 $50,767 -------- ------- -------- ------- - ---------------------------------------------------------------------------------------------------------------------------------- (1) The average prime rate of the Bank was 8.27%, 8.83%, 7.14%, 6.00% and 6.25% for 1996, 1995, 1994, 1993 and 1992, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.51%, 6.04%, 4.75%, 3.29% and 3.83% for the same years, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. The average amortized cost balances for investment securities at fair value totaled $12,610 million, $3,144 million and $3,131 million in 1996, 1995 and 1994, respectively. The average amortized cost balance for mortgage loans held for sale totaled $1,012 million in 1995. 14 - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1994 1993 ------------------------------ ------------------------------- Average Yields/ Interest Average Yields/ Interest balance rates income/ balance rates income/ expense expense EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 189 3.51% $ 7 $ 734 3.17% $ 23 Investment securities: At fair value (3): U.S. Treasury securities 190 6.66 13 - - - Securities of U.S. government agencies and corporations 1,547 5.82 93 - - - Private collateralized mortgage obligations 1,240 6.14 80 - - - Other securities 76 14.13 6 - - - ------- ----- ------- ----- Total investment securities at fair value 3,053 6.12 192 - - - At cost: U.S. Treasury securities 2,376 4.77 113 2,283 5.03 115 Securities of U.S. government agencies and corporations 5,902 6.05 357 7,974 6.41 511 Private collateralized mortgage obligations 1,242 5.74 71 864 4.16 36 Other securities 133 5.75 8 189 5.67 11 ------- ----- ------- ----- Total investment securities at cost 9,653 5.69 549 11,310 5.95 673 At lower of cost or market - - - - - - ------- ----- ------- ----- Total investment securities 12,706 5.79 741 11,310 5.95 673 Mortgage loans held for sale (3) - - - - - - Loans: Commercial 7,092 9.19 652 7,154 9.36 670 Real estate 1-4 family first mortgage 8,484 6.85 581 6,787 7.92 538 Other real estate mortgage 8,071 8.68 700 9,467 8.20 776 Real estate construction 977 9.29 91 1,303 8.50 111 Consumer: Real estate 1-4 family junior lien mortgage 3,387 7.75 262 3,916 6.97 273 Credit card 2,703 15.39 416 2,587 15.62 404 Other revolving credit and monthly payment 2,023 9.60 194 1,893 9.45 179 ------- ----- ------- ----- Total consumer 8,113 10.75 872 8,396 10.19 856 Lease financing 1,271 9.16 116 1,190 9.83 117 Foreign 31 5.06 2 7 - - ------- ----- ------- ----- Total loans (4)(5) 34,039 8.85 3,014 34,304 8.94 3,068 Other 54 5.89 3 - - - ------- ----- ------- ----- Total earning assets $46,988 8.00 3,765 $46,348 8.12 3,764 ------- ----- ------- ----- ------- ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 4,622 .98 45 $ 4,626 1.18 55 Market rate and other savings 18,921 2.34 442 19,333 2.26 438 Savings certificates 7,030 4.28 301 7,948 4.37 347 Other time deposits 304 7.35 22 331 7.19 24 Deposits in foreign offices 925 4.75 44 7 - - ------- ----- ------- ----- Total interest-bearing deposits 31,802 2.69 854 32,245 2.68 864 Federal funds purchased and securities sold under repurchase agreements 2,223 4.45 99 1,051 2.79 29 Commercial paper and other short-term borrowings 224 4.25 10 207 2.90 6 Senior debt 1,930 5.29 102 2,174 4.75 103 Subordinated debt 1,510 5.94 90 1,958 5.23 103 Guaranteed preferred beneficial interests in Company's subordinated debentures - - - - - - ------- ----- ------- ----- Total interest-bearing liabilities 37,689 3.06 1,155 37,635 2.93 1,105 Portion of noninterest-bearing funding sources 9,299 - - 8,713 - - ------- ----- ------- ----- Total funding sources $46,988 2.45 1,155 $46,348 2.38 1,105 ------- ----- ------- ----- ------- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.55% $2,610 5.74% $2,659 ----- ----- ----- ----- Cash and due from banks $ 2,618 $ 2,456 Goodwill 458 501 Other 1,785 1,805 ------- ------- Total noninterest-earning assets $ 4,861 $ 4,762 ------- ------- ------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,019 $ 8,482 Other liabilities 1,062 997 Preferred stockholders' equity 521 639 Common stockholders' equity 3,558 3,357 Noninterest-bearing funding sources used to fund earning assets (9,299) (8,713) ------- ------- Net noninterest-bearing funding sources $ 4,861 $ 4,762 ------- ------- ------- ------- TOTAL ASSETS $51,849 $51,110 ------- ------- ------- ------- - ---------------------------------------------------------------------------------------------------------------------------------- (4) Interest income includes loan fees, net of deferred costs, of approximately $104 million, $41 million, $40 million, $41 million and $57 million in 1996, 1995, 1994, 1993 and 1992, respectively. (5) Nonaccrual loans and related income are included in their respective loan categories. (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. - ----------------------------------------------------------------------------------------- (in millions) 1992 ------------------------------- Average Yields/ Interest balance rates income/ expense EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 919 3.62% $ 33 Investment securities: At fair value (3): U.S. Treasury securities - - - Securities of U.S. government agencies and corporations - - - Private collateralized mortgage obligations - - - Other securities - - - ------- ----- Total investment securities at fair value - - - At cost: U.S. Treasury securities 1,562 5.80 91 Securities of U.S. government agencies and corporations 4,197 7.38 309 Private collateralized mortgage obligations - - - Other securities 110 6.16 7 ------- ----- Total investment securities at cost 5,869 6.93 407 At lower of cost or market 108 8.73 9 ------- ----- Total investment securities 5,977 6.97 416 Mortgage loans held for sale (3) - - - Loans: Commercial 9,702 8.50 825 Real estate 1-4 family first mortgage 7,628 9.27 707 Other real estate mortgage 10,634 8.21 873 Real estate construction 1,837 8.47 156 Consumer: Real estate 1-4 family junior lien mortgage 4,585 8.14 373 Credit card 2,771 15.93 441 Other revolving credit and monthly payment 2,083 9.85 205 ------- ----- Total consumer 9,439 10.81 1,019 Lease financing 1,165 10.36 121 Foreign 1 - - ------- ----- Total loans (4)(5) 40,406 9.16 3,701 Other 1 - - ------- ----- Total earning assets $47,303 8.77 4,150 ------- ----- ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 4,597 1.77 81 Market rate and other savings 18,534 2.88 533 Savings certificates 10,763 4.94 532 Other time deposits 444 7.52 34 Deposits in foreign offices 43 7.89 3 ------- ----- Total interest-bearing deposits 34,381 3.44 1,183 Federal funds purchased and securities sold under repurchase agreements 1,299 3.16 41 Commercial paper and other short-term borrowings 252 3.54 9 Senior debt 2,175 5.77 126 Subordinated debt 1,872 4.99 93 Guaranteed preferred beneficial interests in Company's subordinated debentures - - - ------- ----- Total interest-bearing liabilities 39,979 3.63 1,452 Portion of noninterest-bearing funding sources 7,324 - - ------- ----- Total funding sources $47,303 3.07 1,452 ------- ----- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.70% $2,698 ------ ------ ------ ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,536 Goodwill 541 Other 2,117 ------- Total noninterest-earning assets $ 5,194 ------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 7,885 Other liabilities 1,060 Preferred stockholders' equity 608 Common stockholders' equity 2,965 Noninterest-bearing funding sources used to fund earning assets (7,324) ------- Net noninterest-bearing funding sources $ 5,194 ------- ------- TOTAL ASSETS $52,497 ------- ------- - -----------------------------------------------------------------------------------------
15 NONINTEREST EXPENSE - -------------------------------------------------------------------------------- Table 6 shows the major components of noninterest expense. TABLE 6 NONINTEREST EXPENSE - ----------------------------------------------------------------- (in millions) Year ended December 31, % Change ----------------------- ------------ 1996 1995 1994 1996/ 1995/ 1995 1994 Salaries $1,357 $ 713 $ 671 90 % 6 % Incentive compensation 227 126 155 80 (19) Employee benefits 373 187 201 99 (7) Equipment 399 193 174 107 11 Net occupancy 366 211 215 73 (2) Contract services 295 149 101 98 48 Goodwill 250 35 36 614 (3) Core deposit intangible: Nonqualifying (1) 206 - - - - Qualifying 37 42 49 (12) (14) Operating losses 145 45 62 222 (27) Telecommunications 140 58 49 141 18 Advertising and promotion 116 73 65 59 12 Outside professional services 112 45 33 149 36 Postage 96 52 44 85 18 Travel and entertainment 78 36 30 117 20 Stationery and supplies 76 37 30 105 23 Security 56 21 20 167 5 Outside data processing 55 11 10 400 10 Check printing 43 25 29 72 (14) Escrow and collection agency fees 33 15 19 120 (21) Federal deposit insurance 28 52 101 (46) (49) Foreclosed assets 7 1 - 600 - All other 142 74 62 92 19 ------ ------ ------ Total $4,637 $2,201 $2,156 111 % 2 % ------ ------ ------ --- --- ------ ------ ------ --- --- - ---------------------------------------------------------------- (1) Amortization of core deposit intangibles acquired after February 1992 that are subtracted from stockholders' equity in computing regulatory capital for bank holding companies. In addition to the effect of combining operations of First Interstate with the Company, the overall increase in noninterest expense primarily reflected intangible amortization and other integration expenses, including severance, advertising and higher expenses for contract and outside professional services. Salaries, incentive compensation and employee benefits expense increased $931 million in 1996 compared with 1995. This was substantially due to higher staff levels after the consummation of the Merger. Salaries and employee benefits expense during 1996 included integration-related severance expense of $78 million. Additional severance expense may be incurred in 1997 as the Company continues the integration process. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 36,902 at December 31, 1996, compared with 19,249 at December 31, 1995. First Interstate had 27,200 average FTE in December 1995. The Company currently expects to have less than 35,000 active FTE by the third quarter of 1997. Excluding the effects of the Merger, increases in equipment expense in 1996 compared with 1995 were primarily due to a higher level of spending on software and technology for product development and increased depreciation expense on equipment related to business initiatives and system upgrades. Goodwill and CDI amortization resulting from the Merger were $216 million and $206 million, respectively, for the year ended December 31, 1996. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1997, 1998 and 1999 is expected to be $241 million, $211 million and $186 million, respectively. The related impact on income tax expense is expected to be a benefit of $99 million, $87 million and $76 million in 1997, 1998 and 1999, respectively. The decrease in federal deposit insurance expense in 1996, compared with 1995, was substantially due to the revised rate structure effective June 1, 1995, partially offset by the passage of the Deposit Insurance Funds Act of 1996 (DIFA). DIFA was enacted, in part, to increase the Federal Deposit Insurance Corporation Savings Association Insurance Fund reserve ratio to 1.25% and levied a 65.7 cent fee on every $100 of thrift deposits held on March 31, 1995. The Company acquired thrift deposits through the Merger. Accordingly, $22 million was paid in 1996 based on the thrift deposits of First Interstate. The Company expects noninterest expense, excluding goodwill and nonqualifying CDI amortization, to decrease in 1997 compared with 1996. By the fourth quarter of 1997, noninterest expense is expected to reflect the full impact of integrating the two separate companies, by reducing noninterest expense by $200 million per quarter from the pre-merger combined amounts. INCOME TAXES - -------------------------------------------------------------------------------- The Company's effective tax rate was 46% for 1996 and 42% for 1995. The increase in the effective tax rate for 1996 was due to increased goodwill amortization related to the Merger, which is not tax deductible. 16 EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI - -------------------------------------------------------------------------------- Table 7 reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for the year ended December 31, 1996. TABLE 7 EARNINGS EXCLUDING GOODWILL AND NONQUALIFYING CDI - -------------------------------------------------------------------- (in millions) Year ended December 31, 1996 ----------------------------------------- Reported Amortization "Cash" earnings ----------------------- earnings Goodwill Nonqualifying core deposit intangible Income before income tax expense $1,979 $ 250 $ 206 $2,435 Income tax expense 908 - 84 992 ------ ----- ----- ------ Net income 1,071 250 122 1,443 Preferred stock dividends 67 - - 67 ------ ----- ----- ------ Net income applicable to common stock $1,004 $ 250 $ 122 $1,376 ------ ----- ----- ------ ------ ----- ----- ------ Per common share $12.21 $3.05 $1.48 $16.74 ------ ----- ----- ------ ------ ----- ----- ------ - -------------------------------------------------------------------- Table 8 presents the calculation of the ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the year ended December 31, 1996. These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" or "tangible" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows and Note 3 to the Financial Statements for other information regarding funds available for use by management. TABLE 8 RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI - -------------------------------------------------------------------------------- (in millions) Year ended December 31, 1996 ---------------------------------------- ROA: A/(C-E) = 1.66% ROE: B/(D-E) = 28.46% Efficiency: (F-G)/H = 62.2% ---------------------------------------- Net income $ 1,443 (A) Net income applicable to common stock 1,376 (B) Average total assets 93,392 (C) Average common stockholders' equity 11,370 (D) Average goodwill ($5,614) and after-tax nonqualifying core deposit intangible ($922) 6,536 (E) Noninterest expense 4,637 (F) Amortization expense for goodwill and nonqualifying core deposit intangible 456 (G) Net interest income plus noninterest income 6,721 (H) - -------------------------------------------------------------------------------- BALANCE SHEET ANALYSIS - -------------------------------------------------------------------------------- A comparison between the year-end 1996 and 1995 balance sheets is discussed below. The Bank's assets of $98.7 billion and $48.6 billion at December 31, 1996 and 1995, respectively, represented more than 90% of the Company's consolidated assets at those dates. INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Primarily as a result of the Merger, total investment securities averaged $12.6 billion in 1996, a 26% increase from $10.0 billion in 1995. Total investment securities were $13.5 billion at December 31, 1996, a 52% increase from $8.9 billion at December 31, 1995. Investment securities are expected to decrease in the future as the cash received from their maturities is used to fund loan growth. Table 9 provides expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio. The weighted average expected remaining maturity of the debt securities portfolio was 2 years and 2 months at December 31, 1996, compared with 2 years and 1 month at December 31, 1995. In replacing the maturing securities with new securities, it has been the intention of the Company to maintain a short-term expected maturity position in order to provide additional liquidity and to fund future loan growth. Expected remaining maturities will differ from remaining contractual maturities because borrowers may have the right to prepay certain obligations with or without penalties. It is more appropriate to monitor investment security maturities and yields using prepayment 17
TABLE 9 INVESTMENT SECURITIES EXPECTED REMAINING MATURITIES AND YIELDS - --------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 (in millions) ------------------------------------------------------------------------------------------------------- Total Weighted Weighted Within one year After one year After five years After ten years amount average average through five years through ten years yield expected --------------- ------------------ ----------------- --------------- remaining Amount Yield Amount Yield Amount Yield Amount Yield maturity (in yrs.-mos.) AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 2,824 5.98% 1-10 $ 689 5.76% $2,129 6.05% $ 5 6.26% $ 1 6.85% Securities of U.S. government agencies and corporations 7,043 6.56 2-3 2,614 6.13 3,831 6.73 498 7.28 100 7.33 Private collateralized mortgage obligations 3,237 6.64 2-1 1,081 6.50 2,108 6.70 48 6.71 - - Other 342 7.00 2-0 101 6.68 236 7.14 3 6.72 2 6.71 ------- ------ ------ ---- ---- TOTAL COST OF DEBT SECURITIES $13,446 6.47% 2-2 $4,485 6.18% $8,304 6.56% $554 7.22% $103 7.32% ------- ---- ---- ------ ---- ------ ---- ---- ---- ---- ---- ------- ---- ---- ------ ---- ------ ---- ---- ---- ---- ---- ESTIMATED FAIR VALUE $13,460 $4,490 $8,313 $554 $103 ------- ------ ------ ---- ---- ---- ------- ------ ------ ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. See Note 4 to the Financial Statements for fair value of available-for-sale securities by type of security. assumptions since this better reflects what the Company expects to occur. (Note 4 to the Financial Statements shows the remaining contractual principal maturities and yields of debt securities.) The available-for-sale portfolio includes both debt and marketable equity securities. At December 31, 1996, the available-for-sale securities portfolio had an unrealized net gain of $41 million, comprised of unrealized gross gains of $107 million and unrealized gross losses of $66 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. The unrealized net gain or loss on available-for-sale securities is reported on an after-tax basis as a valuation allowance that is a separate component of stockholders' equity. At December 31, 1996, the valuation allowance amounted to an unrealized net gain of $23 million, compared with an unrealized net gain of $26 million at December 31, 1995. The unrealized net gain in the debt securities portion of the available-for-sale portfolio at December 31, 1996 was predominantly attributable to U.S. Treasury securities, reflecting a decrease in market interest rates since the time of purchase. 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). (See Note 4 to the Financial Statements for investment securities at fair value and at cost by security type.) At December 31, 1996, mortgage-backed securities included in securities of U.S. government agencies and corporations 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 $10,280 million, or 76% of the Company's investment securities portfolio at December 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 $10,280 million to $9,784 million and the expected remaining maturity of these securities would increase from 2 years and 3 months to 2 years and 7 months. 18 LOAN PORTFOLIO - -------------------------------------------------------------------------------- A comparative schedule of average loan balances is presented in Table 5; year-end balances are presented in Note 5 to the Financial Statements. Loans averaged $60.6 billion in 1996, compared with $34.5 billion in 1995. Total loans at December 31, 1996 were $67.4 billion, compared with $35.6 billion at year-end 1995. Most of the increase resulted from the Merger. The most significant increases for average loans were in commercial and the other revolving monthly payment portfolios. The Company's total unfunded loan commitments grew to $55.2 billion at December 31, 1996, from $24.2 billion at December 31, 1995. Commercial loans grew 99% to $19.5 billion at year-end 1996, from $9.8 billion at December 31, 1995. This increase of $9.7 billion was due to the Merger. Total unfunded commercial loan commitments grew from $8.4 billion at December 31, 1995 to $28.1 billion at December 31, 1996. Included in the commercial loan portfolio are agricultural loans of $1,409 million and $1,029 million at December 31, 1996 and 1995, respectively. Agricultural loans consist of loans to finance agricultural production and other loans to farmers. Table 10 presents comparative period-end commercial real estate loans. TABLE 10 COMMERCIAL REAL ESTATE LOANS - ----------------------------------------------------------------- (in millions) December 31, % Change ----------------------- ------------ 1996 1995 1994 1996/ 1995/ 1995 1994 Commercial loans to real estate developers and REITs (1) $ 1,070 $ 700 $ 525 53% 33 % Other real estate mortgage (2) 11,860 8,263 8,079 44 2 Real estate construction 2,303 1,366 1,013 69 35 ------- ------- ------ Total $15,233 $10,329 $9,617 47% 7 % ------- ------- ------ --- --- ------- ------- ------ --- --- Nonaccrual loans $ 376 $ 371 $ 416 1% (11)% ------- ------- ------ --- --- ------- ------- ------ --- --- Nonaccrual loans as a % of total 2.5% 3.6% 4.3% ------- ------- ------ ------- ------- ------ - ----------------------------------------------------------------- (1) Included in commercial loans. REITs are real estate investment trusts. (2) Includes agricultural loans that are primarily secured by real estate of $325 million, $250 million and $256 million at December 31, 1996, 1995 and 1994, respectively. LOAN MIX AT YEAR END (%) [BAR GRAPH] Table 11 summarizes other real estate mortgage loans by state and property type. Table 12 summarizes real estate construction loans by state and project type. 19
TABLE 11 REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) - --------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1996 ---------------------------------------------------------------------------------------------------------- California Texas Washington Nevada Other states (2) All states Non- -------------- -------------- -------------- ------------- ---------------- --------------- accruals Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- as a % loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual of total by type Office buildings $2,285 $144 $128 $ 1 $ 87 $- $ 96 $- $ 582 $29 $ 3,178 $174 5% Industrial 1,425 25 69 1 18 - 24 - 195 2 1,731 28 2 Apartments 919 32 66 - 150 - 19 - 190 - 1,344 32 2 Shopping centers 572 12 171 - 83 - 11 - 285 3 1,122 15 1 Hotels/motels 360 5 81 - 19 - 350 - 399 - 1,209 5 - Retail buildings (other than shopping centers) 568 14 74 3 42 - 11 - 179 - 874 17 2 Institutional 859 28 129 3 200 2 35 - 278 3 1,501 36 2 Land 179 18 21 - - - 2 - 44 - 246 18 7 Agricultural 249 8 5 - 13 - - - 59 2 326 10 3 1-4 family (1): Land 1 - - - - - - - - - 1 - - Structures 16 1 - - 14 - - - 1 - 31 1 3 Other 138 3 23 2 6 - 11 1 119(3) 7 297 13 4 ------ ---- ---- --- ---- -- ---- -- ------ --- ------- ---- Total by state $7,571 $290 $767 $10 $632 $2 $559 $1 $2,331 $46 $11,860 $349 3% ------ ---- ---- --- ---- -- ---- -- ------ --- ------- ---- - ------ ---- ---- --- ---- -- ---- -- ------ --- ------- ---- - % of total loans 64% 6% 5% 5% 20% 100% ------ ---- ---- ---- ------ ------- ------ ---- ---- ---- ------ ------- Nonaccruals as a % of total by state 4% 1% -% -% 2% ---- --- -- -- --- ---- --- -- -- --- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) Consists of 40 states; no state had loans in excess of $421 million at December 31, 1996. (3) Includes loans secured by collateral pools of approximately $28 million (where the pool is a mixture of various real estate property types located in various states, non-real estate-related assets and other guarantees).
TABLE 12 REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE - ------------------------------------------------------------------------------ (in millions) ------------------------------------------------------------------------------------- California Nevada (1) Texas Oregon (1) Arizona (1) Other states (2) -------------- ---------- ------------- ---------- ----------- ----------------- Total Non- Total Total Non- Total Total Total Non- loans accrual loans loans accrual loans loans loans accrual 1-4 family: Land $ 289 $ 3 $ 37 $ - $- $ - $ - $ 63 $ - Structures 206 6 25 32 - 4 41 53 - Shopping centers 70 - 1 3 - - 4 282 - Land (excluding 1-4 family) 143 - 25 8 - 3 4 53 9 Apartments 122 5 24 14 - 27 2 93 - Industrial 73 - 9 7 - 1 1 13 - Office buildings 44 - 2 2 - 6 12 27 - Hotels/motels 34 - 59 14 - 21 - 1 - Retail buildings (other than shopping centers) 56 - - 15 - 2 3 10 - Institutional 27 - 3 53 1 31 16 29 1 Agricultural 6 - - - - - 2 - - Other 13 - 3 12 - 2 2 64 - ------ --- ---- ---- -- --- --- ---- --- Total by state $1,083 $14 $188 $160 $1 $97 $87 $688 $10 ------ --- ---- ---- -- --- --- ---- --- ------ --- ---- ---- -- --- --- ---- --- % of total loans 47% 8% 7% 4% 4% 30% ------ ---- ---- --- --- ---- ------ ---- ---- --- --- ---- Nonaccruals as a % of total by state 1% 1% 1% --- -- --- --- -- --- - -------------------------------------------------- December 31, 1996 ------------------------ All states Non- -------------- accruals Total Non- as a % loans accrual of total by type 1-4 family: Land $ 389 $ 3 1% Structures 361 6 2 Shopping centers 360 - - Land (excluding 1-4 family) 236 9 4 Apartments 282 5 2 Industrial 104 - - Office buildings 93 - - Hotels/motels 129 - - Retail buildings (other than shopping centers) 86 - - Institutional 159 2 1 Agricultural 8 - - Other 96 - - ------ --- Total by state $2,303 $25 1% ------ --- - ------ --- - % of total loans 100% ------ ------ Nonaccruals as a % of total by state - --------------------------------------------------
(1) There were no loans on nonaccrual at December 31, 1996. (2) Consists of 23 states; no state had loans in excess of $70 million at December 31, 1996. 20 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS - -------------------------------------------------------------------------------- Table 13 presents comparative data for nonaccrual and restructured loans and other assets. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Table 13 excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. This information is presented in Table 17. Notwithstanding, real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 150 days of becoming past due and are shown in the table below. (Notes 1 and 6 to the Financial Statements describe the Company's accounting policies relating to nonaccrual and restructured loans and foreclosed assets, respectively.) NONACCRUAL LOANS ($ BILLIONS) [LINE GRAPH] NEW LOANS PLACED ON NONACCRUAL ($ BILLIONS) [LINE GRAPH]
TABLE 13 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS - ---------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 Nonaccrual loans: Commercial (1)(2) $223 $112 $ 88 $ 252 $ 560 Real estate 1-4 family first mortgage 99 64 81 99 96 Other real estate mortgage (3) 349 307 328 578 1,207 Real estate construction 25 46 58 235 235 Consumer: Real estate 1-4 family junior lien mortgage 15 8 11 27 29 Other revolving credit and monthly payment 1 1 1 3 7 Lease financing 2 - - - - ---- ---- ---- ------ ------ Total nonaccrual loans (4) 714 538 567 1,194 2,134 Restructured loans (5) 10 14 15 6 8 ---- ---- ---- ------ ------ Nonaccrual and restructured loans (6) 724 552 582 1,200 2,142 As a percentage of total loans 1.1% 1.6% 1.6% 3.6% 5.8% Foreclosed assets (7)(8) 219 186 272 348 510 Real estate investments (9) 4 12 17 15 40 ---- ---- ---- ------ ------ Total nonaccrual and restructured loans and other assets $947 $750 $871 $1,563 $2,692 ---- ---- ---- ------ ------ ---- ---- ---- ------ ------ - ----------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and REITs of $2 million, $18 million, $30 million, $91 million and $86 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (2) Includes agricultural loans of $13 million, $6 million, $1 million, $9 million and $18 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (3) Includes agricultural loans secured by real estate of $10 million, $1 million, $3 million, $24 million and $28 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (4) Of the total nonaccrual loans, $493 million and $408 million at December 31, 1996 and 1995, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (5) In addition to originated loans that were subsequently restructured, there were loans of $50 million at both December 31, 1996 and 1995 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 were considered impaired under FAS 114 at December 31, 1996 and 1995. (6) Related commitments to lend additional funds were approximately $44 million at December 31, 1996. (7) Includes agricultural properties of $17 million, $22 million, $23 million, $26 million and $55 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (8) Excludes in-substance foreclosures (ISFs) of $99 million reclassified to nonaccrual loans at June 30, 1993 due to clarification of criteria used in determining when a loan is in-substance foreclosed. Complete information is not available for prior periods; however, any ISFs that would be reclassified in prior periods would not be materially higher than $99 million. (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 $154 million, $95 million, $54 million, $34 million and $93 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. 21 Table 14 summarizes the quarterly trend of the approximate changes in nonaccrual loans. 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.
TABLE 14 QUARTERLY TREND OF CHANGES IN NONACCRUAL LOANS - -------------------------------------------------------------------------------------------------------------- (in millions) Quarter ended -------------------------------------------------------------- DECEMBER 31, September 30, June 30, March 31, December 31, 1996 1996 1996 1996 1995 BALANCE, BEGINNING OF QUARTER $ 717 $731 $525 $538 $586 Nonaccrual loans of First Interstate - - 201 - - New loans placed on nonaccrual 213 156 173 113 106 Charge-offs (48) (43) (48) (9) (27) Payments (117) (54) (87) (54) (71) Transfers to foreclosed assets (16) (36) (19) (30) (22) Loans returned to accrual (35) (37) (14) (33) (34) ----- ---- ---- ---- ---- BALANCE, END OF QUARTER $ 714 $717 $731 $525 $538 ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- - --------------------------------------------------------------------------------------------------------------
The Company generally identifies loans to be evaluated for impairment under FAS 114 (Accounting by Creditors for Impairment of a Loan) 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 under FAS 114, 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. 22 If interest due on the book balances of all nonaccrual and restructured loans (including loans no longer on nonaccrual or restructured at year end) had been accrued under their original terms, $60 million of interest would have been recorded in 1996, compared with $27 million actually recorded. In addition, the interest that would have been recorded under the original terms for the $50 million of loans purchased at a steep discount (see Table 13, footnote 5) for the year ended December 31, 1996 was $8 million, compared with $6 million actually recorded. Table 15 summarizes the quarterly trend in foreclosed assets. Table 16 summarizes foreclosed assets by state and type at December 31, 1996. Foreclosed assets at December 31, 1996 increased to $219 million from $186 million at December 31, 1995. Approximately 51% of foreclosed assets at December 31, 1996 have been in the portfolio three years or less, with land and agricultural properties representing substantially all of the amount greater than three years old.
TABLE 15 QUARTERLY TREND OF CHANGES IN FORECLOSED ASSETS - -------------------------------------------------------------------------------------------------------------------- (in millions) Quarter ended -------------------------------------------------------------------- DECEMBER 31, September 30, June 30, March 31, December 31, 1996 1996 1996 1996 1995 BALANCE, BEGINNING OF QUARTER $227 $238 $198 $186 $214 Foreclosed assets of First Interstate - - 51 - - Additions 34 35 37 35 24 Sales (36) (42) (33) (18) (49) Charge-offs (2) (3) (12) (3) (2) Write-downs (2) (1) (1) (1) (1) Other deductions (2) - (2) (1) - ---- ---- ---- ---- ---- BALANCE, END OF QUARTER $219 $227 $238 $198 $186 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - --------------------------------------------------------------------------------------------------------------------
TABLE 16 FORECLOSED ASSETS BY STATE AND TYPE - ---------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1996 ------------------------------------------------------------------------------------------ California Texas Washington Other All % of total D.C. states (1) states foreclosed assets Land (excluding 1-4 family) $ 73 $1 $- $ 6 $ 80 37% 1-4 family 37 1 - 3 41 19 Shopping centers 19 - 7 - 26 12 Agricultural 17 - - - 17 8 Industrial buildings 1 1 - - 2 1 Office buildings 14 5 - 1 20 9 Apartments 3 - - - 3 1 Hotels/motels 4 - - - 4 2 Other 26 - - - 26 11 ---- -- -- --- ---- --- Total by state $194 $8 $7 $10 $219 100% ---- -- -- --- ---- --- ---- -- -- --- ---- --- % of total foreclosed assets 88% 4% 3% 5% 100% ---- -- -- --- ---- ---- -- -- --- ---- - ----------------------------------------------------------------------------------------------------------------------------
(1) Consists of fifteen states; no state had foreclosed assets in excess of $4 million at December 31, 1996. 23 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 17 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 such nonaccrual loans are excluded from Table 17. TABLE 17 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING - ------------------------------------------------------------------------------- (in millions) December 31, ------------------------------------------------- 1996 1995 1994 1993 1992 Commercial $ 65 $ 12 $ 6 $ 4 $ 4 Real estate 1-4 family first mortgage 42 8 18 19 29 Other real estate mortgage 59 24 47 14 22 Real estate construction 4 - - 8 11 Consumer: Real estate 1-4 family junior lien mortgage 23 4 4 6 9 Credit card 120 95 42 43 55 Other revolving credit and monthly payment 20 1 1 1 2 ---- ---- ---- --- ---- Total consumer 163 100 47 50 66 Lease financing - - - - 1 ---- ---- ---- --- ---- Total $333 $144 $118 $95 $133 ---- ---- ---- --- ---- ---- ---- ---- --- ---- - ------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is presented in Note 5 to the Financial Statements. At December 31, 1996, the allowance for loan losses was $2,018 million, or 3.00% of total loans, compared with $1,794 million, or 5.04%, at December 31, 1995. The provision for loan losses was $105 million in 1996, compared with none and $200 million in 1995 and 1994, respectively. During 1991 and 1992, the Company had a significantly higher provision for loan losses than in the years prior resulting from a nationwide (particularly California) recession as well as the Company's examination process and that of its regulators. As both the economic environment and the credit quality of the Company's loan portfolio improved, the Company began reducing its provision in 1993 and 1994. In 1995, as California continued to make progress in its economic recovery and as the Company considered the allowance for loan losses adequate in relation to its existing loan portfolio, no provision was made. The Company made a $35 million and $70 million provision in the third and fourth quarters of 1996, respectively, which were the first provisions since the fourth quarter of 1994. The Company anticipates that it will continue making incremental increases to the provision of approximately $35 million through the fourth quarter of 1997, when it is expected that the provision will approximate net charge-offs. In addition, the Company absorbed the $770 million in allowance for loan losses of First Interstate as a result of the Merger. Net charge-offs in 1996 were $640 million, or 1.05% of average total loans, compared with $288 million, or .83%, in 1995. Loan loss recoveries were $220 million in 1996, compared with $134 million in 1995. Table 18 summarizes net charge-offs by loan category. The largest category of net charge-offs in 1996 was credit card loans, comprising more than 50% of the total net charge-offs. During 1996, credit card gross charge-offs due to bankruptcies were $171 million, or 42%, of total credit card charge-offs, compared with $82 million, or 39%, and $54 million, or 39%, in 1995 and 1994, respectively. In addition, credit card loans 30 to 89 days past due and still accruing totaled $199 million at December 31, 1996, compared with $127 million and $73 million at December 31, 1995 and 1994, respectively. During 1994 and 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 are expected to continue at levels higher than experienced prior to the campaigns. 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. 24
TABLE 18 NET CHARGE-OFFS BY LOAN CATEGORY - ------------------------------------------------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------ ------------------ AMOUNT % OF Amount % of Amount % of AVERAGE average average LOANS loans loans Commercial $ 86 .50 % $ 17 .19 % $ 17 .23 % Real estate 1-4 family first mortgage 10 .11 10 .17 12 .14 Other real estate mortgage (7) (.06) (1) (.02) 44 .55 Real estate construction 2 .09 9 .80 4 .34 Consumer: Real estate 1-4 family junior lien mortgage 19 .33 13 .40 20 .59 Credit card 368 7.44 195 5.46 120 4.45 Other revolving credit and monthly payment 139 1.91 41 1.73 25 1.26 ---- ---- ---- Total consumer 526 2.91 249 2.67 165 2.04 Lease financing 23 .89 4 .31 (2) (.15) ---- ---- ---- Total net loan charge-offs $640 1.05 % $288 .83 % $240 .70 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------
Any loan that is past due as to principal or interest and that is not both well-secured and in the process of collection is generally charged off (to the extent that it exceeds the fair value of any related collateral) after a predetermined period of time that is based on loan category. For example, credit card loans generally are charged off within 180 days of becoming past due. Additionally, loans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to FAS 114) and loans analyzed on a pool basis. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. The Company has deemed it prudent, when reviewing the overall allowance, to maintain a total allowance in excess of projected losses. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California's) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that reports to the Board of Directors and continuously reviews loan quality. Such reviews also assist management in establishing the level of the allowance. Similar to a number of other large national banks, the Bank has been for several years and continues to be examined by its primary regulator, the Office of the Comptroller of the Currency (OCC), and has OCC examiners in residence. These examinations occur throughout the year and target various activities of the Bank, including specific segments of the loan portfolio (for example, commercial real estate and shared national credits). In addition to the Bank being examined by the OCC, the Parent and its nonbank subsidiaries are examined by the Federal Reserve. The Company considers the allowance for loan losses of $2,018 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at December 31, 1996. 25 CORE DEPOSITS AT YEAR END ($ BILLIONS) [BAR GRAPH] DEPOSITS - -------------------------------------------------------------------------------- Comparative detail of average deposit balances is presented in Table 5. Average core deposits increased 94% in 1996 compared with 1995 primarily due to the Merger. Average core deposits funded 76% and 72% of the Company's average total assets in 1996 and 1995, respectively. Year-end deposit balances are presented in Table 19. TABLE 19 DEPOSITS - -------------------------------------------------------------------------------- (in millions) December 31, % ---------------------- Change 1996 1995 Noninterest-bearing $29,073 $10,391 180 % Interest-bearing checking 2,792 887 215 Market rate and other savings 33,947 17,944 89 Savings certificates 15,769 8,636 83 ------- ------- Core deposits 81,581 37,858 115 Other time deposits 186 248 (25) Deposits in foreign offices 54 876 (94) ------- ------- Total deposits $81,821 $38,982 110 % ------- ------- --- ------- ------- --- - -------------------------------------------------------------------------------- CERTAIN FAIR VALUE INFORMATION - -------------------------------------------------------------------------------- FAS 107 requires that the Company disclose estimated fair values for certain financial instruments. Quoted market prices, when available, are used to reflect fair values. If market quotes are not available, which is the case for most of the Company's financial instruments, management has provided its best estimate of the calculation of the fair values using discounted cash flows. Fair value amounts differ from book balances because fair values attempt to capture the effect of current market conditions (for example, interest rates) on the Company's financial instruments. There was a decrease in the excess (premium) of the fair value over the carrying value of the Company's financial instruments at December 31, 1996 compared with December 31, 1995. The Company's FAS 107 disclosures are presented in Note 19 to the Financial Statements. CAPITAL ADEQUACY/RATIOS - -------------------------------------------------------------------------------- The Company uses a variety of measures to evaluate capital adequacy. Management reviews the various capital measures monthly and takes appropriate action to ensure that they are within established internal and external guidelines. The Company's current capital position exceeds current guidelines established by industry regulators. RISK-BASED CAPITAL RATIOS The Federal Reserve Board (FRB) and the OCC issue risk-based capital (RBC) guidelines for bank holding companies and national banks, respectively. The FRB is the primary regulator for the Parent and the OCC is the primary regulator for the Bank. RBC guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. (See Note 17 to the Financial Statements for additional information.) The Company's total RBC ratio at December 31, 1996 was 11.70% and its Tier 1 RBC ratio was 7.68%, exceeding the minimum guidelines of 8% and 4%, respectively. The ratios at December 31, 1995 were 12.46% and 8.81%, respectively. The decrease in the Company's total and Tier 1 RBC ratios at December 31, 1996 compared with 1995 resulted primarily from an overall increase in risk-weighted assets due to the Merger. The Company's risk-weighted assets are calculated as shown in Table 20. Risk-weighted balance sheet assets were $26.7 billion and $11.1 billion less than total assets on the consolidated balance sheet of $108.9 billion and $50.3 billion at December 31, 1996 and 1995, respectively, as a result of weighting certain types of assets at less than 100%; such assets, for both December 31, 1996 and 1995, substantially consisted of claims on or guarantees by the U.S. government or its agencies (risk-weighted at 0% to 20%), cash and due from banks (0% to 20%), 1-4 family first mortgage loans (50%) and private collateralized mortgage obligations backed by 1-4 family first mortgage loans (50%). 26 Table 20 RISK-BASED CAPITAL AND LEVERAGE RATIOS - ------------------------------------------------------------------------- (in billions) December 31, --------------------- 1996 1995 Tier 1: Common stockholders' equity $ 13.5 $ 3.6 Preferred stock (1) .4 .5 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.2 - Goodwill and other deductions (2) (8.5) (.5) ------ ------ Total Tier 1 capital 6.6 3.6 ------ ------ Tier 2: Mandatory convertible deb .2 - Subordinated debt and unsecured senior debt 2.1 1.0 Allowance for loan losses allowable in Tier 2 1.1 .5 ------ ------ Total Tier 2 capital 3.4 1.5 ------ ------ Total risk-based capital $ 10.0 $ 5.1 ------ ------ ------ ------ Risk-weighted balance sheet assets $ 82.2 $ 39.2 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 10.1 2.7 Standby letters of credit 2.1 .7 Other .5 .4 ------ ------ Total risk-weighted off-balance sheet items 12.7 3.8 ------ ------ Goodwill and other deductions (2) (8.5) (.5) Allowance for loan losses not included in Tier 2 (.9) (1.3) ------ ------ Total risk-weighted assets $ 85.5 $ 41.2 ------ ------ ------ ------ Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.68 % 8.81 % Total capital (8% minimum requirement) 11.70 12.46 Leverage ratio (3% minimum requirement) (3) 6.65 % 7.46 % - -------------------------------------------------------------------------- (1) Excludes $175 million of Series D preferred stock due to the Company's December 1996 announcement to redeem this series in March 1997. (2) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on available-for-sale investment securities carried at fair value. (3) Tier 1 capital divided by quarterly average total assets (excluding goodwill, nonqualifying CDI and other items which were deducted to arrive at Tier 1 capital). LEVERAGE RATIO To supplement the RBC guidelines, the FRB established a leverage ratio guideline. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking organizations are expected to have ratios of at least 4% to 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Company's leverage ratios were 6.65% and 7.46% at December 31, 1996 and 1995, respectively. The decrease in the leverage ratio at December 31, 1996 compared with December 31, 1995 resulted primarily from an overall increase in quarterly average total assets due to the Merger. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA) In addition to adopting a risk-based assessment system, FDICIA required that the federal regulatory agencies adopt regulations defining five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. The Bank had a Tier 1 RBC ratio of 8.53%, a total capital ratio of 11.00% and a leverage ratio of 6.81% at December 31, 1996, compared with 10.12%, 13.23% and 7.89% at December 31, 1995, respectively. ASSET/LIABILITY MANAGEMENT - -------------------------------------------------------------------------------- The principal objectives of asset/liability management are to manage the sensitivity of net interest spreads to potential changes in interest rates and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk, which results from changing spreads between loan and deposit rates. These changing spreads are not highly correlated to changes in the level of interest rates and are driven by other market conditions. The Company calls this type of risk "basis risk"; it is the Company's main source of interest rate risk and is significantly more difficult to quantify and manage than term structure risk. One way to 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. Table 21 shows in summary form the Company's interest rate sensitivity based on expected interest rate 27 repricing intervals in specific time frames for the balance sheet and swaps as of December 31, 1996. A more detailed report of the Company's interest rate sensitivity by major asset and liability categories, together with an adjusted cumulative gap measure is presented in Table 22. In addition, a detailed swap maturity schedule is included in Table 24. In categorizing assets and liabilities according to expected repricing time frames, management makes certain judgments and approximations. For example, a new three-year loan with a rate that is adjusted every 30 days would be included in the "0-3 months" category rather than the "over 1-5 years" category. There are also balance sheet categories that have a fixed rate and an unspecified maturity, or a rate that is administered but changes slowly or not at all as market rates change. An example of this type of account is interest-bearing checking, which has balances available on demand and pays a rate that changes infrequently. The balances are relatively stable from quarter to quarter, but could decline because of disintermediation if rates increased substantially. Another example is the revolving credit feature of fixed-rate credit card loans, which differentiates these loans from loans with specified contractual maturities. Given the unusual rate maturity characteristics of these balance sheet items, they are placed in a "nonmarket category." This category is generally viewed as being relatively stable in terms of interest rate variability and the net nonmarket liabilities are viewed as funding fixed-rate assets with maturities greater than one year. Nonmarket assets include noninterest-earning assets, fixed-rate credit card loans, nonaccrual loans and equity securities. Nonmarket liabilities and stockholders' equity include savings deposits, interest-bearing checking, noninterest-bearing deposits, other noninterest-bearing liabilities, common stockholders' equity and fixed-rate perpetual preferred stock. Some asset/liability managers allocate these nonmarket assets and liabilities to the various maturity categories. The Company believes that these allocations are mostly arbitrary and tend to provide a false sense that the gap structure is accurately defined. For this reason, they remain in the nonmarket category, in order to maintain the Company's focus on their unusual rate maturity characteristics. Mortgage-backed investment securities and fixed-rate loans in the real estate 1-4 family first mortgage, other real estate mortgage and consumer loan categories are based on expected maturities rather than on contractual maturities. Expected maturities are estimated based on dealer prepayment projections to the extent that such projections are available. For certain types of adjustable-rate mortgages and consumer loans where dealer prepayment projections are not available, the Company uses its historical experience. The gap structure also does not allocate Prime-based loans and market rate account (MRA) savings deposits, included in market rate and other savings, to specific maturity categories. Statistical evidence indicates that both Prime-based loans and MRA savings deposits have relatively short maturities, with that of MRA savings deposits being somewhat longer. Keeping them in distinct categories (as with nonmarket) helps maintain focus on these rates, since most of the Company's short-term net interest income variability depends on their relative movements. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate maturities. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. For example, the Company uses interest rate futures to shorten the rate maturity of MRA savings deposits to better match the maturity of Prime-based loans.
TABLE 21 SUMMARY OF INTEREST RATE SENSITIVITY - ------------------------------------------------------------------------------------------------------------------------------ (in millions) December 31, 1996 --------------------------------------------------------------------------------------- Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total based savings months months months years years market loans Assets $20,477 $ - $ 19,959 $ 5,061 $ 6,305 $22,831 $13,121 $ 21,134 $108,888 Liabilities and stockholders' equity - 18,344 11,268 3,901 3,902 4,003 3,817 63,653 108,888 ------- -------- -------- ------- ------- ------- ------- -------- -------- Gap before interest rate swaps $20,477 $(18,344) $ 8,691 $ 1,160 $ 2,403 $18,828 $ 9,304 $(42,519) $ - Interest rate swaps - - (15,774) (3,268) 3,253 14,591 1,198 - - ------- -------- -------- ------- ------- ------- ------- -------- -------- Gap adjusted for interest rate swaps $20,477 $(18,344) $ (7,083) $(2,108) $ 5,656 $33,419 $10,502 $(42,519) $ - ------- -------- -------- ------- ------- ------- ------- -------- -------- ------- -------- -------- ------- ------- ------- ------- -------- -------- Cumulative gap $ - $ 2,133 $ (4,950) $(7,058) $(1,402) $32,017 $42,519 $ - ------- -------- -------- ------- ------- ------- ------- -------- ------- -------- -------- ------- ------- ------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------------
28 The under-one-year net liability position at December 31, 1996 was $1,402 million (1.3% of total assets), compared with the under-one-year net liability position of $394 million at December 31, 1995 (.8% of total assets). This measure of term structure risk would indicate a nearly balanced interest rate risk position. A significant under-one-year net liability position (greater than 4% of total assets) would indicate that the Company's net interest income is exposed to rising short-term interest rates, while a similar size net asset position would mean an exposure to declining short-term interest rates. The average under-one-year net liability positions during 1996 and 1995 were $761 million and $555 million, respectively. The two adjustments to the cumulative gap amount shown on Table 22 provide comparability with those bank holding companies that present interest rate sensitivity information in an alternative manner. However, management does not believe that these adjustments depict its interest rate risk. The first adjustment line excludes noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity from the cumulative gap calculation so that only earning assets, interest-bearing liabilities and all interest rate swap contracts used to hedge such assets and liabilities are reported. The second adjustment line moves interest-bearing checking and market rate and other savings deposits in the nonmarket liability category to the shortest rate maturity category. This second adjustment reflects the availability of these deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $12.5 billion and $8.7 billion at December 31, 1996 and 1995, respectively. In addition, the Company performs earnings at risk analysis and net interest income simulations based on multiple interest rate scenarios and projected on- and off-balance sheet changes to estimate the potential effects of changing interest rates. The Company uses four standard scenarios - rates unchanged, expected rates, high rates and low rates in analyzing interest rate sensitivity for policy measurement. The expected rates scenario is based on the Company's projected future interest rates, while the high rates and low rates scenarios cover 90% probable upward and downward rate movements based on the Company's own interest rate models. Earnings at risk may be estimated by multiplying the short-term gap positions by possible changes in interest rates. The potential adverse impact on earnings over the next 12 months is compared to an interest rate risk limit with a sublimit for the term structure risk. The current interest rate risk limit allows up to 30 basis points of sensitivity in the average net interest margin over the next year. The term structure risk sublimit is currently 2 percent of annual net interest income based on the earnings at risk analysis. Subject to these limits, the Company may maintain a particular gap position to achieve a more desirable risk/return tradeoff. Earnings at risk analysis and net interest income simulations allow the Company to fully explore the complex relationships within the gap over time and for various rate environments. The results during the year showed that the Company's interest rate sensitivity was well within the policy limit. The net interest income simulation at December 31, 1996 showed a sensitivity of 3 basis points between the net interest margins for the high and the expected rate scenarios over the next year. To get a complete picture of its current interest rate risk position, the Company must look at both term structure risk and basis risk. The two most significant components of basis risk are the Prime/MRA spread and the rate paid on savings and interest-bearing checking accounts. At the peak of the rate cycle in 1989 and during the first quarter of 1991, the Prime/MRA spreads as well as lagged movements in other deposit rates caused spreads to increase to historic levels. During this time, interest rate contracts were purchased by the Company to hedge against margin compression due to declining interest rates. As interest rates once again began to rise in early 1994 and continued through mid-1995, the spread between loans and deposits began to rise again as the Prime rate increased rapidly and deposit rates were slow to react. As a result of this movement, the decline in hedging income was roughly offset by the increasing loan/deposit spread. During 1996, the Company incorporated First Interstate's interest rate risk position into its own balance sheet and assessed the newly combined term structure risk and basis risk positions. Looking toward managing interest rate risk in 1997, the Company is confronted with several risk scenarios. If interest rates rise, net interest income may actually increase if deposit rates lag increases in market rates. The Company could, however, experience significant pressure on net interest income if there is a substantial movement in deposit rates relative to market rates. This basis risk potentially could be hedged with interest rate caps, but the Company believes they are not cost-effective in relation to the risk they would mitigate. A declining interest rate environment might result in a decrease in loan rates, while deposit rates remain relatively stable, since they did not significantly increase between 1994 and 1996. This rate scenario could also create significant risk to net interest income. The Company has partially hedged against this risk with interest rate floor contracts purchased in 1996 and those remaining from previous years. Based on its current and projected balance sheet, the Company does not expect that a change in interest rates would affect its liquidity position. 29
Table 22 INTEREST RATE SENSITIVITY - ------------------------------------------------------------------------------------------------------------------------------ (in millions) December 31, 1996 -------------------------------------------------------------------------------------- Prime- MRA 0-3 >3-6 >6-12 >1-5 >5 Non- Total based savings months months months years years market loans ASSETS Federal funds sold and securities purchased under resale agreements $ - $ - $ 187 $ - $ - $ - $ - $ - $ 187 Investment securities (1) - - 1,435 1,257 1,798 8,313 657 45 13,505 Loans: Commercial 8,673 - 7,320 631 288 1,021 416 1,166 19,515 Real estate 1-4 family first mortgage 85 - 2,120 1,070 1,483 3,882 1,686 99 10,425 Other real estate mortgage 2,885 - 3,754 804 722 1,889 1,458 348 11,860 Real estate construction 1,213 - 799 62 21 119 64 25 2,303 Consumer 7,599 - 3,355 787 1,211 3,510 762 2,890 20,114 Lease financing - - 298 269 468 1,884 82 2 3,003 Foreign 22 - 100 25 2 11 - 9 169 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total loans (2) 20,477 - 17,746 3,648 4,195 12,316 4,468 4,539 67,389 ------- -------- -------- -------- -------- ------- ------- -------- -------- Other earning assets (3) - - 71 - - - - 397 468 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total earning assets 20,477 - 19,439 4,905 5,993 20,629 5,125 4,981 81,549 Noninterest-earning assets - - 520 156 312 2,202 7,996 16,153 27,339 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total assets $20,477 $ - $ 19,959 $ 5,061 $ 6,305 $22,831 $13,121 $ 21,134 $108,888 ------- -------- -------- -------- -------- ------- ------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest-bearing checking $ - $ - $ - $ - $ - $ - $ - $ 2,792 $ 2,792 Market rate and other savings - 18,344 959 - - - - 14,644 33,947 Savings certificates - - 5,377 3,756 3,648 2,748 157 83 15,769 Other time deposits - - 93 52 38 3 - - 186 Deposits in foreign offices - - 34 - - 20 - - 54 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total interest-bearing deposits - 18,344 6,463 3,808 3,686 2,771 157 17,519 52,748 Short-term borrowings - - 2,426 4 - - - - 2,430 Senior debt - - 1,512 4 34 482 88 - 2,120 Subordinated debt - - 602 70 2 325 1,941 - 2,940 Guaranteed preferred beneficial interests in Company's subordinated debentures - - - - - - 1,150 - 1,150 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total interest-bearing liabilities - 18,344 11,003 3,886 3,722 3,578 3,336 17,519 61,388 Noninterest-bearing liabilities - - 15 15 30 225 481 32,622 33,388 Stockholders' equity - - 250 - 150 200 - 13,512 14,112 ------- -------- -------- -------- -------- ------- ------- -------- -------- Total liabilities and stockholders' equity $ - $ 18,344 $ 11,268 $ 3,901 $ 3,902 $ 4,003 $ 3,817 $ 63,653 $108,888 ------- -------- -------- -------- -------- ------- ------- -------- -------- Gap before interest rate swaps $20,477 $(18,344) $ 8,691 $ 1,160 $ 2,403 $18,828 $ 9,304 $(42,519) $ - Interest rate swaps: Receive fixed - - (15,774) (3,268) 3,253 14,591 1,198 - - ------- -------- -------- -------- -------- ------- ------- -------- -------- Gap adjusted for interest rate swaps $20,477 $(18,344) $ (7,083) $(2,108) $ 5,656 $33,419 $10,502 $(42,519) $ - ------- -------- -------- -------- -------- ------- ------- -------- -------- ------- -------- -------- -------- -------- ------- ------- -------- -------- Cumulative gap $ - $ 2,133 $ (4,950) $(7,058) $(1,402) $32,017 $42,519 $ - ------- -------- -------- -------- -------- ------- ------- -------- ------- -------- -------- -------- -------- ------- ------- -------- Adjustments: Exclude noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity - - (255) (141) (132) (1,777) (7,515) 29,981 Move interest-bearing checking and market rate savings from nonmarket to shortest maturity - - (10,577) - - - - 10,577 ------- -------- -------- -------- -------- ------- ------- -------- Adjusted cumulative gap $20,477 $ 2,133 $(15,782) $(18,031) $(12,507) $19,135 $22,122 $ 20,161 ------- -------- -------- -------- -------- ------- ------- -------- ------- -------- -------- -------- -------- ------- ------- -------- - ------------------------------------------------------------------------------------------------------------------------------
(1) The nonmarket column consists of marketable equity securities. (2) The nonmarket column consists of nonaccrual loans of $714 million, fixed- rate credit card loans of $3,025 million (including $134 million in commercial credit card loans) and overdrafts of $800 million. (3) The nonmarket column consists of Federal Reserve Bank stock. 30 DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge the Company's exposure to interest rate fluctuations. The Company also offers contracts to its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. Table 23 reconciles the beginning and ending notional or contractual amounts for derivative financial instruments for 1996 and shows the expected remaining maturity at year-end 1996. Table 24 summarizes the notional amount, expected maturities and weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements, together with an indication of the asset/liability hedged. For a further discussion of derivative financial instruments, refer to Note 18 to the Financial Statements.
TABLE 23 DERIVATIVE ACTIVITIES - --------------------------------------------------------------------------------------------------------------------------------- (notional or contractual amounts in millions) Year ended December 31, 1996 ------------------------------------------------------------------------------------------- Beginning First Additions Expirations Terminations(3) Ending Weighted balance Interstate balance average Additions(1) expected remaining maturity (in yrs.-mos.) Interest rate contracts: Futures contracts $ 5,395 $ - $21,908 $21,373(2) $732 $ 5,198 0-3 Floors written 105 15 285 - - 405 3-6 Caps written 1,170 982 813 675 116 2,174 1-9 Floors purchased 15,627 3,935 2,284 790 12 21,044(4) 2-8 Caps purchased 1,530 1,001 832 731 109 2,523 1-10 Futures options purchased - - 12 - 12 - - Swap contracts 7,832 4,758 19,329 12,778 155 18,986(5) 3-7 Foreign exchange contracts: Forwards and spot contracts 934 - 35,994 35,551 - 1,377 0-2 Option contracts purchased 29 - 91 55 - 65 0-3 Option contracts written 23 - 88 52 - 59 0-6 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Derivatives acquired from First Interstate on April 1, 1996 (the Merger date). (2) To facilitate the settlement process, the Company enters into offsetting contracts 2 to 45 days prior to their maturity date. Concurrent with the closing of these positions, the Company generally enters into new interest rate futures and forward contracts with a later expiration date since the Company's use of these contracts predominantly relates to ongoing hedging programs. (3) Terminations occur if a customer that purchased a contract decides to cancel it before the maturity date. If the customer contract was hedged, the Company terminates the interest rate derivative instrument used to hedge the customer's contract upon cancellation. The impact of terminations on income before income taxes for 1996 was a loss of less than $.5 million. (4) Includes forward floors, which will hedge loans, of $155 million starting in January 1997, $300 million starting in March 1997, $225 million starting in April 1997, $475 million starting in May 1997 and $2,000 million starting October 1998. (5) See Table 24 for further details of maturities and average rates received or paid. 31
TABLE 24 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES (1) - ------------------------------------------------------------------------------------------------------------------ (notional amounts in millions) 1997 1998 1999 2000 Thereafter Total Receive-fixed rate (hedges loans) Notional amount $ 436 $1,883 $2,570 $3,649 $2,672 $11,210 Weighted average rate received 5.06% 5.95% 6.85% 6.74% 6.59% 6.53% Weighted average rate paid 5.74 5.64 5.58 5.61 5.61 5.61 Receive-fixed rate (hedges senior debt) Notional amount $ 12 $ 67 $ - $ - $1,472 $ 1,551 Weighted average rate received 5.95% 8.38% -% -% 7.43% 7.46% Weighted average rate paid 9.38 5.97 - - 5.73 5.77 Receive-fixed rate (hedges purchased mortgage servicing rights) Notional amount $ - $ 200 $ - $ - $ 200 $ 400 Weighted average rate received -% 5.92% -% -% 5.67% 5.80% Weighted average rate paid - 5.61 - - 5.59 5.60 Receive-fixed rate (hedges deposits) Notional amount $ - $ - $ 250 $1,600 $1,650 $ 3,500 Weighted average rate received -% -% 6.07% 5.36% 5.54% 5.49% Weighted average rate paid - - 5.64 5.60 5.61 5.61 Other swaps (2) Notional amount $ 643 $ 494 $ 300 $ 186 $ 702 $ 2,325 Weighted average rate received 5.50% 6.11% 6.02% 6.29% 5.94% 5.89% Weighted average rate paid 5.47 6.03 6.02 6.09 5.87 5.83 Total notional amount $1,091 $2,644 $3,120 $5,435 $6,696 $18,986 ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------- - ------------------------------------------------------------------------------------------------------------------
(1) Variable interest rates are presented on the basis of rates in effect at December 31, 1996. These rates may change substantially in the future due to open market factors. (2) Represents customer accommodation swaps not used for asset/liability management purposes. The notional amount reflects customer accommodations as well as the swaps used to hedge the customer accommodations. LIQUIDITY MANAGEMENT - -------------------------------------------------------------------------------- Liquidity refers to the Company's ability to maintain a cash flow adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. In recent years, core deposits have provided the Company with a sizable source of relatively stable and low-cost funds. The Company's average core deposits and stockholders' equity funded 89% and 80% of its average total assets in 1996 and 1995, respectively. The remaining funding of average total assets was primarily provided by senior and subordinated debt, deposits in foreign offices, short-term borrowings (comprised of federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Senior and subordinated debt averaged $4.6 billion and $3.1 billion in 1996 and 1995, respectively. Short-term borrowings averaged $2.1 billion and $3.9 billion in 1996 and 1995, respectively. Trust preferred securities averaged $82 million in 1996. The weighted average expected remaining maturity of the debt securities within the investment securities portfolio was 2 years and 2 months at December 31, 1996. Of the $13.4 billion debt securities that were available for sale at December 31, 1996, $4.5 billion, or 33%, is expected to mature or be prepaid in 1997 and an additional $3.7 billion, or 28%, is expected to mature or be prepaid in 1998. The Company purchased shorter-term debt securities to maintain asset liquidity and to fund loan growth. Other sources of liquidity include maturity extensions of short-term borrowings and sale or runoff of assets. Commercial and real estate loans totaled $44.1 billion at December 31, 1996. Of these loans, $15.1 billion matures in one year or less, $14.0 billion matures in over one year through five years and $15.0 billion matures in over five years. Of the $29.0 billion that matures in over one year, $17.8 billion has floating or adjustable rates and $11.2 billion has fixed rates. Of the $11.2 billion of fixed-rate loans, 32 approximately $2.2 billion represents fixed initial-rate mortgage (FIRM) loans. FIRM loans carry fixed rates for a minimum of 3 years to a maximum of 10 years of the loan term and carry adjustable rates thereafter. (Refer to the Consolidated Statement of Cash Flows for further information on the Company's cash flows from its operating, investing and financing activities.) Liquidity for the Parent Company and its 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. In 1996, the Company filed a shelf registration with the Securities and Exchange Commission (SEC) that allows for the issuance of $3.5 billion of senior or subordinated debt or preferred stock. The proceeds from the sale of any securities will be used for general corporate purposes. The Company issued $200 million of preferred stock under this shelf registration. At December 31, 1996, $3.3 billion of securities remained unissued. No additional securities have been issued under this shelf registration. In 1996, the Company also filed a universal shelf registration statement of $750 million with the SEC which includes senior and subordinated debt, preferred stock and common stock of the Company and preferred securities of special purpose subsidiary trusts. The registration allows each special purpose subsidiary to issue trust preferred securities which qualify as Tier 1 capital of the Company for regulatory purposes. The special purpose subsidiary will hold junior subordinated deferrable interest debentures of the Company. Interest paid on these debentures will be distributed to the holders of the trust preferred securities. As a result, distributions to the holders of the trust preferred securities will be tax deductible and treated as interest expense in the consolidated statement of income. This provides the Company with a more cost-effective means of obtaining Tier 1 capital than if the Company itself were to issue additional preferred stock. In December 1996, the Company issued $400 million in trust preferred securities through one trust, Wells Fargo Capital I. The proceeds from the sale of these debentures will be used by the Company for general corporate purposes. At December 31, 1996, $350 million remained unissued under this shelf registration. (See Note 10 to the Financial Statements.) In January 1997, the Company issued an additional $150 million in trust preferred securities through a new trust, Wells Fargo Capital II. In addition to the publicly registered trust preferred securities, the Company established in 1996 three special purpose trusts, which collectively issued $750 million of trust preferred securities in private placements (see Note 10 to the Financial Statements). The proceeds from these issuances were invested in junior subordinated deferrable interest debentures of the Company. The proceeds from the sale of these debentures were used by the Company for general corporate purposes. Similar to the registered trust preferred securities above, these preferred securities qualify as Tier 1 capital for regulatory purposes and the interest on the debentures is paid as tax deductible distributions to the trust preferred security holders. In 1996, a significant portion of the Parent's source of funding was due to dividends paid by the Bank totaling $1,461 million. The dividends received helped to fund the Company's stock repurchase program. The Company expects the Parent to continue to receive dividends from the Bank in 1997. (See Notes 3 and 15 to the Financial Statements for a discussion of the restrictions on the Bank's ability to pay dividends and the Parent Company's financial statements, respectively.) To accommodate future growth and current business needs, the Company has a capital expenditure program. Capital expenditures for 1997 are estimated at about $275 million for equipment for supermarket branches, relocation and remodeling of Company facilities and routine replacement of furniture and equipment. The Company will fund these expenditures from various sources, including retained earnings of the Company and borrowings of various maturities. 33 COMPARISON OF 1995 VERSUS 1994 - -------------------------------------------------------------------------------- Net income in 1995 was $1,032 million, compared with $841 million in 1994, an increase of 23%. Net income per share was $20.37, compared with $14.78 in 1994, an increase of 38%. The percentage increase in per share earnings was greater than the percentage increase in net income due to the Company's stock repurchase program. Return on average assets (ROA) was 2.03% and return on average common equity (ROE) was 29.70% in 1995, compared with 1.62% and 22.41%, respectively, in 1994. The increase in earnings in 1995 compared with 1994 reflected a $163 million ($94 million after tax) gain resulting from the sale of the Company's joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) and a zero loan loss provision, compared with $200 million in 1994. Net interest income on a taxable-equivalent basis was $2,655 million in 1995, compared with $2,610 million in 1994. The Company's net interest margin was 5.80% for 1995, compared with 5.55% in 1994. The increase in the margin was attributable to an increase in the spread between loans and deposits and a change in the mix of average earning assets, as higher-yielding loans, such as credit card and small business, replaced lower-yielding securities and single family loans. Noninterest income was $1,324 million in 1995, compared with $1,200 million in 1994. Credit card membership and other credit card fees increased from $64 million in 1994 to $95 million in 1995, an increase of 48%. The growth was predominantly due to late fees and other transaction fees incurred by customers. The decrease in mutual fund and annuity sales fees from $64 million in 1994 to $33 million in 1995 substantially reflected a lower sales volume of commission-based fixed-rate annuities. The increase in "other" fees and commissions in 1995 compared with 1994 includes mortgage loan servicing fees of $55 million and $17 million, respectively, offset by the related amortization expense of $39 million and $8 million, respectively. Trust and investment services income increased 19% to $241 million in 1995 compared with 1994 and was primarily due to greater mutual fund investment management fees, reflecting the overall growth in the net assets of fund families. These fees amounted to $71 million in 1995 compared with $46 million in 1994. The investment securities losses of $17 million in 1995 largely resulted from the sale of debt securities from the available-for-sale portfolio. The investment securities gains of $8 million in 1994 reflected the sale of both corporate debt and marketable equity securities from the available-for-sale portfolio. In December 1995, the Company sold its joint venture interest in WFNIA as well as its MasterWorks division to Barclays PLC of the U.K., resulting in a $163 million pre-tax gain. The Company's joint venture interest in WFNIA was accounted for as an equity investment under the equity method. The income from the equity investment in WFNIA, included in noninterest income, totaled $27 million and $21 million in 1995 and 1994, respectively. Noninterest income from the MasterWorks division, included in "all other" trust and investment services income, totaled $26 million and $20 million in 1995 and 1994, respectively. In 1995, losses from dispositions of operations included a $70 million fourth quarter accrual related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with the scheduled closures of 120 traditional retail branch locations. In addition to the $70 million accrual, there was also a $13 million liability at December 31, 1995, representing a third quarter 1995 accrual for the closure of 21 branches. In 1994, losses from dispositions of operations included fourth quarter accruals for the disposition of premises and, to a lesser extent, severance of $14 million associated with scheduled branch closures and $10 million associated with ceasing the direct origination of 1-4 family first mortgage loans by the Company's mortgage lending unit. Partially offsetting these accruals was an $8 million payment received in the first quarter of 1994 that was contingent upon performance in relation to the alliance formed with Card Establishment Services (CES). Additional payments from the CES agreement are also contingent upon future performance. 34 Gains and losses on sales of loans for 1995 included a first quarter $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. During the second half of 1995, as all mortgage loans held for sale were sold and because such sales were at prices greater than originally estimated, the Company recorded a $19 million gain on sale. Noninterest expense increased from $2,156 million in 1994 to $2,201 million in 1995. The increase in salaries expense in 1995 compared with 1994 was primarily attributable to increased temporary help expense and higher salary levels. The Company's full-time equivalent staff, including hourly employees, averaged 19,520 in 1995, compared with 19,558 in 1994. The decrease in incentive compensation from $155 million in 1994 to $126 million in 1995 was predominantly due to a differing mix of product sales, reflecting a shift away from commissioned retail products, such as fixed-rate annuities. Additionally, the decrease reflected a decline in incentive compensation related to Mortgage Business' decision at year-end 1994 to cease the origination of first mortgages. The increase in equipment expense to $193 million in 1995 compared with $174 million in 1994 was related 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. In August 1995, the FDIC significantly reduced the deposit insurance premiums paid by most banks. Under the revised rate structure (retroactive to June 1, 1995), the best-rated institutions insured by the Bank Insurance Fund (BIF) paid four cents per $100 of domestic deposits, down from the previous rate of 23 cents per $100. In the third quarter of 1995, the Company received a $23 million refund for the overpayment of assessments made for the period June 1 through September 30, 1995. In November 1995, the FDIC further reduced the rate by four cents per $100 of domestic deposits, effective January 1, 1996. Under the most recent rate structure, the best-rated institutions insured by the BIF pay the statutory annual minimum assessment of $2,000. In the fourth quarter of 1995, the Company adopted Financial Accounting Standard Nos. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (FAS 121), and 122, Accounting for Mortgage Servicing Rights (FAS 122). These adoptions did not have a material impact on the financial statements. For a further discussion of FAS 121 and 122, refer to Note 6 of the Financial Statements. Total loans were $35.6 billion at December 31, 1995, a 2% decrease from December 31, 1994. The decrease resulted from the sale of $4.4 billion of real estate 1-4 family first mortgages in 1995, mostly offset by increases in other loan portfolios. There was no provision for loan losses in 1995, compared with $200 million in 1994. Net charge-offs in 1995 were $288 million, or .83% of average total loans, compared with $240 million, or .70%, in 1994. Loan loss recoveries were $134 million in 1995, compared with $129 million in 1994. The allowance for loan losses was 5.04% of total loans at December 31, 1995, compared with 5.73% at December 31, 1994. Total nonaccrual and restructured loans were $552 million, or 1.6% of total loans, at December 31, 1995, compared with $582 million, or 1.6% of total loans, at December 31, 1994. Foreclosed assets were $186 million at December 31, 1995, compared with $272 million at December 31, 1994. The average volume of core deposits in 1995 was $36.6 billion, 7% lower than in 1994. Average core deposits funded 72% of the Company's average total assets in 1995, compared with 76% in 1994. 35 ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- Common stock of the Company is traded on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock Exchange and the Frankfurt Stock Exchange. The high, low and end-of-period annual and quarterly closing prices of the Company's stock as reported on the New York Stock Exchange Composite Transaction Reporting System are presented in the graphs. The number of holders of record of the Company's common stock was 42,254 as of January 31, 1997. PRICE RANGE OF COMMON STOCK-ANNUAL ($) [LINE GRAPH] PRICE RANGE OF COMMON STOCK-QUARTERLY ($) [LINE GRAPH] Common dividends declared per share totaled $5.20 in 1996, $4.60 in 1995 and $4.00 in 1994. The dividend was increased in the first quarter of 1995 from $1.00 per share to $1.15 per share and increased again to $1.30 per share in January 1996. Quarterly dividends are considered at the Board of Directors meeting the month following quarter end. Dividends declared are payable the second month after quarter end. The Company, with the approval of the Board of Directors, intends to continue its present policy of paying quarterly cash dividends to stockholders. The level of future dividends will be determined by the Board of Directors in light of the earnings and financial condition of the Company. In 1991, the FRB approved an application by Berkshire Hathaway, Inc. (Berkshire) to purchase additional shares of the Company's common stock in the open market, up to a total of 22%. Berkshire entered into a passivity agreement with the Company, in which it agreed not to exercise any control over the Company's management or policies. Accordingly, Berkshire granted its proxy to the Company to vote Berkshire's shares in accordance with the recommendations of the Board of Directors of the Company. As a result of the issuance of additional Company common stock in the Merger, Berkshire's percentage ownership of the Company's stock was reduced from approximately 14.5% at December 31, 1995 to approximately 7.6%. Based on this reduction in percentage ownership to below 10%, Berkshire communicated to the FRB and to Wells Fargo its desire to terminate commitments previously made, including the passivity agreement. The FRB and the Company agreed to Berkshire's request. 36 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(in millions) Year ended December 31, ------------------------------------- 1996 1995 1994 INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 29 $ 4 $ 7 Investment securities 779 599 740 Mortgage loans held for sale - 76 - Loans 5,688 3,403 3,015 Other 27 3 3 ------ ------ ------ Total interest income 6,523 4,085 3,765 ------ ------ ------ INTEREST EXPENSE Deposits 1,586 997 854 Federal funds purchased and securities sold under repurchase agreements 92 199 99 Commercial paper and other short-term borrowings 16 32 10 Senior and subordinated debt 302 203 192 Guaranteed preferred beneficial interests in Company's subordinated debentures 6 - - ------ ------ ------ Total interest expense 2,002 1,431 1,155 ------ ------ ------ NET INTEREST INCOME 4,521 2,654 2,610 Provision for loan losses 105 - 200 ------ ------ ------ Net interest income after provision for loan losses 4,416 2,654 2,410 ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 868 478 473 Fees and commissions 740 433 387 Trust and investment services income 377 241 203 Investment securities gains (losses) 10 (17) 8 Sale of joint venture interest - 163 - Other 205 26 129 ------ ------ ------ Total noninterest income 2,200 1,324 1,200 ------ ------ ------ NONINTEREST EXPENSE Salaries 1,357 713 671 Incentive compensation 227 126 155 Employee benefits 373 187 201 Equipment 399 193 174 Net occupancy 366 211 215 Goodwill 250 35 36 Core deposit intangible 243 42 49 Other 1,422 694 655 ------ ------ ------ Total noninterest expense 4,637 2,201 2,156 ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 1,979 1,777 1,454 Income tax expense 908 745 613 ------ ------ ------ NET INCOME $1,071 $1,032 $ 841 ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $1,004 $ 990 $ 798 ------ ------ ------ ------ ------ ------ PER COMMON SHARE Net income $12.21 $20.37 $14.78 ------ ------ ------ ------ ------ ------ Dividends declared $ 5.20 $ 4.60 $ 4.00 ------ ------ ------ ------ ------ ------ Average common shares outstanding 82.2 48.6 53.9 ------ ------ ------ ------ ------ ------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 37 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
(in millions) December 31, ----------------------- 1996 1995 ASSETS Cash and due from banks $ 11,736 $ 3,375 Federal funds sold and securities purchased under resale agreements 187 177 Investment securities at fair value 13,505 8,920 Loans 67,389 35,582 Allowance for loan losses 2,018 1,794 -------- -------- Net loans 65,371 33,788 -------- -------- Due from customers on acceptances 197 98 Accrued interest receivable 665 308 Premises and equipment, net 2,406 862 Core deposit intangible 2,038 166 Goodwill 7,322 382 Other assets 5,461 2,240 -------- -------- Total assets $108,888 $50,316 -------- -------- -------- -------- LIABILITIES Noninterest-bearing deposits $ 29,073 $10,391 Interest-bearing deposits 52,748 28,591 -------- -------- Total deposits 81,821 38,982 Federal funds purchased and securities sold under repurchase agreements 2,029 2,781 Commercial paper and other short-term borrowings 401 195 Acceptances outstanding 197 98 Accrued interest payable 171 85 Other liabilities 3,947 1,071 Senior debt 2,120 1,783 Subordinated debt 2,940 1,266 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,150 - STOCKHOLDERS' EQUITY Preferred stock 600 489 Common stock-$5 par value, authorized 150,000,000 shares; issued and outstanding 91,474,425 shares and 46,973,319 shares 457 235 Additional paid-in capital 10,287 1,135 Retained earnings 2,749 2,174 Cumulative foreign currency translation adjustments (4) (4) Investment securities valuation allowance 23 26 -------- -------- Total stockholders' equity 14,112 4,055 -------- -------- Total liabilities and stockholders' equity $108,888 $50,316 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 38 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions) Preferred Common Additional Retained Foreign Investment Total stock stock paid-in earnings currency securities stock- capital translation valuation holders' adjustments allowance equity BALANCE DECEMBER 31, 1993 $ 639 $ 279 $ 551 $ 2,829 $ (4) $ 21 $ 4,315 ------- ------- ------- ------- ------- ------- ------- Net income-1994 841 841 Common stock issued under employee benefit and dividend reinvestment plans 3 54 57 Preferred stock redeemed (150) (150) Common stock repurchased (26) (734) (760) Preferred stock dividends (43) (43) Common stock dividends (218) (218) Change in unrealized net gains, after applicable taxes (131) (131) Transfer 1,000 (1,000) - ------- ------- ------- ------- ------- ------- ------- Net change (150) (23) 320 (420) - (131) (404) ------- ------- ------- ------- ------- ------- ------- BALANCE DECEMBER 31, 1994 489 256 871 2,409 (4) (110) 3,911 ------- ------- ------- ------- ------- ------- ------- Net income-1995 1,032 1,032 Common stock issued under employee benefit and dividend reinvestment plans 4 86 90 Common stock repurchased (25) (822) (847) Preferred stock dividends (42) (42) Common stock dividends (225) (225) Change in unrealized net losses, after applicable taxes 136 136 Transfer 1,000 (1,000) - ------- ------- ------- ------- ------- ------- ------- Net change - (21) 264 (235) - 136 144 ------- ------- ------- ------- ------- ------- ------- BALANCE DECEMBER 31, 1995 489 235 1,135 2,174 (4) 26 4,055 ------- ------- ------- ------- ------- ------- ------- Net income-1996 1,071 1,071 Preferred stock issued to First Interstate stockholders 350 10 360 Preferred stock issued, net of issuance costs 200 (3) 197 Common stock issued to First Interstate stockholders 260 11,037 11,297 Common stock issued under employee benefit and dividend reinvestment plans 4 113 117 Preferred stock redeemed (439) (439) Common stock repurchased (42) (2,116) (2,158) Preferred stock dividends (67) (67) Common stock dividends (429) (429) Change in unrealized net gains, after applicable taxes (3) (3) Fair value adjustment related to First Interstate stock options 111 111 ------- ------- ------- ------- ------- ------- ------- Net change 111 222 9,152 575 - (3) 10,057 ------- ------- ------- ------- ------- ------- ------- BALANCE DECEMBER 31, 1996 $ 600 $ 457 $10,287 $ 2,749 $ (4) $ 23 $14,112 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 39 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions) Year ended December 31, ------------------------------------- 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,071 $ 1,032 $ 841 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 105 - 200 Depreciation and amortization 809 272 246 Losses on disposition of operations 95 89 5 Gain on sale of joint venture interest - (163) - Deferred income tax expense (benefit) 169 17 (32) Increase (decrease) in net deferred loan fees 22 (6) (8) Net (increase) decrease in accrued interest receivable (49) 20 (31) Writedown on mortgage loans held for sale - 64 - Net (decrease) increase in accrued interest payable (1) 25 (3) Net decrease (increase) in loans acquired for sale 390 (535) - Other, net (1,536) (139) (74) ------- ------- ------- Net cash provided by operating activities 1,075 676 1,144 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At fair value: Proceeds from sales 719 673 18 Proceeds from prepayments and maturities 5,047 229 670 Purchases (2,759) (77) (724) At cost: Proceeds from prepayments and maturities - 2,191 3,866 Purchases - (104) (2,598) Cash acquired from First Interstate 6,030 - - Proceeds from sales of mortgage loans held for sale - 4,273 - Net (increase) decrease in loans resulting from originations and collections 2,301 (3,700) (3,338) Proceeds from sales (including participations) of loans 364 770 134 Purchases (including participations) of loans (133) (233) (375) Proceeds from sales of foreclosed assets 155 202 240 Net decrease in federal funds sold and securities purchased under resale agreements 2,064 83 1,408 Other, net (756) (172) (264) ------- ------- ------- Net cash provided (used) by investing activities 13,032 4,135 (963) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (4,609) (3,350) 688 Net (decrease) increase in short-term borrowings (892) (235) 1,944 Proceeds from issuance of senior debt 1,260 1,230 248 Repayment of senior debt (1,183) (811) (1,101) Proceeds from issuance of subordinated debt 800 - - Repayment of subordinated debt - (210) (526) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 1,150 - - Proceeds from issuance of preferred stock 197 - - Proceeds from issuance of common stock 117 90 57 Redemption of preferred stock (439) - (150) Repurchase of common stock (2,158) (847) (760) Payment of cash dividends on preferred stock (73) (42) (34) Payment of cash dividends on common stock (429) (225) (218) Other, net 513 (10) 1 ------- ------- ------- Net cash provided (used) by financing activities (5,746) (4,410) 149 ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 8,361 401 330 Cash and cash equivalents at beginning of year 3,375 2,974 2,644 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $11,736 $ 3,375 $ 2,974 ------- ------- ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,916 $ 1,406 $ 1,158 Income taxes $ 641 $ 618 $ 680 Noncash investing and financing activities: Transfers from investment securities at cost to investment securities at fair value $ - $ 6,532 $ - Transfers from loans to foreclosed assets $ 141 $ 115 $ 174 Transfers from loans to mortgage loans held for sale $ - $ 4,440 $ - Acquisition of First Interstate: Common stock issued $11,297 $ - $ - Fair value of preferred stock issued 360 - - Fair value of stock options 111 - - Fair value of assets acquired 55,797 - - Fair value of liabilities assumed 51,214 - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 40 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). Besides servicing millions of customers in ten western states, Wells Fargo & Company and Subsidiaries (Company) provide a full range of banking and financial services to commercial, agribusiness, real estate and small business customers across the nation. The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP) and prevailing practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the financial statements for prior years have been reclassified to conform with the current financial statement presentation. The following is a description of the significant accounting policies of the Company. CONSOLIDATION - -------------------------------------------------------------------------------- The consolidated financial statements of the Company include the accounts of the Parent, the Bank and other bank and nonbank subsidiaries of the Parent. Significant majority-owned subsidiaries are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other subsidiaries and affiliates in which there is at least 20% ownership are generally accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost. Subsidiaries and affiliates that are accounted for by either the equity or cost method are included in other assets. SECURITIES - -------------------------------------------------------------------------------- Securities are accounted for according to their purpose and holding period. INVESTMENT SECURITIES Securities generally acquired to meet long-term investment objectives, including yield and liquidity management purposes, are classified as investment securities. Realized gains and losses are recorded in noninterest income using the identified certificate method. For certain debt securities (for example, Government National Mortgage Association securities), the Company anticipates prepayments of principal in the calculation of the effective yield. SECURITIES AT FAIR VALUE Debt securities that may not be held until maturity and marketable equity securities are considered available for sale and, as such, are classified as securities carried at fair value, with unrealized gains and losses, after applicable taxes, reported in a separate component of stockholders' equity. The estimated fair value of investments is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income as a loss on investment securities. SECURITIES AT COST Debt securities acquired with the positive intent and ability to hold to maturity are classified as securities carried at historical cost, adjusted for amortization of premium and accretion of discount, where appropriate. If it is probable that the carrying value of any debt security will not be realized due to other-than-temporary impairment, the estimated loss is recorded in noninterest income as a loss on investment securities. If a decision is made to dispose of securities at cost or should the Company become unable to hold securities until maturity, they would be reclassified to securities at fair value. 41 TRADING SECURITIES Securities acquired for short-term appreciation or other trading purposes are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in noninterest income. NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities are acquired for various purposes, such as troubled debt restructurings and as a regulatory requirement (for example, Federal Reserve Bank stock). These securities are accounted for at cost and are included in other assets as they do not fall within the definition of an investment security since there are restrictions on their sale or liquidation. The asset value is reduced when declines in value are considered to be other than temporary and the estimated loss is recorded in noninterest income as a loss from equity investments. LOANS - -------------------------------------------------------------------------------- Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the contractual life of the loan using an interest method or the straight-line method if it is not materially different. Loans identified as held for sale are carried at the lower of cost or market value. Nonrefundable fees, related direct loan origination costs and related hedging gains or losses, if any, are deferred and recognized as a component of the gain or loss on sale recorded in noninterest income. NONACCRUAL LOANS Loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 150 days of becoming past due as to interest or principal, regardless of security. Generally, consumer loans not secured by real estate are only placed on nonaccrual status when a portion of the principal has been charged off. Generally, such loans are entirely charged off within 180 days of becoming past due. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection. IMPAIRED LOANS 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. A loan within the scope of FAS 114 is considered impaired when, based on current information and events, 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. For loans covered by these Statements, 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. 42 RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Subsequent to the adoption of FAS 114, loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired loans in the calendar years subsequent to the restructuring if they are not impaired based on the modified terms. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. ALLOWANCE FOR LOAN LOSSES The Company's determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. The Company considers the allowance for loan losses adequate to cover losses inherent in loans, loan commitments and standby letters of credit. PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment, at the capitalized amount less accumulated amortization. Depreciation and amortization are computed primarily using the straight- line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for furniture and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases, which generally range from 20 to 35 years. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - -------------------------------------------------------------------------------- Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from acquisitions made by the Company. Substantially all of the Company's goodwill is being amortized using the straight-line method over 25 years. The remaining period of amortization, on a weighted average basis, approximated 24 years at December 31, 1996. Core deposit intangibles are amortized on an accelerated basis based on an estimated useful life of 10 to 15 years. Certain identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over an original life of 5 to 15 years. Approximately 38% of the December 31, 1996 remaining balance will be amortized in 3 years. The Company reviews its intangible assets periodically for other-than- temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. INCOME TAXES - -------------------------------------------------------------------------------- The Company files a consolidated federal income tax return. Consolidated or combined state tax returns are filed in certain states, including California. Income taxes are generally allocated to individual subsidiaries as if each had filed a separate return. Payments are made to the Parent by those subsidiaries with net tax liabilities on a separate return basis. Subsidiaries with net tax losses and excess tax credits receive payment for these benefits from the Parent. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- INTEREST RATE DERIVATIVES The Company uses interest rate derivative financial instruments (futures, caps, floors and swaps) primarily to hedge mismatches in the rate maturity of loans and their funding sources. Gains and losses on interest rate futures are deferred and amortized as a component of the interest income or expense reported on the asset or liability hedged. Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in the interest income 43 or expense reported on the asset or liability hedged; fees on these financial contracts are amortized over their contractual life as a component of the interest reported on the asset or liability hedged. If a hedged asset or liability settles before maturity of the interest rate derivative financial instruments used as a hedge, the derivatives are closed out or settled, and previously unrecognized hedge results and the net settlement upon close-out or termination are accounted for as part of the gains and losses on the asset or liability hedged. If interest rate derivative financial instruments used in an effective hedge are closed out or terminated before the hedged item, previously unrecognized hedge results and the net settlement upon close-out or termination are deferred and amortized over the life of the asset or liability hedged. Cash flows resulting from interest rate derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the same category as the cash flows from the items being hedged. Interest rate derivative financial instruments entered into as an accommodation to customers and interest rate derivative financial instruments used to offset the interest rate risk of those contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from interest rate derivative financial instruments carried at fair value are classified as operating cash flows. Credit risk related to interest rate derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivative financial instruments. All contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from foreign exchange derivative financial instruments are classified as operating cash flows. Credit risk related to foreign exchange derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. NET INCOME PER COMMON SHARE - -------------------------------------------------------------------------------- Net income per common share is computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year. The impact of common stock equivalents, such as stock options, and other potentially dilutive securities is not material; therefore, they are not included in the computation. ACCOUNTING STANDARDS TO BE ADOPTED IN FUTURE PERIODS - -------------------------------------------------------------------------------- In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 125 (FAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. This Statement provides guidance for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS 125 supersedes FAS 76, 77 and 122, while amending both FAS 65 and 115. The Statement is effective January 1, 1997 and is to be applied prospectively. Earlier implementation is not permitted. In December 1996, the FASB issued FAS 127 which defers certain provisions of FAS 125 for one year. A transfer of financial assets in which control is surrendered over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Liabilities and derivatives incurred or obtained by the transfer of financial assets are required to be measured at fair value, if practicable. Also, any servicing assets and other retained interests in the transferred assets must be measured by allocating the previous carrying value between the asset sold and the interest retained, if any, based on their relative fair values at the date of transfer. For each servicing contract in existence before January 1, 1997, previously recognized servicing rights and excess servicing receivables that do not exceed contractually specified servicing are required to be combined, net of any previously recognized servicing obligations under that contract, as a servicing asset or liability. Previously recognized servicing receivables that exceed contractually specified servicing fees are required to be reclassified as interest-only strips receivable. The Statement also requires an assessment of interest-only strips, loans, other receivables and retained interests in securitizations. If these assets can be contractually prepaid or otherwise settled such that the holder would not recover substantially all of its recorded investment, the asset will be measured like available-for-sale securities or trading securities, under FAS 115. This assessment is required for financial assets held on or acquired after January 1, 1997. The adoption of FAS 125 is not expected to have a material effect on the Company's financial statements. 44 2 MERGER WITH FIRST INTERSTATE BANCORP - -------------------------------------------------------------------------------- On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate), the 14th largest bank holding company in the nation as of March 31, 1996 with 405 offices in California and a total of approximately 1,150 offices in 13 western states. The Merger resulted in the creation of the eighth largest bank holding company in the United States based on assets as of December 31, 1996. The purchase price of the transaction was approximately $11.3 billion based on Wells Fargo's share price on January 19, 1996, 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; 52,001,970 shares of the Company's common stock were issued. Each share of First Interstate preferred stock was converted into the right to receive one share of the Company's preferred stock. Each outstanding and unexercised option granted by First Interstate was converted into an option to purchase Company common stock based on the original plan and the agreed upon exchange ratio. The Merger was accounted for as a purchase transaction. Accordingly, the results of operations of First Interstate are included with those of the Company for periods subsequent to the date of the Merger (i.e., the financial information for periods prior to April 1, 1996 included in this Annual Report excludes First Interstate). The name of the combined company is Wells Fargo & Company. The major components of management's plan for the combined company include the realignment of First Interstate's businesses to reflect Wells Fargo's structure, consolidation of retail branches and administrative facilities and reduction in staffing levels. As a result of this plan, the adjustments to goodwill included accruals totaling approximately $302 million ($178 million after tax) related to the disposition of premises, including an accrual of $116 million ($68 million after tax) associated with the dispositions of traditional former First Interstate branches in California and out of state. The California dispositions included 176 branch closures during 1996. The Company has also entered into definitive agreements with several institutions to sell 20 former First Interstate branches, including deposits, located in California. The sales of 17 of these branches were closed in the first quarter of 1997. The out-of-state dispositions associated with the goodwill adjustment are expected to be completed in 1997. Additionally, the adjustments to goodwill included accruals of approximately $415 million ($245 million after tax) related to severance of former First Interstate employees throughout the Company who will be displaced through December 31, 1997. Severance payments of $151 million were paid during 1996. As a condition of the Merger, the Company was required by regulatory agencies to divest 61 First Interstate branches in California. The Company completed the sale of these branches to Home Savings of America, principal subsidiary of H.F. Ahmanson & Company, in September 1996. In addition, the Company completed the sale of the former First Interstate banks in Wyoming, Montana and Alaska in the fourth quarter of 1996. The 61 branches and the three banks had aggregate assets of approximately $1.7 billion and aggregate deposits of approximately $2.4 billion. The Company entered into an agreement with The Bank of New York to sell the Corporate and Municipal Bond Administration business. The sale is scheduled to close during the first quarter of 1997. Other significant adjustments to goodwill included the write-off of First Interstate's existing goodwill and other intangibles of $701 million. The unaudited pro forma amounts in the table below are presented for informational purposes and are not necessarily indicative of the results of operations of the combined company for the periods presented. These amounts are also not necessarily indicative of the 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 unaudited pro forma amounts. The following unaudited pro forma combined summary of income gives effect to the combination as if the Merger was consummated on January 1, 1995. UNAUDITED PRO FORMA COMBINED FINANCIAL DATA - ------------------------------------------------------------------------------- (in millions, except per share data) Year ended December 31, ----------------------- 1996 1995 SUMMARY OF INCOME Net interest income $5,125 $5,234 Provision for loan losses 105 - Noninterest income 2,505 2,428 Noninterest expense (1) 4,826 4,870 Net income (1) 1,481 1,580 PER COMMON SHARE Net income (1) $15.37 $15.19 Dividends declared 5.20 4.60 AVERAGE COMMON SHARES OUTSTANDING 91.5 99.1 - ------------------------------------------------------------------------------- (1) Noninterest expense excludes $251 million ($245 million after tax) and $28 million ($28 million after tax) for the years ended December 31, 1996 and 1995, respectively, of nonrecurring merger-related expenses recorded by First Interstate. 45 The unaudited pro forma combined net income of $1,481 million for the year ended December 31, 1996 consists of second, third and fourth quarter 1996 net income of the combined company of $807 million, first quarter 1996 net income of the Company of $264 million and a first quarter net loss of First Interstate of $23 million, plus unaudited pro forma adjustments of $433 million. The unaudited pro forma combined net income of $1,580 million for the year ended December 31, 1995 consists of net income of the Company of $1,032 million and First Interstate of $885 million, less unaudited pro forma adjustments of $337 million. The unaudited pro forma combined net income for both periods includes amortization of $288 million relating to $7,191 million excess purchase price over fair value of First Interstate's net assets acquired (goodwill). Goodwill is amortized using the straight-line method over 25 years. Goodwill may change as certain estimates and contingencies are finalized, although any adjustments are not expected to have a significant effect on the ultimate amount of goodwill. In addition to First Interstate premise and severance costs affecting goodwill, an estimated $60 million, $80 million and $300 million of costs related to the Company's premises, employees and operations as well as all costs relating to systems conversions and other indirect, integration costs were expensed during the second, third and fourth quarters, respectively. The Company expects to incur additional integration costs, which will be expensed as incurred. With respect to timing, it is assumed that the integration will be completed and that such costs will be incurred not later than 18 months after the closing of the Merger. 3 CASH, LOAN AND DIVIDEND RESTRICTIONS - -------------------------------------------------------------------------------- Federal Reserve Board regulations require reserve balances on deposits to be maintained by the Company's banking subsidiaries with the Federal Reserve Banks. The average required reserve balance was $2.0 billion and $1.2 billion in 1996 and 1995, respectively. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on extensions of credit to its affiliates. In particular, the Bank is prohibited from lending to the Parent and its nonbank subsidiaries unless the loans are secured by specified collateral. Such secured loans and other regulated transactions made by the Bank (including its subsidiaries) are limited in amount as to each of its affiliates, including the Parent, to 10% of the Bank's capital stock and surplus (as defined, which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) and, in the aggregate to all of its affiliates, to 20% of the Bank's capital stock and surplus. The capital stock and surplus at December 31, 1996 was $9 billion. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency (OCC) are limited to the Bank's retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits are defined by the OCC as net income, less dividends declared during the period, both of which are based on regulatory accounting principles. Based on this definition, the Bank declared dividends in 1996 and 1995 of $650 million in excess of its net income of $2,431 million for those years. Therefore, before it can declare dividends in 1997 without the approval of the OCC, the Bank must have net income of $650 million plus an amount equal to or greater than the dividends declared in 1997. Dividends declared by the Bank in 1996, 1995 and 1994 were $1,461 million, $1,620 million (including a $489 million deemed dividend) and $1,001 million, respectively. The Company's other banking subsidiaries are subject to the same restrictions as the Bank. However, any such restrictions have not had a material impact on the banking subsidiaries or the Company. 46 4 INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The following table provides the major components of investment securities at fair value and at cost:
- --------------------------------------------------------------------------------- (in millions) December 31, ------------------------------------------------ 1996 ------------------------------------------------ COST ESTIMATED ESTIMATED ESTIMATED UNREALIZED UNREALIZED FAIR VALUE GROSS GAINS GROSS LOSSES AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 2,824 $ 16 $ 3 $ 2,837 Securities of U.S. government agencies and corporations (1) 7,043 46 39 7,050 Private collateralized mortgage obligations (2) 3,237 16 23 3,230 Other 342 2 1 343 ------- ---- --- ------- Total debt securities 13,446 80 66 13,460 Marketable equity securities 18 27 - 45 ------- ---- --- ------- Total $13,464 $107 $66 $13,505 ------- ---- --- ------- ------- ---- --- ------- HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $ - $ - $ - $ - Securities of U.S. government agencies and corporations (1) - - - - Private collateralized mortgage obligations (2) - - - - Other - - - - ------- ---- --- ------- Total $ - $ - $ - $ - ------- ---- --- ------- ------- ---- --- ------- - ------------------------------------------------------------------------------------------------------------- (in millions) December 31, --------------------------------------------------------------------------------- 1995 1994 ------------------------------------------------------ ------------------- Cost Estimated Estimated Estimated Cost Estimated unrealized unrealized fair value fair value gross gains gross losses AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $1,347 $13 $ 3 $1,357 $ 372 $ 362 Securities of U.S. government agencies and corporations (1) 5,218 35 30 5,223 1,476 1,380 Private collateralized mortgage obligations (2) 2,121 9 8 2,122 1,290 1,178 Other 169 12 - 181 24 38 ------ --- --- ------ ------ ------ Total debt securities 8,855 69 41 8,883 3,162 2,958 Marketable equity securities 18 19 - 37 16 31 ------ --- --- ------ ------ ------ Total $8,873 $88 $41 $8,920 $3,178 $2,989 ------ --- --- ------ ------ ------ ------ --- --- ------ ------ ------ HELD-TO-MATURITY SECURITIES AT COST: U.S. Treasury securities $ - $ - $ - $ - $1,772 $1,720 Securities of U.S. government agencies and corporations (1) - - - - 5,394 5,101 Private collateralized mortgage obligations (2) - - - - 1,306 1,221 Other - - - - 147 143 ------ --- --- ------ ------ ------ Total $ - $ - $ - $ - $8,619 $8,185 ------ --- --- ------ ------ ------ ------ --- --- ------ ------ ------ - -------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. In November 1995, the FASB permitted a one-time opportunity for companies to reassess by December 31, 1995 their classification of securities under Statement of Financial Accounting Standards No. 115 (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. A related unrealized net after-tax loss of $6 million was recorded in stockholders' equity. Proceeds from the sale of securities in the available-for-sale portfolio totaled $719 million, $674 million and $18 million in 1996, 1995 and 1994, respectively. The sales of debt securities in the available-for-sale portfolio resulted in a $1 million gain, a $13 million loss and a $5 million gain in 1996, 1995 and 1994, respectively. These were sold for asset/liability management purposes. Additionally, a $1 million loss was realized in 1994 resulting from a write-down due to other-than-temporary impairment in the fair value of certain debt securities. The sales of marketable equity securities in the available-for-sale portfolio resulted in a gain of $9 million, none and $4 million in 1996, 1995 and 1994, respectively. Additionally, a $4 million loss was realized in 1995 resulting from a write-down of certain equity securities due to other-than-temporary impairment. 47 The following table provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. (See the Investment Securities section of the Financial Review for expected remaining maturities and yields.)
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1996 ------------------------------------------------------------------------------------------------ Total Weighted Weighted Remaining contractual principal maturity amount average average -------------------------------------------------- yield remaining Within one year After one year maturity (in through five years yrs.-mos.) --------------------- --------------------- Amount Yield Amount Yield AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 2,824 5.98% 1-10 $ 689 5.76% $2,129 6.05% Securities of U.S. government agencies and corporations 7,043 6.56 5-1 1,439 6.25 3,173 6.51 Private collateralized mortgage obligations 3,237 6.64 7-6 395 6.34 1,056 6.34 Other 342 7.00 2-6 62 8.14 177 6.63 ------- ------ ------ TOTAL COST OF DEBT SECURITIES $13,446 6.47% 4-11 $2,585 6.18% $6,535 6.33% ------- ---- ---- ------ ---- ------ ---- ------- ---- ---- ------ ---- ------ ---- ESTIMATED FAIR VALUE $13,460 $2,588 $6,542 ------- ------ ------ ------- ------ ------ - --------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------ (in millions) December 31, 1996 --------------------------------------------------- Remaining contractual principal maturity --------------------------------------------------- After five years After ten years through ten years ---------------------- --------------------- Amount Yield Amount Yield AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 5 6.26% $ 1 6.84% Securities of U.S. government agencies and corporations 1,327 6.99 1,104 6.63 Private collateralized mortgage obligations 779 7.46 1,007 6.44 Other 44 6.65 59 7.44 ------ ------ TOTAL COST OF DEBT SECURITIES $2,155 7.15% $2,171 6.56% ------ ----- ------ ----- ------ ----- ------ ----- ESTIMATED FAIR VALUE $2,157 $2,173 ------ ------ ------ ------ - -------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. There was no dividend income in 1996, 1995 and 1994 included in interest income on investment securities in the Consolidated Statement of Income. Substantially all income on investment securities is taxable. Investment securities pledged primarily to secure trust and public deposits and for other purposes as required or permitted by law was $5.3 billion, $4.8 billion and $3.1 billion at December 31, 1996, 1995 and 1994, respectively. 5 LOANS AND ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- A summary of the major categories of loans outstanding and related unfunded commitments to extend credit is shown in the table on the next page. At December 31, 1996 and 1995, the commercial loan category and related commitments did not have an industry concentration that exceeded 10% of total loans and commitments. Tables 11 and 12 in the Loan Portfolio section of the Financial Review summarize real estate mortgage loans (excluding 1-4 family first mortgage loans) by state and property type and real estate construction loans by state and project type. A majority of the Company's real estate 1-4 family first mortgages and consumer loans are with customers located in California. 48
- ----------------------------------------------------------------------------------------------------------------------- (in millions) December 31, -------------------------------------------------------- 1996 1995 -------------------------- -------------------------- OUTSTANDING COMMITMENTS Outstanding Commitments TO EXTEND to extend CREDIT credit Commercial (1) $19,515 $28,125 $ 9,750 $ 8,368 Real estate 1-4 family first mortgage (2) 10,425 778 4,448 723 Other real estate mortgage 11,860 872 8,263 563 Real estate construction 2,303 1,719 1,366 859 Consumer: Real estate 1-4 family junior lien mortgage 6,278 4,781 3,358 3,053 Credit card 5,462 15,737 4,001 8,644 Other revolving credit and monthly payment 8,374 3,123 2,576 2,035 ------- ------- ------- ------- Total consumer 20,114 23,641 9,935 13,732 Lease financing 3,003 - 1,789 - Foreign 169 101 31 - ------- ------- ------- ------- Total loans (3) $67,389 $55,236 $35,582 $24,245 ------- ------- ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------------------------------
(1) Outstanding balances include loans (primarily unsecured) to real estate developers and REITs of $1,070 million and $700 million at December 31, 1996 and 1995, respectively. (2) Substantially all the commitments to extend credit relate to those equity lines that are effectively first mortgages. (3) Outstanding loan balances at December 31, 1996 and 1995 are net of unearned income, including net deferred loan fees, of $654 million and $463 million, respectively. In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management determines a requisite amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment). A commitment to extend credit is a legally binding agreement to lend funds to a customer and is usually for a specified interest rate and purpose. These commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit shown in the table above because a significant portion of these commitments is expected to expire without being drawn upon. Certain commitments are subject to a loan agreement containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its credit activities. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses. Standby letters of credit totaled $2,981 million and $921 million at December 31, 1996 and 1995, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under a standby letter of credit, the Company assures that the third party will receive specified funds if a customer fails to meet his contractual obligation. The liquidity risk to the Company arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing letters of credit and the Company's management of that credit risk is considered in management's determination of the allowance for loan losses. At December 31, 1996 and 1995, standby letters of credit included approximately $243 million and $159 million, respectively, of participations purchased, net of approximately $61 million and $90 million, respectively, of participations sold. Approximately 72% of the Company's 49 year-end 1996 standby letters of credit had maturities of one year or less and substantially all had maturities of seven years or less. Included in standby letters of credit are those that back financial instruments (financial guarantees). The Company had issued or purchased participations in financial guarantees of approximately $1,798 million and $450 million at December 31, 1996 and 1995, respectively. The Company also had commitments for commercial and similar letters of credit of $406 million and $209 million at December 31, 1996 and 1995, respectively. Substantially all fees received from the issuance of financial guarantees are deferred and amortized on a straight-line basis over the term of the guarantee. Losses on standby letters of credit and other similar letters of credit have been immaterial. The Company considers the allowance for loan losses of $2,018 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at December 31, 1996. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of the factors then prevailing, including economic conditions and the Company's ongoing examination process and that of its regulators, will not require significant increases in the allowance for loan losses. Loans held for sale are included in their respective loan categories and recorded at the lower of cost or market. At December 31, 1996 and 1995, loans held for sale were $308 million and $640 million, respectively. Changes in the allowance for loan losses were as follows: - ----------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------ 1996 1995 1994 BALANCE, BEGINNING OF YEAR $1,794 $2,082 $2,122 Allowance of First Interstate 770 - - Sale of former First Interstate banks (11) - - Provision for loan losses 105 - 200 Loan charge-offs: Commercial (1) (140) (55) (54) Real estate 1-4 family first mortgage (18) (13) (18) Other real estate mortgage (40) (52) (66) Real estate construction (13) (10) (19) Consumer: Real estate 1-4 family junior lien mortgage (28) (16) (24) Credit card (404) (208) (138) Other revolving credit and monthly payment (186) (53) (36) ------ ------ ------ Total consumer (618) (277) (198) Lease financing (31) (15) (14) ------ ------ ------ Total loan charge-offs (860) (422) (369) ------ ------ ------ Loan recoveries: Commercial (2) 54 38 37 Real estate 1-4 family first mortgage 8 3 6 Other real estate mortgage 47 53 22 Real estate construction 11 1 15 Consumer: Real estate 1-4 family junior lien mortgage 9 3 4 Credit card 36 13 18 Other revolving credit and monthly payment 47 12 11 ------ ------ ------ Total consumer 92 28 33 Lease financing 8 11 16 ------ ------ ------ Total loan recoveries 220 134 129 ------ ------ ------ Total net loan charge-offs (640) (288) (240) ------ ------ ------ BALANCE, END OF YEAR $2,018 $1,794 $2,082 ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average total loans (3) 1.05% .83% .70% ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 3.00% 5.04% 5.73% ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------- (1) Includes charge-offs of loans (primarily unsecured) to real estate developers and REITs of $2 million, none and $14 million in 1996, 1995 and 1994, respectively. (2) Includes recoveries from loans to real estate developers and REITs of $10 million, $3 million and $2 million in 1996, 1995 and 1994, respectively. (3) Average total loans exclude first mortgage loans held for sale in 1995. 50 In accordance with FAS 114, the table below shows the recorded investment in impaired loans by loan category and the related methodology used to measure impairment at December 31, 1996 and 1995: - ----------------------------------------------------------------------------- (in millions) December 31, ----------------- 1996 1995 Commercial $155 $ 77 Real estate 1-4 family first mortgage 1 2 Other real estate mortgage (1) 362 330 Real estate construction 24 46 Other 1 3 ---- ---- Total (2) $543 $458 ---- ---- ---- ---- Impairment measurement based on: Collateral value method $416 $374 Discounted cash flow method 101 66 Historical loss factors 26 18 ---- ---- $543 $458 ---- ---- ---- ---- - ----------------------------------------------------------------------------- (1) Includes accruing loans of $50 million at both December 31, 1996 and 1995 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. (2) Includes $27 million and $22 million of impaired loans with a related FAS 114 allowance of $2 million and $3 million at December 31, 1996 and 1995, respectively. The average recorded investment in impaired loans during 1996 and 1995 was $542 million and $472 million, respectively. Total interest income recognized on impaired loans during 1996 and 1995 was $17 million and $15 million, respectively, substantially all of which was 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. 6 PREMISES, EQUIPMENT, LEASE COMMITMENTS AND OTHER ASSETS - -------------------------------------------------------------------------------- The following table presents comparative data for premises and equipment: - ----------------------------------------------------------------------------- (in millions) December 31, ------------------- 1996 1995 Land $ 234 $ 96 Buildings 1,687 520 Furniture and equipment 1,362 730 Leasehold improvements 392 270 Premises leased under capital leases 111 66 ------ ------ Total 3,786 1,682 Less accumulated depreciation and amortization 1,380 820 ------ ------ Net book value $2,406 $ 862 ------ ------ ------ ------ - ----------------------------------------------------------------------------- Depreciation and amortization expense was $238 million, $154 million and $142 million in 1996, 1995 and 1994, respectively. Losses on disposition of premises and equipment, recorded in noninterest income, were $46 million, $31 million and $12 million in 1996, 1995 and 1994, respectively. In addition, also recorded in noninterest income were losses from disposition of operations primarily related to the disposition of premises associated with scheduled branch closures of $95 million, $89 million and $5 million in 1996, 1995 and 1994, respectively. The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms up to 25 years, many of which provide for periodic adjustment of rentals based 51 on changes in various economic indicators. The following table shows future minimum payments under noncancelable operating leases and capital leases with terms in excess of one year as of December 31, 1996: - ----------------------------------------------------------------------------- (in millions) Operating leases Capital leases Year ended December 31, 1997 $ 257 $ 13 1998 229 13 1999 204 12 2000 168 12 2001 119 10 Thereafter 578 72 ------ ---- Total minimum lease payments $1,555 132 ------ ------ Executory costs (3) Amounts representing interest (62) ---- Present value of net minimum lease payments $ 67 ---- ---- - ----------------------------------------------------------------------------- Total future minimum payments to be received under noncancelable operating subleases at December 31, 1996 were approximately $266 million; these payments are not reflected in the preceding table. Rental expense, net of rental income, for all operating leases was $199 million, $111 million and $97 million in 1996, 1995 and 1994, respectively. The components of other assets at December 31, 1996 and 1995 were as follows: - ----------------------------------------------------------------------------- (in millions) December 31, ------------------------ 1996 1995 Nonmarketable equity investments (1) $ 937 $ 428 Net deferred tax asset (2) 437 817 Certain identifiable intangible assets 471 220 Foreclosed assets 219 186 Other 3,397 589 ------ ------ Total other assets $5,461 $2,240 ------ ------ ------ ------ - ----------------------------------------------------------------------------- (1) Commitments related to nonmarketable equity investments totaled $376 million and $159 million at December 31, 1996 and 1995, respectively. (2) See Note 14 to the Financial Statements. Income from nonmarketable equity investments accounted for using the cost method was $137 million, $58 million and $31 million in 1996, 1995 and 1994, respectively. Total amortization expense for certain identifiable intangible assets recorded in noninterest expense was $26 million, $12 million and $13 million in 1996, 1995 and 1994, respectively. Foreclosed assets consist of assets (substantially real estate) acquired in satisfaction of troubled debt and are carried at the lower of fair value (less estimated costs to sell) or cost. Foreclosed assets expense, including disposition gains and losses, was $7 million, $1 million and none in 1996, 1995 and 1994, respectively. The Company adopted on December 31, 1995 Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Additionally, FAS 121 requires that long-lived assets to be disposed of be reported at the lower of their carrying amount or fair value, less costs to sell. The impact of adopting FAS 121 was immaterial. Independent of FAS 121, the Company periodically reviews its space requirements. During the course of 1995, such reviews resulted in two properties being designated as held for sale. Regardless of FAS 121, assets designated as held for sale are carried at the lower of cost or fair value, less costs to sell. Accordingly, the Company recorded a $21 million write-down in 1995 in noninterest income related to these properties. These properties had a carrying value of $15 million at both December 31, 1996 and 1995. In 1995, the Company adopted Statement of Financial Accounting Standards No. 122 (FAS 122), Accounting for Mortgage Servicing Rights. This Statement amends FAS 65 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 1996, 1995 and 1994 were $165 million, $95 million and $89 million, respectively. There were no originated mortgage servicing rights capitalized in 1996 and 1995. Purchased mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. 52 Amortization expense, recorded in noninterest income, totaled $63 million, $39 million and $8 million for 1996, 1995 and 1994, respectively. Purchased mortgage servicing rights included in certain identifiable intangible assets were $257 million (including $72 million from First Interstate), $152 million and $96 million at December 31, 1996, 1995 and 1994, respectively. For purposes of evaluating and measuring impairment for purchased mortgage servicing rights, the Company stratified these rights based on the type and interest rate of the underlying loans. Impairment is measured as the amount by which the purchased mortgage servicing rights for a stratum exceed their fair value. Fair value of the purchased mortgage servicing rights is determined based on valuation techniques utilizing discounted cash flows incorporating assumptions that market participants would use and totaled $289 million and $153 million at December 31, 1996 and 1995, respectively. Impairment, net of hedge results, is recognized through a valuation allowance for each individual stratum. At December 31, 1996 and 1995, the balance of the valuation allowances totaled $582 thousand and $352 thousand, respectively. Certain mortgage servicing rights owned by the Company have not been capitalized as they were acquired by origination prior to the adoption of FAS 122. These rights were not included in the valuation. 7 DEPOSITS - -------------------------------------------------------------------------------- At December 31, 1996, the maturities of time certificates of deposit and other time deposits were as follows: $12,961 million in 1997, $1,496 million in 1998, $643 million in 1999, $376 million in 2000, $236 million in 2001 and $243 million thereafter. Substantially all of these deposits were interest-bearing at December 31, 1996. Time certificates of deposit and other time deposits each with a minimum denomination of $100,000 totaled $3,495 million and $2,099 million at December 31, 1996 and 1995, respectively. Time certificates of deposit and other time deposits issued by foreign offices in amounts of $100,000 or more represent substantially all of the foreign deposit liabilities of $54 million and $876 million at December 31, 1996 and 1995, respectively. Demand deposit overdrafts that have been reclassified as loan balances were $800 million and $210 million at December 31, 1996 and 1995, respectively. 8 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS - -------------------------------------------------------------------------------- The table on the right provides comparative data for securities sold under repurchase agreements. These borrowings generally mature in less than 30 days. - ----------------------------------------------------------------------------- (in millions) December 31, ---------------------------------- 1996 1995 1994 Average amount outstanding (1) $ 689 $1,788 $ 884 Highest month-end balance (2) 1,100 2,776 1,794 Year-end balance 533 896 1,794 - ----------------------------------------------------------------------------- (1) Average balances were computed using daily amounts. (2) Highest month-end balances were at February 1996, April 1995 and December 1994, respectively. 53 9 SENIOR AND SUBORDINATED DEBT - -------------------------------------------------------------------------------- The following is a summary of senior and subordinated debt (reflecting unamortized debt discounts and premiums, where applicable) owed by the Parent and its subsidiaries:
- ----------------------------------------------------------------------------------------------------------------------- (in millions) Maturity Interest December 31, date rate -------------------- 1996 1995 SENIOR Parent: Floating-Rate Medium-Term Notes 1996-99 Various $1,571 $1,478 Notes (1) 1996-98 11% 55 200 Medium-Term Notes (1) 1996-2002 7.69-10.83% 359 25 Notes payable by subsidiaries 68 28 Obligations of subsidiaries under capital leases (Note 6) 67 52 ------ ------ Total senior debt 2,120 1,783 ------ ------ SUBORDINATED Parent: Floating-Rate Notes (2)(3) 1997 Various 100 101 Floating-Rate Notes (2)(4)(5) 1997 Various 100 100 Floating-Rate Notes (2)(4) 1997 Various 83 - Floating-Rate Capital Notes (2)(4)(6) 1998 Various 200 200 Floating-Rate Notes (2)(4) 2000 Various 118 118 Capital Notes (6) 1999 8.625% 190 - Notes 1997 12.75% 70 - Notes (1)(7)(8) 2002 8.15% 97 - Notes 2002 8.75% 201 199 Notes 2002 8.375% 149 149 Notes 2003 6.875% 150 150 Notes 2003 6.125% 249 249 Notes (1) 2004 9.125% 137 - Notes (1)(7)(8) 2004 9.0% 121 - Notes (1) 2006 6.875% 499 - Notes (1) 2006 7.125% 299 - Medium-Term Notes (1) 1998-2002 9.38-11.25% 177 - ------ ------ Total subordinated debt 2,940 1,266 ------ ------ Total senior and subordinated debt $5,060 $3,049 ------ ------ ------ ------ - -----------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially all of these Notes, whereby the Company receives fixed-rate interest payments approximately equal to interest on the Notes and makes interest payments based on an average three- or six-month LIBOR rate. (2) Notes are currently redeemable in whole or in part, at par. (3) Subject to a maximum interest rate of 13% due to the purchase of an interest rate cap. (4) May be redeemed in whole, at par, at any time in the event withholding taxes are imposed by the United States. (5) Subject to a maximum interest rate of 13%. (6) Mandatory Equity Notes. (7) These Notes are redeemable at various future dates, in whole or in part, at par, prior to maturity. (8) The interest rate swap agreement for these Notes is callable by the counter-party prior to the maturity of the Notes. At December 31, 1996, the principal payments, including sinking fund payments, on senior and subordinated debt are due as follows in the table on the right. The interest rates on floating-rate notes are determined periodically by formulas based on certain money market rates, subject, on certain notes, to minimum or maximum interest rates. The Company's mandatory convertible debt, which is identified by note (6) to the table above, qualifies as Tier 2 capital but is subject to discounting and note fund - ----------------------------------------------------------------------------- (in millions) Parent Company 1997 $1,168 $1,173 1998 992 999 1999 347 352 2000 118 128 2001 359 366 Thereafter 1,941 2,042 ------ ------ Total $4,925 $5,060 ------ ------ ------ ------ - ----------------------------------------------------------------------------- 54 restrictions under the risk-based capital rules. The terms of the $200 million of the Mandatory Equity Notes, due in 1998, and $190 million Mandatory Equity Notes, due in 1999, require the Company to sell or exchange with the noteholder the Company's common stock, perpetual preferred stock or other capital securities at maturity or earlier redemption of the Notes. At December 31, 1996, $200 million of stockholders' equity had been designated for the retirement or redemption of those Notes. Certain of the agreements under which debt has been issued contain provisions that may limit the merger or sale of the Bank and the issuance of its capital stock or convertible securities. The Company was in compliance with the provisions of the borrowing agreements at December 31, 1996. 10 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES - -------------------------------------------------------------------------------- In 1996, the Company established four separate special purpose trusts, which collectively issued $1,150 million in trust preferred securities as described below. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested in junior subordinated deferrable interest debentures (debentures) of the Company. The purpose of issuing these trust preferred securities was to provide the Company with a more cost-effective means of obtaining Tier 1 capital for regulatory purposes than if the Company itself were to issue additional preferred stock because the Company is allowed to deduct, for income tax purposes, distributions to the holders of the trust preferred securities. The sole assets of these special purpose trusts are the debentures. These debentures rank junior to the senior and subordinated debt issued by the Company. The Company owns all of the common securities of the four trusts. The preferred securities issued by the trusts rank senior to the common securities. Concurrent with the issuance of the preferred securities by the trusts, the Company issued guarantees for the benefit of the security holders. The obligations of the Company under the debentures, the indentures, the relevant trust agreements and the guarantees, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the trusts under the trust preferred securities and rank subordinate and junior in right of payment to all liabilities of the Company. Listed below are the series of trust preferred securities of Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I issued at $1,000 per security. The distributions are cumulative and payable semi-annually on the first day of June and December for Wells Fargo Capital A, Wells Fargo Capital B and Wells Fargo Capital C and on the fifteenth day of June and December for Wells Fargo Capital I. The trust preferred securities are subject to mandatory redemption at the stated maturity date of the debentures, upon repayment, or earlier, pursuant to the terms of the Trust Agreement. WELLS FARGO CAPITAL A This trust issued $300 million in trust preferred securities in November 1996 and concurrently invested $309.3 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $40.63 per security (8.13% annualized rate). WELLS FARGO CAPITAL B This trust issued $200 million in trust preferred securities in November 1996 and concurrently invested $206.2 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $39.75 per security (7.95% annualized rate). WELLS FARGO CAPITAL C This trust issued $250 million in trust preferred securities in November 1996 and concurrently invested $257.8 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $38.65 per security (7.73% annualized rate). WELLS FARGO CAPITAL I This trust issued $400 million in trust preferred securities in December 1996 and concurrently invested $412.4 million in debentures of the Company with a stated maturity of December 15, 2026. This class of trust preferred securities will accrue semi-annual distributions of $39.80 per security (7.96% annualized rate). On and after December 2006, each of the series of trust preferred securities may be redeemed and the corresponding debentures may be prepaid at the option of the Company, subject to Federal Reserve approval, at declining redemption prices. Prior to December 2006, the securities may be redeemed at the option of the Company on the occurrence of certain events that result in a negative tax impact, negative regulatory impact on the trust preferred securities of the Company or negative legal or regulatory impact on the appropriate special purpose trust which would define it as an investment company. In addition, the Company has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities for up to five years. 55 11 PREFERRED STOCK - -------------------------------------------------------------------------------- Of the 25,000,000 shares authorized, there were 6,600,000 shares and 2,327,500 shares of preferred stock issued and outstanding at December 31, 1996 and 1995, respectively. All preferred shares rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. The following is a summary of preferred stock (adjustable and fixed):
- ---------------------------------------------------------------------------------------------------------------------------------- Shares issued Carrying amount Adjustable Dividends declared and outstanding (in millions) dividends rate (in millions) ----------------------- --------------- ----------------- ----------------------- December 31, December 31, Minimum Maximum Year ended December 31, ----------------------- --------------- ----------------------- 1996 1995 1996 1995 1996 1995 1994 Adjustable-Rate Cumulative, Series A - - $ - $ - 6.0% 12.0% $ - $ - $ 2 (Liquidation preference $50)(1) Adjustable-Rate Cumulative, Series B 1,500,000 1,500,000 75 75 5.5 10.5 4 5 4 (Liquidation preference $50) 9% Cumulative, Series C - 477,500 - 239 - - 21 21 21 (Liquidation preference $500)(2) 8 7/8% Cumulative, Series D 350,000 350,000 175 175 - - 16 16 16 (Liquidation preference $500) 9 7/8% Cumulative, Series F - - - - - - 12 - - (Liquidation preference $200)(3)(4) 9% Cumulative, Series G 750,000 - 150 - - - 10 - - (Liquidation preference $200)(3) 6.59%/Adjustable Rate Noncumulative Preferred Stock, Series H 4,000,000 - 200 - 7.0 13.0 4 - - (Liquidation preference $50) --------- --------- ---- ---- --- --- --- Total 6,600,000 2,327,500 $600 $489 $67 $42 $43 --------- --------- ---- ---- --- --- --- --------- --------- ---- ---- --- --- --- - ----------------------------------------------------------------------------------------------------------------------------------
(1) In March 1994, the Company redeemed all $150 million of its Series A preferred stock. (2) In December 1996, the Company redeemed all $239 million of its Series C preferred stock. (3) On April 1, 1996, the Series F and Series G preferred stock were converted from First Interstate preferred stock into the right to receive one share of the Company's preferred stock. (4) In November 1996, the Company redeemed all $200 million of its Series F preferred stock. ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES A In March 1994, the Company redeemed all $150 million of its Series A preferred stock at a price of $50 per share plus accrued and unpaid dividends. Dividends were cumulative and payable on the last day of each calendar quarter. For each quarterly period, the dividend rate was 2.75% less than the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 6% and a maximum of 12% per year. The average dividend rate was 6.1% (annualized) in 1994. ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares were redeemable at the option of the Company through May 14, 1996 at a price of $51.50 per share and, thereafter, at $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of February, May, August and November. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The average dividend rate was 5.5%, 5.8% and 5.7% during 1996, 1995 and 1994, respectively. 9% CUMULATIVE PREFERRED STOCK, SERIES C In December 1996, the Company redeemed all $239 million of its Series C preferred stock at a price of $500 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-twentieth of a share of the Series C preferred 56 stock. Dividends of $11.25 per share (9% annualized rate) were cumulative and payable on the last day of each calendar quarter. 8 7/8% CUMULATIVE PREFERRED STOCK, SERIES D This class of preferred stock has been issued as depositary shares, each representing one-twentieth of a share of the Series D preferred stock. These shares are redeemable at the option of the Company on and after March 5, 1997 at a price of $500 per share plus accrued and unpaid dividends. Dividends of $11.09 per share (8 7/8% annualized rate) are cumulative and payable on the last day of each calendar quarter. In December 1996, the Company announced that it will redeem all outstanding depositary shares representing its Series D preferred stock on March 5, 1997. 9 7/8% CUMULATIVE PREFERRED STOCK, SERIES F In November 1996, the Company redeemed all $200 million of its Series F preferred stock at a price of $200 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-eighth of a share of the Series F preferred stock. Dividends of $4.94 per share (9 7/8% annualized rate) were cumulative and payable on the last day of each calendar quarter. 9% CUMULATIVE PREFERRED STOCK, SERIES G This class of preferred stock has been issued as depositary shares, each representing one-eighth of a share of the Series G preferred stock. These shares are redeemable at the option of the Company on or after May 29, 1997 at a price of $200 per share plus accrued and unpaid dividends. Dividends of $4.50 per share (9% annualized rate) are cumulative and payable on the last day of each calendar quarter. 6.59%/ADJUSTABLE RATE NONCUMULATIVE PREFERRED STOCK, SERIES H These shares are redeemable at the option of the Company on or after October 1, 2001 at a price of $50 per share plus accrued and unpaid dividends. Dividends are noncumulative and payable on the first day of each calendar quarter at an annualized rate of 6.59% through October 1, 2001. The dividend rate after October 1, 2001 will be equal to 0.44% plus the highest of the Treasury bill discount rate, the 10-year constant maturity rate and the 30-year constant maturity rate, as determined in advance of such dividend period, limited to a minimum of 7% and a maximum of 13%. 12 COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND STOCK PLANS - -------------------------------------------------------------------------------- COMMON STOCK - -------------------------------------------------------------------------------- The following table summarizes common stock reserved, issued, outstanding and authorized as of December 31, 1996: - -------------------------------------------------------------------------------- Number of shares Tax Advantage and Retirement Plan 2,718,228 Long-Term and Equity Incentive Plans 3,780,721 Dividend Reinvestment and Common Stock Purchase Plan 4,012,662 Employee Stock Purchase Plan 673,197 Director Option Plans 164,599 Stock Bonus Plan 14,405 ----------- Total shares reserved 11,363,812 Shares issued and outstanding 91,474,425 Shares not reserved 47,161,763 ----------- Total shares authorized (1) 150,000,000 ----------- ----------- - -------------------------------------------------------------------------------- (1) In 1996, shareholders approved an increase in the authorized shares of common stock to 500,000,000. This will become effective when an amendment to the Restated Certificate of Incorporation is filed with the Secretary of State of Delaware. Under the terms of mandatory convertible debt, the Company must exchange with the noteholder, or sell, various capital securities of the Company as described in Note 9 to the Financial Statements. ADDITIONAL PAID-IN CAPITAL - -------------------------------------------------------------------------------- Repurchases made in connection with the Company's stock repurchase program result in a reduction of the additional paid-in capital (APIC) account equal to the amount paid in repurchasing the stock, less the $5 per share representing par value that is charged to the common stock account. In order to absorb future repurchases of common stock, the Company transferred $1 billion from Retained Earnings to APIC in each of the years 1995 and 1994. 57 DIRECTOR OPTION PLANS - -------------------------------------------------------------------------------- The 1990 Director Option Plan (1990 DOP) provides for annual grants of options to purchase 500 shares of common stock to each non-employee director elected or re-elected at the annual meeting of shareholders. Non-employee directors who join the Board between annual meetings receive options on a prorated basis. The options may be exercised until the tenth anniversary of the date of grant; they become exercisable after one year at an exercise price equal to the fair market value of the stock at the time of grant. The maximum total number of shares of common stock issuable under the 1990 DOP is 100,000 in the aggregate and 20,000 in any one calendar year. No compensation expense was recorded for the stock options under the 1990 DOP, as the exercise price was equal to the quoted market price of the stock at the time of the grant. The 1987 Director Option Plan (1987 DOP) allows participating directors to file an irrevocable election to receive stock options in lieu of their retainer to be earned in any one calendar year. The options become exercisable after one year and may be exercised until the tenth anniversary of the date of grant. Options granted prior to 1995 have an exercise price of $1 per share. Commencing in 1995, options granted have an exercise price equal to 50 percent of the quoted market price of the stock at the time of grant. Compensation expense for the 1987 DOP is measured as the difference between the quoted market price of the stock at the date of grant less the option exercise price. This expense is accrued as retainers are earned. EMPLOYEE STOCK PLANS - -------------------------------------------------------------------------------- LONG-TERM AND EQUITY INCENTIVE PLANS The Wells Fargo & Company Long-Term Incentive Plan (LTIP) became effective in 1994. The LTIP supersedes the 1990 Equity Incentive Plan (1990 EIP), which is itself the successor to the original 1982 Equity Incentive Plan (1982 EIP). No additional awards or grants will be issued under the 1990 or 1982 EIPs. The LTIP provides for awards of restricted shares in addition to the stock options, stock appreciation rights and share rights that could have been awarded under the 1990 EIP. Employee stock options granted under the LTIP can be granted with exercise prices at or, unlike the 1990 EIP, above the current value of the common stock and, except for incentive stock options, can have terms longer than 10 years, the maximum provided in the 1990 EIP. Employee stock options generally become fully exercisable over 3 years from the grant date. Upon termination of employment, the option period is reduced or the options are canceled. The LTIP also provides for grants to recipients not limited to present key employees of the Company. The total number of shares of common stock issuable under the LTIP is 2,500,000 in the aggregate (excluding outstanding awards under the 1990 and 1982 EIPs) and 800,000 in any one calendar year. No compensation expense was recorded for the stock options under the LTIP (or 1990 and 1982 EIPs), as the exercise price was equal to the quoted market price of the stock at the time of grant. Loans may be made, at the discretion of the Company, to assist the participants of the LTIP and the EIPs in the acquisition of shares under options. The total of such interest-bearing loans were $2.9 million and $5.8 million at December 31, 1996 and 1995, respectively. The holders of the restricted share rights are entitled at no cost to the shares of common stock represented by the restricted share rights held by each person five years after the restricted share rights were granted. Upon receipt of the restricted share rights, holders are entitled to receive quarterly cash payments equal to the cash dividends that would be paid on the number of common shares equal to the number of restricted share rights. Except in limited circumstances, restricted share rights are canceled upon termination of employment. In 1996 and 1995, 95,233 and 69,778 restricted share rights were granted with a weighted-average grant date fair value of $236.87 and $173.90, respectively. As of December 31, 1996, the LTIP, the 1990 EIP and the 1982 EIP had 199,014, 218,434 and 12,483 restricted share rights outstanding, respectively, to 1,442, 648 and 49 employees or their beneficiaries, respectively. The compensation expense for the restricted share rights equals the market price at the time of grant and is accrued on a straight-line basis over the vesting period. 58 OTHER STOCK PLANS Pursuant to the Merger agreement, the First Interstate stock option plans were converted into stock option plans to purchase the Company's common stock based on the original stock option plan and the agreed upon exchange ratio (see Note 2 for additional information concerning the Merger). The stock option plans adopted in 1988 and 1991, by First Interstate, provided for the granting of options to key employees to purchase common stock of First Interstate at a price not less than 100% of the fair market value on the date of grant. The First Interstate Bancorp 1991 Director Option Plan, as amended and restated, provided for the granting to non-employee directors of options to purchase common stock of First Interstate at a price not less than 100% of the fair market value on the date of grant. Pursuant to the Merger agreement, each outstanding and unexercised option granted by First Interstate was converted into an option to purchase Company common stock based on the original plan and the agreed upon exchange ratio. As a result of the change in control, all outstanding First Interstate options became exercisable as of April 1, 1996. The 1988 and 1991 First Interstate stock option plans also provided for the issuance of restricted common stock. As of April 1, 1996, all outstanding restricted shares became vested and were issued. As no additional awards were made under these plans and all outstanding grants became fully vested at the time of the Merger, no compensation expense was recognized by the Company for these plans in 1996. The following table is a summary of the Company's stock option activity and related information for the three years ended December 31, 1996:
- ---------------------------------------------------------------------------------------------------------------------------------- 1990 and 1987 DOP LTIP 1990 and 1982 EIP First Interstate ------------------- ------------------- ------------------- ------------------- Number Weighted- Number Weighted- Number Weighted- Number Weighted- average average average average exercise exercise exercise exercise price price price price OPTIONS OUTSTANDING AS OF DECEMBER 31, 1993 24,158 $ 72.35 - $ - 2,007,400 $ 64.23 ------ --------- --------- 1994: Granted 6,149 132.97 284,000 146.75 - - Transferred - - 400,400 110.65 (400,400) 110.65 Canceled - - (28,500) 110.75 (28,665) 73.71 Exercised (2,000) 77.09 (720) 110.75 (303,947) 52.29 ------ --------- --------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1994 28,307 85.18 655,180 126.27 1,274,388 66.86 ------ --------- --------- 1995: Granted 7,264 134.83 284,700 209.27 - - Canceled - - (8,500) 121.34 (2,330) 75.63 Exercised (2,000) 72.47 (66,870) 110.75 (471,625) 63.73 ------ --------- --------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1995 33,571 96.68 864,510 154.87 800,433 68.69 ------ --------- --------- 1996: GRANTED 11,391 225.70 232,620 273.86 - - ACQUIRED (1) - - - - - - 926,857 $93.78 CANCELED - - (9,280) 215.27 - - (10,420) 95.49 EXERCISED (500) 66.25 (33,922) 130.73 (121,444) 65.48 (499,472) 97.94 ------ --------- --------- ------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1996 44,462 $130.08 1,053,928 $181.38 678,989 $ 69.26 416,965 $88.74 ------ ------- --------- ------- --------- ------- ------- ------ ------ ------- --------- ------- --------- ------- ------- ------ Outstanding options exercisable as of: DECEMBER 31, 1996 33,071 $ 97.14 544,508 $138.54 678,989 $ 69.26 416,965 $88.74 December 31, 1995 26,307 86.15 287,875 121.78 800,433 68.69 December 31, 1994 22,158 71.92 371,180 110.64 1,274,388 66.86 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Options acquired from First Interstate pursuant to Merger agreement, April 1, 1996. 59 The following table is a summary of selected information for the Company's compensatory stock option plans:
- ------------------------------------------------------------------------------------- December 31, 1996 ------------------------------------------- Weighted- Number Weighted- average average remaining exercise contractual price life (in yrs.) RANGE OF EXERCISE PRICES 1990 AND 1987 DOP (1) $1.00 Options outstanding/exercisable 5.2 4,919 $ 1.00 $44.63-$93.00 Options outstanding/exercisable 4.0 11,438 71.30 $108.00-$160.00 Options outstanding 6.6 18,643 139.49 Options exercisable 16,714 143.13 $236.38-$250.38 Options outstanding 8.3 9,462 249.69 Options exercisable - - LTIP (2) $107.25-$159.63 Options outstanding 6.5 556,310 128.98 Options exercisable 459,765 125.12 $211.38-$277.00 Options outstanding 8.4 497,618 239.95 Options exercisable 84,743 211.38 1990 AND 1982 EIP $40.50-$78.63 Options outstanding/exercisable 4.9 678,989 69.26 FIRST INTERSTATE $27.75-$83.06 Options outstanding/exercisable 4.2 214,078 65.96 $100.31-$125.81 Options outstanding/exercisable 8.2 202,887 112.77 - -------------------------------------------------------------------------------------
(1) The weighted-average fair value of options granted were $90.51 and $70.98 for 1996 and 1995, respectively. (2) The weighted-average fair value of options granted were $90.86 and $73.27 for 1996 and 1995, respectively. EMPLOYEE STOCK PURCHASE PLAN Transactions involving the Employee Stock Purchase Plan (ESPP) are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- NUMBER WEIGHTED- Number Weighted- Number Weighted- AVERAGE average average EXERCISE exercise exercise PRICE price price Options outstanding, beginning of year 129,980 $182.25 143,404 $153.38 160,476 $114.73 Granted 157,878 227.80 143,072 182.25 159,515 153.38 Canceled (1) (62,524) 189.06 (73,359) 158.53 (83,734) 122.17 Exercised (76,803) 182.25 (83,137) 153.38 (92,853) 114.73 ------- ------- ------- Options outstanding, end of year 148,531 $227.80 129,980 $182.25 143,404 $153.38 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) At the beginning of the option period, participants are granted an additional 50% of options that are exercised only to the extent that the closing option price is sufficiently below the market value at grant date and based on the participant's level of participation. Since the closing option price was higher in 1996, 1995 and 1994, the additional option grants were canceled. These options represent a majority of the canceled options shown above. Options to purchase 750,000 shares of common stock may be granted under the ESPP. Employees of the Company who have completed their introductory period of employment, except hourly employees, are eligible to participate. Certain highly compensated employees may be excluded from participation at the discretion of the Management Development and Compensation Committee of the Board of Directors. The plan provides for an option price of the lower of market value at grant date or 85% to 100% (as determined by the Board of Directors for each option period) of the market value at the end of the one-year option period. For the current option period ending July 31, 1997, the Board approved a closing option price of 85% of the market value. The plan is noncompensatory and results in no expense to the Company. None of the options outstanding as of December 31, 1996, 1995 and 1994 was exercisable. For options outstanding as of December 31, 1996, the exercise price for each option was $227.80, and the remaining contractual life was seven months. The fair value of options granted in 1996 and 1995 was $52.46 and $39.25, respectively. The total compensation expense recognized for the employee stock plans described above was $10 million, $8 million and $8 million in 1996, 1995 and 1994, respectively. In October 1995, the 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 APB 25. Companies may continue to apply the accounting provisions of APB 25 in determining net income; however, they must apply the disclosure requirements of FAS 123 for all grants issued after 1994. 60 The Company elected to continue to apply the provisions of APB 25 in accounting for the employee stock plans described on the preceding pages. Accordingly, no compensation cost has been recognized for fixed stock options granted under the LTIP, 1990 and 1982 EIP and First Interstate plans or the ESPP stock purchase plan. Had compensation cost for these employee stock plans been determined based on the new fair value method under FAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. - ------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------ 1996 1995 Net income As reported $1,071 $1,032 Pro forma (1) 1,063 1,030 Net income per common share As reported $12.21 $20.37 Pro forma (1) 12.12 20.33 - ------------------------------------------------------------------------------ (1) The pro forma amounts noted above only reflect the effects of stock-based compensation grants made after 1994. Because stock options are granted each year and generally vest over three years, these pro forma amounts may not reflect the full effect of applying the (optional) fair value method established by FAS 123 that would be expected if all outstanding stock option grants were accounted for under this method. The fair value of each option grant is estimated based on the date of grant using a modified Black Scholes option-pricing model. For the fixed stock option plans, the following weighted-average assumptions were used for 1996 and 1995, respectively: dividend yield of 1.4% and 1.6%; expected volatility of 29.0% and 33.3%; risk-free interest rates of 6.0% and 5.7% and expected life of 5.4 years for both years. For the stock purchase plan, the following assumptions were used for 1996 and 1995, respectively: dividend yield of 1.8% for both years; expected volatility of 23.8% and 18.0%; risk-free interest rates of 5.8% and 5.7% and expected life of one year for both years. For information on employee stock ownership through the Tax Advantage and Retirement Plan, see Note 13. DIVIDEND REINVESTMENT PLAN - -------------------------------------------------------------------------------- The Dividend Reinvestment and Common Stock Purchase and Share Custody Plan allows holders of the Company's common stock to purchase additional shares either by reinvesting all or part of their dividends, or by making optional cash payments. Participants making optional cash payments to purchase additional shares may do so by making payments between $150 and $2,000 per month. All purchases of additional shares are made at fair market value. Shares may also be held in custody under the plan even without the reinvestment of dividends. During 1996 and 1995, 103,580 and 87,868 shares, respectively, were issued under the plan. 13 EMPLOYEE BENEFITS AND OTHER EXPENSES - -------------------------------------------------------------------------------- RETIREMENT PLAN - -------------------------------------------------------------------------------- The Company's retirement plan is known as the Tax Advantage and Retirement Plan (TAP), a defined contribution plan. As part of TAP, the Company makes basic retirement contributions to employee retirement accounts. Effective July 1994, the Company increased its basic retirement contributions from 4% to 6% of the total of employee base salary plus payments from certain bonus plans (covered compensation). The Company also makes special transition contributions related to the termination of a prior defined benefit plan of the Company ranging from .5% to 5% of covered compensation for certain employees. The plan covers salaried employees with at least one year of service and contains a vesting schedule graduated from three to seven years of service. 61 Prior to July 1994, the Company made supplemental retirement contributions of 2% of employee-covered compensation. All salaried employees with at least one year of service were eligible to receive these Company contributions, which vested immediately. Effective July 1994, the supplemental retirement contributions were discontinued, except for those contributions that are made to employees hired before January 1, 1992. Those employees will continue to receive the supplemental 2% contribution and the 4% basic retirement contributions until fully vested. Upon becoming 100% vested, the basic retirement contribution will increase to 6% of employee-covered compensation and the supplemental 2% contributions will end. Salaried employees who have at least one year of service are eligible to contribute to TAP up to 10% of their pretax covered compensation through salary deductions under Section 401(k) of the Internal Revenue Code, although a lower contribution limit may be applied to certain employees in order to maintain the qualified status of the plan. The Company makes matching contributions of up to 4% of an employee's covered compensation for those who have at least three years of service and elect to contribute under the plan. Effective July 1994, the Company began to partially match contributions by employees with at least one but less than three years of service. For such employees who elect to contribute under the plan, the Company matches 50% of each dollar on the first 4% of the employee's covered compensation. The Company's matching contributions are immediately vested and, similar to retirement contributions, are tax deductible by the Company. Employees direct the investment of their TAP funds and may elect to invest in the Company's common stock. As a result of the Merger, certain benefit plans were acquired from First Interstate. These plans and their current status are described as follows. First Interstate had a defined contribution plan available to all eligible employees who had completed one year of service. Employees could contribute up to 6% of their base salary, which was matched 150% by First Interstate. Additional pre-tax or after-tax contributions could be made by employees of up to 6% or 10%, respectively, of their base salary with no matching contributions. Pursuant to the Merger agreement, accounts for active employees became fully vested on March 28, 1996. On July 1, 1996, this plan was merged into TAP, and all eligible employees began participation in TAP. Expenses related to TAP for the years ended December 31, 1996, 1995 and 1994 were $95 million, $57 million and $56 million, respectively. First Interstate also had a noncontributory defined benefit plan that provides retirement benefits that are a function of both years of service and the highest average compensation for any five (consecutive) year period during the last 10 years before retirement. Pursuant to the Merger agreement, accrued benefits, as of June 30, 1996, for all participants employed as of March 28, 1996 became fully vested. Effective June 30, 1996, all accrued benefits under the plan were frozen. There is no intention at the present time to terminate the plan. The funding policy for the defined benefit retirement plan is to make contributions sufficient to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974, with additional contributions being made periodically when deemed appropriate. The following table sets forth the funded status of the plan as of its Measurement Date (September 30, 1996) and amounts recognized in the Company's Consolidated Balance Sheet as of December 31, 1996. (The plan was not included in the Company's Consolidated Balance Sheet as of December 31, 1995.) - ------------------------------------------------------------------------------- (in millions) DECEMBER 31, 1996 Actuarial present value of benefit obligations: Accumulated benefit obligation (fully vested) $975.2 ------ ------ Plan assets at fair value(1) 988.5 Projected benefit obligation 975.2 ------ Plan assets in excess of projected benefit obligation 13.3 Unrecognized net gain (due to past experience different from assumptions made and effects of changes in assumptions) (13.3) ------ Prepaid pension asset (accrued pension liability) $ - ------ ------ - ------------------------------------------------------------------------------- (1) Primarily invested in equity securities. 62 The net periodic pension cost for 1996 included the following: - ------------------------------------------------------------------------------- (in millions) YEAR ENDED DECEMBER 31, 1996 Service cost (benefits earned during the period) $ 7.4 Interest cost on projected benefit obligation 52.9 Actual return on plan assets (59.1) Net amortization and deferral (1.2) ------ Net periodic pension cost $ - ------ ------ - ------------------------------------------------------------------------------- The weighted-average discount rate used in determining the pension benefit obligation was 7.5%. No increase in future salary levels was assumed as all accrued benefits under the plan were frozen effective June 30, 1996. The expected long-term rate of return on assets was 8.5%. HEALTH CARE AND LIFE INSURANCE - ------------------------------------------------------------------------------- The Company provides health care and life insurance benefits for certain active and retired employees. The Company reserves its right to terminate these benefits at any time. The health care benefits for active and retired employees are self-funded by the Company with the Point-of-Service Managed Care Plan or provided through health maintenance organizations (HMOs). The amount of subsidized health care coverage for employees who retired prior to January 1, 1993 is based upon their Medicare eligibility. The amount of subsidized health care coverage for employees who retire after December 31, 1992 is based upon their eligibility to retire as of January 1, 1993 and their years of service at the time of retirement. Active employees with an adjusted service date after September 30, 1992 are not eligible for subsidized health care coverage upon retirement. Employees with an adjusted service date after January 1, 1994 are not eligible for Company paid life insurance benefits. As a result of the Merger, certain benefit plans were acquired from First Interstate. These plans and their current status are described as follows. First Interstate had a group benefits plan that provided health and welfare benefits to active employees. Pursuant to the Merger agreement, portions of the First Interstate plan were discontinued, effective June 30, 1996, and eligible employees were allowed to participate in similar plans provided by the Company. The remainder of the programs under the First Interstate group benefits plan will be discontinued for active employees after December 31, 1996, and eligible employees will be allowed to participate in similar plans provided by the Company. First Interstate also provided health care benefits to retired employees through its group benefits plan. Employees hired prior to January 1, 1992 and who retire at or after age 55 with at least 10 years of service were eligible for a fixed contribution from First Interstate. Employees hired after December 31, 1991 were not eligible for retiree health care benefits. This plan will be discontinued after December 31, 1996. All active and retired employees covered under the plan will become eligible for similar benefits provided by the Company. The Company recognized the cost of health care benefits for active eligible employees by expensing contributions totaling $78 million, $37 million and $45 million in 1996, 1995 and 1994, respectively. Life insurance benefits for active eligible employees are provided through an insurance company. The Company recognizes the cost of these benefits by expensing the annual insurance premiums, which were $1.2 million in 1996 and $2 million in 1995 and 1994. At December 31, 1996, the Company had approximately 33,400 active eligible employees and 10,000 retirees participating in these plans. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement changed the method of accounting for postretirement benefits other than pensions from a cash to an accrual basis. Under FAS 106, the determination of the accrued liability requires a calculation of the accumulated postretirement benefit obligation (APBO). The APBO represents the actuarial present value of postretirement benefits other than pensions to be paid out in the future (e.g., health benefits to be paid for retirees) that have been earned as of the end of the year. The unrecognized APBO at the time of adoption of FAS 106 (transition obligation) of $142 million for postretirement health care benefits is being amortized over 20 years. 63 The following table sets forth the net periodic cost for postretirement health care benefits for 1996 and 1995: - ------------------------------------------------------------------------------- (in millions) Year ended December 31, -------------------------- 1996 1995 Interest cost on APBO $14.3 $ 8.5 Amortization of transition obligation 7.1 7.1 Amortization of net gain (4.2) (3.5) Service cost (benefits attributed to service during the period) 2.0 1.1 ----- ----- Total $19.2 $13.2 ----- ----- ----- ----- - ------------------------------------------------------------------------------- The following table sets forth the funded status for postretirement health care benefits and provides an analysis of the accrued postretirement benefit cost included in the Company's Consolidated Balance Sheet at December 31, 1996 and 1995. - ------------------------------------------------------------------------------- (in millions) Year ended December 31, -------------------------- 1996 1995 APBO (1)(2): Retirees $ 174.7 $ 64.2 Eligible active employees 11.4 11.9 Other active employees 35.1 18.7 ------- ------- 221.2 94.8 Plan assets at fair value - - ------- ------- APBO in excess of plan assets 221.2 94.8 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 62.0 51.3 Unrecognized transition obligation (113.7) (120.8) ------- ------- Accrued postretirement benefit cost (included in other liabilities) $ 169.5 $ 25.3 ------- ------- ------- ------- - ------------------------------------------------------------------------------- (1) Based on a discount rate of 7.17% and 6.98% in 1996 and 1995, respectively. (2) At the time of the Merger, the Company recognized a liability of $140.7 million for the estimated outstanding obligation related to these benefits. For measurement purposes, a health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. Average annual increases of 5.5% for HMOs and 7.5% for all other types of coverage in the per capita cost of covered health care benefits were assumed for 1997. The rate for other coverage was assumed to decrease gradually to 5.5% in 2001 and remain at that level thereafter. Increasing the assumed health care trend by one percentage point in each year would increase the APBO as of December 31, 1996 by $7.3 million and the aggregate of the interest cost and service cost components of the net periodic cost for 1996 by $0.4 million. The $10.7 million increase in the unrecognized net gain in 1996 was due to a lower average per capita cost of health care coverage and an increase in the discount rate, which was partially offset by an increase in the number of participants and amortization of the previously unrecognized net gain. The Company also provides postretirement life insurance to certain existing retirees. The APBO and expenses related to these benefits were not material. OTHER EXPENSES - ------------------------------------------------------------------------------- The following table shows expenses which exceeded 1% of total interest income and noninterest income and which are not otherwise shown separately in the financial statements or notes thereto. - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------------------- 1996 1995 1994 Contract services $295 $149 $101 Operating losses (1) 145 45 62 Telecommunications 140 58 49 Advertising and promotion 116 73 65 Outside professional services 112 45 33 Postage 96 52 44 - ------------------------------------------------------------------------------- (1) Includes losses from litigation, fraud and other matters. 64 14 INCOME TAXES - ------------------------------------------------------------------------------- Total income taxes for the years ended December 31, 1996, 1995 and 1994 were recorded as follows: - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------------------- 1996 1995 1994 Income taxes applicable to income before income tax expense $908 $745 $613 Goodwill for tax benefits related to acquired assets - - (25) ---- ---- ---- Subtotal 908 745 588 Stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (17) (24) (13) Stockholders' equity for tax effect of the change in net unrealized gain (loss) on investment securities (3) 100 (95) ---- ---- ---- Total income taxes $888 $821 $480 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------- The following is a summary of the components of income tax expense (benefit) applicable to income before income taxes: - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ---------------------------------- 1996 1995 1994 Current: Federal $557 $507 $472 State and local 182 183 146 ---- ---- ---- 739 690 618 ---- ---- ---- Deferred: Federal 139 37 (26) State and local 30 18 21 ---- ---- ---- 169 55 (5) ---- ---- ---- Total $908 $745 $613 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------- Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1995 are primarily a result of adjustments to conform to tax returns as filed. The Company's income tax expense (benefit) related to investment securities transactions was $4 million, $(7) million and $3 million for 1996, 1995 and 1994, respectively. The Company had net deferred tax assets of $437 million and $817 million at December 31, 1996 and 1995, respectively. The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below: - ------------------------------------------------------------------------------- (in millions) Year ended December 31, ----------------------- 1996 1995 DEFERRED TAX ASSETS Net tax-deferred expenses $ 879 $ 196 Allowance for loan losses 784 717 State tax expense 63 56 Certain identifiable intangibles - 46 Foreclosed assets 45 42 Premises and equipment - 26 Core deposit intangible - 7 ------ ------ 1,771 1,090 Valuation allowance - - ------ ------ Total deferred tax assets, less valuation allowance 1,771 1,090 ------ ------ DEFERRED TAX LIABILITIES Core deposit intangible 759 - Leasing 393 254 Premises and equipment 106 - Investments 40 10 Certain identifiable intangibles 16 - Other 20 9 ------ ------ Total deferred tax liabilities 1,334 273 ------ ------ NET DEFERRED TAX ASSET $ 437 $ 817 ------ ------ ------ ------ - ------------------------------------------------------------------------------- 65 Substantially all of the Company's net deferred tax asset of $437 million at December 31, 1996 related to net expenses (the largest of which were the net tax-deferred expenses and the provision for loan losses, offset by the core deposit intangible) that have been reflected in the financial statements, but which will reduce future taxable income. At December 31, 1996, the Company did not have any net operating loss carryforwards. The Company estimates that approximately $401 million of the $437 million net deferred tax asset at December 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 $36 million primarily relates to approximately $448 million 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 $1.5 billion for each of the last three years. The Company believes that it is more likely than not that it will have sufficient future California taxable income to fully utilize these deductions. The amount of the total deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. The following is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
- ---------------------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, --------------------------------------------------------------------------------- 1996 1995 1994 --------------------- ------------------- --------------------- AMOUNT % Amount % Amount % Statutory federal income tax expense and rate $693 35.0% $622 35.0% $509 35.0% Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 124 6.3 132 7.4 110 7.5 Amortization of certain intangibles not deductible for tax return purposes 102 5.2 14 .8 17 1.2 Other (11) (.6) (23) (1.2) (23) (1.5) ---- ---- ---- ---- ---- ---- Effective income tax expense and rate $908 45.9% $745 42.0% $613 42.2% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------------------------------
The Company has not recognized a federal deferred tax liability of $36 million on $102 million of undistributed earnings of a foreign subsidiary because such earnings are indefinitely reinvested in the subsidiary and are not taxable under current law. A deferred tax liability would be recognized to the extent the Company changed its intent to not indefinitely reinvest a portion or all of such undistributed earnings. In addition, a current tax liability would be recognized if the Company recovered those undistributed earnings in a taxable manner, such as through the receipt of dividends or sale of the entity, or if the tax law changed. 66 15 PARENT COMPANY - -------------------------------------------------------------------------------- Condensed financial information of Wells Fargo & Company (Parent) is presented below. For information regarding the Parent's long-term debt and derivative financial instruments, see Notes 9 and 18, respectively.
CONDENSED STATEMENT OF INCOME - ------------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------ 1996 1995 1994 INCOME Dividends from subsidiaries: Wells Fargo Bank, N.A. $1,461 $1,131 $1,001 Other bank subsidiaries 33 - - Nonbank subsidiaries 1 - - Interest income from: Wells Fargo Bank, N.A. 99 86 81 Other bank subsidiaries 9 3 - Nonbank subsidiaries 8 12 15 Other 71 53 51 Noninterest income 163 52 38 ------ ------ ------ Total income 1,845 1,337 1,186 ------ ------ ------ EXPENSE Interest on: Commercial paper and other short-term borrowings 10 14 8 Senior and subordinated debt 299 194 181 Noninterest expense 93 35 56 ------ ------ ------ Total expense 402 243 245 ------ ------ ------ Income before income tax benefit and undistributed income of subsidiaries 1,443 1,094 941 Income tax benefit 17 17 27 Equity in undistributed income of subsidiaries: Wells Fargo Bank, N.A. (1) (455) (26) (138) Other bank subsidiaries 48 (65) - Nonbank subsidiaries 18 12 11 ------ ------ ------ NET INCOME $1,071 $1,032 $ 841 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------
(1) Amounts represent dividends distributed by Wells Fargo Bank, N.A. in excess of its 1996, 1995 and 1994 net income of $1,006 million, $1,105 million and $863 million, respectively.
CONDENSED BALANCE SHEET - ------------------------------------------------------------------------------------- (in millions) December 31, ---------------------- 1996 1995 ASSETS Cash and due from Wells Fargo Bank, N.A. (includes interest-earning deposits of $1,000 million and $1 million) $ 1,043 $ 31 Investment securities at fair value 395 424 Loans 220 263 Allowance for loan losses 66 58 ------- ------ Net loans 154 205 ------- ------ Loans and advances to subsidiaries: Wells Fargo Bank, N.A. 2,156 1,417 Other bank subsidiaries 275 90 Nonbank subsidiaries 90 141 Investment in subsidiaries (1): Wells Fargo Bank, N.A. 13,912 4,322 Other bank subsidiaries 1,439 203 Nonbank subsidiaries 213 113 Other assets 1,457 508 ------- ------ Total assets $21,134 $7,454 ------- ------ ------- ------ LABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 170 $ 160 Other liabilities 742 270 Senior debt 1,984 1,703 Subordinated debt 2,940 1,266 Indebtedness to subsidiaries (2) 1,186 - Stockholders' equity 14,112 4,055 ------- ------ Total liabilities and stockholders' equity $21,134 $7,454 ------- ------ ------- ------ - ------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's total equity investment in subsidiaries to its total stockholders' equity, was 110% and 114% at December 31, 1996 and 1995, respectively. (2) The increase in indebtedness to subsidiaries for 1996 represents amounts due to Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I. 67
CONDENSED STATEMENT OF CASH FLOWS - ---------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------ 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,071 $1,032 $ 841 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax benefit (3) (15) (4) Equity in undistributed loss of subsidiaries 389 79 127 Other, net 155 (52) (24) ------ ------ ------ Net cash provided by operating activities 1,612 1,044 940 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At fair value: Proceeds from sales 11 4 5 Proceeds from prepayments and maturities 206 2 - Purchases (183) (59) (175) At cost: Proceeds from prepayments and maturities - 56 256 Purchases - - (122) Net decrease in loans 51 70 24 Net (increase) decrease in loans and advances to subsidiaries 289 (192) 529 Net (increase) decrease in investment in subsidiaries (216) (266) 5 Net decrease in securities purchased under resale agreements - - 250 Other, net (88) 119 12 ------ ------ ------ Net cash provided (used) by investing activities 70 (266) 784 ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings 10 27 (5) Proceeds from issuance of senior debt 1,260 1,230 248 Repayment of senior debt (1,183) (811) (1,101) Proceeds from issuance of subordinated debt 800 - - Repayment of subordinated debt - (210) (526) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 1,186 - - Proceeds from issuance of preferred stock 197 - - Proceeds from issuance of common stock 117 90 57 Redemption of preferred stock (439) - (150) Repurchase of common stock (2,158) (847) (760) Payment of cash dividends on preferred stock (73) (42) (34) Payment of cash dividends on common stock (429) (225) (218) Other, net 42 16 57 ------ ------ ------ Net cash used by financing activities (670) (772) (2,432) ------ ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM WELLS FARGO BANK, N.A.) 1,012 6 (708) Cash and cash equivalents at beginning of year 31 25 733 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,043 $ 31 $ 25 ------ ------ ------ ------ ------ ------ Noncash investing activities: Transfers from investment securities at cost to investment securities at fair value $ - $ 147 $ - ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------------
16 LEGAL ACTIONS - -------------------------------------------------------------------------------- In the normal course of business, the Company is at all times subject to numerous pending and threatened legal actions, some for which the relief or damages sought are substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on stockholders' equity of the Company; the Company is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and its relationship to the future results of operations are not known. 68 17 RISK-BASED CAPITAL - -------------------------------------------------------------------------------- The Company and the Bank are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and the OCC, respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Bank maintain minimum ratios (set forth in the table below) of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on available-for-sale investment securities carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Parent and the allowance for loan losses, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments and derivative financial instruments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) are assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. (See Notes 5 and 18 for further discussion of off-balance sheet items.) The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 1996, the Company and Bank met all capital adequacy requirements to which they are subject. Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the OCC categorized the Bank as well capitalized. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the Bank's risk-based capital category.
- ---------------------------------------------------------------------------------------------------------------------------------- (in billions) To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total capital (to risk-weighted assets) Wells Fargo & Company $10.0 11.70% >$ 6.8 > 8.00% - - Wells Fargo Bank, N.A. 8.0 11.00 > 5.8 > 8.00 >$ 7.2 >10.00% - - - - Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $ 6.6 7.68% >$ 3.4 > 4.00% - - Wells Fargo Bank, N.A. 6.2 8.53 > 2.9 > 4.00 >$ 4.4 > 6.00% - - - - Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $ 6.6 6.65% >$ 4.0 > 4.00%(1) - - Wells Fargo Bank, N.A. 6.2 6.81 > 3.6 > 4.00(1) >$ 4.5 > 5.00% - - - - - ----------------------------------------------------------------------------------------------------------------------------------
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. 69 18 DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps and interest rate swap agreements. The contract or notional amounts of derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contract or notional amounts do not represent exposure to liquidity risk. The Company is not a dealer but an end-user of these instruments and does not use them speculatively. The Company also offers contracts to its customers, but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The interest rate derivative financial instruments 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. These instruments are accounted for by the deferral or accrual method only if they are designated as a hedge and are expected to be and are effective in substantially reducing interest rate risk arising from assets and liabilities exposing the Company to interest rate risk at the consolidated or enterprise level. Furthermore, futures contracts must meet specific correlation tests. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives are closed out or settled; previously unrecognized hedge results and the net settlement upon close-out or termination that offset changes in value of the asset or liability hedged are deferred and amortized over the life of the asset or liability with excess amounts recognized in noninterest income. The Company also enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivative financial instruments. The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts (except futures contracts and floor, cap, and 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 counterparties, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. The table on the right summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at December 31, 1996 and 1995. Interest rate futures contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific financial instrument at a predetermined price or yield. Gains and losses on futures contracts are settled daily based on a notional (underlying) principal value and do not involve an actual transfer of the specific instrument. Futures contracts are standardized and are traded on exchanges. The exchange assumes the risk that a counterparty will not pay and generally requires margin payments to minimize such risk. Market risks arise from movements in interest rates and security values. The Company uses 90- to 120-day futures contracts on Eurodollar deposits and U.S. Treasury Notes mostly to shorten the rate maturity of market rate savings to better match the rate maturity of Prime-based loans. Initial margin requirements on futures contracts are provided by investment securities pledged as collateral. The net deferred gains related to interest rate futures contracts were $4 million at December 31, 1996, which will be fully amortized in 1997. Interest rate floors and caps are interest rate protection instruments that involve the payment from the seller to the buyer of an interest differential. This differential represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate, the strike rate, applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential by a counterparty, should the current short-term rate fall below the strike level of the agreement. The Company generally receives cash quarterly on purchased floors (when the current interest rate falls below the strike rate) and purchased caps (when the current interest rate exceeds the strike rate). The premiums paid for interest rate purchased floor and cap agreements are included with the assets hedged. Of the total purchased floors of $20.6 billion at December 31, 1996, the Company had $19.0 billion of purchased floors to protect variable-rate loans from a drop in interest rates. These contracts have a weighted average maturity of 2 years and 8 months. Included in purchased floors are forward starting floor contracts of $155 million starting in January 1997, $300 million starting in March 1997, $225 million starting in April 1997, $475 million starting in May 1997 and $2,000 million 70
- ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, -------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT RISK ESTIMATED Notional or Credit risk Estimated CONTRACTUAL AMOUNT(4) FAIR VALUE contractual amount(4) fair value AMOUNT amount ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Futures contracts $ 5,188 $ - $ - $ 5,372 $ - $ - Floors purchased(1) 20,640 101 101 15,522 206 206 Caps purchased(1) 435 3 3 391 1 1 Swap contracts(1)(2) 16,661 217 117 6,314 185 175 Foreign exchange contracts: Forward contracts(1) 64 - - 25 - - CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 10 - - 23 - - Floors written 405 - (10) 105 - (1) Caps written 2,174 - (4) 1,170 - (4) Floors purchased(1) 404 9 99 105 1 1 Caps purchased(1) 2,088 4 4 1,139 4 4 Swap contracts(1) 2,325 12 2 1,518 5 1 Foreign exchange contracts(3): Forward and spot contracts(1) 1,313 14 1 909 10 1 Option contracts purchased(1) 65 1 1 29 - - Option contracts written 59 - (1) 23 - - - ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Parent's share of the notional principal amount outstanding was $1,231 million and $224 million at December 31, 1996 and 1995, respectively. (3) The Company has immaterial trading positions in certain of these contracts. (4) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. starting October 1998. The remaining purchased floors of $1.6 billion and purchased caps of $.4 billion at December 31, 1996 were used to hedge interest rate risk of various other specific assets and liabilities. Interest rate swap contracts are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a notional principal amount. Payments related to the Company's swap contracts are made either monthly, quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The primary risk associated with swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. At December 31, 1996, the Company had $16.7 billion of interest rate swaps outstanding for interest rate risk management purposes on which the Company receives payments based on fixed interest rates and makes payments based on variable rates (i.e., one- or three-month LIBOR rate). Included in this amount, $11.2 billion was used to convert floating-rate loans into fixed-rate assets. These contracts have a weighted average maturity of 3 years and 2 months, a weighted average receive rate of 6.53% and a weighted average pay rate of 5.61%. An additional $3.5 billion was used to convert fixed- rate deposits into floating-rate deposits. These contracts have a weighted average maturity of 3 years and 11 months, a weighted average receive rate of 5.49% and a weighted average pay rate of 5.61%. The remaining swap contracts used for interest rate risk management of $2.0 billion at December 31, 1996 were used to hedge interest rate risk of various other specific assets and liabilities. 71 19 FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions set forth below for the Company's financial instruments are made solely to comply with the requirements of FAS 107 and should be read in conjunction with the financial statements and notes in this Annual Report. The carrying amounts in the table are recorded in the Consolidated Balance Sheet under the indicated captions, except for the derivative financial instruments, which are recorded in the specific asset or liability balance being hedged or in other assets if the derivative financial instrument is a customer accommodation. Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit, credit card and trust customers, since these intangibles are not financial instruments. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. FINANCIAL ASSETS - -------------------------------------------------------------------------------- SHORT-TERM FINANCIAL ASSETS This category includes cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. INVESTMENT SECURITIES Investment securities at fair value at December 31, 1996 and 1995 are set forth in Note 4. LOANS The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. Discount rates presented in the paragraphs below have a wide range due to the Company's mix of fixed- and variable-rate products. The Company used variable discount rates which incorporate relative credit quality to reflect the credit risk, where appropriate, on the fair value calculation. The fair value of commercial loans, other real estate mortgage loans and real estate construction loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. Most of the discount rates for commercial loans, other real estate mortgage loans and real estate construction loans are between 7.75% and 9.5%, 7.75% and 12.25%, and 7.75% and 11.0%, respectively, at December 31, 1996. Most of the discount rates for the same portfolios in 1995 were between 6.3% and 9.5%, 7.0% and 11.3%, and 7.3% and 10.0%, respectively. For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates, using discount rates based on current industry pricing for loans of similar size, type, remaining maturity and repricing characteristics. Most of the discount rates applied to this portfolio are between 5.5% and 8.5% at December 31, 1996 and 6.0% and 9.0% at December 31, 1995. For credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. 72 The following table presents a summary of the Company's financial instruments, as defined by FAS 107:
- ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ----------------------------------------------------- 1996 1995 ----------------------- ----------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE amount fair value FINANCIAL ASSETS Cash and due from banks $11,736 $11,736 $ 3,375 $ 3,375 Federal funds sold and securities purchased under resale agreements 187 187 177 177 Investment securities at fair value 13,505 13,505 8,920 8,920 Loans: Commercial 19,515 19,550 9,750 9,785 Real estate 1-4 family first mortgage 10,425 10,343 4,448 4,370 Other real estate mortgage 11,860 11,772 8,263 8,249 Real estate construction 2,303 2,319 1,366 1,367 Consumer 20,114 19,149 9,935 9,460 Lease financing 3,003 3,022 1,789 1,789 Foreign 169 162 31 31 ------- ------- ------- ------- 67,389 66,317 35,582 35,051 Less: Allowance for loan losses 2,018 - 1,794 - Net deferred fees on loan commitments and standby letters of credit 76 - 27 - ------- ------- ------- ------- Net loans 65,295 66,317 33,761 35,051 Due from customers on acceptances 197 197 98 98 Nonmarketable equity investments 937 1,361 428 694 Other financial assets 637 637 151 151 FINANCIAL LIABILITIES Deposits $81,821 $81,943 $38,982 $39,162 Federal funds purchased and securities sold under repurchase agreements 2,029 2,029 2,781 2,781 Commercial paper and other short-term borrowings 401 401 195 195 Acceptances outstanding 197 197 98 98 Senior debt(1) 2,053 2,117 1,731 1,753 Subordinated debt 2,940 2,806 1,266 1,319 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,150 1,151 - - DERIVATIVE FINANCIAL INSTRUMENTS(2) Interest rate floor contracts purchased in a receivable position $ 82 $ 110 $ 27 $ 207 Interest rate floor contracts written in a payable position (9) (10) (1) (1) Interest rate cap contracts purchased in a receivable position 12 7 13 5 Interest rate cap contracts written in a payable position (9) (4) (11) (4) Interest rate swap contracts in a receivable position - 229 - 190 Interest rate swap contracts in a payable position - (110) - (14) Foreign exchange contracts in a gain position 15 15 11 10 Foreign exchange contracts in a loss position (14) (14) (9) (9) - ----------------------------------------------------------------------------------------------------------------------------------
(1) The carrying amount and fair value exclude obligations under capital leases of $67 million and $52 million at December 31, 1996 and 1995, respectively. (2) The carrying amounts include unamortized fees paid or received, deferred gains or losses and gains or losses on derivative financial instruments receiving mark-to-market treatment. 73 For other consumer loans, the fair value is calculated by discounting the contractual cash flows, adjusted for prepayment estimates, based on the current rates offered by the Company for loans with similar characteristics. Most of the discount rates applied to this portfolio are between 8.0% and 10.5% at December 31, 1996 and 7.3% and 16.5% at December 31, 1995. For auto lease financing, the fair value is calculated by discounting the contractual cash flows at the Company's current pricing for items of similar remaining term, without including any tax benefits. The discount rate applied to this portfolio was 8.22% at December 31, 1996 and 8.35% at December 31, 1995. Commitments, standby letters of credit and commercial and similar letters of credit not included in the previous table have contractual values of $55,236 million, $2,981 million and $406 million, respectively, at December 31, 1996, and $24,245 million, $921 million and $209 million, respectively, at December 31, 1995. These instruments generate ongoing fees at the Company's current pricing levels. Of the commitments at December 31, 1996, 63% mature within one year and 92% are commitments to extend credit at a floating rate. NONMARKETABLE EQUITY INVESTMENTS The Company's nonmarketable equity investments, including securities, are carried at cost and have a book value of $937 million and $428 million and an estimated fair value of $1,361 million and $694 million at December 31, 1996 and 1995, respectively. There are restrictions on the sale and/or liquidation of the Company's interest, which is generally in the form of limited partnerships; and the Company has no direct control over the investment decisions of the limited partnerships. To estimate fair value, a significant portion of the underlying limited partnerships' investments are valued based on market quotes. FINANCIAL LIABILITIES - -------------------------------------------------------------------------------- DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and market rate and other savings, is equal to the amount payable on demand at the measurement date. Although the FASB's requirement for these categories is not consistent with the market practice of using prevailing interest rates to value these amounts, the amount included for these deposits in the previous table is their carrying value at December 31, 1996 and 1995. The fair value of other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. SHORT-TERM FINANCIAL LIABILITIES This category includes federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. SENIOR AND SUBORDINATED DEBT The fair value of the Company's underwritten senior and subordinated debt is estimated based on the quoted market prices of the instruments. The fair value of the medium-term note programs, which are part of senior debt, is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remaining maturities. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The fair value of the Company's trust preferred securities is estimated based on the quoted market prices of the instruments. DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Derivative financial instruments are fair valued based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. LIMITATIONS - -------------------------------------------------------------------------------- These fair value disclosures are made solely to comply with the requirements of FAS 107. The calculations represent management's best estimates; however, due to the lack of broad markets and the significant items excluded from this disclosure, the calculations do not represent the underlying value of the Company. The information presented is based on fair value calculations and market quotes as of December 31, 1996 and 1995. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. 74 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Wells Fargo & Company: We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo & Company and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Certified Public Accountants San Francisco, California January 21, 1997 75 WELLS FARGO & COMPANY AND SUBSIDIARIES QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME - QUARTERLY - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 QUARTER ENDED Quarter ended ------------------------------------- ------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30 June 30 Mar. 31 INTEREST INCOME $1,812 $1,847 $1,858 $1,006 $1,010 $1,019 $1,031 $1,025 INTEREST EXPENSE 562 552 558 330 343 356 372 360 ------ ------ ------ ------ ------ ------ ------ ------ NET INTEREST INCOME 1,250 1,295 1,300 676 667 663 659 665 Provision for loan losses 70 35 - - - - - - ------ ------ ------ ------ ------ ------ ------ ------ Net interest income after provision for loan losses 1,180 1,260 1,300 676 667 663 659 665 ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 233 254 258 122 121 121 119 118 Fees and commissions 207 205 211 118 116 112 103 101 Trust and investment services income 110 104 104 59 65 63 57 55 Investment securities gains (losses) 8 - 3 - (3) - - (15) Sale of joint venture interest - - - - 163 - - - Other 6 80 63 55 (28) 43 31 (17) ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income 564 643 639 354 434 339 310 242 ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 397 378 400 181 187 176 177 172 Incentive compensation 80 53 61 32 33 33 33 27 Employee benefits 112 105 102 54 40 46 48 53 Equipment 129 103 111 55 54 47 45 47 Net occupancy 109 96 108 53 52 54 53 53 Federal deposit insurance 1 24 3 1 5 - 24 24 Goodwill 80 81 81 9 9 9 9 9 Core deposit intangible 73 78 82 10 10 10 11 11 Other 507 387 329 172 173 167 160 141 ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense 1,488 1,305 1,277 567 563 542 560 537 ------ ------ ------ ------ ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 256 598 662 463 538 460 409 370 Income tax expense 133 277 299 199 232 199 177 137 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME $ 123 $ 321 $ 363 $ 264 $ 306 $ 261 $ 232 $ 233 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 103 $ 302 $ 344 $ 254 $ 295 $ 251 $ 222 $ 223 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ PER COMMON SHARE Net income $ 1.12 $ 3.23 $ 3.61 $ 5.39 $ 6.29 $ 5.23 $ 4.51 $ 4.41 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Dividends declared $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.15 $ 1.15 $ 1.15 $ 1.15 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 92.2 93.7 95.6 47.0 47.0 47.9 49.1 50.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------------------------------------------
76 WELLS FARGO & COMPANY APPENDIX TO EXHIBIT 13 Description Page number 1. Line graph of Return on Average Total Assets (ROA) and "Cash" ROA for 1996, 1995, 1994, 1993 and 1992 (shown in %). ROA "Cash" ROA 1996 1.15 1.66 1995 2.03 2.12 1994 1.62 1.71 1993 1.20 1.28 1992 0.54 0.62 6 2. Line graph of Return on Common Stockholders' Equity (ROE) and "Cash" ROE for 1996, 1995, 1994, 1993 and 1992 (shown in %). ROE "Cash" ROE 1996 8.83 28.46 1995 29.70 34.92 1994 22.41 26.88 1993 16.74 20.98 1992 7.93 11.21 6 3. Line graph of Net Interest Margin for 1996, 1995 and 1994 (shown in %). Also presented is the yield on total earning assets and the rate on total funding sources for the same periods. This information is also presented in Table 5 - AVERAGE BALANCES, YIELDS AND RATES PAID on pages 14 and 15. 12 4. Bar graph of the Loan Mix at Year End shown as a percentage of total loans at December 31, 1996, 1995 and 1994. 1996 1995 1994 Commercial 29 % 27 % 22 % Real Estate 1-4 family first mortgage 15 13 25 Other real estate mortgage 19 23 22 Real estate construction 3 4 3 Consumer 30 28 24 Lease Financing 4 5 4 ---- ---- ---- Total 100 % 100 % 100 % 19 5. Line graph of Nonaccrual Loans at December 31, 1996, 1995, 1994, 1993 and 1992 (shown in billions). This information is also presented in Table 13-NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS on page 21. 21 6. Line graph of New Loans Placed on Nonaccrual at December 31, 1996, 1995, 1994, 1993 and 1992 (shown in billions). 1996 0.7 1995 0.5 1994 0.3 1993 0.8 1992 2.2 21 7. Bar graph of Core Deposits at Year End at December 31, 1996, 1995 and 1994 (shown in billions). 1996 1995 1994 Noninterest-bearing 29.1 10.4 10.1 Interest-bearing checking 2.8 .9 4.5 Market rate and other savings 33.9 17.9 16.7 Savings certificates 15.8 8.6 7.1 ----- ----- ----- Total Core Deposits $81.6 $37.9 $38.5 26 8. Bar graph on the Price Range of Common Stock (high, low, closing price) on an annual basis for 1996, 1995 and 1994 (shown in dollars). This information is also presented in Table 1- RATIOS AND PER COMMON SHARE DATA on page 7. 36 9. Bar graph on the Price Range of Common Stock (high, low, closing price) on a quarterly basis for 1996 and 1995 (shown in dollars). HIGH LOW QTR END 1996 1Q $261.25 $203.13 $261.25 2Q 264.50 232.13 239.13 3Q 264.00 220.13 260.00 4Q 289.88 250.25 269.75 1995 1Q $160.63 $143.38 $156.38 2Q 185.88 157.00 180.25 3Q 189.00 177.75 185.63 4Q 229.00 190.00 216.00 36 EX-23 6 EXHIBIT 23 EXHIBIT 23 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Wells Fargo & Company: We consent to the incorporation by reference in the Registration Statements noted below on Forms S-3 and S-8 of Wells Fargo & Company of our report dated January 21, 1997, relating to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the December 31, 1996 Annual Report on Form 10-K of Wells Fargo & Company.
Registration Statement Number Form Description - ---------------- ---- ----------- 333-1051 S-8 Employee Stock Purchase Plan 33-7274, 33-40781 S-8 Equity Incentive Plans 33-26052, 33-41731 S-8 Director Option Plans 2-93338 S-8 Tax Advantage Plan and Tax Advantage Plan Sales by Wells Fargo Bank 33-54441 S-8 Long-Term Incentive Plan 2-88534, 33-47434 S-3 Dividend Reinvestment and Common Stock Purchase and Share Custody Plan 33-60573 S-3 Shelf registration of senior and subordinated debt securities, preferred stock, depositary shares and common stock 33-64575 S-8 Common stock issuable under employee stock and option plans of First Interstate Bancorp assumed in the acquisition 333-10469 S-3 Shelf registration of senior and subordinated debt securities, preferred stock, depositary shares and common stock 333-15253 S-3 Shelf registration of senior and subordinated debt securities, preferred stock, depositary shares and common stock 333-02801 S-3 Employee Savings Plan of First Interstate Bancorp KPMG PEAT MARWICK LLP
San Francisco, California March 14, 1997 EX-27 7 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K DATED MARCH 14, 1997 FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 11,736 0 187 0 13,505 0 0 67,389 2,018 108,888 81,821 2,430 4,118 6,210 0 600 457 13,055 108,888 5,688 779 56 6,523 1,586 2,002 4,521 105 10 4,637 1,979 1,071 0 0 1,071 12.21 11.98 6.11 714 333 10 0 1,794 860 220 2,018 0 0 798
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