-----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, Po+0Zhv1DETVifWdBw4cAIBiJsJm5m3XYJRcpUyEV7arepFIwXTmE1jt8q7QW8B/ 0JKWqkAplWwVcEedu1TMQw== 0001047469-97-004495.txt : 19971115 0001047469-97-004495.hdr.sgml : 19971115 ACCESSION NUMBER: 0001047469-97-004495 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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-Q SEC ACT: SEC FILE NUMBER: 001-06214 FILM NUMBER: 97717455 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 8004114932 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 Commission file number 1-6214 ----------------- WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding October 31, 1997 ------------------- Common stock, $5 par value 86,698,870 FORM 10-Q TABLE OF CONTENTS
Page ---- PART I-- FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income............................................................ 2 Consolidated Balance Sheet.................................................................. 3 Consolidated Statement of Changes in Stockholders' Equity................................... 4 Consolidated Statement of Cash Flows........................................................ 5 Notes to Financial Statements............................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data...................................................................... 10 Overview.................................................................................... 11 Line of Business Results.................................................................... 14 Earnings Performance........................................................................ 19 Net Interest Income....................................................................... 19 Noninterest Income........................................................................ 22 Noninterest Expense....................................................................... 24 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI.................................. 26 Balance Sheet Analysis...................................................................... 27 Investment Securities..................................................................... 27 Loan Portfolio............................................................................ 29 Commercial real estate.................................................................. 29 Nonaccrual and Restructured Loans and Other Assets........................................ 30 Changes in total nonaccrual loans....................................................... 30 Changes in foreclosed assets............................................................ 33 Loans 90 days past due and still accruing............................................... 33 Allowance for Loan Losses................................................................. 34 Other Assets.............................................................................. 36 Deposits.................................................................................. 37 Capital Adequacy/Ratios................................................................... 37 Asset/Liability Management................................................................ 39 Derivative Financial Instruments.......................................................... 40 Liquidity Management...................................................................... 41 PART II-- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................................ 43 SIGNATURE................................................................................................. 44
- -------------------------------------------------------------------------------- The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. In addition, this Form 10-Q 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 Bancorp and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. The interim financial information should be read in conjunction with the Company's 1996 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------- Quarter Nine months ended September 30, ended September 30, ------------------ ------------------ (in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 3 $ 11 $ 15 $ 21 Investment securities 175 215 573 568 Loans 1,513 1,612 4,570 4,106 Other 16 9 39 16 ------ ------ ------ ------ Total interest income 1,707 1,847 5,197 4,711 ------ ------ ------ ------ INTEREST EXPENSE Deposits 430 446 1,280 1,140 Federal funds purchased and securities sold under repurchase agreements 44 15 109 72 Commercial paper and other short-term borrowings 5 3 12 11 Senior and subordinated debt 75 88 234 217 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 -- 75 -- ------ ------ ------ ------ Total interest expense 579 552 1,710 1,440 ------ ------ ------ ------ NET INTEREST INCOME 1,128 1,295 3,487 3,271 Provision for loan losses 175 35 420 35 ------ ------ ------ ------ Net interest income after provision for loan losses 953 1,260 3,067 3,236 ------ ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 214 254 649 634 Fees and commissions 246 205 694 534 Trust and investment services income 117 104 338 267 Investment securities gains (losses) (1) -- 6 2 Other 101 80 309 199 ------ ------ ------ ------ Total noninterest income 677 643 1,996 1,636 ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 308 378 964 960 Incentive compensation 54 53 143 146 Employee benefits 80 105 256 261 Equipment 97 103 289 269 Net occupancy 96 96 292 257 Goodwill 81 81 245 170 Core deposit intangible 64 78 193 170 Operating losses 40 31 262 72 Other 267 380 806 844 ------ ------ ------ ------ Total noninterest expense 1,087 1,305 3,450 3,149 ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 543 598 1,613 1,723 Income tax expense 253 277 756 775 ------ ------ ------ ------ NET INCOME $ 290 $ 321 $ 857 $ 948 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 285 $ 302 $ 836 $ 901 ------ ------ ------ ------ ------ ------ ------ ------ PER COMMON SHARE Net income $ 3.26 $ 3.23 $ 9.38 $11.42 ------ ------ ------ ------ ------ ------ ------ ------ Dividends declared $ 1.30 $ 1.30 $ 3.90 $ 3.90 ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 87.5 93.7 89.1 78.8 ------ ------ ------ ------ ------ ------ ------ ------ - --------------------------------------------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 7,823 $ 11,736 $ 11,622 Federal funds sold and securities purchased under resale agreements 188 187 284 Investment securities at fair value 10,737 13,505 13,433 Loans 65,104 67,389 69,233 Allowance for loan losses 1,823 2,018 2,137 ------- -------- -------- Net loans 63,281 65,371 67,096 ------- -------- -------- Due from customers on acceptances 104 197 356 Accrued interest receivable 537 665 590 Premises and equipment, net 2,173 2,406 2,380 Core deposit intangible 1,771 2,038 2,130 Goodwill 7,149 7,322 7,407 Other assets 3,892 5,461 3,878 ------- -------- -------- Total assets $97,655 $108,888 $109,176 ------- -------- -------- ------- -------- -------- LIABILITIES Noninterest-bearing deposits $23,005 $ 29,073 $ 29,512 Interest-bearing deposits 47,917 52,748 54,225 ------- -------- -------- Total deposits 70,922 81,821 83,737 Federal funds purchased and securities sold under repurchase agreements 4,268 2,029 1,033 Commercial paper and other short-term borrowings 458 401 350 Acceptances outstanding 104 197 356 Accrued interest payable 245 171 215 Other liabilities 2,574 3,947 3,151 Senior debt 2,280 2,120 2,470 Subordinated debt 2,585 2,940 2,941 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,150 -- STOCKHOLDERS' EQUITY Preferred stock 275 600 1,039 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 86,780,522 shares, 91,474,425 shares and 92,875,661 shares 434 457 464 Additional paid-in capital 8,925 10,287 10,674 Retained earnings 3,235 2,749 2,766 Cumulative foreign currency translation adjustments -- (4) (4) Investment securities valuation allowance 51 23 (16) ------- -------- -------- Total stockholders' equity 12,920 14,112 14,923 ------- -------- -------- Total liabilities and stockholders' equity $97,655 $108,888 $109,176 ------- -------- -------- ------- -------- -------- - -------------------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------- Nine months ended September 30, ------------------------------- (in millions) 1997 1996 - -------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of period $ 600 $ 489 Preferred stock issued to First Interstate stockholders -- 350 Preferred stock issued -- 200 Preferred stock redeemed (325) -- ------- ------- Balance, end of period 275 1,039 ------- ------- COMMON STOCK Balance, beginning of period 457 235 Common stock issued to First Interstate stockholders -- 260 Common stock issued under employee benefit and dividend reinvestment plans 3 3 Common stock repurchased (26) (34) ------- ------- Balance, end of period 434 464 ------- ------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 10,287 1,135 Preferred stock issued to First Interstate stockholders -- 10 Preferred stock issuance costs -- (3) Common stock issued to First Interstate stockholders -- 11,037 Common stock issued under employee benefit and dividend reinvestment plans 64 85 Common stock repurchased (1,426) (1,701) Fair value adjustment related to First Interstate stock options -- 111 ------- ------- Balance, end of period 8,925 10,674 ------- ------- RETAINED EARNINGS Balance, beginning of period 2,749 2,174 Net income 857 948 Preferred stock dividends (21) (47) Common stock dividends (350) (309) ------- ------- Balance, end of period 3,235 2,766 ------- ------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning of period (4) (4) Translation adjustments 4 -- ------- ------- Balance, end of period -- (4) ------- ------- INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period 23 26 Change in unrealized net gain, after applicable taxes 28 (42) ------- ------- Balance, end of period 51 (16) ------- ------- Total stockholders' equity $12,920 $14,923 ------- ------- ------- ------- - --------------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------- Nine months ended September 30, -------------------------------- (in millions) 1997 1996 - -------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 857 $ 948 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 420 35 Depreciation and amortization 683 560 Deferred income tax provision 119 165 Increase (decrease) in net deferred loan fees 11 (14) Net decrease in accrued interest receivable 128 26 Net increase in accrued interest payable 74 43 Other, net 968 208 -------- ------- Net cash provided by operating activities 3,260 1,971 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities at fair value Proceeds from sales 275 763 Proceeds from prepayments and maturities 3,270 3,601 Purchases (726) (1,347) Cash acquired from First Interstate -- 6,030 Net decrease in loans resulting from originations and collections 1,755 804 Proceeds from sales (including participations) of loans 158 301 Purchases (including participations) of loans (210) (93) Proceeds from sales of foreclosed assets 116 111 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (1) 1,967 Other, net 62 (411) -------- ------- Net cash provided by investing activities 4,699 11,726 -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (10,899) (2,693) Net increase (decrease) in short-term borrowings 2,296 (1,939) Proceeds from issuance of senior debt 700 1,260 Repayment of senior debt (525) (816) Proceeds from issuance of subordinated debt -- 800 Repayment of subordinated debt (351) -- Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 149 -- Proceeds from issuance of preferred stock -- 197 Proceeds from issuance of common stock 67 88 Redemption of preferred stock (325) -- Repurchase of common stock (1,452) (1,735) Payment of cash dividends on preferred stock (21) (56) Payment of cash dividends on common stock (350) (309) Other, net (1,161) (247) -------- ------- Net cash used by financing activities (11,872) (5,450) -------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,913) 8,247 Cash and cash equivalents at beginning of period 11,736 3,375 -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,823 $11,622 -------- ------- -------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,636 $ 1,310 Income taxes $ 558 $ 269 Noncash investing and financing activities: Transfers from loans to foreclosed assets $ 76 $ 108 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 - --------------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. DERIVATIVE FINANCIAL INSTRUMENTS The following is an enhanced description of the derivative financial instruments accounting policy contained in the Company's 1996 Form 10-K, as also shown in the Company's second quarter 1997 Form 10-Q. 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. These instruments serve to reduce rather than increase the Company's exposure to movements in interest rates. At the inception of the hedge, the Company identifies an individual asset or liability, or an identifiable group of essentially similar assets or liabilities that expose the Company to interest rate risk at the consolidated or enterprise level. Interest rate derivatives 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 the assets and liabilities identified as exposing the Company to risk. Futures contracts must meet specific correlation tests (i.e., the change in their fair values must be within 80 to 120 percent of the opposite change in the fair values of the hedged assets or liabilities). For caps, floors and swaps, their notional amount, interest rate index and life must closely match the related terms of the hedged assets or liabilities. Further, for futures, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. 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 hedged asset or liability are deferred and amortized over the life of the asset or liability with excess amounts recognized in noninterest income. Gains and losses on futures contracts result from the daily settlement of their open positions and are deferred and classified on the balance sheet with the hedged asset or liability. They are recognized in income when the effects of the related fair value changes of the hedged asset or liability are recognized (e.g., amortized as a component of the interest income or expense reported on the hedged asset or liability). Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in the interest income or expense reported on the hedged asset or liability. Fees associated with these financial contracts are included on the balance sheet at the time that the fee is paid and are classified with the hedged asset or liability. These fees are amortized over their contractual life as a component of the interest reported on the hedged asset or liability. If a hedged asset or liability settles before maturity of the hedging interest rate derivatives, 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 hedged asset 6 or liability. If interest rate derivatives used in an effective hedge are closed out or terminated before the hedged item settles, previously unrecognized hedge results and the net settlement upon close-out or termination are deferred and amortized over the life of the hedged asset or liability. Cash flows resulting from interest rate derivatives (including any related fees) that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows from the items being hedged and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Interest rate derivatives entered into as an accommodation to customers and interest rate derivatives 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 in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. 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 derivatives. All contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from foreign exchange derivatives are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the foreign exchange derivatives are collected, paid or settled. Credit risk related to foreign exchange derivatives is considered and, if material, provided for separately from the allowance for loan losses. 7 2. MERGER WITH FIRST INTERSTATE BANCORP (MERGER) On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp (First Interstate). 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. 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 since April 1, 1996 included accruals totaling approximately $324 million ($191 million after tax) related to the disposition of premises, including an accrual of $127 million ($75 million after tax) associated with the dispositions of traditional former First Interstate branches in California and out of state. The California dispositions included 175 branch closures during 1996 and 45 branch closures during the first nine months of 1997, of which 9 occurred in the third quarter. In addition, one branch is scheduled to be closed by year-end 1997, with another 14 branches to be closed in 1998. The Company 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 completed in the first quarter of 1997. The sales of the remaining three branches are expected to be completed in 1998. The out-of-state dispositions included 82 branch closures that were completed in the first nine months of 1997, of which 42 occurred in the third quarter. In addition, 6 branch closures have been completed or are scheduled to be completed in the fourth quarter of 1997, with another 61 closures to be completed in 1998. The Company also entered into definitive agreements with several institutions to sell 87 former First Interstate out-of-state branches, including deposits. The sales of five of these branches were completed in the second quarter of 1997 and the remaining 82 were completed in the third quarter of 1997. (See Noninterest Income section for information on other, Wells Fargo branch dispositions.) Additionally, the adjustments to goodwill included accruals of approximately $481 million ($284 million after tax) related to severance of former First Interstate employees throughout the Company who have been or will be displaced. Severance payments totaling $341 million were paid since the second quarter of 1996, including $39 million in the third quarter of 1997. In the first quarter of 1997, the Company completed the sale of the Corporate and Municipal Bond Administration (Corporate Trust) business to the Bank of New York. During the second quarter, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. Transfer of the accounts is occurring in several stages, the first of which was during the third quarter of 1997. The sales price will be settled subsequent to these transfers, starting in the fourth quarter of 1997. Substantially all of the businesses were acquired as part of the acquisition of First Interstate; therefore, the excess of proceeds over the cost of the net assets sold on that portion of the sale will be deducted from goodwill. The net income for the first nine months of 1997 generated by the Institutional Custody businesses was approximately $10 million. 8 The $7,267 million excess purchase price over fair value of First Interstate's net assets acquired (goodwill) is amortized using the straight-line method over 25 years. 9 FINANCIAL REVIEW SUMMARY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------ % Change Quarter ended Sept. 30, 1997 from Nine months ended ------------------------------- ------------------- -------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions) 1997 1997 1996 1997 1996 1997 1996 Change - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 290 $ 228 $ 321 27% (10)% $ 857 $ 948 (10)% Net income applicable to common stock 285 222 302 28 (6) 836 901 (7) Per common share Net income $ 3.26 $ 2.49 $ 3.23 31 1 $ 9.38 $ 11.42 (18) Dividends declared 1.30 1.30 1.30 -- -- 3.90 3.90 -- Average common shares outstanding 87.5 89.0 93.7 (2) (7) 89.1 78.8 13 Profitability ratios (annualized) Net income to average total assets (ROA) 1.18% .92% 1.18% 28 -- 1.14% 1.43% (20) Net income applicable to common stock to average common stockholders' equity (ROE) 8.94 6.88 8.64 30 3 8.62 11.36 (24) Efficiency ratio (1) 60.2% 68.2% 67.3% (12) (11) 62.9% 64.2% (2) Average loans $ 63,865 $64,618 $ 69,274 (1) (8) $ 64,653 $ 58,384 11 Average assets 97,032 99,739 108,378 (3) (10) 100,703 88,719 14 Average core deposits 70,744 73,524 82,378 (4) (14) 73,937 67,572 9 Net interest margin 5.94% 5.93% 6.15% -- (3) 6.00% 6.11% (2) NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (2) Net income applicable to common stock $ 400 $ 338 $ 424 18 (6) $ 1,181 $ 1,154 2 Net income per common share 4.57 3.79 4.52 21 1 13.25 14.64 (9) ROA 1.81% 1.51% 1.77% 20 2 1.74% 1.94% (10) ROE 35.44 29.27 31.91 21 11 33.83 32.70 3 Efficiency ratio 52.6 60.6 59.6 (13) (12) 55.4 57.8 (4) AT PERIOD END Investment securities $ 10,737 $11,530 $ 13,433 (7) (20) $ 10,737 $ 13,433 (20) Loans 65,104 65,689 69,233 (1) (6) 65,104 69,233 (6) Allowance for loan losses 1,823 1,850 2,137 (1) (15) 1,823 2,137 (15) Goodwill 7,149 7,231 7,407 (1) (3) 7,149 7,407 (3) Assets 97,655 100,180 109,176 (3) (11) 97,655 109,176 (11) Core deposits 70,580 73,545 83,308 (4) (15) 70,580 83,308 (15) Common stockholders' equity 12,645 12,831 13,884 (1) (9) 12,645 13,884 (9) Stockholders' equity 12,920 13,106 14,923 (1) (13) 12,920 14,923 (13) Tier 1 capital (3) 6,005 6,101 6,111 (2) (2) 6,005 6,111 (2) Total capital (Tiers 1 and 2) (3) 9,153 9,329 9,588 (2) (5) 9,153 9,588 (5) Capital ratios Common stockholders' equity to assets 12.95% 12.81% 12.71% 1 2 12.95% 12.71 2 Stockholders' equity to assets 13.23 13.08 13.66 1 (3) 13.23 13.66 (3) Risk-based capital (3) Tier 1 capital 7.53 7.49 7.04 1 7 7.53 7.04 7 Total capital 11.47 11.45 11.05 -- 4 11.47 11.05 4 Leverage (3) 6.76 6.67 6.12 1 10 6.76 6.12 10 Book value per common share $ 145.72 $145.68 $ 149.44 -- (2) $ 145.72 $ 149.44 (2) Staff (active, full-time equivalent) 32,663 33,216 38,859 (2) (16) 32,663 38,859 (16) COMMON STOCK PRICE High $ 279.88 $287.88 $ 264.00 (3) 6 $ 319.25 $ 264.50 21 Low 250.13 246.00 220.13 2 14 246.00 203.13 21 Period end 275.00 269.50 260.00 2 6 275.00 260.00 6 - -----------------------------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) Nonqualifying core deposit intangible (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 $34 million and $1,000 million, respectively, for the quarter ended September 30,1997 and $100 million and $1,043 million, respectively, for the nine months ended September 30, 1997. Goodwill amortization and average balance (which are not tax effected) were $81 million and $7,190 million, respectively, for the quarter ended September 30, 1997 and $245 million and $7,255 million, respectively, for the nine months ended September 30, 1997. (3) See the Capital Adequacy/Ratios section for additional information. 10 OVERVIEW Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, Wells Fargo & Company and its subsidiaries are referred to as the Company. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate). As a result, the financial information presented in this Form 10-Q for all periods reflects the effects of the acquisition subsequent to the Merger's consummation. Since the Company's results of operations subsequent to the Merger's consummation reflect amounts recognized from combined operations, they cannot be divided between or attributed directly to either of the two former entities. In the majority of the Company's income and expense categories, the increases in the amounts reported for the first nine months of 1997 compared with the amounts reported for the same period in 1996 resulted from the Merger. Other significant factors affecting the Company's results of operations are described in the applicable sections below. Net income for the third quarter of 1997 was $290 million, compared with $321 million for the third quarter of 1996, a decrease of 10%. Per share earnings for the third quarter of 1997 were $3.26, compared with $3.23 in the third quarter of 1996, an increase of 1%. Net income for the first nine months of 1997 was $857 million, or $9.38 per share, compared with $948 million, or $11.42 per share, for the first nine months of 1996. Return on average assets (ROA) was 1.18% and 1.14% in the third quarter and first nine months of 1997, respectively, compared with 1.18% and 1.43% in the same periods of 1996. Return on average common equity (ROE) was 8.94% and 8.62% in the third quarter and first nine months of 1997, respectively, compared with 8.64% and 11.36%, respectively, in the same periods of 1996. Earnings before the amortization of goodwill and nonqualifying core deposit intangible ("cash" or "tangible" earnings) in the third quarter and first nine months of 1997 were $4.57 and $13.25 per share, respectively, compared with $4.52 and $14.64 per share in the same periods of 1996. On the same basis, ROA was 1.81% and 1.74% in the third quarter and first nine months of 1997, respectively, compared with 1.77% and 1.94% in the same periods of 1996; ROE was 35.44% and 33.83% in the third quarter and first nine months of 1997, respectively, compared with 31.91% and 32.70% in the same periods of 1996. Net interest income on a taxable-equivalent basis was $1,132 million and $3,497 million in the third quarter and first nine months of 1997, respectively, compared with $1,299 million and $3,278 million in the same periods of 1996. The decrease in net interest income for the third quarter of 1997 compared with the same period of 1996 was primarily due to a decline in earning assets. The Company's net interest margin was 5.94% for the third quarter of 1997, compared with 6.15% in the same quarter of 1996 and 5.93% in the second quarter of 1997. 11 The lowest monthly average balance for total loans in the third quarter of 1997 was $63.6 billion in August. The average was $64.3 billion in September and $64.5 billion in October. The lowest monthly average balance for noninterest-bearing deposit accounts in the third quarter of 1997 was $22.2 billion in August. The average was $22.3 billion in September and $22.2 billion in October. Noninterest income was $677 million and $1,996 million in the third quarter and first nine months of 1997, respectively, compared with $643 million and $1,636 million in the same periods of 1996. Noninterest expense in the third quarter and first nine months of 1997 was $1,087 million and $3,450 million, respectively, compared with $1,305 million and $3,149 million for the same periods of 1996. The major portion of the decrease in noninterest expense in the third quarter of 1997 resulted from cost savings achieved subsequent to the Merger. The Company expects to meet its pre-merger objective of realizing annual cost savings of about $800 million by the fourth quarter of 1997, except for expenses unrelated to the Merger, such as approximately $10 million each in the fourth quarter for computer conversion costs related to the Year 2000 and the rollout of a debit card product, and higher operating losses that are expected to remain at about the third quarter level. For additional discussion of the Company's plan for branch closures and consolidations, see Note 2 to Financial Statements. The provision for loan losses in the third quarter and first nine months of 1997 was $175 million and $420 million, respectively, compared with $35 million for each of the same periods in 1996. During the third quarter of 1997, net charge-offs totaled $202 million, or 1.25% of average loans (annualized). This compared with $212 million, or 1.32%, during the second quarter of 1997 and $171 million, or .98%, during the third quarter of 1996. The allowance for loan losses of $1,823 million was 2.80% of total loans at September 30, 1997, compared with 2.82% at June 30, 1997 and 3.09% at September 30, 1996. Total nonaccrual and restructured loans were $574 million at September 30, 1997, compared with $724 million at December 31, 1996 and $728 million at September 30, 1996. Foreclosed assets amounted to $196 million at September 30, 1997, $219 million at December 31, 1996 and $227 million at September 30, 1996. Common stockholders' equity to total assets was 12.95% at September 30, 1997, compared with 12.81% and 12.71% at June 30, 1997 and September 30, 1996, respectively. The Company's total risk-based capital ratio at September 30, 1997 was 11.47% and its Tier 1 risk-based capital ratio was 7.53%, exceeding minimum guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. At June 30, 1997, the risk-based capital ratios were 11.45% and 7.49%, respectively; at September 30, 1996, these ratios were 11.05% and 7.04%, respectively. The Company's leverage ratios were 6.76%, 6.67% and 6.12% at September 30, 1997, June 30, 1997 and September 30, 1996, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline of 5% for banks. 12 The Company has bought in the past, and will continue to buy, shares to offset common 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. Under these two programs, the Company has repurchased a total of 9.5 million shares (net of shares issued) since April 1996, including 1.3 million shares (net of shares issued) in the third quarter of 1997. In October 1997, the Board of Directors authorized the repurchase from time to time of up to an additional 8.6 million shares of the Company's outstanding stock. The Company currently expects to continue repurchasing shares in the last quarter of 1997, although not at the same level as the third quarter. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. This Statement establishes standards for computing and presenting earnings per share (EPS). It replaces the presentation of primary EPS (net income applicable to common stock divided by average common shares outstanding and, if dilution is 3% or more, common stock equivalents) with a presentation of basic EPS (net income applicable to common stock divided by average common shares outstanding), which the Company currently presents. It also requires dual presentation of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of both EPS computations. This Statement is effective with the year-end 1997 financial statements. Earlier application is not permitted; however, the Statement requires restatement of all prior period EPS data presented, including interim periods. The basic and diluted EPS under FAS 128 for the Company's quarter and nine-month period ended September 30, 1997 would not differ materially from the existing primary and fully diluted EPS under APB 15. In June 1997, the FASB issued FAS 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires that a company classify items of other comprehensive income, as defined by accounting standards, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The Company is in the process of determining its preferred format. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This Statement is effective with the year-end 1998 financial statements; however, a total for comprehensive income is required in the financial statements of interim periods beginning with the first quarter of 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. 13 LINE OF BUSINESS RESULTS (ESTIMATED)
- --------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Banking Investment Group Group Group ------------------------------------------------------------------------ 1997 1996 1997 1996 1997 1996 QUARTER ENDED SEPTEMBER 30, Net interest income (1) $ 240 $ 236 $ 198 $ 182 $ 191 $ 223 Provision for loan losses (2) -- -- 36 26 1 1 Noninterest income (3) 294 319 67 67 138 134 Noninterest expense (3) 461 502 112 124 158 186 ------ ------ ----- ----- ----- ----- Income before income tax expense (benefit) 73 53 117 99 170 170 Income tax expense (benefit) (4) 30 22 48 41 70 70 ------ ------ ----- ----- ----- ----- Net income (loss) $ 43 $ 31 $ 69 $ 58 $ 100 $ 100 ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- Average loans $ -- $ 0.2 $ 5.7 $ 4.8 $ 2.0 $ 2.0 Average assets 2.8 3.9 7.5 7.3 2.6 2.8 Average core deposits 17.9 18.9 11.7 13.1 33.0 37.2 Return on equity (5) 17% 11% 36% 34% 57% 57% Risk-adjusted efficiency ratio (6) 96% 100% 65% 70% 58% 62% NINE MONTHS ENDED SEPTEMBER 30, Net interest income (1) $ 744 $ 575 $ 583 $ 456 $ 587 $ 550 Provision for loan losses (2) -- -- 99 64 4 3 Noninterest income (3) 877 797 201 179 410 341 Noninterest expense (3) 1,402 1,258 352 322 488 458 ------ ------ ----- ----- ----- ----- Income before income tax expense (benefit) 219 114 333 249 505 430 Income tax expense (benefit) (4) 90 47 136 103 207 177 ------ ------ ----- ----- ----- ----- Net income (loss) $ 129 $ 67 $ 197 $ 146 $ 298 $ 253 ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- Average loans $ -- $ 0.1 $ 5.5 $ 4.1 $ 2.0 $ 1.5 Average assets 3.0 2.9 7.4 6.0 2.8 2.1 Average core deposits 18.8 15.7 12.0 10.8 34.0 31.3 Return on equity (5) 17% 10% 34% 33% 57% 55% Risk-adjusted efficiency ratio (6) 96% 101% 67% 71% 59% 61% - ---------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (3) The Retail Distribution Group's charges to the product groups are shown as noninterest income to the branches and noninterest expense to the product groups. They amounted to $88 million and $112 million for the quarters ended September 30, 1997 and 1996, respectively, and $267 million and $273 million for the nine months ended September 30, 1997 and 1996, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. The line of business results show the financial performance of the Company's major business units. The table presents the third quarter and nine months ended September 30, 1997 and the same periods of 1996. First Interstate results prior to April 1, 1996 are not included and, therefore, the results for the nine months ended September 30, 1997 are not comparable to the same period of 1996. 14
- ---------------------------------------------------------------------------------------------------------------------------- Wholesale Real Estate Products Consumer Consolidated Group Group Lending Other Company - ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 $ 95 $ 99 $ 172 $ 214 $ 282 $ 276 $ (50) $ 65 $1,128 $1,295 11 11 19 20 113 118 (5) (141) 175 35 46 18 84 87 122 86 (74) (68) 677 643 26 26 109 107 121 145 100 215 1,087 1,305 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ 104 80 128 174 170 99 (219) (77) 543 598 43 32 53 71 69 41 (60) -- 253 277 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ $ 61 $ 48 $ 75 $ 103 $ 101 $ 58 $(159) $ (77) $ 290 $ 321 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ $ 9.3 $10.2 $16.5 $18.1 $23.4 $24.4 $ 7.0 $ 9.6 $ 63.9 $ 69.3 10.3 10.9 20.0 22.7 24.4 25.4 29.4 35.4 97.0 108.4 0.4 0.5 7.4 10.3 0.5 0.4 (0.2) 2.0 70.7 82.4 25% 18% 18% 22% 27% 15% -- % --% 9% 9% 56% 71% 80% 70% 66% 90% -- % --% --% --% $ 293 $ 275 $ 551 $ 526 $ 833 $ 727 $(104) $ 162 $3,487 $3,271 32 31 56 52 340 303 (111) (418) 420 35 94 56 249 208 332 226 (167) (171) 1,996 1,636 80 77 323 266 364 352 441 416 3,450 3,149 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ 275 223 421 416 461 298 (601) (7) 1,613 1,723 113 92 172 172 189 123 (151) 61 756 775 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ $ 162 $ 131 $ 249 $ 244 $ 272 $ 175 $(450) $ (68) $ 857 $ 948 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ $ 9.4 $ 9.2 $16.7 $15.3 $23.8 $20.2 $ 7.3 $ 8.0 $ 64.7 $ 58.4 10.2 9.8 20.8 18.7 24.9 21.0 31.6 28.2 100.7 88.7 0.4 0.4 8.2 7.6 0.5 0.4 -- 1.4 73.9 67.6 22% 19% 19% 22% 24% 18% --% --% 9% 11% 61% 70% 77% 71% 70% 82% --% --% --% --% - ----------------------------------------------------------------------------------------------------------------------------
(4) Businesses are taxed at the Company's marginal (statutory) tax rate, adjusted for any nondeductible expenses. Any differences between the marginal and effective tax rates are in Other. (5) Equity is allocated to the lines of business based on an assessment of the inherent risk associated with each business so that the returns on allocated equity are on a risk-adjusted basis and comparable across business lines. (6) The risk-adjusted efficiency ratio is defined as noninterest expense plus the cost of capital divided by revenues (net interest income and noninterest income) less normalized loan losses. 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. 15 The following describes the major business units. The Retail Distribution Group sells and services a complete line of retail financial products for consumers and small businesses. 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, business centers and ATMs. Retail Distribution also includes the consumer checking business, which primarily uses the network as a source of new customers. At September 30, 1997, there were 971 traditional branches and 864 in-store branches, banking centers and business centers with 2,757 ATM locations throughout the Western United States. Retail Distribution Group's net income for the third quarter of 1997 increased $12 million, or 39%, over third quarter 1996. Noninterest income for the quarter reflected lower sales and service charges to the product groups and lower service charges on deposit accounts, which were partly offset by higher external fees and commissions. Noninterest expense decreased in the quarter due to branch closures and merger-related cost savings. 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 of the business is also the principal financial decision maker. Business Banking's net income for the third quarter of 1997 increased $11 million, or 19%. The increase in net interest income was due to higher volume and spreads on commercial loans and higher spreads on core deposits. This was partially offset by lower deposit balances. The provision was higher due to the volume of loans acquired through direct market mailings. Noninterest expense improved from the same quarter of 1996 due to lower distribution expense. 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. During the second quarter, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. In July 1997, the Bank announced an alliance with Morgan Stanley, Dean Witter, Discover & Co., whereby Dean Witter would provide technology, investment products, services and sales 16 and marketing support to Wells Fargo Securities and its clients. The full range of Dean Witter's services is expected to be available to Wells Fargo customers by the first quarter of 1998. The Investment Group's net income for the third quarter of 1997 was unchanged from the same quarter in 1996. Net interest income decreased by $32 million primarily due to a decline in core deposits which was partially offset by wider deposit spreads. Noninterest expense decreased as a result of cost savings from the sale of Corporate Trust, lower personnel expense (including incentive compensation) and lower distribution costs from lower deposit sales. Assets under management at September 30, 1997 were $63.2 billion, compared with $57.2 billion at September 30, 1996. 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 senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications and commercial real estate loan servicing. The Real Estate Group's net income for the third quarter of 1997 increased by $13 million, or 27%, from 1996. Net interest income decreased by $4 million due to lower loan balances. Noninterest income increased by $28 million predominantly due to sales of loans. 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 that provides trade financing, letters of credit and collection services. The Wholesale Products Group's net income for the third quarter of 1997 decreased by $28 million, or 27%, from 1996. Net interest income decreased by $42 million due to lower loan and deposit balances. Noninterest income declined due to lower service charges on deposit accounts which were offset partially by higher income from foreign exchange and trust and investment services. Consumer Lending offers a full array of consumer loan products, including credit cards, transportation (auto, recreational vehicle, marine) financing, home equity lines and loans, lines of credit and installment loans. The loan portfolio for third quarter 1997 averaged $23.4 billion, consisting of $5.1 billion in credit cards, $11.4 billion in equity/unsecured loans and $6.9 billion in 17 transportation financing. This compares with $5.3 billion in credit cards, $12.1 billion in equity/unsecured loans and $7.0 billion in transportation financing in 1996. Consumer Lending's net income for the third quarter of 1997 increased $43 million, or 74%. Net interest income increased due to higher auto lease balances which were partially offset by higher interest losses related to an increase in loans charged off in the consumer portfolio. The increase in noninterest income was due largely to higher fee income on credit cards. The decrease in noninterest expense was due to lower distribution expense. 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. The net loss for the Other category for the quarter ended September 30, 1997 increased by $82 million from 1996. Net interest income during the third quarter of 1997 reflects the impact of lower investment securities and higher short-term borrowing. Noninterest expense improved due to merger-related cost savings in the systems and other support groups. In June 1997, the FASB issued FAS 131, Disclosures about Segments of an Enterprise and Related Information. The Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement is effective for the year-end 1998 audited financial statements. 18 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1,132 million in the third quarter of 1997, compared with $1,299 million in the third quarter of 1996. The decrease in net interest income was primarily due to a decline in earning assets. The Company's net interest margin was 5.94% in the third quarter of 1997, compared with 6.15% in the third quarter of 1996 and 5.93% in the second quarter of 1997. Net interest income on a taxable-equivalent basis was $3,497 million in the first nine months of 1997, compared with $3,278 million in the first nine months of 1996. The Company's net interest margin was 6.00% in the first nine months of 1997, compared with 6.11% in the first nine months of 1996. The Company expects the net interest margin to be essentially flat in the fourth quarter of 1997 compared with the third quarter of 1997. Interest income included hedging income of $16 million in the third quarter of 1997, compared with $24 million in the third quarter of 1996. Interest expense included hedging expense of $4 million in the third quarter of 1997, compared with $3 million in the third quarter of 1996. Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 20 and 21. Loans averaged $63.9 billion and $69.3 billion in the third quarter of 1997 and 1996, respectively, and $64.7 billion and $58.4 billion in the first nine months of 1997 and 1996, respectively. The decrease in average loans from the third quarter of 1996 was largely due to runoff. In addition, a significant portion of the decrease was due to the divestitures and sales of former First Interstate branches and banks in 1996, which included $1.5 billion of loans. Investment securities averaged $11.0 billion and $13.6 billion in the third quarter of 1997 and 1996, respectively, and $12.0 billion and $12.4 billion in the first nine months of 1997 and 1996, respectively. Average core deposits were $70.7 billion and $82.4 billion in the third quarter of 1997 and 1996, respectively, and funded 73% and 76% of the Company's average total assets in the same quarter of 1997 and 1996, respectively. For the first nine months of 1997 and 1996, average core deposits were $73.9 billion and $67.6 billion, respectively, and funded 73% and 76% of the Company's average total assets in the same period of 1997 and 1996, respectively. The decrease in average core deposits from the third quarter of 1996 was primarily due to net runoff. In addition, a significant portion of the decrease was due to the divestitures of branches and sales of former First Interstate banks which occurred in 1996, and the sales of branches in 1996 and 1997, including $3.9 billion of core deposits. 19 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- ------------------------------------------------------------------------------------------------------------- Quarter ended September 30, ------------------------------------------------------------- 1997 1996 ----------------------------- ----------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 229 5.63% $ 3 $ 800 5.44% $ 11 Investment securities at fair value (3): U.S. Treasury securities 2,634 6.00 40 2,678 5.92 40 Securities of U.S. government agencies and corporations 5,303 6.42 85 7,473 6.32 119 Private collateralized mortgage obligations 2,737 6.68 46 2,920 6.49 48 Other securities 330 6.41 4 489 6.49 8 -------- ------- -------- ------ Total investment securities at fair value 11,004 6.38 175 13,560 6.28 215 Loans: Commercial 18,283 9.11 419 18,848 8.92 422 Real estate 1-4 family first mortgage 9,543 7.52 180 11,514 7.32 211 Other real estate mortgage 11,421 9.35 269 12,614 9.15 290 Real estate construction 2,304 10.90 63 2,345 10.97 65 Consumer: Real estate 1-4 family junior lien mortgage 5,946 9.35 140 6,716 9.17 154 Credit card 5,073 14.66 186 5,295 14.84 196 Other revolving credit and monthly payment 7,638 9.26 178 9,011 9.44 214 -------- ------- -------- ------ Total consumer 18,657 10.75 504 21,022 10.71 564 Lease financing 3,533 8.99 79 2,791 8.75 61 Foreign 124 6.88 2 140 8.25 3 -------- ------- -------- ------ Total loans 63,865 9.45 1,516 69,274 9.30 1,616 Other 883 7.18 16 550 6.25 9 -------- ------- -------- ------ Total earning assets $ 75,981 8.97 1,710 $ 84,184 8.76 1,851 -------- ------- -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,736 1.45 6 $ 6,022 1.31 20 Market rate and other savings 31,098 2.64 207 32,918 2.64 218 Savings certificates 15,602 5.17 203 16,496 4.74 197 Other time deposits 253 4.83 3 381 6.89 7 Deposits in foreign offices 731 5.48 10 293 5.08 4 -------- ------- -------- ------ Total interest-bearing deposits 49,420 3.45 429 56,110 3.15 446 Federal funds purchased and securities sold under repurchase agreements 3,211 5.48 44 1,217 5.01 15 Commercial paper and other short-term borrowings 343 5.82 5 361 3.37 3 Senior debt 1,770 6.47 29 2,607 6.05 40 Subordinated debt 2,604 7.12 46 2,816 6.92 48 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 7.81 25 -- -- -- -------- ------- -------- ------ Total interest-bearing liabilities 58,647 3.92 578 63,111 3.48 552 Portion of noninterest-bearing funding sources 17,334 -- -- 21,073 -- -- -------- ------- -------- ------ Total funding sources $ 75,981 3.03 578 $ 84,184 2.61 552 -------- ------- -------- ------ -------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 5.94% $ 1,132 6.15% $1,299 ----- ------- ----- ------ ----- ------- ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 7,299 $ 9,877 Goodwill 7,190 7,439 Other 6,562 6,878 -------- -------- Total noninterest-earning assets $ 21,051 $ 24,194 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 22,308 $ 26,942 Other liabilities 3,135 3,551 Preferred stockholders' equity 275 854 Common stockholders' equity 12,667 13,920 Noninterest-bearing funding sources used to fund earning assets (17,334) (21,073) -------- -------- Net noninterest-bearing funding sources $ 21,051 $ 24,194 -------- -------- -------- -------- TOTAL ASSETS $ 97,032 $108,378 -------- -------- -------- -------- - -------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Bank was 8.50% and 8.25% for the quarters ended September 30, 1997 and 1996, respectively, and 8.42% and 8.28% for the nine months ended September 30, 1997 and 1996, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.73% and 5.59% for the quarters ended September 30, 1997 and 1996, respectively, and 5.71% and 5.51% for the nine months ended September 30, 1997 and 1996, 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 $10,931 million and $13,651 million for the quarters ended September 30, 1997 and 1996, respectively, and $11,973 million and $12,431 million for the nine months ended September 30, 1997 and 1996, respectively. (4) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all periods presented. 20
- -------------------------------------------------------------------------------------------------------------- Nine months ended September 30, -------------------------------------------------------------- 1997 1996 --------------------------- ------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - -------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 351 5.58% $ 15 $ 505 5.43% $ 21 Investment securities at fair value (3): U.S. Treasury securities 2,745 6.03 124 2,405 5.67 102 Securities of U.S. government agencies and corporations 5,972 6.43 287 6,968 6.13 322 Private collateralized mortgage obligations 2,935 6.63 147 2,552 6.28 122 Other securities 340 6.42 15 460 6.84 22 -------- ------ -------- ------ Total investment securities at fair value 11,992 6.39 573 12,385 6.09 568 Loans: Commercial 18,373 9.07 1,246 15,883 9.05 1,077 Real estate 1-4 family first mortgage 9,899 7.49 555 9,287 7.43 518 Other real estate mortgage 11,514 9.82 846 11,277 9.23 778 Real estate construction 2,288 10.23 175 2,020 10.40 157 Consumer: Real estate 1-4 family junior lien mortgage 6,049 9.34 423 5,617 8.95 377 Credit card 5,188 14.39 560 4,805 14.95 539 Other revolving credit and monthly payment 7,913 9.29 550 6,929 9.62 499 -------- ------ -------- ------ Total consumer 19,150 10.69 1,533 17,351 10.88 1,415 Lease financing 3,295 8.83 218 2,430 8.87 162 Foreign 134 6.91 7 136 6.11 6 -------- ------ -------- ------ Total loans 64,653 9.46 4,580 58,384 9.40 4,113 Other 770 6.79 39 339 6.39 16 -------- ------ -------- ------ Total earning assets $ 77,766 8.94 5,207 $ 71,613 8.79 4,718 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,847 1.30 18 $ 4,651 1.26 44 Market rate and other savings 32,562 2.59 632 27,962 2.63 550 Savings certificates 15,596 5.10 595 13,979 4.88 511 Other time deposits 201 4.47 7 402 6.59 20 Deposits in foreign offices 708 5.38 28 373 5.26 15 -------- ------ -------- ------ Total interest-bearing deposits 50,914 3.36 1,280 47,367 3.21 1,140 Federal funds purchased and securities sold under repurchase agreements 2,712 5.37 109 1,861 5.20 72 Commercial paper and other short-term borrowings 264 5.96 12 354 4.32 11 Senior debt 1,840 6.33 87 2,204 6.11 101 Subordinated debt 2,808 6.99 147 2,222 6.94 116 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,283 7.82 75 -- -- -- -------- ------ -------- ------ Total interest-bearing liabilities 59,821 3.82 1,710 54,008 3.56 1,440 Portion of noninterest-bearing funding sources 17,945 -- -- 17,605 -- -- -------- ------ -------- ------ Total funding sources $ 77,766 2.94 1,710 $ 71,613 2.68 1,440 -------- ------ -------- ------ -------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 6.00% $3,497 6.11% $3,278 ----- ------ ----- ------ ----- ------ ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 8,293 $ 7,116 Goodwill 7,255 5,027 Other 7,389 4,963 -------- -------- Total noninterest-earning assets $ 22,937 $ 17,106 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 23,932 $ 20,980 Other liabilities 3,588 2,418 Preferred stockholders' equity 397 728 Common stockholders' equity 12,965 10,585 Noninterest-bearing funding sources used to fund earning assets (17,945) (17,605) -------- -------- Net noninterest-bearing funding sources $ 22,937 $ 17,106 -------- -------- -------- -------- TOTAL ASSETS $100,703 $ 88,719 -------- -------- -------- -------- ------------------------------------------------------------------------------
21 NONINTEREST INCOME
- --------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------- % ---------------- % (in millions) 1997 1996 Change 1997 1996 Change - --------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $214 $254 (16)% $ 649 $ 634 2% Fees and commissions: Credit card membership and other credit card fees 62 30 107 162 83 95 Shared ATM network fees 43 28 54 125 67 87 Charges and fees on loans 37 32 16 100 81 23 Debit and credit card merchant fees 25 33 (24) 72 85 (15) Mutual fund and annuity sales fees 18 17 6 51 44 16 All other (1) 61 65 (6) 184 174 6 ---- ---- ------ ------ Total fees and commissions 246 205 20 694 534 30 Trust and investment services income: Asset management and custody fees 64 59 8 186 154 21 Mutual fund management fees 47 34 38 131 89 47 All other 6 11 (45) 21 24 (13) ---- ---- ------ ------ Total trust and investment services income 117 104 13 338 267 27 Investment securities gains (losses) (1) -- -- 6 2 200 Income from equity investments accounted for by the: Cost method 18 37 (51) 109 92 18 Equity method 11 3 267 42 13 223 Check printing charges 17 15 13 53 39 36 Gains on sales of loans 28 6 367 41 11 273 Gains (losses) from dispositions of operations (1) (1) -- 7 5 40 Losses on dispositions of premises and equipment (10) (8) 25 (45) (25) 80 All other 38 28 36 102 64 59 ---- ---- ------ ------ Total $677 $643 5% $1,996 $1,636 22% ---- ---- --- ------ ------ --- ---- ---- --- ------ ------ --- - ---------------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $24 million and $21 million for purchased mortgage servicing rights for the third quarter of 1997 and 1996, respectively, and $73 million and $58 million for the first nine months of 1997 and 1996, respectively. Also includes the related amortization expense of $16 million and $18 million for the third quarter of 1997 and 1996, respectively, and $51 million and $44 million for the first nine months of 1997 and 1996, respectively. Service charges on deposit accounts decreased $40 million, or 16%, from the third quarter of 1996 due to a decrease in deposits. (See page 19 for an additional discussion of the decrease in deposits.) Credit card membership and other credit card fees increased $32 million, or 107%, from the third quarter of 1996 reflecting an industry trend of increased fees. The increase in gain on sales of loans of $22 million, or 367%, from the third quarter of 1996 is predominantly due to real estate loan syndications. A major portion of the increase in trust and investment services income for the first nine months of 1997 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 the second and third quarters of 1997, this increase was substantially offset by a reduction in income due to the sale of the Corporate Trust business to The Bank of New York in the first quarter of 1997. The Company managed 30 of the Stagecoach family of funds consisting of $16.0 billion of assets at September 30, 1997, compared with 28 Stagecoach funds consisting of $13.7 billion of assets at September 30, 1996. The Company also manages the Overland Express family of 14 funds, which had $5.6 billion of assets under management at September 30, 1997, compared with $4.7 billion at September 30, 1996, and is sold through brokers around the country. In the fourth quarter of 1997, the Overland Express Funds will be merged into the 22 Stagecoach family of mutual funds. The assets and fees generated are not expected to change significantly as a result of the merging of the two families of funds. In addition to managing Stagecoach and Overland Express Funds, the Company managed or maintained personal trust, employee benefit trust and agency assets of approximately $185 billion and $299 billion (including $245 billion from First Interstate) at September 30, 1997 and 1996, respectively. The balance at September 30, 1997 included $62 billion of assets managed by the Institutional Custody businesses, which is being sold to The Bank of New York in several stages, the first of which was during the third quarter of 1997. The decrease in assets under management was mostly due to the sale of the Corporate Trust business in the first quarter of 1997. In addition, a major portion of the decrease was due to the sale of assets managed by the Institutional Custody businesses in the third quarter of 1997. At December 31, 1996, the Company had a liability of $111 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with branches not acquired as a result of the Merger (see Note 2 to Financial Statements for other, former First Interstate branch dispositions). Of this amount, $15 million represented the balance of the 1995 accrual for the sale of 12 traditional branches, including deposits, that were completed in February 1997 and for the disposition of 10 branches, 9 of which were closed in the first quarter of 1997 and one of which was sold in the third quarter of 1997. At December 31, 1996, the remaining balance consisted of a fourth quarter 1996 accrual of $96 million for the disposition of 137 traditional branches in California. Of the $96 million, $31 million was associated with 41 branches that were closed in the second quarter of 1997 and $15 million was associated with 20 branches that were closed in the third quarter of 1997. The remaining $50 million liability at September 30, 1997 was related to 7 branches which have been closed or are scheduled to be closed by year-end 1997 and 69 branches that are expected to be closed in 1998. At September 30, 1997, the Company had 971 traditional branches, 459 supermarket branches, 380 banking centers and 25 business centers, in 10 Western states. The Company expects noninterest income in the fourth quarter of 1997 to be about the same as the third quarter of 1997. 23 NONINTEREST EXPENSE
- --------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, --------------- % --------------- % (in millions) 1997 1996 Change 1997 1996 Change - --------------------------------------------------------------------------------------- Salaries $ 308 $ 378 (19)% $ 964 $ 960 --% Incentive compensation 54 53 2 143 146 (2) Employee benefits 80 105 (24) 256 261 (2) Equipment 97 103 (6) 289 269 7 Net occupancy 96 96 -- 292 257 14 Goodwill 81 81 -- 245 170 44 Core deposit intangible: Nonqualifying (1) 56 69 (19) 169 142 19 Qualifying 8 9 (11) 24 28 (14) Operating losses 40 31 29 262 72 264 Contract services 56 88 (36) 172 196 (12) Telecommunications 35 42 (17) 108 85 27 Security 22 16 38 66 38 74 Postage 19 27 (30) 64 68 (6) Outside professional services 20 32 (38) 56 76 (26) Stationery and supplies 19 18 6 56 49 14 Advertising and promotion 19 32 (41) 53 66 (20) Travel and entertainment 15 23 (35) 44 48 (8) Check printing 12 11 9 42 27 56 Outside data processing 11 17 (35) 37 36 3 Foreclosed assets 1 2 (50) (2) 5 -- All other 38 72 (47) 110 150 (27) ------ ------ ------ ------ Total $1,087 $1,305 (17)% $3,450 $3,149 10% ------ ------ --- ------ ------ --- ------ ------ --- ------ ------ --- - ---------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. Salaries and employee benefits expense decreased $95 million from the third quarter of 1996 due to staff reductions after the Merger. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 32,663 at September 30, 1997, compared with 38,859 at September 30, 1996. A significant portion of the increase in noninterest expense in the first nine months of 1997 resulted from an increase in operating losses. The operating losses for the second quarter of $180 million were predominantly a result of back-office problems which arose subsequent to certain systems conversions and other changes to operating processes that were part of the First Interstate integration. These problems were related to clearing accounts with other banks, misposting of deposits and loan payments to customer accounts and processing of returned items. Since the inception of these problems, management dedicated resources to resolve the increasing volume of ensuing suspense items. In the second quarter of 1997, based on the age and volume of suspense items as well as additional research and better insight, management determined that many of the items would not be cleared or collected. Consequently, it was determined that there was a need to record an operating loss related to the outstanding items. Substantially all of these items were written off in the third quarter. Goodwill and CDI amortization resulting from the Merger were $73 million and $56 million, respectively, for the third quarter of 1997, compared with $72 million and $69 million, 24 respectively, for the third quarter of 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 1998, 1999 and 2000 is expected to be $199 million, $178 million and $162 million, respectively. The related impact on income tax expense is expected to be a benefit of $82 million, $73 million and $66 million in 1998, 1999 and 2000, respectively. The Company has incurred, and will continue to incur, incremental, out of pocket costs associated with the Year 2000 computer systems conversion. The Company currently estimates that it will incur (and expense) conversion costs of approximately $10 million in the fourth quarter of 1997, approximately $60 million in 1998 and approximately $25 million thereafter. 25 EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI The following table reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for the quarter ended September 30, 1997:
- --------------------------------------------------------------------------------------------------- Quarter ended (in millions) September 30, 1997 - --------------------------------------------------------------------------------------------------- Amortization -------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - --------------------------------------------------------------------------------------------------- Income before income tax expense $ 543 $ 81 $ 56 $ 680 Income tax expense 253 -- 22 275 ----- ----- ----- ----- Net income 290 81 34 405 Preferred dividends 5 -- -- 5 ----- ----- ----- ----- Net income applicable to common stock $ 285 $ 81 $ 34 $ 400 ----- ----- ----- ----- ----- ----- ----- ----- Per common share $3.26 $ .93 $ .38 $4.57 ----- ----- ----- ----- ----- ----- ----- ----- - ---------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended September 30, 1997 were calculated as follows:
- --------------------------------------------------------------------------------------------------- Quarter ended (in millions) September 30, 1997 - --------------------------------------------------------------------------------------------------- ROA: A*/ (C-E) = 1.81% ROE: B*/ (D-E) = 35.44% Efficiency: (F-G) / H = 52.6% Net income $ 405(A) Net income applicable to common stock 400(B) Average total assets 97,032(C) Average common stockholders' equity 12,667(D) Average goodwill ($7,190) and after-tax nonqualifying core deposit intangible ($1,000) 8,190(E) Noninterest expense 1,087(F) Amortization expense for goodwill and nonqualifying core deposit intangible 137(G) Net interest income plus noninterest income 1,805(H) - ---------------------------------------------------------------------------------------------------
* Annualized 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 on page 5 for other information regarding funds available for use by management. 26 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 1997 1996 1996 ----------------- ------------------ ------------------ ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - --------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 2,638 $ 2,652 $ 2,824 $ 2,837 $ 2,607 $ 2,611 Securities of U.S. government agencies and corporations (1) 5,050 5,088 7,043 7,050 7,306 7,264 Private collateralized mortgage obligations (2) 2,656 2,656 3,237 3,230 3,108 3,084 Other 283 283 342 343 403 408 ------- ------- ------- ------- ------- ------- Total debt securities 10,627 10,679 13,446 13,460 13,424 13,367 Marketable equity securities 24 58 18 45 36 66 ------- ------- ------- ------- ------- ------- Total $10,651 $10,737 $13,464 $13,505 $13,460 $13,433 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - ---------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages. The available-for-sale portfolio includes both debt and marketable equity securities. At September 30, 1997, the available-for-sale securities portfolio had an unrealized net gain of $86 million, or less than 1% of the cost of the portfolio, comprised of unrealized gross gains of $110 million and unrealized gross losses of $24 million. 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 September 30, 1996, the available-for-sale securities portfolio had an unrealized net loss of $27 million, comprised of unrealized gross losses of $107 million and unrealized gross gains of $80 million. The unrealized net gain or loss on available-for-sale securities is reported on an after-tax basis as a separate component of stockholders' equity. At September 30, 1997, the valuation allowance amounted to an unrealized net gain of $51 million, compared with an unrealized net gain of $23 million at December 31, 1996 and an unrealized net loss of $16 million at September 30, 1996. During the first nine months of 1997, realized gross gains and losses resulting from the sale of available-for-sale securities were $8 million and $2 million, respectively. During the first nine months of 1996, realized gross gains and losses resulting from the sale of available-for-sale securities were $4 million and $2 million, respectively. 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). 27 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ----------------------------------------------------------------------------------------------------------------------------------- September 30, 1997 ----------------------------------------------------------------------------------------------- Expected remaining principal maturity ----------------------------------------------------------------------------------------------- Weighted average After one After five expected One year or year through years through After ten Weighted remaining less five years ten years years Total average maturity ------------- ------------- ------------- ------------- (in millions) amount yield (in yrs.-mos.) Amount Yield Amount Yield Amount Yield Amount Yield - ----------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 2,638 6.02% 1-6 $ 878 5.83% $1,759 6.12% $ 1 6.64% $-- --% Securities of U.S. government agencies and corporations 5,050 6.62 2-3 2,072 6.71 2,446 6.53 455 6.93 77 5.44 Private collateralized mortgage obligations 2,656 6.74 1-10 1,015 6.96 1,579 6.48 49 6.71 13 20.74 Other 283 6.77 2-4 92 7.11 187 6.63 2 7.00 2 4.11 ----- ------ ------ ---- --- TOTAL COST OF DEBT SECURITIES $10,627 6.51% 2-0 $4,057 6.59% $5,971 6.40% $507 6.91% $92 7.57% ------- ---- ---- ------ ---- ------ ---- ---- ---- --- ----- ------- ---- ---- ------ ---- ------ ---- ---- ---- --- ----- ESTIMATED FAIR VALUE $10,679 $4,071 $6,004 $512 $92 ------- ------ ------ ---- --- ------- ------ ------ ---- --- - -----------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. The weighted average expected remaining maturity of the debt securities portfolio was 2 years and 0 months at September 30, 1997, compared with 2 years and 2 months at June 30, 1997 and 2 years and 2 months at December 31, 1996. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At September 30, 1997, mortgage-backed securities included in securities of U.S. government agencies and corporations primarily consisted of pass-through securities and collateralized mortgage obligations (CMOs) and substantially all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $7,744 million, or 72%, of the Company's investment securities portfolio at September 30, 1997. 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 $7,744 million to $7,459 million and the expected remaining maturity of these securities would increase from 2 years and 1 month to 2 years and 6 months. 28 LOAN PORTFOLIO
- ----------------------------------------------------------------------------------------------- % Change Sept. 30, 1997 from ------------------- SEPT. 30, Dec.31, Sept. 30, Dec.31, Sept.30, (in millions) 1997 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------- Commercial (1)(2) $19,512 $19,515 $20,064 -- % (3)% Real estate 1-4 family first mortgage 9,311 10,425 10,754 (11) (13) Other real estate mortgage (3) 11,614 11,860 12,462 (2) (7) Real estate construction 2,351 2,303 2,331 2 1 Consumer: Real estate 1-4 family junior lien mortgage 5,931 6,278 6,406 (6) (7) Credit card 5,020 5,462 5,292 (8) (5) Other revolving credit and monthly payment 7,513 8,374 8,846 (10) (15) ------- ------- ------- Total consumer 18,464 20,114 20,544 (8) (10) Lease financing 3,754 3,003 2,891 25 30 Foreign 98 169 187 (42) (48) ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $781, $654 and $561) $65,104 $67,389 $69,233 (3)% (6)% ------- ------- ------- --- --- ------- ------- ------- --- --- - -----------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $1,397 million, $1,070 million and $990 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,464 million, $1,409 million and $1,441 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (3) Includes agricultural loans that are secured by real estate of $326 million, $325 million and $349 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. The table below presents comparative period-end commercial real estate loans.
- -------------------------------------------------------------------------------------------------- % Change Sept. 30, 1997 from ------------------- SEPT. 30, Dec.31, Sept. 30, Dec.31, Sept.30, (in millions) 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------------------------- Commercial loans to real estate developers and REITs (1) $ 1,397 $ 1,070 $ 990 31 % 41 % Other real estate mortgage 11,614 11,860 12,462 (2) (7) Real estate construction 2,351 2,303 2,331 2 1 ------- ------- ------- Total $15,362 $15,233 $15,783 1 % (3)% ------- ------- ------- --- --- ------- ------- ------- --- --- Nonaccrual loans $ 277 $ 376 $ 412 (26)% (33)% ------- ------- ------- --- --- ------- ------- ------- --- --- Nonaccrual loans as a % of total 1.8% 2.5% 2.6% ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 29 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ----------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1997 1996 1996 - ----------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2)(3) $172 $223 $216 Real estate 1-4 family first mortgage 100 99 77 Other real estate mortgage (4) 258 349 370 Real estate construction 18 25 28 Consumer: Real estate 1-4 family junior lien mortgage 16 15 21 Other revolving credit and monthly payment 1 1 2 Lease financing -- 2 3 ---- ---- ---- Total nonaccrual loans (5) 565 714 717 Restructured loans (6) 9 10 11 ---- ---- ---- Nonaccrual and restructured loans 574 724 728 As a percentage of total loans .9% 1.1% 1.1% Foreclosed assets 196 219 227 Real estate investments (7) 4 4 6 Total nonaccrual and restructured loans ---- ---- ---- and other assets $774 $947 $961 ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes loans (primarily unsecured) to real estate developers and REITs of $1 million, $2 million and $14 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (3) Includes agricultural loans of $16 million, $13 million and $15 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (4) Includes agricultural loans secured by real estate of $15 million, $10 million and $5 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (5) Of the total nonaccrual loans, $356 million, $493 million and $530 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (6) In addition to originated loans that were subsequently restructured, there were loans of $23 million, $50 million and $50 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively, that were purchased at a steep discount whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. Of the total restructured loans and loans purchased at a steep discount, $23 million, $50 million and $50 million were considered impaired under FAS 114 at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. (7) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $170 million, $154 million and $128 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. The table below summarizes the changes in total nonaccrual loans.
- ----------------------------------------------------------------------------------- SEPT. 30, Sept. 30, (in millions) 1997 1996 - ----------------------------------------------------------------------------------- Balance, beginning of quarter $602 $731 New loans placed on nonaccrual 128 156 Charge-offs (53) (43) Payments (107) (54) Transfers to foreclosed assets (1) (36) Loans returned to accrual (4) (37) ---- ---- Balance, end of quarter $565 $717 ---- ---- ---- ---- - -----------------------------------------------------------------------------------
30 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. The average recorded investment in impaired loans was $394 million and $435 million during the third quarter and first nine months of 1997, respectively, and $562 million and $542 million during the third quarter and first nine months of 1996, respectively. Total interest income recognized on impaired loans was $2 million and $11 million during the third quarter and first nine months of 1997, respectively, and $5 million and $14 million during the third quarter and first nine months of 1996, respectively, substantially all of which was recorded using the cash method. 31 The table below shows the recorded investment in impaired loans by loan category at September 30, 1997, December 31, 1996 and September 30, 1996: - ------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------- Commercial $110 $155 $160 Real estate 1-4 family first mortgage 1 1 5 Other real estate mortgage (1) 249 362 386 Real estate construction 17 24 28 Other 2 1 1 ---- ---- ---- Total (2) $379 $543 $580 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $298 $416 $427 Discounted cash flow method 60 101 126 Historical loss factors 21 26 27 ---- ---- ---- $379 $543 $580 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------- (1) Includes accruing loans of $23 million, $50 million and $50 million purchased at a steep discount at September 30, 1997, December 31, 1996 and September 30, 1996, respectively, whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $26 million, $27 million and $33 million of impaired loans with a related FAS 114 allowance of $4 million, $2 million and $4 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates normal influxes of nonaccrual loans as it 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. 32 The table below summarizes the changes in foreclosed assets. - ------------------------------------------------------------------------------- SEPT. 30, Sept. 30, (in millions) 1997 1996 - ------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $194 $238 Additions 23 35 Sales (25) (42) Charge-offs (3) (3) Write-downs (1) (1) Other 8 -- ---- ---- BALANCE, END OF QUARTER $196 $227 ---- ---- ---- ---- - ------------------------------------------------------------------------------- LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual because they are automatically charged off after being past due for a prescribed period (generally, 180 days). Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 150 days of becoming past due and such nonaccrual loans are excluded from the following table. - ------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------- Commercial $ 14 $ 65 $ 78 Real estate 1-4 family first mortgage 42 42 45 Other real estate mortgage 11 59 48 Real estate construction 1 4 4 Consumer: Real estate 1-4 family junior lien mortgage 37 23 23 Credit card 123 120 111 Other revolving credit and monthly payment 13 20 11 ---- ---- ---- Total consumer 173 163 145 ---- ---- ---- Total $241 $333 $320 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------- 33 ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------- Quarter ended Nine months ended ------------------------- -------------------------- SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, (in millions) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,850 $2,273 $2,018 $1,794 Allowance of First Interstate -- -- -- 770 Provision for loan losses 175 35 420 35 Loan charge-offs: Commercial (1) (69) (30) (198) (91) Real estate 1-4 family first mortgage (5) (4) (15) (13) Other real estate mortgage (2) (13) (13) (29) Real estate construction -- (5) (3) (9) Consumer: Real estate 1-4 family junior lien mortgage (6) (7) (18) (24) Credit card (124) (105) (372) (292) Other revolving credit and monthly payment (55) (52) (168) (124) ------ ------ ------ ------ Total consumer (185) (164) (558) (440) Lease financing (10) (7) (29) (21) ------ ------ ------ ------ Total loan charge-offs (271) (223) (816) (603) ------ ------ ------ ------ Loan recoveries: Commercial (2) 21 16 53 30 Real estate 1-4 family first mortgage 1 1 3 6 Other real estate mortgage 13 9 42 32 Real estate construction 1 2 3 6 Consumer: Real estate 1-4 family junior lien mortgage 2 2 6 7 Credit card 12 10 34 26 Other revolving credit and monthly payment 17 10 51 28 ------ ------ ------ ------ Total consumer 31 22 91 61 Lease financing 2 2 9 6 ------ ------ ------ ------ Total loan recoveries 69 52 201 141 ------ ------ ------ ------ Total net loan charge-offs (202) (171) (615) (462) ------ ------ ------ ------ BALANCE, END OF PERIOD $1,823 $2,137 $1,823 $2,137 ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) 1.25% .98% 1.27% 1.05% ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 2.80% 3.09% 2.80% 3.09% ------ ------ ------ ------ ------ ------ ------ ------ - -----------------------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans to real estate developers for any of the periods presented, except for $1 million in the nine months ended September 30, 1996. (2) Includes recoveries from loans to real estate developers of $1 million and $7 million for the quarters ended September 30, 1997 and 1996, respectively, and $2 million and $8 million for the nine months ended September 30, 1997 and 1996, respectively. 34 The table below presents net charge-offs by loan category.
- --------------------------------------------------------------------------------------------------------------------------- Quarter ended Nine Months Ended --------------------------------------- ---------------------------------------- SEPTEMBER 30, 1997 September 30, 1996 SEPTEMBER 30, 1997 September 30, 1996 ------------------ ------------------ ------------------ ------------------ % OF % of % OF % of AVERAGE average AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1) - --------------------------------------------------------------------------------------------------------------------------- Commercial $ 48 1.03% $ 14 .28% $145 1.04% $ 61 .50% Real estate 1-4 family first mortgage 4 .16 3 .09 12 .16 7 .10 Other real estate mortgage (11) (.36) 4 .12 (29) (.34) (3) (.04) Real estate construction (1) (.21) 3 .46 -- -- 3 .20 Consumer: Real estate 1-4 family junior lien mortgage 4 .25 5 .28 12 .27 17 .41 Credit card 112 8.77 95 7.18 338 8.71 266 7.42 Other revolving credit and monthly payment 38 1.99 42 1.87 117 1.98 96 1.84 ---- ---- ---- ---- Total consumer 154 3.28 142 2.70 467 3.26 379 2.92 Lease financing 8 .82 5 .83 20 .83 15 .86 ---- ---- ---- ---- Total net loan charge-offs $202 1.25% $171 .98% $615 1.27% $462 1.05% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. The commercial loan category includes net charge-offs for the commercial loan component of small business loans of $33 million (or 3.38% of the average small business loans in this category), compared with $23 million (or 2.43%) in the second quarter of 1997 and $14 million (or 1.89%) in the third quarter of 1996. During the third quarter of 1997, the period for charging off past due loans for the Business Direct product within this portfolio was changed from 180 days to 150 days. The impact of this change was an increase in gross charge-offs of approximately $7 million. The target market for small business loans is expected to experience higher loss rates on a recurring basis than is the case with loans to middle market and corporate borrowers, and such loans are priced at appropriately higher spreads. The largest category of net charge-offs in all periods presented was credit card loans, comprising more than 50% of total net charge-offs in each period. During the third quarter of 1997, credit card gross charge-offs due to bankruptcies were $54 million, or 44%, of total credit card gross charge-offs, compared with $59 million, or 45%, in the second quarter of 1997 and $46 million, or 44%, in the third quarter of 1996. In addition, credit card loans 30 to 89 days past due and still accruing totaled $180 million at September 30, 1997, compared with $172 million at June 30, 1997 and $174 million at September 30, 1996. The total amount of credit card charge-offs and the percentage of net charge-offs to average credit card loans are expected to continue for the remainder of 1997 at a level consistent with that experienced over the past twelve months. The Company considers the allowance for loan losses of $1,823 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at September 30, 1997. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company made a $175 million provision in the third quarter 1997. The Company expects that the provision will increase to approximately $205 to $215 million in the fourth quarter of 1997, when it is anticipated that the provision will approximate net charge-offs. 35 OTHER ASSETS
- ------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------------------- Nonmarketable equity investments $ 981 $ 937 $ 902 Net deferred tax asset 347 437 491 Certain identifiable intangible assets 491 471 469 Foreclosed assets 196 219 227 Other 1,877 3,397 1,789 ------ ------ ------ Total other assets $3,892 $5,461 $3,878 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------
The Company estimates that approximately $306 million of the $347 million net deferred tax asset at September 30, 1997 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 $41 million primarily relates to approximately $532 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. Purchased mortgage servicing rights included in certain identifiable intangible assets were $301 million, $257 million and $246 million at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. The purchased mortgage loan servicing portfolio totaled $29 billion, $22 billion and $21 billion at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. Mortgage servicing rights purchased during third quarter 1997 and third quarter 1996 were $39 million and $32 million, respectively. (For loan sales, there were no retained servicing rights recognized during the same periods.) Purchased mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Amortization expense, recorded in noninterest income, totaled $16 million and $18 million for the quarters ended September 30, 1997 and 1996, respectively. The other identifiable intangible assets included in other assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $8 million and $9 million for the quarters ended September 30, 1997 and 1996, respectively. In January 1997, the Company adopted Statement of Financial Accounting Standards No. 125 (FAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for those provisions that became effective at that date. The adoption did not have a material effect on the Company's third, second or first quarter 1997 financial statements. Also, in December 1996, the FASB issued FAS 127, Deferral of the Effective Date of Certain Provisions of FASB Statement 125, which deferred to January 1, 1998 those provisions of FAS 125 related to repurchase agreements, dollar-rolls, securities lending and similar transactions. 36 The adoption of FAS 127 is not expected to have a material effect on the Company's financial statements. DEPOSITS
- -------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1997 1996 1996 - -------------------------------------------------------------------------- Noninterest-bearing $23,005 $29,073 $29,512 Interest-bearing checking 2,209 2,792 5,460 Market rate and other savings 29,906 33,947 32,332 Savings certificates 15,460 15,769 16,004 ------- ------- ------- Core deposits 70,580 81,581 83,308 Other time deposits 288 186 381 Deposits in foreign offices 54 54 48 ------- ------- ------- Total deposits $70,922 $81,821 $83,737 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's RBC ratios at September 30, 1997 compared with December 31, 1996 resulted substantially from the repurchase of common stock. 37 The table below presents the Company's risk-based capital and leverage ratios.
- ---------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in billions) 1997 1996 1996 - ---------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $12.6 $13.5 $13.9 Preferred stock(1) .3 .4 .8 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.2 -- Goodwill and other deductions(2) (8.2) (8.5) (8.6) ----- ----- ----- Total Tier 1 capital 6.0 6.6 6.1 ----- ----- ----- Tier 2: Mandatory convertible debt .2 .2 .2 Subordinated debt and unsecured senior debt 2.0 2.1 2.2 Allowance for loan losses allowable in Tier 2 1.0 1.1 1.1 ----- ----- ----- Total Tier 2 capital 3.2 3.4 3.5 ----- ----- ----- Total risk-based capital $ 9.2 $10.0 $ 9.6 ----- ----- ----- ----- ----- ----- Risk-weighted balance sheet assets $77.1 $82.2 $83.4 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.4 10.1 10.4 Standby letters of credit 1.7 2.1 2.2 Other .6 .5 .5 ----- ----- ----- Total risk-weighted off-balance sheet items 11.7 12.7 13.1 ----- ----- ----- Goodwill and other deductions(2) (8.2) (8.5) (8.7) Allowance for loan losses not included in Tier 2 (.8) (.9) (1.0) ----- ----- ----- Total risk-weighted assets $79.8 $85.5 $86.8 ----- ----- ----- ----- ----- ----- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.53% 7.68% 7.04% Total capital (8% minimum requirement) 11.47 11.70 11.05 Leverage ratio (3% minimum requirement)(3) 6.76% 6.65% 6.12% - ----------------------------------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at December 31, 1996 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). Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At September 30, 1997, the Bank had a Tier 1 RBC ratio of 8.51%, a combined Tier 1 and Tier 2 ratio of 11.39% and a leverage ratio of 7.23%. 38 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuation in interest rates. Accordingly, an essential objective of asset/liability management is to control interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between the two will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." Another source of interest rate risk, "basis risk," results from changing spreads between loan and deposit rates. More difficult to quantify and manage, this type of risk is not highly correlated to changes in the level of interest rates, and is driven by other market conditions. The Company employs various asset/liability strategies, including the use of interest rate derivative products, to ensure that exposure to interest rate fluctuations is limited within Company guidelines of acceptable levels of risk-taking. The Company uses interest rate derivatives as an asset/liability management tool to hedge mismatches in interest rate maturities. For example, receive-fixed rate swaps are used to convert fixed-rate debt to a floating-rate liability. One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitive gap indicates that there would be a negative impact on the net interest margin from an increasing rate environment. At September 30, 1997, the under-one-year cumulative gap was a $117 million (0.1% of total assets) net liability position, compared with net liability positions of $338 million (0.3% of total assets) at June 30, 1997 and $1,402 million (1.3% of total assets) at December 31, 1996. The decrease in the net liability position from June 30, 1997 was primarily due to an increase in commercial loans and interest rate swaps repricing within one year, a significant portion of which is offset by a decrease in senior debt repricing within one year. Two adjustments to the cumulative gap provide comparability with those bank holding companies that present interest rate sensitivity in an alternative manner. However, management does not believe that these adjustments depict its interest rate risk. The first adjustment excludes noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity from the reported cumulative gap. The second adjustment moves interest-bearing checking, savings deposits and Wells Extra Savings (included in market rate savings) from the nonmarket category to the shortest possible maturity category. The second adjustment reflects the availability of the deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $8.2 billion, $9.4 billion and $12.5 billion at September 30, 1997, June 30, 1997 and December 31, 1996, respectively. 39 The gap analysis provides a useful framework to measure the term structure risk. To more fully explore the complex relationships within the gap over time and interest rate environments, the Company performs simulation modeling to estimate the potential effects of changing interest rates. DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at September 30, 1997 and December 31, 1996.
- ------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 December 31, 1996 ----------------------------------- ---------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT(3) VALUE amount amount(3) value - ------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Futures contracts $ 5,769 $ -- $ -- $ 5,188 $ -- $ -- Floors purchased (1) 21,639 54 54 20,640 101 101 Caps purchased (1) 259 2 2 435 3 3 Futures options purchased 163 -- -- -- -- -- Swap contracts (1) 16,250 190 111 16,661 217 117 Foreign exchange contracts: Forward contracts (1) 65 -- (1) 64 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 2 -- -- 10 -- -- Floors written 1,020 -- (12) 405 -- (10) Caps written 2,506 -- (6) 2,174 -- (4) Floors purchased (1) 1,024 11 11 404 9 9 Caps purchased (1) 2,466 5 5 2,088 4 4 Swap contracts (1) 2,563 13 4 2,325 12 2 Foreign exchange contracts (2): Forward and spot contracts (1) 1,767 20 3 1,313 14 1 Option contracts purchased (1) 71 2 2 65 1 1 Option contracts written 63 -- (2) 59 -- (1) - -------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Company has immaterial trading positions in these contracts. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. 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 40 also offers contracts to its customers, but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The Company also enters into foreign exchange derivative positions (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. In February 1997, the Securities and Exchange Commission (SEC) published rule amendments to clarify and expand existing disclosure requirements for derivative financial instruments. The amendments require enhanced disclosure of accounting policies for derivative financial instruments in the notes to the financial statements. In addition, the amendments expand existing disclosure requirements to include quantitative and qualitative information about market risk inherent in market risk sensitive instruments. The required quantitative and qualitative information should be disclosed outside the financial statements and related notes thereto. The enhanced accounting policy disclosure requirements were effective beginning with the quarterly period ended June 30, 1997; accordingly, see Note 1 to Financial Statements in this Form 10-Q. The rule amendments that require expanded disclosure of quantitative and qualitative information about market risk are effective with the 1997 Form 10-K. LIQUIDITY MANAGEMENT Liquidity for the Parent Company and its subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, and through dividends from subsidiaries and lines of credit. In 1996, the Company filed a shelf registration with the 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. As of September 30, 1997, the Company had issued $.2 billion of preferred stock and $.7 billion of medium-term notes under this shelf registration with $2.6 billion of securities remaining unissued. In 1996, the Company also filed a universal shelf registration statement with the SEC that allows for the issuance of $750 million of 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 (debentures) of the 41 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. In January 1997, the Company issued an additional $150 million in trust preferred securities through a separate trust, Wells Fargo Capital II. At September 30, 1997, $200 million remained unissued under this shelf registration. 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. Similar to the registered trust preferred securities, 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. The proceeds from the publicly registered and private placement issuances were invested in debentures of the Company. The proceeds from the sale of these debentures were used by the Company for general corporate purposes. 42 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) of Form 10-K filed March 21, 1994 (b) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Adjustable Rate Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(c) of Form 10-K filed March 21, 1994 (c) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H, incorporated by reference to Exhibit 4(a) of Form 8-K/A filed September 23, 1996 (d) By-Laws, incorporated by reference to Exhibit 3(ii) of Form 10-Q filed August 13, 1997 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 10 Amendment to 1987 Director Option Plan adopted September 16, 1997 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.89 and 2.02 for the quarters ended September 30, 1997 and 1996, respectively, and 1.89 and 2.13 for the nine months ended September 30, 1997 and 1996, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.02 and 5.34 for the quarters ended September 30, 1997 and 1996, respectively, and 4.07 and 5.46 for the nine months ended September 30, 1997 and 1996, 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 1.86 and 1.91 for the quarters ended September 30, 1997 and 1996, respectively, and 1.85 and 2.02 for the nine months ended September 30, 1997 and 1996, 43 respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.83 and 4.28 for the quarters ended September 30, 1997 and 1996, respectively, and 3.78 and 4.48 for the nine months ended September 30, 1997 and 1996, respectively. (b) The Company filed the following reports on Form 8-K during the third quarter of 1997 and through the date hereof: (1) July 9, 1997 under Item 5, containing the Press Release that announced that Wells Fargo & Company's second quarter 1997 earnings would not meet analysts' expectations (2) July 15, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter due June 30, 1997 (3) August 21, 1997 under Item 5, containing the Press Release that announced that Berkshire Hathaway remained a substantial stockholder of Wells Fargo & Company (4) October 21, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1997 (5) October 22, 1997 under Item 5, containing the Press Release that announced the Company's additional share repurchase authorization and quarterly dividend SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 1997. WELLS FARGO & COMPANY By: /s/ Frank A. Moeslein ------------------------------ Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 44 EX-10 2 EXHIBIT 10 Exhibit 10 AMENDMENT TO 1987 DIRECTOR OPTION PLAN Section VI.A. of the Wells Fargo & Company 1987 Director Option Plan, as amended and restated effective February 21, 1995, is further amended to read in full as follows, effective September 16, 1997: A. Options Grant Dates. Effective for options granted after January 2, 1997, options shall be granted automatically on January 2 (or if January 2 is not a business day, on the next succeeding business day) of the year to any eligible director who, before December 31 of the previous year, files with the Company's Personnel Division or its designate an irrevocable election to receive a stock option in lieu of retainer fees to be earned in the following year beginning January 1 and ending December 31 ("Plan Year"). EX-11 3 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ------------------ ----------------- (in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 290 $ 321 $ 857 $ 948 Less preferred dividends 5 19 21 47 ------- ------- ------- ------- Net income for calculating primary earnings per common share $ 285 $ 302 $ 836 $ 901 ------- ------- ------- ------- ------- ------- ------- ------- Average common shares outstanding 87.5 93.7 89.1 78.8 ------- ------- ------- ------- ------- ------- ------- ------- PRIMARY EARNINGS PER COMMON SHARE $3.26 $3.23 $9.38 $11.42 ------- ------- ------- ------- ------- ------- ------- ------- FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 290 $ 321 $ 857 $ 948 Less preferred dividends 5 19 21 47 ------- ------- ------- ------- Net income for calculating fully diluted earnings per common share $ 285 $ 302 $ 836 $ 901 ------- ------- ------- ------- ------- ------- ------- ------- Average common shares outstanding 87.5 93.7 89.1 78.8 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 .9 1.6 1.0 1.6 ------- ------- ------- ------- Average common shares outstanding as adjusted 88.4 95.3 90.1 80.4 ------- ------- ------- ------- ------- ------- ------- ------- FULLY DILUTED EARNINGS PER COMMON SHARE $3.23 $3.17 $9.28 $11.20 ------- ------- ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------------------
(1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K. This presentation is not required by APB Opinion No. 15, because it results in dilution of less than 3%. EX-27 4 EXHIBIT 27 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q DATED NOVEMBER 13, 1997 FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 7,823 0 188 0 10,737 0 0 65,104 1,823 97,655 70,922 4,726 2,819 6,164 0 275 434 12,211 97,655 4,570 573 39 5,197 1,280 1,710 3,487 420 6 3,450 1,613 857 0 0 857 9.38 3.23 6.00 565 241 9 0 2,018 816 201 1,823 0 0 0
EX-99.A 5 EXHIBIT 99.A EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------ Quarter Nine months ended Sept. 30, ended Sept. 30, ----------------- ---------------- (in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------ EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 543 $ 598 $1,613 $1,723 Fixed charges 610 584 1,805 1,526 ------ ------ ------ ------ $1,153 $1,182 $3,418 $3,249 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges (1): Interest expense $ 579 $ 552 $1,710 $1,440 Estimated interest component of net rental expense 31 32 95 86 ------ ------ ------ ------ $ 610 $ 584 $1,805 $1,526 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 1.89 2.02 1.89 2.13 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 543 $ 598 $1,613 $1,723 Fixed charges 180 138 525 386 ------ ------ ------ ------ $ 723 $ 736 $2,138 $2,109 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense $ 579 $ 552 $1,710 $1,440 Estimated interest component of net rental expense 31 32 95 86 Less interest on deposits 430 446 1,280 1,140 ------ ------ ------ ------ $ 180 $ 138 $ 525 $ 386 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 4.02 5.34 4.07 5.46 ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.B 6 EXHIBIT 99.B EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ------------------------------------------------------------------------------------------------------------------ Quarter Nine months ended Sept. 30, ended Sept. 30, -------------------------------- ------------------------ (in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 543 $ 598 $1,613 $1,723 Fixed charges 610 584 1,805 1,526 ------ ------ ------ ------ $1,153 $1,182 $3,418 $3,249 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividend requirement $ 5 $ 19 $ 21 $ 47 Ratio of income before income tax expense to net income 1.87 1.86 1.88 1.82 ------ ------ ------ ------ Preferred dividends (2) $ 9 $ 34 $ 40 $ 85 ------ ------ ------ ------ Fixed charges (1): Interest expense 579 552 1,710 1,440 Estimated interest component of net rental expense 31 32 95 86 ------ ------ ------ ------ 610 584 1,805 1,526 ------ ------ ------ ------ Fixed charges and preferred dividends $ 619 $ 618 $1,845 $1,611 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 1.86 1.91 1.85 2.02 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 543 $ 598 $1,613 $1,723 Fixed charges 180 138 525 386 ------ ------ ------ ------ $ 723 $ 736 $2,138 $2,109 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends (2) $ 9 $ 34 $ 40 $ 85 ------ ------ ------ ------ Fixed charges: Interest expense 579 552 1,710 1,440 Estimated interest component of net rental expense 31 32 95 86 Less interest on deposits 430 446 1,280 1,140 ------ ------ ------ ------ 180 138 525 386 ------ ------ ------ ------ Fixed charges and preferred dividends $ 189 $ 172 $ 565 $ 471 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 3.83 4.28 3.78 4.48 ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. -----END PRIVACY-ENHANCED MESSAGE-----