ML20212F602
| ML20212F602 | |
| Person / Time | |
|---|---|
| Site: | Perry  |
| Issue date: | 12/31/1985 |
| From: | Hazen P, Reichardt C WELLS FARGO & CO. |
| To: | |
| Shared Package | |
| ML20212F471 | List: |
| References | |
| NUDOCS 8703050121 | |
| Download: ML20212F602 (100) | |
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i monars li 7 (9 p. 4 -
. (in millions)' 1985 1984 Percentage increase
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FORTHE YEAR I' -' Net income . $ngo.o $i69 3 - 12 % ' Per common share . Net income . -
-83o 6.85' ' 21 Dividends declared 2 48 2.16 15
, . Net income to average total assets , .
.67% ' 62% 8 Net income applicable to common stock to average common stockholders' equity 14 05 12.88 9 AT YEAR END Loans $24,6 4 ' $22,894 8%
Assets 29,429 28,184 4-
-Stockholders' equity - 1,458 1,344 9
- Primary capital 2,217' 1,892 17
- %tal capital -
4,333 2,955 47
' Primary capital to assets 7 44 % 6.65 % 12 h 'Ibtal capital to assets - , 14 53 10-39 40 Common shares outstanding (in thousands) 21,139 21,235' -
W ' Book value per common share $61.87 $56.21 to P 5 l: yo J 2 a
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WIELLE FAUMbO 6 COkWPAN Y AND QUDD20DBAEUE2 LETTER TO SHAREHOLDERS g.n , _ i ;' w4
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I A ~- ells Fargo & service to customers, more excit-Company in 1985 ing opportunities for employees, W$190 million,or$8 3o earned net income of and increased returns to share-holders. Further, this acquisition is per share.The Company achieved consistent with our strategy of this performance by pursuingits emphasizing domesticbanking, stated strategy of focusing on the since Crocker has verylittle financial services we know best, ; y foreign exposure. The Crocker paring awaylines ofbusiness that q ; branch system has wide represen-do not fit in with our California / , , tation throughout California, and western banking goals, and particularly in the southern part strengthening our organization to [p ^ 1 of the state where it is highly make it more competitive and complementary to our own. [' more able to move quickly to take o . , Crocker National Corporation, advantage ofopportunities. - .,gj{ _ which had year-end 1985assets Early in 1986, we did move to
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N.E o - a of $19 2 billion,is the parent of capitalize on such an opportunity. Crocker National Bank. We believe In the early hours of February 7, that the combined organization, a definitive agreement was signed after certain asset sales and m providing for the purchase of """"""'""'""*"'d""#" adjustments, willbe the tenth - and Present Paul llazen ! Crocker National Corporation from largest bank holding companyin 1 Midland Bank plc for an amount the United States. equivalent to Crocker's net asset Crocker reported 1985 net value at the end of t985 as carried income of $38 million. As ofyear on Midland's books, end, its nonperforming assets The purchase price, subject market conditions. amounted to $297 million, or to certain adjustments, willbe The acquisition is expected to 2 4 percent ofloans and other real $1.08 billion. In connection with be completed in 1986, subject to estate. The allowance for loan the acquisition, Wells Fargo expects appropriate regulatory and share- losses amounted to 2 percent of to issue approximately $300 mil- holder esproval.The combined loans. This was the lowest ratio of lion of common stock, approxi- organization will carry the name nonperforming assets and the mately $250-$350 million of Wells Fargo & Company, and its highest ratio of allowance toloans preferred stock and up to approxi- principal subsidiary will carry the of any of the large California mately $500 million of debt name Wells Fargo Bank, banking companies. securities. The amount ofequity This combination of two of we believe this acquisition and debt securities to be issued the oldest and proudest banking represents a continuation of Wells may change depending on specific organizations in California should Fargo's policy of concentrating its plans developed for integrating create an even stronger new bank, resources on basic domestic Crocker's assets as well as on one that can offer more convenient banking activities, such as deposit 2
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b9 .-j,. M.a:: E' gathering andlending, with certain branches and operations help and strong support ofour ]{.. .& emphasis on California. We expect where there is overlap, and by staff.They have tightened their 0.J.w tobenefit from economics of scale closing those in areasin which belts and found imaginative new .] and efficiencies in a number of their continued operation does not ways to get thejob done while . our operations. make sense. % accomplish this, working to maintain the quality of 5 - *f Studying the operations of we will follow the same guidelines our service. For this we thank Crocker and preparing to blend that we have used over the past them. As tangible evidence of them with those of Wells Fargo will three or four years as we made our our gratitude,in1985 we gave be a major challenge for1986,but own system more eflicient. approximately 10,000 full-time and one that we expect to carry out We will combine the products some 1,500 part-time employees a smoothly and without disruption in and services now offeredby gift ofcash and time off to enjoy it. service for customers of either Crocker with our own and will Working together, the manage- . institution. select those that offer the greatest ment, staff and directors ofWells Significant economics willbe potential, and discontinue those Fargo have successfullybrought achieved by the climination of that make less economic or the Company through uncharted duplicate management and marketing sense. waters during the recent years support services. This will, of For their advice and guidance ofderegulation. In 1986 we will course, involve personnel disloca- in this undertaking, asin all welcome into this group the tion,but we believe that we can others, Wells Fargo owes a debt of management and staff of Crocker minimize the effects of this by gratitude to its Board of Directors. National Corporation, who have takingseveralactions. AtWells Their considered review of this worked hard and effectively over Fargo, we established an imme- acquisition plan was beneficial to the past two years to restore health diate selective freeze on all management, and their sound to that fine organization. Working new hiring and will try to hold counsel will provide us with strong together, we hope to create a vacancies open so that upon support in coming months. new and dynamic team that will completion of the acquisition we In 198 5, J. W. Mailliard III retired achieve solid returns for our will have openings for Crocker as a director after 31 years of shareholders while providing personnel. Inline with trends in dedicated service and was named first-rate service for our customers. the bankingindustry, we have an director emeritus. Robert L average staff turnover of approxi- Bridges retired from his position as p g, g mately 20 pertent. Crocker's director emeritus after 20 years of turnover rate is higher. Thus, we wise counsel to our organization. Carl E. Reichardt willattempt to preserve opportu- We warmly thank both these Chairman nities for employeec of Crocker gentlemen for theiryears ofvalued to move into vacant Wells Fargo assistance. positions. This should mitigate the Few of our Company's [ impact on individuals. achievements in adapting to the We plan to consolidate the two new world of deregulation would Paul Hazen banks' structures by combining have been possible without the President February 20,1986 3
A F i 15 t A ttf a 4( ( 7 M I'4 N i A N I) 5 L H5llfl Alt!F % 1985 WAS A YEAR @F PROGRESS Nf"rINCOME & DIVIDENDS PER COMMON SHARE (*) I ! l !' I
\ ! I 1
s9 i , l i
' i I a I 76 he year 1985 was one of j l
- share to 60 cents, and in the fourth progress for Wells Fargo. quarter to 68 cents a share. The TThe Company produced record earnings, strength-7
{s ;1 ll j l combined effect of these two actions was a 26 percentincrease ened its balance sheet and gl [= l t' - in the dividend. continued tobuild its reputation , p! !. l P: M ll Increased net interest income and market presence. e 1
~
i
!' I j i
, was a major factorbehind Wells These achievements reflected a 4
3l :
! l Fargo's earnings performance in solid performancein the Company's ". ; p. l 3 f lr )! O 1985. Higher volumes ofloans and basicbusinesses, as well as a 3
i j $ j ij ;' ? l ; core deposits contributed to this greater concentration of resources in these selected core activitics. I i I C l
~
l i Ll l
! ! h;jM p increase, as did the generally favor-able funding conditions of t985 2MjN Wells Fargos business and q:i During the past three years,
$$h18 F
;ljp dl investment decisions during the i[ i the Company has reorganized its year were directed toward Ihj operations and shifted a greater increasing the profitability of o ]["7"[jMT% [M j ]Ql
; portion of assets into its four i[ M $ #
existing operations, providing a targeted lending areas: consumers, higher return for shareholders and commercial real estate and positioning the Company to meet ,1 constmction firms, small and the challenges of deregulation. m:2 middle-market commercial
' # """d" businesses, and West Coast-based corporations.
In 1985, the Company actively EPS AND DIVIDENDS marketed its consumerloan prod-ucts. The Real Estate Industrics repurchase plan. It repurchased Group and the Company's two real Two aspects of the Company's 3 million common shares in 198 4 estate subsidiaries, Wells Fargo performance of particularinterest and 500,000 shares in 198 5, all of Realty Finance and Wells Fargo to sharcholders are earnings per which were bought back at below Realty Advisors, also increased j share (EPS) and dividends on book value. their loans outstanding to top-tier common stock. Two other decisions in 1985 had a developers around the country. Wells Fargo earned $8.30 per direct effect on shareholders. Based Another area of solid growth in common share in 1985, an increase on the Company's earnings trend 1985 was the Corporate Banking of 21 percent from 1984. EPS grew and capital position, the Board of Group's increasing role as agent at a higher rate than the 12 percent Directors increased the quarterly bank forlarge syndicated loans increase in net income chiefly dividend on common stock in the involving West Coast corporations. because of the Company's stock first quarter ofig85 from 54 cents a Loans to middle-market companies 4
%' s s
.- ~ 'I
\ ,
e
) t
't f
I s r RE'rURN ON
- COMMON STOCKHOLDERS' EQUITY ,p CM y n"=
y %ggf . gjp 4: ;My.W, ~p @y e,
' isd W p? 1 E Sa ' r [Q gl 1 h
grewless rapidly than planned in [d in 1985. The allwance for loan' 1985 as the Company continued I1 mN ' MH losses was incr.:nsed to i.70 percent to emphasize strict credit quality "k s
'% of totalloaru atthe end of tyS3, standards. [
! from 1.14 perdent at the end of i
A range of service fees and [ $ 1984 . The larger allowance charges also contribated to carn-ings gmwth and overall pmfitability [ /r -
~* T N
' ] strengthens the Co:npany'sbalance sheet at a time ofgeneral financial g @
- 12-
.{
in 1985.The Company continued to (12. . -] uncertainties aboutboth domestic rationalize pricing for a variety of (s:f6 , 1 andinternational credit. noninterest services and products % k g3 ; to ensure a satisfactory return. @ # ' y
@'.5 M{
h, ^ These changes combined with i2 I
+
i ,I
-1 I'HOFITABILIT'I
~0 higher core depositsled to a solid g m.
i Afm STRATEGY \ , - gain in service income on deposit i J j -9 accounts. Service income frora tju ' 4 ".F ,. hC Wells Fargo Investment Advisors,a g . Building on the progreu ofig84,- nonbank subsidiary, rose sharply as " ~ I^ 7 N"^a[h Wells Fargo continued 0 {mprche : its key profitability me.nures it increased the amount of pension - and endowment ftmds under in 1935. The return on ave' rage' management from $14 billon at R uus nmntonw arsuele u"onunon sa k comn.on equity increased to
"'"""""""""*"*""** 14 05 percent, from 12.03 percent the end of1984 to more than $29 billion at the end of t985. WFIA '
in 1984. Return on asset 3 increased is now the largest manager ofindex to .67 percent, from .62 percent' ' funds in the natien. in 1984 Leveraging income growth with ..
< To alarge degree, these ratics management of noninterest Uneven economic grmyth, reflect Wells Farps strategv of expense continues to be an impor- disinflation and the strong U.S. building pmfhbility by simplify-tant element of the Company's dollar continued to have harsh ingits operations and sharpening business strategy. Noninterest effects on portions of the doniestic its focus on basic domesticbanking cxpense was held to a 6 percent portfolio, particularly in the activities in California and the increase in 1985 agricultural sector. The interna- West. During Om past three years, Higherloanlosses partially tionalloan situation will continue the Company has reordered priori-offset income gains in 1985. In to present problems forahe ties and reorganized activities in addition, there were increases in foreseeable future. order to control costs and concen-nonaccrual and restmeturedloans Thu Company's provision for trate its resources in the business and other real estate obtained in loan bsses significantly exceeded lines it knows best. As part of that setticment of troubled loaic. the leel of actualloan ch'arge offs process, the Company sold Wells W
5
e r-
-9 R
t, r n, , i ! RETURN ON CAPITAL RATIOS AVERAGE *IUTAL ASSETS AT YEAR END (H (%)
~g yny mmemmrq rn.emm]~,
L' s% y f .w. j {
+ ))
e.c, o .x q L. :i
. QN N g; 7 ;
iC y 3 cf, : 7 A V. -
-p ', 14.53 (y g -
- T [ py Consistent with Wells Fargo's i4 ; <
13 [,
,7 NpL D >
focus on domesticbanking activi- ! i 'i [. My E D Mi ties, the Company entered into an , 3 j [f [ .< 3, agreement in February 1986 to pur- u ?- r (j b chase Crocker National Corporation. *
-p M e t i.'
.E%81 ~
'.s2. M. w m 9 411 ij h.6' c
o 4
- y
_M! .: , fy .- A f Lt * ~ r + ' 4 P t %.s -- :1 10. L ww,- i w ec- . .se zL ~ u j s J s FINANCIAL ![
. P h
- F5 u > $,s/.j STABILITY -
9 , t U # j y~ -;f ). n -j g , ; - 1 s r/ Q> & ,' g" ;+ g y 4 Wells Fargo also worked to further t-pD n
- a. -f44 3
, ;k
g strengthen its capital position in 7 ' t c 16- P fN
^
g ( 198 5.The Company's ratio of i
)h j
, s.os $
3' i i . Primary capital to total assets was 3,, , . 3 , q p 4, g/3$ i the second highest among the s [ s.02 , _j
,WhW %A s jM 15 largest U.S. bank holding 1
," a:. , R' 4
.w a ca 4
~ w=' --
gi 32 y. y 3 companies at the end of the year. si 82 aa m as Its ratio of total capital to assets c was first among those companies. romn "",,,s These ratios are considered key ==== n.mo of ... t m ome to aveuge toui ami.s measures of financial stability by """"""'""'" federal regulators.The Company remains committed to maintaining a strong capital position. Capitalincreased in 1985 as a Fargo Mortgage Company in 1985 result of the issuance of senior and because they provide funding at The Company also restructured subordinated debt, and increases in favorable rates. The average and further consolidated its the allowance forloanlosses and volume ofcore depositsincreased international operations, focusing retaired earnings. The issuance of 6 percent over 1984 . its attention on trade-related long-term debt, in conjunction with Steadily increased earnings, a finpte between the West Coast Wells Fargo's large base of core strongerbalance sheet and progress anji the growing economies of the deposits, providesliquidity and in organizing the Company for
< Pa.:ific Rhn. The International financial stability for the Company. competition in a deregulated Banking Group continued to Besides adding toliquidity, core environment have put Wells Fargo develop new specialized services deposits are an important element in a solid position to meet the for selected segments of this trade. in Wells Fargo's earnings stream challenges ahead.
.- 6
q-MANAGEMENT'S ANALYSIS OF FINANCIAL OPERATION 1 OVERVIEW et income in 198das $190.o million, an _.3 : The average volume ofcore deposits in 1985 was $17 7bil-Nincrease ef12 prcent over $169 3 million AL 1984. Net indome per share was $8.30, up ;
- 21 percent from $6.85 in 1984. The percent.' ;-
lion, a 6 percent increase over 1984. Core deposits, which consist of noninterest-bearing deposits, interest-beanng . checking accounts, savings accounts and savings certifi-cates, funded 62 percent and 61 percent of the Company's age income increase in net primarily due incomeinper
~
to a reduction share common shares exceeded out-/ . that of net . . . average total assets in 1985 and 1 standing. The repurchase of 3 million shares ofcommon # Noninterest income was $395 7 million in 1985, com-stock during 1984 was fully reflected in ilet income per L - pared with $270.6 million in 1984. Noninterest income in share in 1985. In addition,500 thousand shares ofcommon 1985 included a gain on the sale of a mortgage banking sub-stock were repurchased during 1985, all in the second half. sidiary of $50.2 million and investment securities gains of Improved spreads between lending and deposit rates . $55 5 million. Investment securities gains were $3.o million ' on increased volumes ofloans and core deposits, as well as . in 1984. Noninterest expense of $943 8 million in 1985 was management of noninterest expense, contributed to the . up 6 percent compared with 1984 carnings perforraance. Net interest income on a taxable . The Company's provision forloan losses was $371.8 mil-equivalent basis (interest differential) increased 13 percent ' lion in 1985, compared with $194.6 million in 1984. During to $13 billion in 1985. The interest rate spread was 4 93 Per- 1985, net charge-ofTs were $2n.6 million, or .90 percent of cent in 1985, an increase of 27basis points over 1984 average loans, compared with $133 3 million, or.62 percent The average volume ofloans in 1985 was $23 4 billion, of average loans, during 1984 . The allowance for loan losses up 8 percent frorn 1984, primarily because ofincreaacs of, -- increased to 170 percent of total loans at the end ofi985, 38 percent in both the real estate construction-related and 1 compared with 1.14 percent at the end of t984 consumerloan portfolios. 9
< TABLE 1 SIX. YEAR
SUMMARY
OF SELECTED FINANCIAL DATA (in millions) 1985 Y $984 1983 - 1982 ' 1981 1980 Change Five-year 1985/ compound 1984 growth rate INCOME STATEMENT Net interest income $ 1,220.2 $ 1,o69 5 $915.o $ 8219 $ 731.o $ 677 6 14 % 12 % Provision forloan losses 371.8 194.6 121.1 - n5 4 63 4 77 0 91 37 Noninterest income 395 7- 270.6 279 5 293 9 231 3 163 3 46 19 Noninterest expense 943 8 886.6 843 7 '836.6 743 5 590.8 6 to Net income 190.0 169 3 154 9 13 8.6 124 0 121 9 12 9 Per common share Net income 8 30 6.85 6.03 5.81 5 33 5 33 21 9 Dividends declared 248 2.16 1 98 1 92 1 92 1 92 15 5 l BALANCF.SIIEET Ioans $ 24,614 2 $ 22,893 9 $ 20,267 6 $ 19,768 5 $ 17,977 7 $ 16,834 2 8% 8% l Allowance forloan losses 417 5 260 3 199.6 190 5 1531 141.8 60 24 l 'Ibtal assets 29,429 4 28,184.1 27,017.6 '24,814 0 23,219 2 23,638.1 4 4 l Senior debt 2,129 7 1,708.6 1,493 7 1,335 2 968.4 765.8 25 23 Subordinated debt 2,056 5 1,011 7 38.8 38.8 38.8 38.8 103 121 Stockholders' equity 1,450 0 1,343 7 1,347 8 1,100 4 1,020 9 913.6 9 to i
. 7
e TABLE 2 RATIOS AND STATISTICS The ratios of primary capital and total capital to assets also increased over 1984 . Primary capital was 7 44 percent year enda ocurer n of total assets at December 31,1985, compared with 6.65 per- ,,83 ,984 i983 cent at the end of1984. 'Ibtal capital was 14 53 Percent of total assets, compared with 10 39 Percent at the end ofig84 PROrlTABILITY RATIOS Net income to: The increase in total capital was primarily due to the Average total assets .67% .62 % .61% issuance of $1.o billion of subordinated debt during 1985 Average stockholders' equity n3 50 12.60 12.29 On February 7,1986, the Company entered into a defi- Net income applicable to common nitive stock purchase agreement (Purchase Agreement) stock to averare common with Midland Bank plc (Midland) and certain Midland afilli. stockholders' equity 4 05 12.88 12 51 ates providing for the acquisition by the Company of all the g,iTmTiOs issued and outstanding common stock of Crocker National Year-end balances: Corporation (Crocker). On the basis of assets of $19 2 billion Equity to assets 4 95 % 4 77 % 4 99 % as of December 31,1985, Crocker was the 25th largest bank Primary capital to assets (i) 7 44 6.65 5.68 holding company in the United States. It is anticipated that mal capital to assets (2) i4 53 20 39 72o Crocker's wholly-owned subsidiary, Crocker National Bank, Average balances: will be combined with Wells Fargo Bank, N. A. and operated Equity to assets 4 93 4 93 4 95 under the Wells Fargo Bank name. Primary capital to assets 7.o6 6.36 5.68 The base purchase price is $1,o80 million and is subject 'Ibtal capital to assets 32 57 8.44 6.97 to certain adjustments. Subject to receipt of appropriate reg-STATISTICAL
SUMMARY
ulatory and shareholder approvals, and the fulfillment of Per common share: certam conditions, the acquisition is expected to close in Dividend payout (3) 29 88 % 31 53 % 32.84% 1986. There is no assurance as to when or whether such Book value $6i.87 $56.22 $5o.15 approvals will be obtained and, if obtained, as to what, if any, Market prices (4): conditions or restrictions might be imposed. The Purchase High 6%4 49 % 41 % Im 45% 31 % 6% Agreement may be terminated by either party if the trans- Year end 6% 3 47 % 39% action has not closed on or before December 31,1987 and m. certain other circumstances. Other year-end data: The purchase price is payable in cash and, at the Com- Common stockholders (5) 22.28: 23,100 23,100 pany's election, common stock of the Company, provided Commori shares utstanding(in thousands) 2n,i39 21,235 23,882 that the number of shares issued to Midland may not Company staff t6) 16,200 14,000 15.400 exceed the greater of(1) 4 9% of the total number of shares Domes:ic -nd foreign of common stock outstanding at closing of the proposed bankic g ;cesy 3,4 337 380 acquisition (giving effect to the issuance of common stock to Midland) or (2) that number of shares of common stock
- 0) Based on regulatory concem primary capital ($2.217 rmlhon at Decem-which has an aggregate value of $75 milh,on. 3,,3,, ,,33)i,decined a. ,tocka,,iac, . cquity (si.438 mitiion), quanfying 7b meet the requirements for additional primary capital mandatory convertible debt (s369 million, net orNote rund discussed on page in Connection with the proposed acquisition, the Company 31) 'ad '" "'" f ' l 'n aes (s390 manon. exclusive oranocated transfe r risk reserves discussed on page16). Assetsinclude unamortized goodwiH of expects to issue approximately $300 million of common sis mulion.
stock, including the stock that may be issued to Midland, o) nased on regulatory concepts, totai capitaus4.awninion at necember 32, approximately $250-$350 million of preferred stock and up 198 5)is defined as primary capital, certain senior and subordinated debt of the P'rea' '"d i'5 " "b'"k '"b'idri'* ($2.o77 mitnonj and subordinated notes or to approximately $500 million of debt securities. The the Bank (s39 million). amount of equity and debt securit.cs to be issued may
. (3) Dividends declared per common share as a percentage of net income per change depending on specific plans developed for integrat- common ,3,,,.
ing Crocker's assets as well as on market conditions. (4) Based an daily closing priceslisted on the New York stock Exchange The acquisition will be accounted for as a purchase trans- composite transacuan Reporting system. action. Accordingly, the results of operations of Crocker will (5) rmed on actual number of holoa a of record at Scar end. be included with that of the Company for periods subse- (6) ruil-time eqmvalent, excluding hourly employeca and unpaid leaves. quent to the date of acquisition. An unauditcd pro forma condensed combincd income statement for 1985 for the Company and Crocker is pre-sented in note 16 to the financial statements on page 42. The Company's key performance ratios and other selected data are shown in the following tabic. I 8
EARNINGS PERFORMANCE lls Fargo & Company (Parent)is abank WFBC's earnings was a lower net loss incurred by Wells holding company registered under the Fargo Ag Credit of $12.1 million in 1985, compared with a Bank Holding Company Act of1956, as net loss of $23 3 million in 1984. These losses reflected net amended. Its principal subsidiary is Wells charge-offs of $n.8 million in 1985 and $28.2 million in 1984 4 Fargo Bank, N.A. (Bank). In addition, the Parent, through its nonbank subsidiaries, provides equipment lease, real estate
~ and agricultural financing; originates and services real INTEREST DIFFERENTIAL AND SPREAD estate loans for mvestors; advises a real estate investment trust; provides consumer, accounts receivable and inventory financing; and provides credit insurance to bormwers from certain of the Parent's subsidiaries. In the Annual Report, Net interest income is the difference between interest
_ Wells Fargo & Company and its subsidiaries are n ferred to income (which includes certain loan-related fees) and inter-ias the Company. est expense. Net interest income was $1,220 million in 1985
- A condensed consolidating statement ofincome of the and $1,o69 million in 1984. The interest differential is inter-Parent and its subsidiaries is shown in Table 3. Net income est income on a " taxable-equivalent" basis reduced by inter-of the Parent increased 12 percent in 1985 to $190.0 million. est expense. Interest differential was $1,269 million in 1985, This increase reflects an after-tax gain of $32.1 million on an increase of13 percent over $1,124 million in 1984. The
. the sale of a mortgage banking subsidiary in 1985, Partially interest differential expressed as a percentage of average offset by a decline of $18 3 million in equity in earnings of total earning assets is referred to as the " spread," which rep-subsidiaries. Net income of the Bank increased 6 percent resents the average net effective rate on earning assets. For
- in 1985 to $162 5 million, including a $25.o million gain from 1985, the spread was 4 93%, 27 basis points higher than 1984
' the sale of a subsidiary to the Parent. This gain was elimi. Individual components ofinterest differential and spread nated in consolidation. are presented in the rate / yield tal'ie on page to.
Net income of the nonbank subsi<liaries, all of which are Interest income shown in the rate / yield table exceeds wholly owned by the Parent, was $171 million, down s4 per. that in the consolidated statement ofincome by the amount - cent from 1984. This decrease was primarily the result of of the taxable-equivalent adjustment ($48 million for1985 a $10.1 million net loss reported by Wells Fargo Business and $43 million for 1984). The taxable-equivalent adjust-Credit (WFBC) in 1985, compared with net income of $5 6 ment isbased on the 46% federal tax rate and reflects the million in 198 4. The results of operations of WFBC reflected state tax applicable to income from securities and loans that net charge-offs of $26.6 million in 1985 and $.3 million in are exempt from federal taxes. Therefore, such income 1984; contributing to this increase were higher charge-offs included in the rate / yield table is comparable with revenue ofenergy-related loans. Partially offsetting the decline in that is fully taxable. TABLE 3 CONDENSED CONSOLIDATING STATEMENT OF INCOME Year ended December 33.198 5 (in thousands) Wells Fargo Wells Fargo Nonbank Eliminations Consolidated
& Company Bank,N.A. subsidiaries and wells Fargo reclassifications & Company (Parent)
$ 466,o67 $ 2,492,271 $ 515,069 $ (456,46o) $ 3.016,947 Interest income 481,851 1,426,238 382,284 (456,460) 1,833,913 Intereit expense
- Amortized gain on interest rate hedging - 37,225 - -
37.225 (15,784) i,to3,258 132,785 - 1,220,259 Net interest income 3,864 307,110 60,862 - 371.836 Provision forloanlosses (19,648) 796,148 71,923 - 848,423 Net interest inwme after pruvision for loan losses - Equity in earnings of subsidiaries 154,584 - - (154.584) 68,574 53,234 (60,227) 395,664 Noninterest income 334.o83 96504 (35.227) 943,755 Noninterest expense 9.045 873.433 Income before income tax expense 194.465 256,798 28,653 (179.58 4) 300.332 4,4 31 11542
- 110,298 Income tax expense 94.325
$ 190.034 $ 162.473 $ 17.111 $ (179 584) $ 190.034 Net income 9
W F I I 5 t A Ri d l & 4 ( D M P A N ) A NI) 5l H5!1)l ARi > % r ., _ L 'TAELEd AVEEAGE mALANCES, YIELDS (TAXABLE.EGUIVALENT Bt. SIS) AND BATES PAID (in millions) 3985 1984 Average Yields / Interest Average - Yicids/ Interest balance - rates income / balance rates income / . expense expense EARNING ASSETS Interest-carningdeposits - - $' Sog 97I% $. 47 6 ' $ L g26 . tid 8% . $ $o6 3 Investment securities: U.S. Treasury securities 882 9 71 85 6 . ~64: ' . 1o.85 .~ ;69 5 Securities ofother U.S. government agencies and corporations 20 7 70 1.6 65I - 8.57 56' Obligations of states and political subdivisions n62 ~ 8 78 14 2 -_218 8.83 19 3 Other securities 289 15 12 43 6 202 _17.6o 35 6
- Ibtalinvestment securities n,353 ' 10 72 145 0 1,126 11 54 130A TYadingaccount securities 266- 8 56 22.8 137 10.88 14 9 -
Federal funds sold .2 0- 8 30 17 4 374 10.75 ~ '40.2 Ioans:
. Commercial, financial,and agricultural .7,80 4 30 71 839 4 7,504 12 50 937 9 Real estate construction-related 3,746 an.38 426.2 2,721 13.6 0 ' 370.0 Real estate mortgage (i) 4,760 at.no 528 3 4,980 - 11.1 7 556.3-Consumer (s) 3,609 14 74 $44 0 2,6 71 15 16 404 9-Lease financing gas 14 20 872 13.88 . 121.1 330.0~
- Foreign 2,427 s t.28 : 273 7 : 2,834 13 09 - 3 71.0 Fees and sundry interest - -
91.8 - - 92.1 Tbtalloans(a) 23,378 12.12 2,833 4 21,582 . n3 22 2.853-3 Tbtal earning assets $ 25,716 :n.92 3,065 3 $ 24,145 13 02 3,144 7 FUNDING SOURCES Interest-bearing liabilities: Deposits: Savings deposits $ n,381 ' 5 50 75 9.- $ t 507 5 51 83 1 NOW accounts 1,429 5 12 73 1 ' t,376 5 10 _ 70.2 Market rate checking 326 5 75 18 7 287 6.89 19 8 - Market rate savings 5,327 6.63 353 0 4,742 8.51 '403 4 Savings certificates 5,920 9 24 547 2 ' 5,343 10 73 573 3 Certificates ofdeposit 278 .'13 94 38.8 414 14 06' 58.2 ' Other time deposits 265 9 g8 26 4 697 11.0 0 76.6 Deposits in foreign offices 1,135 9 88 a12.2 1,820 1146 208.7
'Ibtal interest-bearing deposits 16,o6: ' 7 75 1,245 3 16,186 1,493 3 9 23 Fundsborrowed 1,321 7 62 100 7 1,070 10.01 - 107 2 Commercial paper n,95: 8.23 360 5 2,139 10 56 225.8 Senior and subordinated debt:
Seniordebt n,797 no.64 agi. 1,441 12.08 174 1 Subordinated debt i,562 8 73 336 3 385 10 28 39 5 7btal senior and subordinated debt 3,359 9 75 327 4 1,826 s1 70 213 6 Tbtal interest. bearing liabilities 22,692 8.08 n,833 9 21,221 ' g.61 2,039 9 l'ortion of noninterest-bearing funding sources 3,o24 - - 2.924 - ~~ Tbtal funding sources $ 25,716 7 33 s,83 39 2,039-9
$ 24.145 - 8 45 i Amortized gain on interest rate hedging 37 2 19-4 Spread and interest differential 493% $ n,268.6 4.66 % $ 1,124.2 NONINTEREST EARNING ASSETS Cash and due from banks $ n,639 $ n,7:2 Other(3) :,2:4 t,376 Tbtal noninterest-earning assets $ 2,853 $ 3,088 NONINTEREST-BEARING FUNDING SOURCES Deposits $ 3,366 $ 3,422 Otherliabilities n,M3 1,247 Stockholders" equity n,4o8 1,343 Noninterest-bearing funding sources used to fund earning assets _[3_,024 ) (2,924)
Tbtal net noninterest-bearing funding sources $ 2,853 $ 3.088
'IDTAL ASSETS $ 28,569 $ 27,233 (1) EtTective January n,198 3. second mortgages and otherjunior lien loans to individuals that are secured by -4 family residential properties have been classified as consumer loans. In prior periods, portions of these balances were included in both the real estate mortgage loan and consumerloan categories. The 1983 average - consumer loan balance included approx;mately $5m million that was previously classified as real estate mortgage loans. Periods prior to 198 3 have not been reclassified for this change as complete information is not available.
10
ay tynz_.7 w ~pe = *"~- -
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, s c i- :M es-rm 7wi e u vs n .
7 '. 1983 ~ 1982}s + 1981 ; ,Q + c Average Yicids/ , . Interest JAverage Yields / . Interest ^ Average Yicids/1
. income / balance ' ' balance Interest
. income / '
? d:D h.
u
. balance - rates - rates income / . 1.
rates .'
' expense expense - sexpen.sel,'
' S.g s
[ Y$i ,342 1 t 10 74%. $ l ' 144.t' - $ J 1,756 13 80 % ( $ . 242 4 ~ $ 1;403? 116.55 %M- E$ i 232.2 '- , s'j, [_ 233' 10.19 ~23 7 204 10.04 204- 440 E i10401 $57) P1
' , g M.
l ~ .'133 , 8.81 1117 - 215 8 96 19 2 . {276: 9.o(:1 I24 9 Q //j t -;282- 7896: J 25 3 ' 476 - 9 15 '43.6 .694f i9195 ' 63.8 i A p: ' ;16.35 ' : n.o - J 6.5 i '
- 67 27 ~ ' ' 10 98 L
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[f , 715 10.03 71 7 930- 9 24 85-9 J1,469 9 59 , 140 9 f j
~ ist - 9 39 - 110 4 85 14 41 12 3 162-- 16.02'- :99L 233 9 53 22.2 187 11.8 9 22.2 ;
^
226 116.61 l 137.6[f' j A
; 6,803 u 58 787 7 5,822 14 90 867 2 c 4I950 17 98 ). : 889 8'- h
~
2,194
- 4,g62 .
12.68 -
,11.14 ?
1278.2
- 552 9 -
2,166 5,634 15 30 n.16 ' 3314 628 5 1,890 .. 5,669
' 18.98 ?
1092;
- 358.7
; 618 9 '- .pp i
i 2,190 . ~ 1,761 264 4 . 2,026 -14 52 ; 12941T 14.63 320 3 . 15 01 ?Jf i 9:4 14.27_ 130 5 902 14.82 133 7f 770' 13 14 [ " ,
. son.2j _ _
e (
' 2,8Q t190 * . 337.8 2,302 15.63 359 7 2,074 18.08' ;3750 i<
'- -- 96 4 -- ' -
851 ' -- t Ji > '68.51 , ;
^'
2,503 8 18,587 2,60.0 '17,379 2,706.2.i G, .'19.902.
. ' 12 58 -- 14 36 7 '.15 d.
X f ., $ 22,303 12 34 2.752.2 $ 21,545 ' 14.o8 3,032.8 ; $ 20,539 ~ 15221 3,126.8' ~, g Y 2
$ 2,898
~
- 1 $ 4 t,768 ' '5 29 ' 93.6 $ 2,428 5 33 129 5. 5 31 J t 154 0$
' 1,270 '
5 18 65 7 1,272 5 17 65 8 566 ? 5 00 :: :28 3 :
;225 6.98 15 7
- 4.577 : 8 35 ' 3823 330 9 43 31.2 -? -c - r 4,295 - 10 46 449 3 - 5,787 12.86 -7441 5,105 -- 13 95 ? / 7:25 J 640 . '13 94 :89 3 1,012 1415 143 3 - t,382 . 15 03 - 3 207.8 ) J'"
- 679 9 96 ' 67.6 1,125 12.82 - 1441 .1,093 : 15 23 - ,166.4 L '1,96 6 11.16 s 219 3 2,140 14 13 ~ 302 4 ' 2,652 -- . 16.16 '428.6 ;
':15,420 : 8 97 1,382.8 14,094- 11.0 7 t,56 0 4 113,6 69- 11239' 1,697.1 f i
1,171 8 78 102 9 1,315 12.84 168.8 1,313 - 17 40 228.4 - 1,720 , 9 15 157 3 2,42 12 48 302.1 1,952 : 16 54 . 13231
.- 1,141 12 78 145 8 1,05: 12 48 131.2 : 787. . 11.o 8 87 2 . ,4 t.8 : ' J 39 4 54 t.8 39 4 54 1.8 39 . 4 54 '
' t,180 12 52 147.6 1,090 12.20 133 0 826 10 78 89.o l 19,491: 9 19 1,790.6 18,920 at 44 2,164 3 17,787 1314 c 2,337.6 j
- 2,812 -- - 2,625 - - 2,752 - -i 1"
- $ 22,303 '8.03 1,790.6 $ 21,545 10.05 2,164 3 $ 20,539 1138 2,337.6_;
32 6.7 '.4 ,_. [ 4 33 % $ 94.8 6 4.o6% $_ 8 75 2 3 85 % $ 789.6-
$ ' t,713_ $ 1,712 $ 1,853 r 1,422 1,516 1,814
$ 3,t35 - $ 3,273 $ 3,667
$ 3.420 $ 3.380 $ 3,644 1,267 1,459 1,811 t,260 1,059 946 -
(2,812) (2,625) (2,752)
$ 3,135 $ 3,273 $ 3,667
. $ 25,438 $ 24.818 $ 24,206 1
(2) Nonaccrual and restructured loans and related income are included in their respective loan categories.
~ (3) Includes the average allowance forloan losses of $336 million. $222 milhon, $197 million, $162 million and $152 million in i985,1984.1983.19 82 and 1981, respectively.
4
mis >uus,s.. m u m amonums SPREAD (%) Growth in earning assets, especially in relatively high-yielding loan categories, contributed to the improvement in interest differential in 1985. Loan volume averaged $23 4 bil- {Yjf" p4 ' 7 TCC]0 A lion during 1985, up 8 percent over 1984, primmily because of 38 percent increases in both real estate construction- 16 %{ 4 y 4 W j jpQ y y 'U related and consumer loans. Additional discussion of j } changes in the loan portfolio appears on page 15 %% g W[ g% N The change in the mix of earning assets, as well as 34 f'9* f Qg3 " f( more favorable relationships between lending and deposit ( 14 p? 1 f rates, contributed to the 27 basis point improvement in 'd
- M spread. The yield on both average total loans and average . 12 gg 4p ,
[ total earning assets decreased no basis points in 1985. while e f d, S
. the rate paid on average total funding sources decreased 132 4. % *- 4 66 basis points. The rate paid on interest-bearing deposits, the io Nh #[ ' 4yf 3 largest funding source, declined 148 basis points. Deposit ?V 1 balances are discussed beginning on page 19. In addition, f bl.: j 4;
[L d the 1985 increase in amortized gain on interest rate hedg- p @jh ~@" ing contributed 5 basis points to the improvement in 8
} yy y .
U spread. The use ofinterest rate futures, which is discussed . M $ j7; more fully on page 21, resulted in an amortized gain on {; p [? Q g y ' 7j interest rate hedging of $37 2 million in 1985 and $19 4 !' k- i " * ;P' N kb g* d
-~
6 - million in 1984.- A schedule ofloan fees and sundry interest is presented below. ff M '
.s R
M q[ l k((:AMGumdi.h"
.i TABM 5 81 82 83 84 85 LOAN FEES AND SUNDRY INTEREST musumm Yield on earning assets (taxable-equivalent basis)
(in millions) Year ended December 31, 8 1985 1984 3983 Spread LOAN FEES Rate on total funding sources Commercial, financial, and agricultural $ 28.1 $30 2 $30 5 Real estate construction-related 49 10 7 6.6 Real estate mortgage 45 7.6 18.5 f Monthly payment 10 3 8.4 93 Credit card 31.6 23 1 15-7 Other revolving credit 25 2.1 9 Lease financing i.9 14 2.8 Foreign s.: s7 36 Sundry interest 69 69 85
'Ibtal $ g3.8 $ 92.1 $96.4 While total loan fees and sundry interest were essen-tially unchanged in 1985 compared with 1984, there were significant changes in the composition of the total from year to year. Most of the 54 Percent decrease in real estate construction-related loan fees in 1385 was due to lower fees earned on income participation loans. Real estate mortgage loan fees decreased 41 percent in 195, primarily as a result of the sale of Wells Fargo Mortgage Company, discussed on page 13. Credit card fees increased 37 percent over 1984 ,
primarily due to increases in the number of cardholder accounts in 1985 and late 1984. Sundry interest principally consists ofinterest recovered on charged oiTloans. 12
NONINTEREST INCOME account profits and commissions was due to gains from an arbitrage program. iThe table below shows the major components of non- Most of the decrease in "all other" income in 1985 com-pared with 1984 resulted from the recognition in 1985 of interest income.
$11.6 million in net closing costs associated with restruc-TABLE 6 turing the Company's international activities. In addition, NONINTEREST INCOME the decrease reflected a $5.8 million decline in income from investments accounted for using the equity method, par-on mmion ) - year ended December 31, Percentage change tially offset by a $5 5 million increase in gains on sales of 1985 - 1984 ig83 s98 5/ 1984/ Variousbranches and premises.
'88 4 83 In connection with the restmcturing ofinternational service charges on . activities, the Company closed in 1985 its Iondon branch, deposit accounts $ 309.o $ 95 2 ' $ 85 5 34 % 31 % the New York ofIice ofits Edge Act subsidiary (Wells Fargo Domestic fees and Bank International) and representative ofIices in Madrid, commissions . 88.2 275 4- 58.o 37 3 Manila, Taipei, Bangkok, Jakarta and Kuala Lumpur. Also, estment secu i gains - - 55 5 3.o 5 -- 463 the Company sold its branch in Milan. Four Asian oflices services income 55 3 ~ 53.2 56.4 8 (9) have been retained: the Hong Kong,'Ibkyo and Seoul
- Intern:tional fees, branches and the Singapore representative ofIice. The San commissions and Francisco headquarters and the Asian branches will con-foreign exchange -17 7 : o.7 30.3 ( 4) (3n) tinue to engage in foreign exchange activities. In addition,
( ) d m ions 13 3 38 (.7) 25i - sale of a mortgage . sentative offices and its merchant banking subsidiary in the banking subsidiary 50.2 - - - - Cayman Islands. The restructuring focuses the Company's sale ormajor real estate international resources on providing domestic and inter-holding -- - 10.0 - - national trade services to customers in the West.
' Allother 6.7 21 3 39 7 (69) (46)
Total J
$ 957 $ 270.6 $ 279 5 46 (3)
NONINTEREST EXPENSE The Company recognized a pretax gain of $50.2 million The table below shows the major components of non-($32.2 million after tax) on the sale of Wells Fargo Mortgage interest expense. Company (WFMC) in the first quarter of1985. A deferted TABLE 7 gain of approximately $40 million is being amortized over the expected remaininglife (approximately 12 years) of the NONINTEREST EXPENSE residential mortgages held by the Bank. In addition to the Ilank's residential mortgages, WFMC serviced mortgages (in millionsj vear ended December ai. Percentage change held by other investors. WFMC's residential mortgage bank- i985 i984 1983 198 5/ 1984/
'884 '883 ing business had assets of approximately $125 million and serviced approximately $6 billion of residential mortgages. salaries 5 4 4 5 $4o5.8 $30s.o 2% 3%
The Company continues to conduct its commercial mort- Employee benefits 99 5 83 5 88.7 19 (6) Net occupancy 87 8 81 7 78.8 8 4
. gage bankingbusiness.
Equipment 75 9 74 2 68.3 2 9 The improvement in 1985 compared with 1984 in ser. " Posta8 vice charges on deposit accounts reflected fee increases ,ds li 39 9 39.6 40.2 (2) implemented during1985- Riephone and telegraph 3i.8 27 7 26.8 is 4 Professional services 32 2 The increase in domestic fees and commissions in 1985 22 3 29 8 17.6 compared with 198 4 was primarily due to higher domestic contract services is.g 21 3 i71 (ii) 25 Advertising is.3 17.i 26.8 7 2 loan syndication fees, letter ofcredit fees, credit card mer. navel and entertainment i74 ig- 38.3 ,(8) 5 , chant fees and real estate brokerage commissions. These Operatinglosses 34 9 95 74 57 28 ,' increases were partially offset by lower mortgage servicing outside data processing (1) i45 23 3 13 2 si fees due to the sale of WFMC. The largest component of rederal deposit insurance i38 i23 it.7 iz 5 i domestic fees and commissions was credit card merchant other real estate n2.6 37 (.4) 246 - Protection 93 91 95 2 (4) fees, which were $19 2 million and $15.o million in 1985 and 6 All other 32 4 49.2 34 9 4 1984, respectively. 6
**l 5941;8 $886.6 $843 7 5 Investment securities gains in 1985 primarily resulted from sales of U.S. Treasury securities. The decrease in inter-national fees, commissions and foreign exchange in 198 5 was primarily due to a decrease in letter of credit fees, Salary expense, which includes wages of hourly employ-partially offset by an increase in foreign exchange trading ces,was up 2 percent compared with the prior year. Growth income. Most of the 1985 over 1984 increase in trading in salary expense was restrained by the sale of WFMC and 13 s a
g.,_ m , INCOME TAXES O closing ofoffices. Domestic and foreign banking offices O declined to 314 at year-end 1985, from 337 at year.end 1984 s' Employee benefits expense increased in 1985 compared . The Company's effective income tax rate in 1985 was 37% . with'1984, primarily due to an increase in retirement plan compared with 35% m 1984. Most of the 1985 increase
-Gxpense. Effective January 1,1985, the Company changed resulted from a greater amount ofearnings subject to U.S.
12? retirement plan from a defined benefit plan to a defined taxation, partially offset by an increase in income taxed at contribution plan. The former plan was overfunded at mid-the capital gains rate. 1984; therefore, no reu,rement plan expense accrual or con- . In management's opinion, the effective income tax rate tribution was necessary for the last half of1984. Additional .
. . is not indicative of the Company's true economic tax burden'
. discussion of the Company's retirement plans is presented
. . because the rate computation does not m.clude all the rele-m note 9 to the financial statements beginning on page 35 .. . .
vant financial charactenstics of tax-sensitive transactions.
.Most of the increase in ope.ating losses m.1985 compared For a more complete discussion ofincome taxation, refer with 1984 resulted from credit card operating losses.
t n te to to the financial statements beginning on page36. The 1985 over 198 4 increase in net costs related to other real estate primarily resulted from the operation and
. reappraisal of real estate obtained in settlement of troubled
> agricultural- and energy-related loans.
BALANCE SHEET ANALYSIS by the issuance of senior and subordinated debt. The Bank's Acondensed consolidating balance sheet o Parent and its subsidiaries is shown in Table 8. Tbtal assets of the Parent were up 36 percent at December 31,1985 compared with year-end total assets declined 2 percent. Combined total assets of the nonbank subsidiaries increased 15 pertent, primarily due to growth in consumer and commercial loans of Wells Fargo 1984 , reflecting increases in investment securities and inter- Credit Corporation and in real estate construction-related i company loans and advances, which were primarily funded loans of Wells Fargo Realty Advisors.
. TABLE 8 CONDENSED CONSOLIDATING BALANCE SHEET (in thousands) December 31,1985 Wells Fargo Wells Fargo Nonbank Eliminations consolidated
& Company Bank,N A. subsidiaries and Wells Fargo (Parent) reclassifications & company ASSETS
- Cr3h and due from banks $ t,455 $ 1,393,138 $ 63,912 $ (56,343) $ t,402,162 Interest-carning deposits 200,000 534,511 216 (200,216) 534,511 Investment securities 3,242,793 435,697 17,580 - 1,696,070 Trading account securities -
146,658 - - 146,658 Federal funds sold - 39,650 - - 39,650 Netloans 70,o43 19,792,124 4,334,486 - 24,i96,653
. Investment in subsidiaries 1,622,848 - -
(1,622,848) - Interccmpany loans and advances 4,565,406 14,000 252,500 (4,831,906) - Other assets _ 206,196 1,165,182 165,269 (122,957) 1,413.69 o Total assets $ 7,908,741 $ 23,520,96 0 $ 4,833,963 $ (6,834,270) $ 29,429,394 LIABILITIES AND SIUCKIIOLDERS' EQUITY Deposits $ -
$ 19,757,859 $ -
$ (256.559) $ 19,501,300
; Borrowings 6,o38,100 n,214,039 279,293 -
7,531,432 Intercompany borrowings 264,000 600,775 3,9 67,131 (4,831,906) -
. Otherliabilities 148,68: 579.932 333,046 (122,957) 938,702
'1btalliabilities 6,450,78: 22,152,605 4,579,470 (5,211,422) 27,971,434
- Paid-in capital and retained carnings 1,464,880 1,375,275 254,493 (1,629,768) 1.464,880 Equity adjustment from foreign currency translation (6,920) (6.920) -
6,920 (6.920) lbtal stockholders' equity n,457,96 0 1,368,355 254,493 (t,622,848) 1,457,96 0 Tbtalliabilities and stockholders
- equity $ 7,908,74: $ 23,520,96 0 $ 4,833,963 $ (6,834,270) $ 29,429,394 14
s Ioan uix
^""^"'*"
CH LOAN PORTFOLIO f % 7 W r ~: d 1$ '
-: A comparative schedule ofyear-end loans is presented in
~
$[
@g u g g ;
note 4 to the financial statements on page 30. A compara-tive schedule of average loan balances is presented in the N
"" $[ 7 E, -<
rate / yield table on page to. The average balances ofboth h Wq i p ~ the real estate constniction-related and consumerloan cate-gories increased 38 percent in 1985 compared with 1984 I W Average foreign loans decreased 14 percent. The increase in real estate construction-related loans, which generally have maturities of five yearmr less, was broadly based and resulted primarily from loans made to
'icDh finance commercial properties. Growth in credit card activ-ity and real estate juniorlien mortgage loans accounted for l most of the increase in consumer loans. Credit card loans averaged $1.1 billion during 1985, an increase of 67 percerit over 1984; real estatejunior lien mortgage loans averaged
, , ,z , $14 billion, an increase of 27 percent. Credit card loan growth was due to origination of new cardholder accounts Ite] W g
?si u g/ IM isn 1 g and line increases to existing accounts. There were 1.2 mil-5 lion cardholder accounts at year-end 1985, an increase of14 4-8 4
[A percent over year-end 1984. The decrease in foreign loans reflected a general reduction and realignment of the Com-W " pany's international activities. Average commercial, finan-1981 1982 1983 1984 1985 higher in 1985 compared with 1984 , reflecting an increase in ema corporate commercial lending, partially offset by a reduc-commeraal tion in loans to financial institutions. Real estate u n on-niatea Included in the commercial portfolio were agricultural agggg loans of approximately $700 million at December 31,1985 Real estate mongage and 1984. Agricultural loans include loans to finance agricul-em= tural production, fisheries and forestries and other loans to fanners. Agricultural loans that are secured by real ectate trase nnanang are included in real estate mortgage loans; such loans were mumm $125 million and $102 million at December 31,1985 and 1984, F""*" rs Ipectively. NONACCRUAL LOANS, RESTRUCTURED LOANS AND OTHER REAL ESTATE Table 9 presents comparative data for nonaccrualloans, restructured loans and other real estate (ORE) In 1985, the m st significant increase in nonaccruals occurred in agri-INVESTMENT SECURITIES cultural loans mcluded in the commercial portfolio. Foreign nonaccruals decreased at December 31,1985 compared with ! 1984, reflecting the return to accrual status ofloans to cer-Investmelit securities were $17 billion at December 31, tain borrowers in Argentina and cha1ge-offs of Mexican pri-l 1985, a 56 percent increase over 198 4 . The increase was pri- vate sector loans, partially effset by increases in nonaccrual l marily the result of a net increase of $497 million in U.S. loans to borrowers in Brazil and Peni. Treasury securities. Note 3 to the financial statements on The increase in ORE at Deceraber 31,1985 compared page 30 shows the composition of the investment portfolio with 1984 was primarily due to properties acquired in settle-by typ ofissuer. ment of agticultural-related loans. l '*
u i i s r mm < om - nsn um s ALLOWANCE FOR LOAN LOSSES - L Note I to the financial statements on page 28 describes the Company's policies relating to nonaccrualloans and other real estate. In cases where a borrower experiences An analysis of the changes in the allowance for loan losses, financial difficulties and the Company makes certain modi-including net charge-offs by loan category, is presented in fications to contractual terms, the loan is classified as a re-note 4 to the financial statements on page 31. At December .. structured loan. If the borrower's ability to meet the revised - 31,1985, the allowance forloan losses as a percentage of payment schedule is uncertain, the loan is classified as a total loans was 17o percent, compared with 1.14 percent at - nonaccrual loan. Management's classification of a loan as December 31,1984 nonaccrual or restructured does not necessarily indicate The Company considers the allowance forloan losses of that the principal of the loan is uncollectible in whole $417 5 million adequate to coverlosses inherent in the loans or in part.
, outstanding at December 31,1985. It must be emphasized, Loans contractually past due 90 days or more as to inter-however, that the determination of the adequacy of the est or principal, but not included in the nonaccrual or re-allowance rests upon variousjudgments and assumptions structured categodes, were $147.6 million at December 31 about future economic conditions and other factors affect-1985, compared with $93 7 million at December 31,1984 ng loans. No assurance can be given that the Compmy will The 1985 increase was primarily due to increases in past not in any particular period sustain loan losses that are siz-due credit card and agricultural loans. Allloans in this cate-able in relation to the amount reserved, or that subsequent gory are both well secured and in the process of collection es aluations of the loan portfolio, in light of conditions and or are 1-4 family residential real estate loans or consumer factors then prevailing, will not require significant changes -
loans that are exempt under regulatory rules from being in the allowance forloan losses. classified as nonaccrual. Federal banking agencies require banking institutions to - establish allocated transfer risk reserves against inter-TABLE 9 national assets which, in the agencies'judgr,ent, have " . . NONACCRUAL LOANS, RESTRUCTURED LOANS been impaired by a protracted inability of ." tblic or private AND OTHER REAL ESTATE borrowers in a foreign country to make payments on their external indebtedness." Included in the allowance at . December 31, December 31,1985 and 198 4 are allocated transfer risk (in millions) , , 985 1984 1983 1982 1@t reserves of $27.6 million and $6.o million, respectively. The provision for loan losses in 1985 was $371.8 million, commercial, financial, compared with $194.6 million in 1984. The amount of the and agricultural (i) $463 0 $382 4 $ 3791 $249.8 $130 3 provision is dependent upon the amount that management R*' **[ , ion.related Si.o 26.2 57 9 146.6 355 7 be}ieves is required to maintain the allowance at an appro-Real estate mortgage (23 49 5 43 7 15.6 17 5 6.1 Pnate level after net charge-offs. During 1985. net charge - consurrer 36 .6 a.3 i.6 56 offs were $211.6 million, compared with $133 3 million in 1 case financing 95 14 4 11 1 17 0 17 1984. As a percentage ofaverage loans outstanding, net Foreign (3) 194.8 249 9 236 4 1079 44 7 charge-offs were .90 percent in 1985 and .62 percent in 1984 Tbtal $ 77s.4 $ 717.2 $708.4 $540 4 $ 3441 The increase in net charge-offs in the commercial loan port-Restructured loans $ 18.4 $ 17 4 $ 40.2 $ 20 7 $ gig folio reflected higher charge-offs of energy-related loans, Nonaccrual a:.d Partially offset by a decline in charge-offs of agncultural restructured loans loans. The increase in net charge-offs for credit card and as a percentage or related plans reflected significant growth in credit card totalioans 32% 32% 37% 2.8% 2.4% loans as well as a higher ratio of charge-offs to average credit Other real estate card loans. (ORE)(4) $a69 3 $ 87.6 $ 77 7 $54 8 $ 271 Net charge-offs of agricultural-related loans (included in Nonaccrual and both the commercial and real estate mortgage loan port-restructured loans and folios) were $36.7 million in 1985 and $45 9 million in 1984 ORE as a percentage Management has established Company-wide charge-off of totalloans and ORE 39% 3.6% 4.1% 31% 2.6% policies. l.Dans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. (t) includes agriculturalloans of $i80 milhon and $64 mdlion at December 3i. Additionally, any loan that iS past due as to ptinCipal or
d 5 '"d 84#"'P""*'*
interest and that is not both well secured and in the process (2) includes agricuhuralloans secured by real estate of $24 milhon and $22 million at December 31.1985 and 1934, respectively (3) Induden loans (all private sector) of $i6 million. $39 milhon and $6 milhon time that is based on loan category in Menico and $t3 million, Sig milhon and $68 milhon in Venezuela at December 31.1985.1984 and 19 8 3. respectively Also includes $15 milhon ofloans r all private acctor) m Brazil at December 31,1985 (4) includes agricuhural-related properties of $94 million and $46 milhon at Der.emberJi.1985 and 198 4 respectively 26
wrusmmooac.+ v v.: au oww CROSS-BORDER OUTSTANDINGS The remainder of the Company's foreign outstandings was spread among 45,55 and 68 countries at December 31, 198 5,1984 and 1983, respectively. At December 31,1985, the The following tabic shows the Company's cross-border Company did not have outstandings equaling or exceeding outstandings to borrowers in individual countries that
.25 percent of total assets in any of these countries, except accounted for .75 percent or more of total assets at Decem-f r Argentina ($133 million), Chile ($104 million), Korea ber 31,198 5.1984 or 1983. Outstandings are defined as loans, interest-earning time deposits with other banks, other ($98 million) and Peru ($75 million).
A Country Review Committee, which includes senior interest-carning investments, accrued interest receivable, flicers of the International and Economics departments of acceptances and other monetary assets that are denomi-the Bank, analyzes each country where the Company has or nated in dollam or other nonk) cal currency. Country distri- , m y have exposure in order to assess the cross border butions are based on the location of the obligor or invest-nsk. Based on the Committee's assessments, International ment, except (1) for cross-border outstandings guaranteed Banking Group management recommends specific coun-by a third party, in which case the country is that of the try hmits. guarantor, and (2) when tangible liquid collateral is held out-As has been widely reported, various foreign countrics side the foreign country, in which cast the country is that have aperienced serious economic and/or pohtical difD-in which the collateral is located. Loaa made or deposits culo s in meeting scheduled payments ofinterest and prin-placed with the branch of a bank outside the bank's home cip 1 n their debt. In the event of further deterioration in country are considered outstandings of the home country. these countries, additional loans may be placed on non-accrual status, reserved for or charged off under Company
,g.ggg 3o policies and bank regulatory requirements. In late 1985 and carly 1986, there was a significant decline in the worldwide CROSS BORDER OUTSTANDINGS AT YEAR END price of oil It is possible that declining oil revenue of oil-exporting countries, such as hicxico and Venezuela, aanksand Total on milhons) congnmery ,
commeruaj may result in new borrowm
- g requirements from com-institutionsO) . Hnancial industnal merCial banks and Concessionary interest rates on existing and new debt.
Meximm NIEXICO Cross-border outstandings to the hiexiccn gov-198s $352 $ 45 $209 $6o6 crnment and ofHcial institutions (public sector) increased iW4 '143 32 268 663 6ss by $9 million during 1985. This increase was the result of iga 3 312 ss 287 the following activity: a public entite assumption of Bra $10 million of existing private sector hicxican loans, the i98 3 336 233 >2 s>3 sea 269 33s i3 si7 Company's disbursement of the final $9 million ofits ig83 209 347 i2 s68 $36 million participation in the 1984 $3.8 billion term loan venciuela facility to the hicxican government, principal payments si7 43 99 2sg 198s rcCeived of $4 million and a $6 million dcCrease in accrued tea izi 44 m 276 interest receivable. Accrued interest receivable decreased 1983 i23 44 lio 279 . from $9 million at December 31,198 4 to $3 million at December 31,1985 During 1985, the Company received 292 65 337 ig4 - 3o6 60 420
$39 million ofinterest payments and accrued $33 million of i9a3 -
242 63 307 interest income. There was no other significant revenue naty from Nicxican public sector borrowers reported as income iws 37 4i 3 ni during the year. At December 31,1985, there were no loans i98 4 io6 i3s 24 26s to publiC sCClor borroWCrs on nonaCCrual Status. iwa nos io3 34 242 In September 1984, a proposal to reschedule certain hiex-t nited Kingdom ican public sector debt falling due between 19 85 and 199: 5 " *' was announced. The proposal included extension of some [ maturitics, changes in hxm pricing and prepayments of i@3 12 394 47 433 other existing debt. m im.iudes t ommen iat enterenses ihai are maiority-ownca by c.cnirai Nu h mu mk pposal, certain Alexican public g,,ve r n me n n sector debt existing before 198 3 and originally due between m The company also haa approximately $ 39 mdhon. $28 milhon ana $ i2 mil- 198 2 and 1991 would be rescheduled through 1998 and, effec-hon in ies ie4 ana igi. resen nveiv. or stanaby iceiers of < redit in surpori of' tive lanuary 1,1985. interest rates applicable to the Com-ueman enunes, all of whwh were m the pnvate sc< tor stanaby Iceten of a reait E ,I g g g in support of entities m other Lann Amernan wuntrics were not significant tamdon Interbank Oflered Rate (LIBOR) fbr dollar deposits for the period 198 5-1986,1%% over I,lBOR for the period 198 7-1991 and 1%% over i IBOR for the period 1992-1998 . In 17
as,,-eum.s ,, w , m u m u um s htarch 1985, documents were signed by the Company and extension of these payments was granted. Also in the Octo-other banks to amend the existing rescheduling agreements ber communication, the Mexican government estimated for some pre-198 3 public sector debt in order to bring them that its net new 1986 bo. Towing requirements from com-into conformity with the terms of this proposal. These mercial banks would be approximately $2 5 billion. The existing agreements had extended the principal of public government and the Mexican Bank Advisory Group have sector debt (originally falling due between August 1982 and decided to defer further debt discussions pending a clarifica-December 1984) to mature between 1987 and 1990. Of the tion of the country's financing requirements and the various Company's approximately $161 million of public sector financing resources available to meet those requirements. loans that originally were due between 1982 and 1984, At December 31,1985, the Company had $16 million of approximately $122 million was amended as described private sector loans in Mexico on nonaccmal status, and above. In August 1985, the Company and other creditor approximately $200 million ofloans to private sector Mexi-banks signed an agreement to reschedule most of the re- can borrowers had been rescheduled under a program maining pre-ig83 public sector debt that falls due between administered by the Trust for the Coverage of Exchange 1985 and 1991 in accordance with these terms. The Com- Risks (*FICORCA"). This $200 million represents substan-pany's share of these 1985-1991 maturities is approximately tially all of the Company's loans to the private sector $130 million. in Mexico that are expected to be renegotiated under Another portion of the September 1984 proposal was this program. instituted when the Company and other banks signed agree- BRAZIL During 1985, the Company had a net decrease in ments in March 1985 to amend a March 1983 $5 billion new cross border outstandings to borrowers in Brazil of $14 mil-money facility. Under the terms of this amendment, the
. lion, primarily due to a net decrease in hans and accep.
Mexican government was to prepay $1 billion of this loan in tances of $11 million. Accrued interest receivable decreased October and November 1985, and the remaining pnncipal from $13 million at December 31,1984 to $10 million at De-(scheduled to mature between 1986 and 1990) was extended cember 31,1985, as the Company received $63 million ofin-to a new final maturity of1994. The $1 billion overall pre-terest payments and accrued $60 million ofinterest income. payment would reduce the Company's $43 million current At December 31,1985, total Brazilian loans on nonaccrual balance of this loan by approximately $9 million; the Com- status were $15 million, all to private sector botrowers. pany's remaining balance of this facility will carry an inter- During 1985, bank creditors of Brazil continued to pro-est rate of1%% over prime. (The Company's $36 million vide trade and interbank facilities under interim measures participation m the above-mentioned 1984 term loan was recommended by the Bank Advisory Committee for Brazil. not amended, because it already carries a final maturity of In addition, all the 1985 maturities were deferred on an
" *^ B0th of the me ures were adopted pending I for i adopt o of t Sc e ber 1984 proposal, the g. n r weighted average contractual interest rate for the Com-The Brazilian government is in the process of completing pany's pubhc sector prime-based loans in Mexico was a draft ofits economic program for 1986, which it intends to approximately i.6% over prime and the weighted average submit to the International Monetary Fund. It is widely contractual interest rate for its LIBOR-based public sector anticipated that submission will be merely on an advisory, loans in Mexico was approximately 1.1% over LIBOR. When and not on an approval, basis. Negotiations with the Bank the terms of the proposal are fully mstituted, the contractual Advisory Committee on the refinancing of1985 and subsc-rate will be 1%% over prime for prime-based loans and th quent maturities, and on the trade and interbank facilities contractual rate will be imtially %% over LIBOR(and, there- have resumed. The Brazilian government has asked after, increasing) far LIBOR-based loans. On the basis of th its foreign creditors to extend the interim measures to current mterest rate environment, it is estimated that the March 1986.
immediate overall effect ofimplementing this proposal would be a decline of approximately 150 basis points in the VENEZUELA in May 1985, an agreement in principle pretax yield of the Company's Mexican public sector port- was reached between the Bank Advisory Committee and folio, reflecting the changes in contractual interest rate and the Venezuelan government on the terms of a rescheduling the mix of prime- and LIBOR-based loans. The Company of the public sector debt. If such rescheduling is agreed to halieves that the effect of this rescheduling on it will not by all of Venezuela's commercial bank creditors, including be matetial. the Company, it will provide for the refinancing of all public In October 1985, the Mexican government requested that sector debts falling due between March 22,1983 and Decem-its creditor banks defer the above-mentioned $i billion ber 31,1988. The Company's share of such debts is expected prepayment of the 198 3 facility in light of the recent carth- to be approximately $150 million. The rescheduling pro-quakes, declining oil revenue and other factors. A six-month posal calls for repayment over u years through 1997. The Company believes the effect of this rescheduling on it will not be material. 18 ; i
.n ,~ .
. CORE DEPOSITS AT YEAR END
~
Progress toward a public sector refinancing continues to depend on successful implementation by the Vene-zuelan government of mechanisms that permit private
$20 sector debtors to repay famign obligations. Successful - completion of this process should reduce creditc 'a' private 18A 18.0 Y
sectorloan problems. At December 31,1985, total Vene . 9 zuelan loans on nonaccrual status were $13 million,'all to - private sector bormwers. M M ;f
" h; ' ARGENTINA At December 31,1985, the Company had ' total cross border outstandings in Argentina of $133 million 33.o Oj1 ^ ' . (.45 Percent of total assets), including $32 million of non- 9 ..
accrual loans, substantially all of which were to private p, - , sector borrowers. .. p '4 10 In January 1985, the Company converted its Buenos lb
~ Aires branch into a representative ofIice and transferred -
certain branch assets and liabilities to a local Argentine .g. p- 3
- bank in which the Company acquired a minority interest. ?; .
7.-'
- In June 1985, the Government of Argentina announced 1 a major, new program designed to counter inflation and s -
l
. provide the basis for an improved economy. The program
- includes a substantial reduction in the public sector deficit,
'a major reform of the monetary system and a plan to con- -
trol the escalation of prices and the resulting escalation in wages. In addition, Argentina reached agreement with the g management of the International Monetary Fund (IMF) on 81 82 83 84 as
' the performance requirements for the country's financial program.This agreement has enabled Argentina to resume Noninteresthanng deposits drawings under an IMF 1.4 billion Special Drawings Rights standby facility. interestwanna cheaung aununm In August 1985, Argentina and its creditor banks signed agreements for the new money and debt rescheduling games components of the 1984/ 85 Financing Plan. This signing s.amas ceruticates was made possible, in part, by Argentina's above-mentioned agreement with the IME The Financing Plan calls for each citditor bank to participate in a $4 2 billion long term and trade finance new money facility. The Company's sharc DEPOSITS under this facility is $20 million. During September and November 1985, $3 billion was disbursed under the new money component, of which the Company's net share was Comparative year-end detail of total deposits is presented in
$14 million. Ofits share, the Company has not yet disbursed the following table.
. $6 million. Under the terms of the debt rescheduling com-ponent of the Plan, the public sector loans due for TABLE n repayment during the period 1982 through 1985 are to be DEPOSITS extended to mature during 1992 through 1997; the Company has $18 million outstanding in this category. The Plan also on mmions) December v.
contains a provision for extending 1982 through 1985 Private ses ig4 sector maturities to 1992 through 1995 APProximately Noninten st-bearing deposits $ 3,702.s $ 3 921.8
$25 million of the Company's private sector loans would be ' 7 '"
included in this rescheduling under the guarantee of the ((* '"[" g , ' ' " *" ""'* g,'g7gj 'f[*j 7 . Rcpublic of Argentina. The Company believes that the savings certincate a s,oso.8 5.gi3 5 effect of this rescheduling on it will not be material. core deposits i8,3s7 5 is.oo3.s Certincates ofdeposit 232 3 287.6 Other tirne deposits 223 9 386.3 Interest-bearing deposits - foreign 687 6 s.523.8
'Ibtal deposits 5 19.508 3 $ 20,201.2 19
a r i i , , uu % . mm m a mu -
'Ibtal deposits were down 3 percent at December 31,1985 The Company shifts borrowing activities from market to compared with year-end 1984 . Declines occurred primarily market to obtain the lowest-cost funds in each maturity in interest-bearing foreign deposits, reflecting the Bank's category while maintaining access to different borrowing restructuring ofinternational activities. Core deposits markets. Global funds management is centralized to facili-increased 2 percent, largely because of growth in market tate such shifts and to control overall borrowing positions.
rate savings accounts. The savings accounts category Pursuant to shelf registrations filed with the Secunties consists of savings deposits as well as market rate say- and Exchange Commission, the Parent had registered but ings accounts. unissued debt securitics of $352 million at February 20, A comparative schedule af average deposit balances is 1986, of which $150 million was for subordinated debt. presented in the rate / yield table on page 10. Average total Refer to note 6 to the financial statements beginnia g on deposits were essentially unchanged in 198 5 compared with page 32 for a schedule of senior and subordinated debt as of 198 4, despite some change in composition. Significant December 31,1985 and 1984. Information regarding declines occurred in interest-bearing foreign deposits and restrictions on subsidiaries transferring funds to the Parent other time deposits. Average core deposits increased 6 per. in the form ofcash dividends, loans or advances is provided cent, substantially due to growth in both market rate in note 2 to the financial statements on page 29 savings accounts and savings certificates. 'Ib accommodate future growth and current business Core deposits funded 62 percent and 61 percent of the needs, the Company has a capital expenditure program. Company's average total assets in 1985 and 1984, respec. Included in 1986 projections for capital expenditures is tively. Core deposits funded 75 percent and 71 percent of the $66 million for the relocation and remodeling of Company Bank's average total assets in 1985 and 1984, respectively. facilitics, routine replacement of furniture and equipment and additional automation equipment for branches. The Company will fund these expenditures from various LIQUIDITY MANAGEMENT sources, including net income of the Company and borrowings ofvarious maturities. Liquidity refers to the Company's ability to maintain a cash CAPITAL ADEQUACY flow adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. In recent years, core deposits, listed on page 19, have provided the Company with a sizable source of relatively The Bank and the Parent utilize a variety ofleverage mea-stable and low-cost funds. In 1985, the Parent raised $1,777 sures to evaluate capital adequacy. The capital ratios for million from issuances of unsecured debt, composed of sub- 1985,1984 and 1983, which are shown on page 8, reflect ordinated debt of $1,m8 million and senior debt of $759 mil- continued strengthening of the Company's capital position. lion. During 1985, senior debt of $341 million matured or The increase in capital at year-end 1985 compared with 1984 was redeemed. In 1984, the Parent and a subsidiary issued was primarily due to issuance of unsecured subordinated subordinated debt of $974 million and senior debt of and senior debt and to increases in retained carnings and
$287 million. the allowance for loan losses. The subordinated debt of The Company's core deposits, senior and subordinated $i,ota million issued in 1985 included $100 miF of man-debt and stockholders' equity, funded 79 percent and 73 per- datory equity notes, which were partially in. im d under cent ofits average total assets in 1985 and 1984 , respectively. regulatory guidelines in primary capital. All of the sub-Most of the remaining funding was provided by short-term ordinated debt and $100 million of unsecured senior debt borrowings, which primarily consisted of commercial paper issued in 198 5 were included in total capital.
issued by the Parent, federal ftmds borrowed by the Bank Management reviews the various leverage measures and sales of securities under repurchase agreements by monthly and takes appropriate action to ensure that they both the Parent and the Bank. The Parent, in addition to are within established internal and external guidelines. raising ftmds for its own use, acts as a funding source for the Management believes that its current leverage and liquidity nonbank subsidiaries, borrowing funds in a variety of mar- positions are stmng and exceed guidelines established by kets and lending them to the nonbank subsidiaries. industry regulators, and that its capital position is adequate Other sources ofliquidity include maturity extensions to support its various businesses. Management also moni-of short-tenn borrowings, confinned lines of credit from tors the extent and term of standby letters of credit relative banks, sale or runoff of assets and short-term interest- to its capital position. At December 31,198 5, standby letters carning deposits. The Company's policy is to extend maturi- of credit were $13 billion, or 58 percent of primary capital. tics of short-tenn borrowings when it is cost-effective to do so and to maintain confinned lines of cmdit from a variety of money center, regional and international banks. At December 31,198 5, the Company had $ 84 0 million in bank line coverage from unatliliated banks. 2o
TABLE 12 ASSET / LIABILITY MANAGEMENT INTEREST RATE SENStrIVITY (in billions) Averages for December 1985 Principal objectives of asset / liability management are to Assets Liabilitie Net a et iRema nl,n ,e manage the sensitivity of net interest spreads to potential matunty equity (column a mmus as a percent c,f total changes in interest rates and to enhance profitability in coiumn 23 assets w ys that promise sufIicient reward for understood and controlled risk. Specific asset / liability strategies are chosen -29 days s 2.s s 7.6 $ (s.3) (i7 2)%
~
to achieve an appropriate tradeoff between average spreads [ke aIe savings D ss (N) ' 09) (f8$) ' C34 and the variability of spreads. 30-i79 days 35 33 .2 7 When management decides to maintain maturity im- iso-3 64 days i. i.o .i 3 balances, it usually does so on the basis of statistical studies 1-5 years 4.s 2. i 24 8.i ofinterest rates of different maturities. Funding positions Oversyears 37 5 32 .8 10.8 2.7 N nrnaaet 48 9s (4 sy (ie.2) , are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is prop-w $ 29 6 s 29 s erly maintained. The Comi._.y hedges primarily to reduce mismatches in the r, te maturity of certain loans and deposit liabilities The preceding table shows the Company's interest-rate through the use ofinterest rate futures. Gains and losses on sensitivity based on average balances in December 1985-these futures contracts are deferred and amortized over the Interest rate sensitivity measures the interval of time before expected loan or deposit liability holding period. earning assets and interest-bearing liabilities are responsive Approximately 80 percent of the Bank's prime loan to changes in market rates ofinterest. Assets and liabilities portfolio is funded by market rate savings and six-month are categorized by remaining interest-rate maturities rather con:umer deposits. The Bank uses interest rate futures to than by final maturities ofobligations. For example, a new shorten the effective maturity of a portion of these deposits five-year loan with a rate that is adjusted every 180 days to the overnight to three-month range, which manage- would have a remaining interest rate maturity of180 days. ment believes will provide more stable and more profitable In 60 days, the same loan would have a remaining interest spreads between prime loans and the rates on those fund- rate maturity of120 days. ing sources. Management has made certainjudgments and approxi-The use ofimerest rate futures resulted in an amortized mations in assigning assets and liabilities to rate maturity gain on interest rate hedging of $37 2 million and $19 4 mil- categories: (i) the remaining maturities of fixed-rate k)ans lion in 19 85 and 1984, respectively. The 1985 increase in gain have been estimated based on recent repayment patterns oirsct a decrease in spread between the Bank's prime loan rather than on contractual maturity; (2) "nonmarket" assets yields and the rates paid on liabilities that fund prime k>ans. include noninterest-carning assets and credit card out-standings; anonmarket" liabilities include savings deposits, NOW accounts, demand deposits, other noninterest-bearing liabilities and equity and (3) asset and liability maturities reflect the effects ofinterest rate swaps. The one-year-and-over position has increased to a net asset position of $800 million as of December 1985 (2 7 percent of total assets) from $700 million a year ago (2 5 percent of total assets). 21
Ai 1 :-I \ Hi ,4 i% < s I M I' T N r \ Nit wi H 511 )f \ Hl f w COMPARISON OF 1934 VERSUJ 1983 1 n 1984 , net income was $169 3 million, up 9 percent Nonaccrual and restructured loans were $734.6 million, from $154.9 million in 1983. Net income per share for or 3 2 Percent of totalloans, at December 31,1984, com-1984 was $6.85, compared with $6.o3 in 1983 Pared with $748.6 million, or 3 7 Percent of total loans, at Interest differential increased 17 percent, from December 31,1983. The most significant increase in non-
$965 million in 1983 to $1,124 million in 1984, due to an 8 accnials occurred in agricultural-related loans secured by percent growth in average earning assets and a 33 basis real estate, which are included in the real estate mortgage point improvement in spread. The improvements in spread portfolio.
and in interest differential were primarily attributable to The Company's effective tax rate increased to 35% in increases in targeted loan categories and core deposits, 1984, compared with 33% in 1983. The higher 198 4 rate pri-f.vorable funding conditions and management ofinterest marily resulted from a greater amount of earnings subject r:te risk. to U.S. taxation and a decline in investment tax credits. Average loan volume in 1984 was $21.6 billion, an The Company's ratio of primary capital to assets was increase of 8 percent over 1983. Contributing to the to per- 6.65 Percent at December 31,1984 , compared with 5.68 per-cent increase in average commercial loans was growth in cent at the end of1983. 'Ibtal capital was 10 39 Percent of middle-market loans. The 24 percent increase in real estate assets at December 31,1984 and 7 20 percent a year earlier. construction-related loans was broadly based and resulted The increases were primarily due to the issuance of un-primarily from loans made to finance commercial prop- secured subordinated debt of $974 millioa during 1984 . Of erties. Consumer loans rose 22 percent, reflecting origina- this amount, $300 million was mandatory convertible debt, tion of new credit card accounts and line increases to exist- which qualified as primary capital. The remaining $674 mil-ing accounts. lion was included in total capital. Average core deposits increased 7 percent to $16.7 billion in 1984, largely because ofgrowth in savings certificates. A schedule of average loan and deposit balances for 1984 and 1983 is shown in the rate / yield table on page 10. Noninterest income was $270.6 million in 1984, a decrease of 3 percent from $279 5 million in 1983. The 1984 decrease reflected higher gains in 1983 from sales of prop-erty in San Francisco, equity securities received in troubled debt restructurings, bank premises and loans, partially offset by a 30 Percent increase in domestic fees and commissions. Noninterest expense increased 5 Percent in 1984 to
$886.6 million. Salaries increased by less than 3 Percent in 1984 while employee benefits expense decreased 6 percent, primarily due to a decrease in retirement plan expense. "All other" expense was up 41 percent in 19P4. In 1983, the Company reversed a $9 4 million reserve it had established for possible payments associated with settlement of out-standing tax issues, which had the effect of reducing "ah other" expense in 1983 The allowance for loan losses at the end of1984 was 1.14 percent of total loans, compared with .98 percent at the end ofi983. The provision for loan losses was $194.6 million in 198 4, compared with $i21.1 million in 1983. During 1984 , net charge-offs were $133 3 million, compared with $nt.9 mil-lion during 1983. As a percentage of average loans out-standing, net charge-offs were .62 percent in 1984 and .56 percent in 1983. A significant portion of the 1984 increase was attributable to private sector foreign loans, agricultural-related loans and loans to small and mid-size borrowers in a variety ofindustries.
22
g - -y _ _ PRICE RANC 1 PIUCE RANGE OF COMMON STOCK ANNUAL OF COMMON S1DCK-QUARTERLY (C) (C)
?$70 .$70 64 %
65 64 % 65
$" 62 60 h 60 61 %
f-55 .N :. 7Ei 55 55 % 49 7; 50 51 % 52 % 45 45 % 41 % b, y S 40 45 44 43g 35 35 % 1 h4 42 i f - M 40 h l d%D 38 %
@ ,; 31 %
30 l
$ 35 35 %
25 g 26 % 3l 31 4 30 20 . M '? 18 % 15 25 81 82 83 84 85 IQ .2Q 3Q 4Q IQ 2Q 3Q 4Q 1984 1985 llI233 Indicates pnce at end of year Indicates pnce at end of quarter GENERAL INFORMATION ommon stock of the Parent is traded on the New by the Company's Board of Directors in light of the earnings York Stock Exchange, the Pacific Stock Exchange, and financial condition of the Company. In the first quarter C B6rse. The high, low and closing annua the London Stock Exchange and the Frankfurter of1985, the common stock quarterly dividend was increased to $.6o per share from $.54 Per share and, in the fourth quarterly prices of the Parent's stock as reported on the New quarter, it was increased to $.68 per share. Information York Stock Exchange Composite Transaction Reporting regarding restrictions on the payment of dividends is System are presented in the above graphs. The approximate presented in note 2 to the financial statements on page 29 number of holders of record of the Parent's common stot k In February 1986, the Board of Directors approved an was 22,100 as ofJanuary 31,1986. . increase in the number of authorized common shares from Common dividends declared per share totaled $2 48 in 50 million to 75 million, subject to stockholder approval. 1985, $2.16 in 1984 and $198 in 1983. The Company intends information on financial reporting and changing prices is to continue its present policy of paying quarterly cash divi- presented on page 45 dends to stockholders. Future dividends will be determined l 1' I I 23
W El.15 F AMIM) & ('()MPAN Y AND 9t'HMIDI ARIES CONSOLIDATED STATEMENT OF INCOME (in thousands) Year ended December 31, 1985 1984 1983 INTEREST INCONIE loans $ 2,809,273 $ 2,830,880 $ 2,481,o86 ~
. Interest-earning deposits 46,664 '106,309 144,094 Investment securitics:
Taxable 113,870 99,380 43,476 Exempt from federalincome taxes 7,389 9,937 13,075 Trading account securitics 22,308 14,841 10,365 Federal funds sold - 17,443 40,200 22,231 lbtalinterest income 3,016,947 3,101,547 2,714,327 INTEREST EXPENSE Dcposits . 1,245,323 1,493,267 1,382,839 Short-term borrowings 261,209 332,738 259,631 Senior and subordinated debt 327,381 225,500 160,o99 Tbtalinterest expense 1,833,913 2,o51,505 1,802,569 Amortized gain on interest rate hedging 37,225 19,437 3,236 NET INTEREST INCOA1E 1,220,259 1,o69,479 914,994 Provision forloan losses 371,836 194,593 121,109 Net interest income after provision for loan losses 848,423 874,886 793,885 NONINTEREST INCOA1E Service charges on deposit accounts 108,994 95,236 85,503 Domestic fees and commissions 88,176 75,396 57,986 Investment securities gains 55,471 3,o22 537 TYust and investment services income 55,132 51,159 56,379 International fees, commissions and foreign exchange 17,766 20,728 30,o76 Sale of a mortgage banking subsidiary 50,152 - - Other 19,973 25,088 48,976 1btal noninterest income 395,664 270,629 279,457 NONINTEREST EXPENSE Salaries 414,445 405,849 394,968 Employee benefits 99,468 83,499 88,756 Net occupancy 87,788 81,654 78,764 Equi,tment 75,940 74,189 68,267 Other 266,114 241,396 212,894 Tbtal noninterest expense 943,755 886,587 843,649 INCON1E BEFORE INCOA1E TAX EXPENSE 300,332 258,928 229,093 Income tax expense 110,298 89,663 74,793 NET INCOA1E $ 190,o31 $ 169_,2_65 $ 154 _,900 NET INCOAIE APPLICAHLE'IU COA 1A10N STOCK $ 177,246 $ 154,171 $ 143,o67 PER COA 1A10N SIIARE Net income $ 8 30 $ 6.85 $ 6.03 Dividends declared $ 2 48 $ 2.16 $ 1 98 Average common shares outstanding (in thousands) 21,351 22,5y 23,737 The accompanying notes are an integral part of these statements. 24
CONSOLIDATED BALANCE SHEET
. (in thousands) December 31, 1985 1984 ASSETS . Cash cnd due from banks $ 1,402,162 $ 2,o48,981 Interest-earning deposits 534,511 432,628 Investment securities (market value $1,675,112 and $1,048,986) 1,696,070 1,088,543 Trading account securities 146,658 198,614
- FederEl funds sold 39,650 225,024 loans 24,614,173 22,893,870
- Allowance for loan losses 417,52o 260,314 Net loans 24,196,653 22,633,556 Premises and equipment, net 444,408 453,46 7 Due fro'n customers on acceptances 254,871 426,538 Accrualinterest receivable 222,549 283,214 Other assets 491,862 393,559
'Ibtal assets $ 29,429,394 $ 28,184,124 LIABILITIES AND STOCKHOLDER 8' EQUITY Deposits:
Noninterest-bearing-domestic $ 3,6 93,69 7 $ 3,799,746 Noninterest-bearing-foreign 8,411 122,038 Interest-bearing-domestic 15,111,602 14,755,66o Interest-bearing-foreign 687,590 1,523,793
'Ibtal deposits 19,501,300 20,201,237 Short-term borrowings:
Federal funds borrowed and repurchase agreements 1,800,o58 963,333 Commercial paper outstanding s,436,227 1,783,885 Other 108,898 50,880
'Ibtal short-term borrowings 3,345,183 2,798,098 Acceptances outstanding 255,225 426,661 Accrued taxes and other expenses 373,187 4 60,493 Senior debt 2,129,689 1,708,568 Otherliabilities 310,29o 233,694 25,914,874 25,828,751 Subordinated debt 2,o56,560 1,on,703
'Ibtal habilities 27,971,434 26,840,454 Stockholders' equity:
Preferred stock-no par value, authorized 10,000,000 shares; issued and outstanding 3,000,000 shares (nonconvertible, cumulative, stated value-$50) 150,000 150,000 Common stock-$5 Par value, authorized 50,000,000 shares; issued and outstanding 21,139,311 shares and 21,234,597 shares 105,697 106,173 Additional paid-in capital 158,190 169,904 Retained earnings 1,050,993 926,738 Equity adjustment from foreign currency translation (6,92o) (9,14 5)
'Ibtal stockhoklers' equity 1,457,96 o 1,343,670
'Ibtal liabilities and stockholders' equity $ 29,429,394 $ 28,184,124 The acwmpanying notes are an integral part of these statements.
25
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) Preferred Common Additional Retained Foreign 7btal stock stock paid-in earnings currency stockholders
- capital translation equity Balance December 31,1982 $ - $ 118,034 $ 262,556 $ 724,589 $ (4,744) $ 1,100,435 Net income-1983 154,900 154,900 Preferred stock issued, net ofissuance costs 150,000 (3,800) 146,200 Conversion ofconvertible notes 25 123 14 8 Common stock issued under employee benefit and dividend reinvestment plans 1,525 6,803 8,328 Common stock mpurchased (175) (773) (948)
Preferred stock dividends (11,833) (11,833) Common stock dividends (47,045) (47,045) Equity adjustment from foreign currency translation (net ofincome tax expense of$2.145) (2,414) (2,414) Net change 150,000 1,375 2,353 9fr.022 (2,414) 247,336 Balance December 31,1983 150,000 _ 119,409 264,909 820,611 (7,158) 1,347,771 Net income-1984 169,265 169,265 Exercise of warrants and conversion of convertible notes 776 3.045 3,821 Common stock issued under employee benefit and dividend reinvestment plans 1,029 5,75o 6,779 Common stock repurchased (15.041) (103,800) (128,841) Preferred stock di/.dends (15,094) (15,094) Common stock dividends (48,044) (48,o44) Equity adjustment fmm foreign curmncy translation (net ofincome tax benefit of$860) (1,987) (1,987) Net change - (13,236) (95,005) 106,127 (1,987) (4,101) Ilalance December 31,1984 150,000 106,173 169,904 926,738 (9,145) 1,343,67o Net income-1985 190,034 190,034 Exercise of warrants and conversion of com crtible notes 676 2,660 3,336 Common stock issued under employee benefit and dividend reinvestment plans 1,340 9,483 10,823 Equity adjustment from fbreign currency translation (net ofincome tax expense of$1,303) 2,225 2,225 Common stock repurchased (2,492) (23,857) (26,349) Prefermd stock dividends (12,78 8) (12,788) Common stock dividends (52,991) (52,991) Net change - (476) (li,7:4) n24,255 2,225 114,290 llalance December 31,1985 $ 150,000 $ 105,69 7 $ 158,190 $ 1,050,993 $ (6,920) $ 1,457.960 The accompanying notes are an integral part of these statements. en
CONSOLIDATED STATEMENT EF CHAN~ES IN FINANCIAL POSITION (in thousands) Year ended December 31, 1983 1984 1983 Financial resources provided by (applied to): Operations: Net income $ 190,034 $ 169,265 $ 154,900 Noncash charges: Provision forloan losses 371,836 194,593 121,109 Depreciation and amortization 64,759 58,220 50,422 Deferred income tax expense 29,407 44,135 49,953 Financial resources provided by operations 656,o36 466,213 376,384 Cash dividends declared (65,779) (63,138) (58,878) Net financial resources provided by operations 590,257 403,o75 317,506 Deposits and other financing activities: Noninterest-bearing deposits (219,67 6) 77,082 193,375 Interest-bearing deposits (4 8o,261) (236,841) 1,982,831 Short-term borrowings 547,085 146,573 (46,241) Senior and subordinated debt 1,465,978 1,187,745 158,520 Exercise of warrants and conversion of convertible notes 3,336 3,821 148 Common stock issued under employee benefit and dividend reinvestment plans 10,823 6,779 8,328 Common stock repurchased (26,349) (128,841) (948) Preferred stock Nsued, net ofissuance costs - - 146,200 Financial resources provided by deposits and other financing activitics 1,300,936 1,066,318 2,447,213 i I Other activities-(increase) decrease in net noncarning assets: Cash and due from banks 646,819 143,558 (507,167) Net additions to premises and equipment (51,287) (48,934) (62,983) Other net (79,712) (65,604) (126,914) Financial resources provided by (applied to) net noncarning assets 515,82o 29,020 (697,064 ) Increase in financial resources invested in earning assets $ 2,407,013 $ 1,498,413 $ 2,o67,655 Increase (decrease) in earning assets: Interest-carning deposits $ 101,883 $ (1,132,773) $ 574,865 Inyestment securitics 6o7,527 120,239 364,447 Trading account securities (51,956) 136,293 (51,580) Federal funds sold (185,374) (385,476) 568,800 Net loans 1,934,933 2,760,13o 611,123 Increase in carning assets $ 2,407,013 $ 1,498,413 $ 2,o67,655 The anompanying notes are an integral part of these statements. 21
b NOTES TO FINANCIAL STATEMENTS NOTE 1
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Wells Fargo & LOANS loans are reported at the principal amount out-Company and Subsidiaries (Company) conform with gener- standing, net of unearned income. Unearned income on ally accepted accounting principles and prevailing practices loans is recognized as income primarily on a declining basis within the banking industry. Certain amounts in prior years' (sum of-the-digits method) over the term of the loan, except financial statements have been reclassified to conform with at certain nonbank subsidiaries where unearned income is the current financial statement presentation. amortized using an interest method. The following is a description of the more significant A portion ofloan origination fees intended to offset direct policies. origination costs are recognized as income at the time of the loan closing. Any excess fees are amortized to interest CONSOLIDATION The consolidated financial statements income over the expected loan period using an interest of the Company include the accounts of Wells Fargo & Com-method or the straight-line method ifit is not materially pany (Parent), Wells Fargo Bank, N.A. (Bank) and the non-different' bank subsidiaries of the Parent. .
. . Uncarned income from directlease financing trans-Foreign branches and sigmficant, majority-owned sub-actions is amortized over the ! ease terms using an interest odiaries are consolidated on a line-by-line basis. Sigmficant method. Income on leveraged leases is recognized to attain mtercompany accounts and transactions are chm, m ated a constant yield on the outstanding investment in the lease, m consolidation. Other subsidiaries and affiliates in net of related deferred tax liability, in the years in which the which there is at least 20 percent ownership are generally net investment is positive. At the lease inception, Wells accounted forby the equity method and less than 20 percent .
Fargo Leasing Corporation recognizes a portion of unearned owned m. vestments are carried at cost. These m. vestments income equal to the approximate direct costs of acquiring are reported m other assets; mcome, mcluding disposition leases plus an estimated provision for loss. gains and losses, is included in noninterest income. Nonaccrualloans Loans, other than 1-4 family residen-SECURITIES Trading account securities are carried at tial real estate loans and consumer loans for which no por-market value. Realized and unrealized gains or losses are tion of the principal has been charged otT, are placed on reported m namnterest income. nonaccrual status when the loan becomes 90 days past due Debt securities held for investment purposes are carried as to interest or principal, unless both well secured and in at cost, adjusted for amortization of premium and accretion the process of collection, or when the full timely collection ofdiscount. Gains orlosses on the sale ofinvestment secu- of nterest or principal becomes uncertain. When a loan is rities are reported using the " identified certificate" method. placed on nonaccrual status, the accrued and unpaid inter-Nonmarketable securities acquired for various reasons, est receivable is reversed and the loan is accounted for on such as troubled debt restructurings or distributions, are the cash or cost recovery method thereafter, until qualifying included in other assets. for return to accrual status. PREMISES AND EQUIPMENT Premises and equip- Allowance for k>an losses The allowance for loan losses ment are stated at cost less accumulated depreciation and is supported by a review and evaluation of various factors
- amortization. Capital leases are included in premises and which affect the collectibility of the loan portfolio. In the equipment at the capitalized amount less accumulated evaluation, numerous factors are considered, including, but amortization. not necessarily limited to, general economic conditions, Depreciation and amortization are computed primarily loan portfolia composition, priorloan loss experience and using the straight-line method with appropriate salvage val- management's estimate oflosses inherent in the loan ucs. Estimated useful lives range up to 40 years for buildings, portfolio.
3-iS years for furniture and equipment and up to the lease OTIIER REAL ESTATE Other real estate, consisting tenn for leaschold improvements. Capitalized leased assets of real estate acquired as a result of troubled debt restruc-are amortized on a straight-line basis over the lives of the turings and excess real estate, is carried at the lower of cost respective Icases, which generally range from 20-35 years. or market and is included in other assets. When the prop-erty is acquired, any excess of the k>an balance over market value of the property is charged to the allowance for loan losses. Subsequent write-downs, if any, and disposition gains and losses are recorded in noninterest expense, a
L INCOME TAXES The Company files a consolidated fed- financial statements are then translated into U.S. dollars
; ral income tax return and a combined California franchise using the current rate method. Translation adjustments are tax return. Generally, the tax Pabilities are settled between disclosed as a separate component of stockholders' equity.
subsidiaries as if each had file d a separate return. Payments Such adjustments are reversed upon sale or upon complete, are made to the Parent by those subsidiaries with net tax or substantially complete, liquidation of the investment and liabilitics on a separate basis. Subsidiaries with net tax losses recognized in net income. r nd excess tax credits receive payment for these benefits Forward exchange contracts that hedge equity invest-from the Parent. Taxable income is computed primarily ments are revalued monthly at current market rates.
- using the cash receipts and disbursements method of The gain or loss, less applicable income taxes from such accounting as permitted by the tax statutes. . revaluation, is included in the translation adjustment in the Deferred income taxes, included in accrued taxes and separate component of stockholders' equity. The amortiza-
. other expenses, result from timing differences between tion of the premiums or discounts on these contracts is income as reported in the financial statements and as included in income.
reported for income tax return purposes. Gains or losses from other foreign currency transactions, Federal income taxes are not provided on carnings of including foreign exchange trading activities, are recognized foreign subsidiaries or afliliates that are intended to be in the current period in noninterest income. Premiums or indefinitely reinvested abroad. Federal income taxes are discounts on forward exchange contracts that are associated provided on the carnings of foreign consolidated subsidi- with the funding of assets from liabilitics of a different cur-aries and foreign equity investments that may be repatri- rency (swap transactions) are deferred and amortized into ated to the U.S. under the assumption that all such earnings interest income or expense over the life of the contract. will be distributed in the future as dividends. INTERESF RATE FUTURES The Company hedges pri-Tax reductions arising from the mvestment tax credit on marily to reduce mismatches in the rate maturity of certain property purchased and used by the Company are recog-loans and deposit liabilities through the use ofinterest rate nized as a reduction of tax expense m the current period. futures. Gains and losses on these futures contracts are Investment tax credit on property purchased for lease t deferred and amortized over the expected loan or deposit customers is deferred and amortized as lease financmg i ability holding period. This amortization is shown as a sep-income over the term of the related lease. arate component of net interest income. Futures contracts FOREIGN CURRENCY TRANSLATION The Company obtained for hedging assets in the trading portfolio are employs the net investment concept for foreign operations. marked to market and gains and losses are included in non-Under this concept, a functional currency is designated for interest income, each foreign entity based on the currency of the primary NET INCOME PER COMMON SIIARE Net income per economic environment m which the entity operates. The common share is computed by dividing net income (after assets, liabilities and operations of an entity denominated .in deducting dividends on preferred stock) by the average other than its functional currency are mitially remeasured number ofcommon shares outstanding during the year. mto its functional currency with the gain or loss recognized The impact of common stock equivalents and other poten-m current period income. For consolidation purposes, the tially dilutive securitics is not material. NOTE 2 CASH, LOAN AND DIVIDEND RESTRICTIONS I Federal Reserve Board regulations require reserve balances Dividends payable by the Bank to the Parent without the on deposits to be maintained by the Bank with the Federal express approval of the Oflice of the Comptroller of the Cur-Reserve Bank.The average required reserve balance was rency are limited to the Bank's net profits (as defined) for approximately $530 million and $500 million in 1985 and the preceding two years plus net profits up to the date of 1984 , respectively, any dividend declaration. Under this formula, the llank can The 11ank is subject to t ertain restrictions under the Fed- declare additional dividends in 1986 of approximately cral Reserve Act, including restrictions on any extension of $290 million ofits undistributed carnings at December 31, credit to its affiliates. In particular, the Parent and its non- 1985 plus net profits for 1986 up to the date of any such divi-bank subsidiaries are prohibited from borrowing from the dend declaration. Bank unicss the loans are secured by specified collateral. At December ai,19 85, net assets of the Bank that were Such secured hxms and other regulated investments made restricted as described in the prece img two paragraphs by the ILmk are limited in amount as to the Parent or to any were approximately $t.o billion. ofits nonbank subsidiaries to to percent of the Bank's capi-tal and surplus and, in the aggregate to all such entitics, to 20 percemt of the Bank's capital and surplus. 20
A} I -E \ H( a > A i t iM I' T N Y A N ) > s t H%Ilil T HIF % ,. - e NOTED INVESTMENT SECURITIES
' The following table provides the major components of investment securities and a comparison ofbook and market values. .
. (12 thousands) . December 31, 1985 1984- 1983 Book value Market value _ Book value Market value Book value Market value
'U.S. Treasury securities $ 1,n34,768 $ 1,147,873 $ 637,659 $ ' 645,704 $ 478,540 $ 475,073 '
Securities of other U.S. government - agencies and corporations 19,588 18,065 20,993 23,456 100,291 94,140 Obligations of states and political subdivisions 135,194 I10.873 190,955 157,683 247,185 205,785 Other securities 4o6,52o 39 8,3o1 038,936 222,i43 142,288 ~ 143,404
'Ibtal investment securities $ n,696,070 $ n,675,II2 $ t,o88.543 $ t,048,986 $ 968,304 ' $ 918,402 The market value of U.S. Treasury, other U.S. govern- million in 1985,1984 and 1983, respectively, is included in
- ment securities and certain other securities is determined taxable income on investment securities in the consolidated based on current quotations. The market value ofobli- statement ofincome.
. gations of states and political subdivisions is determined The book value ofinvestment securities pledged to
' based on current quotations, where available. Where cur- secure public deposits and for other purposes as required rent quotations are not available, market value is deter- or permitted by law was $268 million and $275 million at mined based on the present value of future cash flows, December 31,1985 and 1984, respectively.
adjusted for the quality rating of the securities and other The income tax expense for 1985,1984 and 1983 factors. included $28.2 million, $1.6 million and $.3 million, respec- - Dividend income of $21.2 million, $14 4 million and $4.6 tively, related to investment securities gains. NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES (in thousands) December 31, 8983 3984 The table at left shows comparative year-end detail of the Domestic loan portfolio. Commercial, financial, and agricultural $ 8,474,897 $ 8,o54,968 The components oflease financing at December 31,1985 Real estate construction-related 4,iB6,23o 3,303,543 and 1984 are as follows: Real estate first mortgage loans secured by t-4 family residential properties 3, 09,595 3,400,041 Other real estate mortgage loans n,509,796 1,462,288 December 33, (in thousands)
'Ibtal real estate mortgage loans 4,6sg,391 4,862,329 s985 3944 Monthly payment n,074,730 795,392 Credit card i,298,o63 908,647 Direct lease financing minimum lease Other revolving credit 225,206 payments receivable $ 924,507 $ 71 ,837 3no.275 Real estate juttior lien mortgage loans Direct lease financing unguaranteed secured by 1-4 family residential residual value 370,746 287,884 leveraged leases 83,206 76,316 Properties 3,523,76o n,152,787 E2 uipment pendinglease placement a4,348 131
'1btal ccmsumer 4,206,828 3,082,032 Investment in lease financing t,392,807 1,076,168 lease financing i,in a,695 855,649 Uncarned income (278,882) (220,519)
Foreign - Investment in lease financing, net Governments and ofDciat institutions 673,374 8o3,742 of unearned inwmc 8.t na,695 85,649 5 Banks and other financial institutions 457,13: 687 433 Allowance forlosses ( 5,sh6) (8.480) Commercial and industrial (i) 88:,647 i,244.174 Net investment in lease financing $_n ,t_199 $ 8 47,169
'Ibtal foreign 2 oi2,n32 2.735.349 Tbtalloans(net of unearned income of $416,350 and $386,454) $ 24,6:4, 73 $ 22,893170 Wells Fargo trasing Corporation recognized $7 5 million, (i) includes commercial enterprises that are masonty-owned by cent ral $2.0 million and $1.o million of unearned income in 1985, noveraments. 198 4 and 1983, respectively, to ofTset initial direct costs of so _ _ _ _ _ __ _
j
A F 1 1 % b A Hi a > & ( ( )%f l' A N N A N I > % t HSil >! A HI F S Direct lease receivable installments mature as follows: Nonaccrual and restructured loans were $789.8 million and $734.6 million at December 31,1985 and 1984, respec-tively. Related commitments to lend additional funds totaled 0 """'*"d') approximately $30 million and $36 million at December 31, year ended December 3i, 1985 and 1984, respectively. ig86 $ 24o.226 Ifinterest due on all nonaccrual and restructured loans 1987.- 204,824 had been accrued at the original contract rates, it is esti-1988 i68,683 mated that income before income taxes would have been ig89 i27,681 61,454 greaterby the amount shown in the following table: 1990 1991-200o 121,639
'Ib,al ' $ 924,507
( n thousands) Year ended December 31, ig83 1984 1983 Interest that would have been recorded For financial statement purposes, the Company had under original terms $ 91,948 $ 94,881 $ 83,478 Gmss interest recorded 35,879 37,112 50,o64 unamortized investment tax credits on property purchased for lease to customers of $40 5 million, $25 7 million Foregone interest $ 56,069 $ 57,76 9 $ 33,414 r_nd $28.2 million at December 31,1985,1984 and 1983, respectively. Changes in the allowance for loan losses were as follows: (in thousands) Year ended December 33, 8985 1984 1983 Balfnce, beginning ofyear $ 260,3:4 : $ 199,556 $ 190,538 NOTE 5 Provision forloan losses 371,836 194,593 121,109 DMMMM Netloan charge ofTs: Commercial, financial, and agricultural 36,2g: 88,07 84,954 Real estate construction-related 306 3,5 71 342 , Red estate i-4 family n,3o8 1,487 i,383 The following table presents comparative data for premises Other real estate mortgage loans 7,442 4,498 0 45) and equipment: Monthly payment 6,6a4 1,949 4,158 Credit card and related plans 45,453 9,717 6,148 lease financing g,352 4,g22 6,267 (in thousands) December 3i, Foreign 24,818 19.oSo 8,834 3985 3984
'1btd net loan charge-offs (i) 241,587 133,265 111,941 Other deductions 3,043 570 15o 1and $ 26,496 $ 31,354 Bal:nce, end ofyear $ 4:7,52o
** *** 4' '3
$ 260,334 $ 199.556 Allowince as a percentage leasehold improvements 303,275 99,96 7 of totalloans n.70% 1.14 % 98 % Premises leased under capital leases a 24,726 126,90:
'Ibtal 754,644 729,072 (i) Includes recoveries of $25.6 4: thousand. $27.805 thousand and $23,724 thou. less accumulated depreciation and amortization 310,236 275,605 tend in igas,1984and se3, respectively- Net book value 5444,408 $ 453,467
- Changes in allocated transfer risk reserves, which are included in the allowance for loan losses, were as follows: Included in accumulated depreciation and amortization was accumulated amortization related to capital leases of
$47 5 million and $43 9 million at December 31,1985 and (in thousands) Year ended December 3i, 1984, respcClively.
ies ie4 ie3 Depreciation and amortization expense was $60 3 mil-lion, $55 3 million and $49 9 million for the years ended a , beginning of year $ 5,9 8: $ 8n $ - December 31,1985,1984and 1983, respectively. Dcductions n3 - - Bal:nce, end of year $ 27,585 $ 5.981 $ 822 3:
W F I I M F AMG4 ) & ( ()MPAN Y A N D SU HNIDI ARIF.M 1 . > n .-:q r ~- t - i + m.:.e- , ,
^ NOFE CJ SENIOR AND SUBORDINATED DEBT ~
The following is a summary of the major categoties of senior and subordinated debt (less~ unamortized debt discount where
' applicable) at December 31 1985 and 198v (in thousands) December 31, 1985 3984 -
SENIOR
- Intermediate term (original maturities.from 1-12 years)
Parent:
$~ ' - -$150,m -
- 9 55% Notes due 1985
- 10%% Notes due 1985 ($100,000 face amount) - -
99.934 3t40% Notes due 19870) 50,0N -50,000 12% Notes due 1987 ($100,000 face amount)(i) 99,924 ' 99,882 13%% Notes due 1987(2) sm,mo . Im,e - 12%% Notes due 198 9 ($75,000 face amount)(2) 74,8:9 - 74,784 12 30% Notes due 1990(i)(a) 100,000 100,000 14%% Notes duc 1991 ($100,000 face amount)(2) 99,079 . 98 ,974 : 9%% Notes due 1993 ($1m ooo face amount)(a) . 99,200
. Floating Rate Extendable Notes duc 1988 (3) am,om . -
Floating Rate Extendable Notes duc 1992 ($300,000 face amount)(4) 299,705 299,672 7 90% to n2.60% Medium-Thrm Notes due 1986 through 1990 65,65 9 9 137,200 Other notes - 15,433 Subsidiaries: 15% Guaranteed Notes due 1985 ($75,000 face amount) - 74,843 15% Guaranteed Notes due aga7(5) 75,om 75,000 - Zero Coupon Notes due 1988-effective rate of14 75% ($164,249 face amount)~ Parent guaranteed (6) s2n,277 105,870' Other notes 2,447 2.477 Total intermediate-term senior debt 1,917,146 1,484.069 tong-term (original maturities of more than 12 years)
' Notes payable by the Parent 100,4:2 102,10 Notes payable by subsidiaries i4,776 20,955 Tbtal long-term senior debt i 5,iB6 123,o56 Obligations under capitalleases 97,355 101,443
%tal senior debt . 2,t::g.689 t,708,568 SUBORDINATED
. Intermediate-term (original maturities from t-12 years)
Parent: 12%% Notes due 1991, Series A ($21,248 face amount at December 31,1985)(t)(7) 25.098 104,493 12%% Notes due 1991, Series B ($85,055 face amount)(i)(a) 84,308 - 12%% Notes due 199i ($ ion.orm face amount)(ix2) 99,897 99,879 13%% Notes due 1991 ($ tex),txx) face amount)(t)(8) 99,78 0 99,756 13 50% Notes due 19910)(2) 150,mm 150,om Floating Rate Notes due 1992(axe) s 50,8xx) - Floating Rate Notes due 1994 (U.K. pounds sterling denominated E60,ooo face amount)( gsyg) 86,7s2 69,450 Floating Rate Notes duc 1994 (2)(s) 150,om iso,om Deutsche Mark Floating Rate Notes due 1995 (DM 3m,tum)(syno) s22,700 - Floating Rate Notes duc 1996 ($ ion,txx) face amount)(2xii) 99,473 99,421 Floating Rate Capital Notes due 1996 ($i50,000 face amount)(a gia) 149,934 149,927 Floating Rate Notes duc 1997(a)(a) 250,txe - floating Rate Notes due June 1997($ ion, cum face amount)(2)03) 99,88 - Floating Rate Notes due July 1997(agex 3) im,mm - Floating Rate Capital Notes due i9g7(2xsMiz) im,mm - Subsidiaries: 4%% Capital Notes due 198 9 (r) 3 8,777 3 8,777 Floating Rate Notes due 1996 - Parent guaranteed (sM n) So txm 50,000
%tal intermediate-term subordinated debt i,8 56,56o 1,oit,703 tong-term (original maturities of more than 12 3 cars)
Parent: Floating Rate Notes duc 2000 (:Ms) ano, cum -
- %tallong-term subordinated debt zoo, cum -
Total subordinated debt _ 2,oS6,56o e,oit,703
%tal senior and subordinated debt $ 4,386,249 $ 2,720,271 32
~
- n. . . .%~-
wy 4 (i) "nie Corr pany has intered into f n interest r:te sw p agreement, whereby the Company tercives fi - rFp intere;t paymentupproximately equal thttered /on W Notes and trakts !nterest payments based on a noating rate. ,
- (2) May be redeemed in who4 eda part, at par beginning at various dates through January i,ig60.
- (3) Repayable in whole or in part, at par,in ag86 and 398 7 at the option of the holder.
(4) Repayable in whole or in part, at par,in 19 68 and 3989 at the option of the holder _ a (5) May be redeemed in whole or in part, at par, beginning 1986 or if the event described in note (6) below occurs. (6) May be redeemed in whole, at par, at any time in the event withholdmg taxes are imposed in the United states cr the Netherlands Ar.tilles. (7) Issued with 00,000 warrants to purchase $noo million 12%% subordinated Notes due iggs, series B. These warrants may be excrc.ised prior to n990. When warrast ve ex ; rcised, series A Notes in an identical principal amount are redeemable at ion %. At December 3i,19 5,8 $78,752 thousand of Series A Notes had been redeemed. Tho series A Notes are also redeemable at not% beginning ig89 and at par beginning i990 or if the event described in note (8)below occurs. : (8) M:y be redeemed in whole, at par, at any time in the event withholding taxes are im povIbhe United States. (9)The Company has entered into a sup agreement, whereby the com pany receives Nunaherling sufricient to cover floating rate interest and pnncipal on the Notes c nd m:les payments in U.s. dollars covering interest and principal. The transaction aanvint at the date ofissue and swap was $74.oio thousand. The differences of
$i2,702 thousand amlis,560 thousand at Decen,her 3i,3985 and 3984 respectively, mest da ao the foreign currency trasarA u adjustment in accordance with FASB st: tement No. 52. -
q,, (to)These notes are sebiect to a maximum interest rate of 8%. The company has sold thisyterest rate carg mder an agreement wheret v it rei eives fixed pavmems in deut =he marks and mdes payments based on the amou nt by .rhich a 00ating raN. exceeds 8%.The Company has also entered into a swap agreement whereby the company receivedeu' sche marks approximately equal to interest and prNcipal on the Notes and makes payments in U.s. dollars.The transaction amount at thiJatt w'
- i. issue tnd swap was $n7,702 thousand. The difference of $4.998 thousand at December 33.1983 was due to the foreign currency transaction adjustment in accordance with FASB st tement No.-p t.
(n) Equity Cownument Notes. (12) Mzndatory Equ.ity Notes, ) ' (33) subject to a manmum interest rate of 3%. } The principal payments, including sinking fund pay-ments, on senior and subordinated debt are due as follows: - p _ (in thousands) 1986 ig87 1988 709 i990 After1990 Total Pirent $240,$94 $415.444 $262,244 $ aso,20t $160,644 $ 2,139.99$ $ 3,769J22 - Cornpany 248,602 499,640 C h,554 194.310 abu,723 2,665,297 4,211726 The interest rates on the floating rate note issues are Certain of the agreements under which the notes, determined periodically by formulas based on certain debentures and mortgages were issued contain provisions money market rates or, in certain circumstances, by that restrict the payment ofdividends, the disposition of minimum interest rates as specified in the terms of the assets, the creation of property liens and the issuance of respective issues. capital stock of the Company.The Company was in compli-The Company's mandatory convertible debt, which is ance with the provisions of the bormwing agreements at identified by notes (11) and (12) to the tab 1c on the preceding December 31,1985 page, qualifies as primary capital, subject to certain regu-
- latory limitations. The tenns of the Mandatory Equity Notes require the Company to sell or exchange with the note holder the Company's common stock, perpetual preferred stock or other capital securitics at maturity or earlier redemption of the notes. Mandatory Equity Notes at December 31,1985 totaled $250 million (face amount),'
of which $150 million is due in 1996 and $100 milli 6r/ m 1997 The terms of the Equity Commitment Notes, which totaled
$150 million (face amount) at December 31,1985, require the 3 Company to deposit proceeds from the issuance of capital < ,
- securitics into a Note Fund according to the following sched- e ule: $50 million by 1988,1992 and 1996. As of December 31, 1985, $24 million had been dedicated to or deposited in a )
Note Fund. 33
, __ _ _ ~ . _ ,m_ - -- ___,_ _ .
AI I iw I \ ld a l a ( r )Mi* T N i \ Nl r wl H511)l A Rit % ff # O \ NOTE 7-PREFERRED S'IOCK u , I in 1983, the Cc,mpwy issued 3,000,000 shares of Adjustable The dividend rate through the dividend period ending Rate CumulativWmferred Stock, Series A, with a stated March 31,1984 was 10% per annum. For each quarterly value of $50.00 Per share.These shares are redeemable period thereafter, the dividend rate is 2 75% less than the between April 1,1983 and March 31,1993, at the option of highest of the three-month Treasury bill discount rate, the Company at a redemption price of $5150 Per share and, to-year constant maturity bond yield or 20-year constant thereafter, at $50.00 Per share plus hccrued and unpaid maturity bond yield, but limited to a minimum of 6% and a dividends. maximum of12% per annum. The average dividend rate Dividends are cumulative and payable quarterly on was 8 5% during 1985 and 10.1% during 198 4 March 31, June 30, September 30 and December 31 of All preferred shares rank senior to common shams each year. both as to dividends and liquidation but have no general voting rights. i/ NOTE 8
/
EMPLOYEE S'IDCK PLANS AND COMMON STOCK EMPIDYEE STOCK PIANS In 1982, the Wells Fargo & issuable under the EIP cannot exceed 750,000 in the aggre-Company Equity incentive Plan (EIP) replaced the Stock gate and 250,000 in any one calendar year. The Board of Option Plan, Stock Option and Appreciation Plan and the Directors has approved, sulziect to stockholder approval, an Restricted Share Rights Plan (Other Plans) as a means for amendment to the EIP which we.uld increase such limits to the future granting of stock options and restricted share 1,750,000 and 350,000, respectively. rights to key employees. Other Plans in conjunction with the adoption of the EquityIncentive Plan The EIP provides for the Ell) the Other Plans have been amended such that no addi-n , granting to key employees incentive stock options, non- tional awards or grants will be issued. In addition, existing
. ' quahtied stock options as defined under current tax laws shares in the Other Plans may be converted to incentive and restricted share rights. The options may be exercised stock option status in accordance with current tax laws.
for periods of up to o years, at the fair market value at time Transactions involving options of the EIP and Other of pant The tv d numberof shares ofcommon stock Plans are summarized as follows: Number of shares Equity Incentive Plan Other Plans ig85 1984 ag85 1984 Opt ra outstanding. beginning of year 232,860 341,360 325,7 7 388,100 Gr? nt'ed 337,500 4 6,000 - - k CEticelled (6,900) (24,900) - - , Forfeited (as defined below) 1 (no,gi8) (6.428) (50,822) (50,712) Exerd ed p.868) (23,t72) ( 7,3-8) (it,671) Options out:,:anding, end of year 298,674 232,86o $7,5:7 125,717 Oftions e tercisabic, end of year 77,074 54,010 $7,587 125.7 7 shares available for grant, end of year e 45.138 316,968 - - Price range ofoptions: Outwanding $i8.88-$5913 $18.88-$36.75 $26.25-$28.13 $24.88-$28.13 Ferleuted (as defined bdw) or exercised $i8.88-$36 75 $i8.88-$i8.88 $24 88-$28. 3 $20.25-$28.13 The terms of the EIP and the other Plans provide that, share rights and34,u50 final share rights outstanding to 278 when the option becomes exercisable, the optionce may employees and the Other Plans had 53,315 final share rights surrender or forfeit the option and receive the appreciation outstanding to 47 employees under the restricted share between the option price and the fair market value of the rights provisions of these plans. The tentative share rights stock at date or surrender in the form ofcash end common convert into final share rights during the second quarter of stock, provided that at least 50 percent of the appreciation the third year after the rights are granted. The number of be in shares of the Company's common stock based on the final shares is based on the Company's performance in the market price at date of surrender. three years following the date of grant. The holders of the As of December 31,1985, the EIP had 176,205 tentative share rights are entitled to the number of shares of common 34
The following table summarizes com-COLIMON SPOCK 8 stock represented by the final share sights heldby mon eachstock per. reserved and authorized as of December 31,19 5: son five years after the tentative share rights were granted. Ioans, at the discretion of the Company, may be made Number uf shares to assist the participants of the EIP and Other Plans in the i,835,o83 acquisition of shares under options and share rights. The plan Tax advantage i ot3,846 amount of expense accrued for the EIP 8 and Other Plans Dividendwas reinvestment plan 867,503
$8 3 million, $4 9 million and $8.2 million in 19 5,1984 and Employee stock purchase plan 640,62:
400,000 Equity incentive plan 198 3, respectively stock option and appreciation plan 392,317 At the 1984 annual Restricted share rights plan Employee Stock Purchase Plan 2:5.058 meeting, the stockholders approved the current stock stockpur-option plan si4,792 8 warrants chase plan, effective August 1,19 4, to replace the former 8 E oycestocjown nhippj,an m plan which cypired on July 31.19,,stockbonus 4. The n plan current plan isessentially the sam t 8,209 s,542,603 granted for up to 950,000 shares. Under the plan, employees
.n>tg shares resened 23.3t8,o86 of the Company with over one year of service, except cer-shares not reserved ai.139,3n tain key employees, are eligible to participate. The shares plan issued and outstanding 30,000.000 provides for an option price of the lower of market value 1btal shares at authorized grant date or 85-'o0 percent (as determined by the Board of Directors for cach option period) of fair market value at the end of the option period,12 months after the date of grant. For the current option period, the Board approved Warrants to a purchase a total of114,792 shares of common closing option price of 85 Percent of fair market value. stock of Thethe Company at a price of $24.63 Per share, plan is noncompensatory and results in no expense to to attached theEuro Deutsche Mark Debentures, are currently detachable and expire on October 31,1988.
Company. Transactions irwolving the Employee Stock Purchase Under the terms of mandatory convertible debt, the Plan are summarized as follows: Company must exchange with the note holder or sell various capital securities of the Company as descnbed in ' """*""' note 6 to the financial stateme.nts on page 33 (Current (rormer (current plan) r' m) plan) Options outstanding, beg. tning -
'6 9 ,832 ofyear 68.580 95.403 Granted (3,549) (13.943)
( 3072) Cancelled 8 (7s,193) Exercised ($3418in19 5and (82,497) 8
$30 56 in 94) 91,852
_64,563 Optionsoutstanding, end of year Options available for grant, end 802., a 858,148 ofyear NOTE 9 4 EMPLOYEE BENEFITS Effective December 31,1984, the RETIREMENT PLANS The provisions for the retirement and profit sharing Company plans terminated the noncontributory, defined bene retirement plan, which covered substantially all employees. were as follows: Pension costs under that plan were actuarially compute vear ena-a ocremder and were funded as accrued. Prior to tennination, certain (in thousananj _ plan benefits were increased to the extent of plan assets.
$ 16,s42 As a result, no gain or loss arose from the termination. 8 Retirement plans
$ 20,897 $ 9.742 Ilowever, this former plan was overfunded at mid-19 4;
$ 6,886 therefore, no retirement plan expense accrual or contribu-
$ 9,on) $ 7.930 Profk sharing plan tion was necessary for the last half ofig84 m .
EfTertive January 1,1985, the Company adopted a defined contribution retirement plan with Company contributionsdecides not to fund the contribution for 1985, this accrual based on a percentage of employee compensation. The will be plan with an ofTsetting increase to income tax reversed covers employees with one year ofservice and ccmtains a expense. The decision will be made by the time the Com-vesting schedule graduated from 3-10 years of service. pany files its 1985 tax return. For4 198 , $13 million of Also eEcctive January 1,1985. the Company amended cmployee benefit expense was accrued. The credit was not the Tax Advantage Plan (TAP) to allow the Company to utilized in 198 fully 4 and is part of a credit carryfonvard for make retirement contributions without a requirement fbrsubsequent years. The 3 198 plan year's tax credit was not employee contributions. All salaried employees with oneutilized as a reduction of the Company's federal tax liabi year of se;vice are eligible to receive these Company contri- Therefore, the $i.4 million of employee benefit expense butions, which are immediately vested. The Company accmed alsin ig8 3 was subsequently reversed in 198 4 makes matching contributions to TAP that are mcluded in profit sharing plan expense. RETIREEIIEALTII AND LIFEINSURANCE In addi-tion to providing pension ber efits, the Company provides PROFIT StIARING PLAN All salaried employees who have one year of service are eligible to contribute to TAP certain health care and life insurance benefits for re employees. The Company reserves its right to terminate through salary reduction under Section 4oi(k) of the Inter- these plans at any time, but if they continue in effect sub-nal Revenue Code. The Company makes matching contri- stantially all of the Company's salaried employees may butions for those who have three years of service and who eligible for these benefits if they reach retirement become elect salary reduction contnbutions under the plan. The age while working for the Company. The health care and contributions are immediate'y vested. Company contribu- similar benefits for active and retired employees are self-tions are tax deductible by the Company. funded by the Company or provided through federally DIPIXWEE STOCK OWNERSIIIP PLAN Under the qualified IIcalth Maintenance Organizations (IIMO's). The Employec Stock Ownership Plan (ESOp), the Company *P nyis expens. recognized the cost of health care benefits by mg the annua incurred claims and IIMO premiums allowed to make certain reductions in its federal totaling $20 income 7 million taxand $19 2 milhon m 1985 and 1984 payments if the savings are passed to the plan. All salaried , employees of participating Wells Fargo companies whorespectively. hav The life insurance and amilar benefits for worked for three contmuous years are eligible to participate. active and retired employees are provided through an insur-Effective with the 1984 contribution, the ESOP was whose premiums are based on the benefits amended by the Ccmpany to remove the mquirement that paid during the year. The Company recognizes the cost the Company must receive a tax benefit for the contribu- f these benefits by expensing tlye annual insurance pre-tion. For 198 , approximately $15 million of employee 4bene-which were 5 9 milhon m 1985 and $.7 milhon m 5 rniums, fit expense was accrued for the ESOP If the Company 198 . The cost of providing heahh and life insurance bene-fits for 2,438 retirees is not separable from the cost of pro-viding benefits for approximately 14,400 active employees. NOTE 10 INCOME TAXES \ i l l Current and deferred income tax provisions were as follows: l The deferred tax provisions are the result of certain items being accounted forin difTerent time speriod or f on thousand4 financial reporting purposes than for income tax purposes. Year ended Dec ember 31 The components of the deferred income tax provisions 1985 1@4 t@3 and the tax effect ofcach were as follows: Current: Federal
$ 28,258 $ 5,383 $ On thousands)
State and local 1.502 Foreign 26,15o 20,623 Year ended Der ember w 9.956 W85 iW4 26,483 19.s22 i@i 13.382 Drferred income on lease 6nancing M" 80.89: 45 528 24,840 *"""** $101.64 o $ 63.948 O - -- - " "" b' 5 "C"'"" $ 46,202 Federal tax purposes 3i,912 (86,IE6) (24,573) State and local 45.875 39.599 Cash basis auounnng for tax purposes (2.193) (2,387 ) 19,437 Foreign (565) 11,166 Reahzation oflosses (gains) on sales of (5.134 ) 7,206 _ ] i8) ( t.175) equity investments (8tz) (7,423) 29 407 Foreign exchange 242 (650; dI 44.135 49 951 Other (2,872) 8,240
$ (2.692)
U t298 } p@ $ yap; Total 3,47s 1.410 2.080
{ 29,4o_7 }44ys (49,95j
~ Amounts for the current year are based upon estimates Following is e reconciliation of the statutory federal and assumptions as of the date of this report and could vary income tax expense and rate to the effective income tax significantly from amounts shown on the tax returns as expense and rate:
filed. Accordingly, the variance from the amounts pre-viously reported for prior years are primarily the result of adjustments to confomi to the tax returns as filed. Year ended December 31, (in thousands) i98 5 1984 1983 Amount Percent Amount Percent Amount Percent st*tutory federal income tax expense and rate $ n38,153 46.0% $ ug,to7 46.0 % $ 105,659 46.0 % Increcse (decrease) in tax rate resulting from: Tbt exempt income (i6,610) (5 5) (14,672) (5 7) (18,9 91) (5 2) St te End local taxes on inrome, net of federal income tax benefit 12,890 43 10,819 42 11,268 49 Capital gain rate difference (7,044) (2 4) (3,806) (.7) (4,252) (19) Amortization ofinvestment tax credit (6,60s) (2.2) ($,665) (2.2) (7,009) (31) Indefinitely reinvested earnings of foreign subsidiaries and tn affiliate (6,430) (2.n) (15.948) (6.2) (13,299) (5 8) Investment tu credit on furniture and equipment (4,558) (15) (3,168) (1.2) (4,655) (2.0) Other 49: .: 996 4 (928) (.3) . F.tTectiv 1 i icome tax expense and rate $ 0,298 367% $ 89.663 34.6 % $ 74,793 32.6 % The Company had deferred income taxes payable of Additionally, the Company is subject to indirect taxation
$186.2 million, $295 3 million and $163.o million rt Decem- because it must maintain noninterest-earning reserves with ber 31,1985,1984 and 1983, respectively. It had current the Federal Reserve Bank. These reserves generate revenue income taxes payable (receivable) of $(6.6) million, for the Federal Reserve which, net of expenses; is turned
$9 5 million and $(1.1) million at the same dates, over to the U.S. '1Teasury. The Company has estimated the The Company has not provided federal taxes on amount of this indirect tax based upon its average funds
$124 5 million of undistributed eamings of a foreign subsid- borrowed rate and the average noninterest-carning reserve iary and an afliliate, because the carnings are indefinitely balances. While no single method of determination can rcinvested in those companies. If the carnings were distrib- precisely quantify this additional federal tax burden, the uted to the parent, federal taxes on them, less credit for Company believes the foregoing method is reasonable.
foreign taxes, would be provided at that time. If the effects of tax-exempt financing and reserve In management's opinion, the effective income tax rate is requirements had been included in the Company's income not indicative of the Company's true economic tax burden. statement and tax provision, the effective income tax rate The Company acts as an intermediary for tax incentives would have been 45% in 1985,1984 and 1983 between the U.S. Government and certain recipients identi-ficd by Congress. These incentives are primarily intended to be indirect subsidies to state and local governments as well as to benefit companies that cannot directly utilize such incentives. Because interest income from state and local obligations is exempt from federal income tax, the Company is able to accept lower yields on these obligations, thereby pmviding lower borrowing costs to the issuers. IIad these obligations been taxable, the Company would not have been abic to reduce the interest rates to these borrow-ers and, thus, would have reported additional interest income and paid additional tax. Similarly, the Company, by utilizing the tax incentives ofownership, is able to off:r lower cost lease financing to businesses through the reduc-tion of rental payments from lessees. Such tax incentives lower the Company's eiTective income tax rate, but a substantial portion of the benefit oflower taxes is passed on to the Company's customers and to publicly supported borrowers. 37
NOTE 11
' FOREIGN ACTIVITIES i
i The Company's foreign activities include international A condensed income statement for foreign activities
. banking operations conducted through its foreign and follows:
domestic brancks, representative offices, subsidiaries, affiliates, Edge Act subsidiaries and International Banking U"'h*"""d') Y*'r ended December si, Facilities. As required by the Securities and Exchange Com-mission, the Company reports its foreign activities on the basis of the domicile of the customer. interest income $ 339,674 $ 465,003 $ 456,702 Since the Company's foreign and domestic activities are Interest expense 267,072 398,59o 377,673 integrated, an identification of foreign activities necessaril7 - Net interest income 72,602 66,4 3 ~ 79,029 invohes certain assumptions. For the years presented, such Provision forloan losses 42,370 25.647 6 9,73. assumptionsinclude: Netinterest income after
, provision forloanlosses 30,432 40,766 69,266 (1) cost for capital funds is charged based on the amount Noninten se income 5,88. 26,297 32,i77 -
and nature of the assets funded; Noninterest expense 37, gig 59,036 61,787 (2) adjustments are made for the difference between host income (loss)before income country and U.S. tax rates; tax expense $ (i,669 ) $ 8,o27 $ 39,656 (3) income and expenses are primarily allocated based on Net ina,me (loss) - $ (968) $ 5,4o8 $ 34,552 , the distribution of assets; (4) the provision for loan losses is based on actual net charge-offs during the year and an allocation of the Company's allowance to a level management deems Changes in the allowance for loan losses related to appropriate for foreign loans; foreign activities were as follows: (5) foreign exchange t.rading activities in domestic and foreign offices are included in foreign activities. On thousands) Year en d Decernber 31
'Ibtal revenue, income (loss) before income taxes, net ,9g, ,
income (loss) and total identifiable assets by geographic
- crea at December 31,1985,1984 and 1983 and for the years salance, beginning ofyear $ 3o,906 : $ 24,879 $ 24,300 then ended were as follows: Provision forloanlosses 42,370 25,647 g,763 Gross charge-offs 27,8:n 20,o91 g,444 Recoveries (3,000) 0,o41) (610)
"" Net loan charge-ofTs 24,8st 8,834 rev e "Yoss$
( income identif 19,050 before (loss) assets Other deductions 3,043 57o ' 150 income tax expenne Balance, end ofyear $ 45,222 $ 30,906 $ 24,879 l Latir America 19 8 5 $ 209 4 $ (4 0) $ (2 3) $ 2,073-3 'l and Mexico 1984 -2317 1.1 .8 2,006.2 1983 214 1 17.6 15 3 1.998.4 Europe 1985 71.2 1.g 3.1 702.8 The net gains arising out of foreign currency transac-1984 158.0 53 3.6 3,38.1 6 tions, which were included in noninterest income, were i983 i42 4 it.5 io.o i,306.2
$3.6 million in 1985, negligible in 1984 and $9.8 million A:ia and 3985 53 5 3 .2 530 7
.6 in 1983 Pacific 1984 68 7 9- 595.o Basin 1983 90.3 71 6.2 809.8 Ctnada 3985 57 .
56.2 1984 16.5 5 3 1430 1983 21 9 1.8 1.6 2090 Middle East ag85 57 - - 52 6 and Africa 1984 16.4 .2 . 142.2 1983 20 4 17 15 195 9
'Ibtal foreign 1985 345 5 (L7) (8.0) 24 92 198 4' 491.3 8.o 5-4 4,254 5 1983 488.9 39 7 34.6 4.519 3 Domestic n985 31043 302.0 191.0 26,ono.2 1984 2,900 3 250-9 163 9 23.929.6 1983 2.50f>.1 190.0 120 3 22,498.3 'Ibtal foreign t985 - $ 3,449 8 $ 300 3 $ 190.0 $ 29,429 4 (nd 1984 3,391.6 258 9 169 3 28,t84.s domestic 1981 2.497 0 229 7 iS4 9 27.017E 38
.m ._ _ . . .
NOTE 12 PARENT COMPANY Condensed financial information of Wells Fargo & Company (Parent) is presented below. CONDENSED STATER $ENT OF INCOREE (in thousands) , Year ended December 31, a985 1984 1983 Income Dividends from subsidiaries: Wells Fargo Bank, N.A. . $ ' C,084 $ 54,647 $ 46,097 Nonbank 33,363 22,675 .26,000 Interest income (primarily from subsidiaries) 466,067 421,094 289,779 Noninterest income 68,574 430 12,568
'Ibtalincome 630,088 498,846 373,444 Expense -
Interest on: . Short-term borrowings 166,6sg ' 226,238 - 159,257 Senior and subordinated debt 272,433 160,906 92,390 Indebtedness to nonbank subsidiary 42,799 46,660 43,525 Provision forloanlosses 3,864 1,000 - Noninterest expense 9.045 ' 6,516 8,550 Tbtal expense 494,760 441,320 303,722 income before income tax benefit (expense) and undistributed incnme of subsidiaries 235,328 57,526 69,722 Income tax benefit (expense) (4,431) 16,ty7 3,739 Equity in undistributed income (loss) of subsidiaries: Wells Fargo Bank, N. A. 75,38g 98,362 81,329 Nonbank- (16,252) (2,800) 12o Net income $ 190,o34 $ 169,265 $ 154,900 CONDENSED BALANCE SHEET f (in thousands) December 31, 1985 1984 ASSETS Cash and due from banks $ t,455 $ 2,546 Investment securities 1,242,793 151,885 Netloans 70,o43 167,383 Loans and advances to subsidiaries-Wells Fargo Bank, N. A. 79 8,275 482,384 Nonbank 3,967,23a 3,241,7 8 Investment in subsidiaries: Wells Fargo Bank, N. A. 1,368,355 1,265,711 Nonbank 254,493 283,930 Other assets 206,196 205,150
'Ibtal assets $ 7,908,741 $ 5,800,724 LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper outstanding $ 1,436,227 $ t,783,885 Other short-term borrowings 815,256 369 Seniorand subordinated debt 3,786,617 2,250,906 Indebtedness to nonbank subsidiary 264 ,000 3:5,646 Otherliabilities 248,681 106,238
'Ibtalliabilities 6,450,781 4,457,044 Stockholders' equity 1,457,96 0 1,343.670 Tbtalliabilities and stockholders' equity $ 7,908,741 $ 5,800,714 39
r , , _ CONDENSED STATruMNT OF CHANGES IN FINAN 7IAL POSITION Year ended December 33,
' (in thousands) 1985 3984 1983 Financial resources provided by (applied to):
. Operations:
Net income $ i90,o34 $ 169,265 $ 354.900 '
' Noncash charges (credits):
Provision forloan losses 3,864 - a,ooo - Deferred income tax expense 22,012 20,602 (2,o99) Equity in undistributed income ofsubsidiaries (59,137) (95,562) (81,439). Financial resources provided by operations n56,773 95.305 71,362 Cash dividends declared . (6 5,779) (63,t38) (58,878) ' Net financial resources provided by operations 90,994 32,167 32,484 Other financing activities: Short-term borrowings 4 67,229 71,604 224,76o Senior and subordinated debt 1,535,711 3,190,291 150,215 Indebtedness to nonbank subsidiary (5n,64 6) 30,273 12.091 Common stock repurchased, net ofissued (sz,190) (1o8,241) - 7,528 Preferred stock issued, net ofissuance costs - - 146,200 Financial resources provided by other financing activities - a,939,no4 t,183.927 540,794 other activities-(increase) decrease in net nonearning assets: Cash and due from banks i.ogn (1,425) (319) Investment in subsidiaries (n4,070) (138,709) (23,788) Other. net 23,6:o (ios 320) ~ 56,869
- Financial resources provided by (applied to) net noncarning assets 8,6 3: (245,454) ~_22g increase in financial resources invested in earning assets $ 2,038,729 $ 970,640 $ 586,04o Increase (decrease) in earning assets:
Investment securities $ n,ogo,908 $ 68,352 $ 72,039 Netloans (93,476) 81,457 85,389 loans and advances to subsidiaries 1,04 n,297 820,831 428,612 Increase in earning assets $ 2,038,729 $ 970,640 $ 586,040 4 1 The Parent had available lines of credit supporting com- December 31,1985 and 198 4 , respectively. The lines of credit : mercial paper borrowings and similar arrangements with require commitment fees or compensating balances, which unaffiliated banks totaling $480 million and $680 million at were not significant. NOTE 13 LOANS TO RELATED PARTIES Certain directors and executive ofFcers of the Company, terms, including interest rate and collateralization, and certain entities to which they are related and their relatives none represent more than a normal risk of collection. Such were loan customers of the Company during 1985 and 1984 . loans were $142 4 million at December 31,1985 and $60 7 L Substantially all such loans were made by the Bank in the million at December 31,1984. During 1985, additional loans
- ordinary course ofbusiness at the Bank's normal credit made were $i12.6 million and payments received were
$30 9 million.
40
- ~ -
NOTE 14 LEASE COMMITMENTS The Company has lease arrangements primarily for the - Net' rental expense for all operating leases was $46 4 mil-use of real property. These leases do not contain restrictive . lion, $43 4 million and $47 7 million for the years ended clauses concerning dividends, debt financing or further December 31,1985,1984 and 1983, respectively. leasing, nor do they generally involve contingent rentals or bargain purchase options. _ _ The Company is obligated under a number of non-cancelable operating leases for premises and equipment - with terms ranging from 1-35 years, many ofwhich provide for periodic adjustment of rentals based on changes in various economic indicators. Future minimum payments under capital leases and noncancelable operating leases with terms in excess of one year as of December 31,1985 are as follows: (in thousands) Capitalleases Operatingleases Year ended Decemberan, 1986 $ 17,6:4 $ 43.455 1987 17,50 35.096
- 1988 37,400 31,252 1989 17,317 26,717 1990 '17,247 22,698 Thereafter 224.273 7 ,648 Tbtd minimum lease payments 311,352 $230,866 Executory costs (51,455)
Amounts representing interest (162.542) Present value of net minimum lease payments $ 97.355 NOTE 15 CO1WMITMENTS AND CONTINGENT LIABILITIES In the normal course ofbusiness there are various commit- Actions are pending against the Company in which the monts outstanding and contingent liabilities, such as foreign reliefor damages sought are very substantial. In addition exchange contracts, letters ofcredit and commitments to the Company is at all times subject to numerous pending extend credit, which are not reficcted in the accompanying and threatened legal actions and proceedings arising in the financ'.al statements. No material losses are anticipated by normal course ofbusiness. After reviewing with counsel management as a result of these commitments. pending and threatened actions and proceedings, manage-At December 31,1985, the Company had outstanding ment considers that the outcome ofsuch actions or pro- - commitments under standby letters ofcredit and guaran- ccedings will not have a material adverse effect on stock-tecs totaling $13 billion. This amount includes $.2 billion of holders' equity of the Company. participations purchased and is net of $.1 billion of partici-pations sold. 41
&&n nn
^
-m , . - - , .. .. , - - ~
a NM M .
,.1 t ; SUBSEQUENT EVENT y ,
I ,
~
n
~ ~
~
i di February 7,1986, the Company entered into a definitive ; and liabilities at December 31,1985; Such preliminary esti-- G ' stock purchase agreement (Purchase Agreement) with mates and assumptions are subject to change as additional ~ L Midland Bank plc (Midland) and certain Midland affiliates ' information is obtained. Purchase adjustments will be made providing for the acquisition by the Company of all the . on the basis ofestimate , appraisals and evaluations as of
; issued and outstanding common stock of Crocker National . the date'ofclosing and, therefore, will differ from those -
L Corporation (Crocker). On the basis of assets of $19 2 billion - ' reflected below. i as of December 31,1985, Crocker was the 25th largest bank . Because the pro forma income statement is based on 5 holding company in the United States. It is anticipated that historical data, the Company believes tha't it is not neces .
, Crocker's wholly-owned subsidiary, Crocker National Bank, sarily indicative of the effects which the proposed acquisi-l
~
will be combined with Wells Fargo Bank, N.A. and operated . ' tion will have on the results ofoperations of the Company
- . under the Wells Fargo Bank name. .
in the future. The Company believes that such results will - . %e base purchase price is $1,o80 million and is subject be affected, in particular, by the effects of the sale of sub-to certain adjustments. Subject to receipt of appropriate reg- stantially all of Crocker's international business and certain ulatory and shareholder approvals, and the fulfillment of domestic assets to Midland; operating efficiencies and cost certain conditions, the acquisition is expected to close in ' reductions which may be achieved following the proposed 1986. There is no assurance as to when or whether such acquisition; the Company's intention to reduce the asset approvals will be obtained and, ifobtained, as to what, if - size of the resulting entity; and certain tax benefits which
- < any; conditions or restrictions might be imposed.The Pur- may accrue to the Company. The pro forma income state-
. chase Agreement may be terminated by either party if the ment does not include the effects of the foregoing factors 5 transaction has not closed on or before December 31,1987 since they cannot be estimated as of February 18,1986.
"and in certain other circumstances. Following is the unaudited pro forma condensed -
ne purchase price is payable in cash and, at the Com- combined income statement for 1985 of the Company h pany's election, common stock of the Company, provided and Crocker as though the acquisition had occurred on . .that the number of shares issued to Midland may not January 1,1985:
' ! exceed the greater of(t) 4 9% of the total number ofshares .
- - ) ofcommon stock outstanding at closing of the proposed -
~ acquisition (giving errect to the issuance ofcommon stock (in miiiion.3 ve.,enaea -
- ***'"h*' 3' *85
. to Midland) or (2) that number ofshares ofcommon stock which has an aggregate value of $75 million. Netinterest inmme $ 1,879
'Ib meet the requirements for additional primary capital Provision forloanlosses 482.
in connection with the proposed acquisition, the Company Net interest income after provision for loan losses 1,397 I expects to issue approximately $300 million of common Noninterest income 623 1 stock, including the stock that may be issued to Midland, Noninterest expense 1,729 inmnie tax expense los
. approximately $250-$350 million of prefened stock and up to approximately $500 million ofdebt securities. The ' '""** h*f '". extra nunay itern is3
" """**~** *"**"**'#"* 8 7' amount of equity and debt securities to be issued may
**I"*"'* 8 '9'
- change depending on specific plans developed for integrat-
, ing Crocker's assets as well as on market conditions. The acquisition will be accounted for as a purchase trans-p ; action. Accordingly, the results of operations of Crocker will - The pro forma net income of $ng2 million consists ofig85
. be included with that of the Company for periods subse- net income of the Company and Crocker of $190 million m : quent to the date of acquisition. and $38 million, respectively, less a pro forma net expense The following unaudited pro forma condensed combined of $36 million. The pro forma net expense includes amorti-
' income statement shows the pro forma effect of the pro- zation of$n million relating to an estimated $270 million posed acquisition of Crocker on the historical income excess purchase price over fair value of Crocker's net assets statement of the Company. This statement is based on infor- acquired (goodwill).
mation avail #i to the Company as of February 18,1986 as > well as on the Secu;ities and Exchange Commission's rules
- and regulations.
The unaudited pro forma condensed combined income statement is based upon the audited income statements of f the Company and Crocker for the year ended December 31,
- 1985. Purchase accounting adjustments have been made,
, 1 based upon preliminary estimates and assumptions, to reflect estimated fair values with respect to Crocker's assets 1 42
, + . - - i ,....-.. -,- - - - --- . . - - , -.: - - , . - . . . . ~ . -- -.,r-
ACCOUNTANTS' REPORT The Board of Directors and Stockholders of Wells Fargo & Company: We have examined the consolidated balance sheet of Wells Fargo & Company and Subsidia1ies cs of December 31,1985 and 1984 and the related consolidated statements ofincome, changes in stockholders' equity and changes in financial position for each of the years in the three-year period ended December 31,1983. Our examinations were made in accor-dance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing pmcedures as we considered necessary in the circumstances. In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Wells Fargo & Company and Subsidiaries at December 31,1985 and 1984, and the results of their operations and changes in their financial position for each of the years in the three-year period ended December 31,1985, in conformity with generally accepted accounting principles applied on . consistent basis. Skal A (o . h4%WleAwde . Peat, Marwick, Mitchell & Co. Certified Public Accountants San Francisco, California January 20,1986, except as to note 16, which is as of February 18,1986 43
EUPPLEMENTAL QUARTERLY AND ANNUAL FINANCIAL DATA CONDENSED CONSOLIDATED STATEMENT OF QUARTERLY INCOME i 1 (in thousands) n985 1984 Quarter ended Quarter ended Mart.h3a Junc30 Sept. 30 Dec. 3 March 3i June 30 Sept. 30 Dec. 3 Interest income $ 753,328 $ 76i,882 $ 748,iB5 $ 753,552 $ 723.250 $ 776,no $ 808,688 $ 793,499 Interest expense 475,599 462,612 44 8,408 447,294 484,200 509,983 539,363 518,059 Amortized gain (loss) on interest rate hedging 9,347 8,229 32,o65 8 7,54 (85) (1,627) 5,259 15.890 Net interest income 287,076 307,499 3:n,842 313,842 239,o65 264,500 274.584 291,330 Provision forloan losses 328,6 4 83 4,62 89,n59 105d33 31,302 48,409 50,552 64,330 Net interest income after provision forloan losses 158,462 258,867 222,683 2o8,4:n 207,763 216.09 224.032 227,000 Noninterest income: Service charges on deposit accounts 25,766 27,693 27,205 28,330 23,384 23,632 23,207 25.013 Domestic fees and commissions 2a,607 19,529 23,48 9 23,55 16,539 20,336 17,396 21,125 Im>cstment securities gains 3,747 1,750 29,625 20,349 420 416 187 1,999 Trust and investment services income 13,322 13,37 14,4 5 34,224 14,89 0 11,783 11,944 12.542 Sale of a mortgage banking subsidiary 50,152 - - - - - - - Other O) 15,863 (2,504) 3,930 20,450 9,559 11,619 9,837 14,821
'Ibtal noninterest income 130,257 59.839 98,664 106,904 64,792 67,786 62,551 75.500 Noninterest czpense:
Salaries 104,391 103.055 105.35n son 64 8 99,38o 99,442 101,761 105,266 Employee benefits 25,468 24,153 24,769 25,078 24,049 22,413 17,519 19,518 Net occupancy 21,016 21,326 22,024 23,422 20,38o 20,76 2 20,208 20,304 Equipment n8.315 19 348 18,235 20,042 17,303 18,250 18,681 19,955 Other 57,a80 70,107 6,85 9 4 68,982 51,562 60,231 61,351 68,252 Total noninterest expense 226,370 237,98 9 240,224 239,172 212,674 221,o98 219,52o 233.295 Income before income tax expense 62,349 80,717 B n,223 76,143 59.881 62,779 67,063 69,205 income tax expense 17,399 33,234 32,572 27,o93 19,855 21,927 23,224 24,657 Net income $ 44,950 $ 47,483 $ 48,551 $ 49050 $ 40,o26 $ 40,8 52 $ 43,639 $ 44,548 Net income applicable to common stock $ 41,594 $ 43,977 $ 45,64 4 $ 4 6,03: $ 36,276 $ 37,234 $ 39,826
$ 40,835 PER COMMON SI(ARE Net income $ 195 $ 2.05 $ 2.32 $ 2.18 $ 152 $ t63 $ .8o $ i.92 Dividends dedared $ .6o $ .6o $ .6o $ .68 $ .54 $ .54 5 54 $ .54 (i) Amounts in 19 85 include a total of $si 6 million in net closing costs associated with restructuring the Company's international activities, of which $9 3 million was recognize 1in the second quarter.
44
FINANCIAL REPORTING AND CHANGING PRICES As required by FASB Statement No. 33, " Financial Reporting monetary assets and liabilities-by the averagc Consumer rnd Changing Prices," the Company has provided supple- Price Index for All Urban Consumers (CPI) to reflect mental information concerning the effects of changing changes in the general purchasing power of the dollar. This prices on its financial statements. results in 1.istorical cost / constant dollar amounts, which are The following data were calculated by adjusting certain intended to eliminate financial statement distortions caused historical cost information- premises and equipment and by generalinflation. SUPPLEMENTARY FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA ADJUSTED FOR THE EFFECTS OF CHANGING PRICES (in thousands) Year ended December 31, (doll rs expressed in average 1985 dollars) Historicd cost information adjusted for general innation i98 5 1984 ig83 1982 398 . Net interest income (after provision for loan losses) p) $ 848,423 $ 906,102 $ 857,204 $ 787.367 $ 789.579 Net income a31957 128,286 u8.955 110,697 125,472 Net income per common share (z) 5 68 5 00 4 47 4.64 5 39 - Purchasing powerloss on net monetary assets held during the year 23,905 28,120 24,261 23.733 57,251 Net assets at year end 2,017,406 a.956,498 2,o21.573 2,797,293 I,744,929 Other information: Cash dividends declared per common share 248 2.24 2.14 2.14 2.27 M;rket pnce per common share at year end 62 % 48 % 42 29% 29% Average consumer price index 322.2 31t1 298.4 2891 272 4 p) Net interest income is not presented on a taxable-equivalent basis. (2) Computed based on net income applicable to common stock. The principal ditTerence between 1985 net income as agement believes that the effects of changing prices are dctennined on the historical cost / constant dollar basis more appropriately measured through careful analysis of ($134.o million) and net income as reported in the financial liquidity management and interest-rate sensitivity as dis-statements ($190.0 million) is additional depreciation and cussed in hianagement's Analysis of Financial Operations amortization expense in the historical cost / constant dollar on pages 20 and 21. hianagement does not believe that the presentation ($56.o million) caused by increasing the value restatement of financial data based on changes in the CPI of premises and equipment before computing depreciation is necessarily indicative of the effects ofinflation on finan-expense thereon. It should be noted that the accounting cial institutions. The nature of the Company's operations principles involved do not change under historical cost / is such that there will always be an excess of monetary constant dollar assumptions; only the unit of measure assets over monetary liabilities. Therefore, this calculation changes under this concept. Restatement based on cur- will always show a loss of purchasing power in periods of rent cost / constant dollar data has been omitted because price increases. thcre is no material difference fmm historical cost / constant How well the Company copes with changing prices and dollar data. fluctuating interest rates may also be assessed by analyzing As specified by FASB Statement No. 33, no adjustments its asset and liability structure. This is developed under or allocations of the amount ofincome tax in the primary Asset / Liability hianagement in hianagement's Analysis of financial statements were made in the computation of the Financial Operations on page 21. Additional insight can be supplementalinformation. obtained by reference to the rate / yield table on page to. The Company believes that comparisons of price level The Company believes that such analysis is superior to a adjusted data are most meaningful when interpreted in mechawal restatement as specified by FASB Statement terms of trends and relationships among the periods. hian- No. 33 4s
DIRECTORS WELLS FARGO as COMPANY DIRECTORS EMERITI AND TPS PRINCIPAL SUBSIDIARY. WELLS FARGO BANK. N.A. WELLS FARGO BANK. N.A. William R. Breuner RobertT. Nahas W.P. Fuller III Retired Chairman of the Board President, R.T. Nahas Company Retired Vice President John Breuner Company (real estate and construction) Western Region of PPG Industries
- (retailer of home furnishings) (glass, paint and chemicals)
Ellen M. Newman James F. Dickason President, Ellen Newman Associates George S. Ishiyama Chairman of the Board (consumer relations consultants) President,Ishiyama Corporation The Newhall Land and (raw materials exporting) Farming Company B. Regnar Paulsen (agricultural, recreational, Retired Chairman of the Board Edmund W. Littlefield petroleum andland development) Rice Growers Association Chairman of the Executive Committee ofCalifornia Utah InternationalInc. James K. Dobey (mining and ocean shipping) Retired Chairman of the Board Atherton Phleger Wells Fargo & Company Partner, Brobeck, Phleger and IIarrison, J.W. Mailliard III Attorneys at Law Chairman of the Executive Committee Paulllazen Bromar, Inc. President and Chief Operating Officer Carl E. Reichardt (manufacturers' agents, importers and Chairman and Chief Executive Officer brokers of food products) Robert K.Jacdicke - Dean liarry O. Reinsch Graduate School of Business President, Bechtel Power Corporation Stanford University (engineering, construction, management of power-generating facilities) Donald M. Koll Chairman of the Board and Donald B. Rice Chief Executive Officer President, The Rand Corporation 1 The Koll Compan} (nonprofit research and analysis firm) l (real estate development) Wilson Riles Mary E. Lanigar President, Wilson Riles & Associates, Inc. Retired Partner (education consultants) Arthur Young & Company (certified public accountants) IIenry F.Trione Chairman of the Board Roger D. Lapham, Jr. Geyser Peak Winery Chairman and Managing Director (wine growers and vintners) Roma Corporation, Ltd. (investment and consulting) John A. Young President, liewlett-Packard Company Arjay Miller (electronic equipment manufacturing Dean Emeritus and marketing) Graduate School of Business Stanford University Paul A. Miller Chairman of the Board and Chief Executive OfTicer Pacific Lighting Corporation (natural gas holding company) 46
MANAGEMENT WELLS FARGO &, COMPANY WELLS FARGO BANK, N.A. Chairman and ChiefExecutive Officer Chairman and ChiefExecutive Officer operations Group Carl E. Reichardt ' Carl E. Reichardt E. Alanliotroyde President and ChiefOperating Officer Executive Vice President President and ChiefOperating Officer P?ulllazen Paulliazen Real Estate Industries Group Executiste Vice Presidents Commercial Banking Group Dale R. Walker Thomas II. Boughey Executive Vice President R. Thomas Decker Charles M. Johnson
. Executive Vice President Ronald E. Eadie . Retail Banking Group Gordon S. Grout Stephen G. Carpenter Executive Vice President and William E Zuendt John E Grundhofer Executive Vice President Jack L. IIancock Southern California Division Manager E. Alan flolroyde Jerry A.Grundhofer Connumer Operations and Executive Vice President Robert L. Joss Frrnk N. Newman Systems Division Barry E. Young Strategy and Systems Group Clyde W. Ostler i
Fredrick W. Petri Executive Vice President Jack L.11ancock Divid M. Petrone Executive Vice President Guy Rounsaville, Jr. Consumer Services Division Dale R. Walker Jack Kopec Trust and Investment Group William E Zuendt Executive Vice President Robert L. Joss Executive Vice President ChiefMnancialOfficer Corporate Banking Group Frink N. Newman as M r General Auditor Executive Vice President Clyde W. Ostler James C. Flood WELLS FARGO BANK Executive Vice President GLOBAL FACILITIES ChiefCounselandSecretary Guy Rounsaville, Jr. Credit Policy Group Chiefloan Examiner Gordon S. Grout . Douglas P. IIolloway Executive Vice President wells Fargo Corporate Services, Inc.: DirectorofTaxes Finance Group New York, Chicago, Atlanta, Dallas Alan C. Gordon
# Wells Fargo International Limited, Treasurer .
Executive Vice President Cayman Islands Alan J. Pabst Controller Funding Group Branches Frank A. Moeslein liong Kong Thomas 11. Boughe{ dent Executive Vice Presi Japan:'Ibkyo DirectorofInvestor Relations Korea: Seoul Eric R. Durant International Banking Group Nassau Director ofCorporate Communications Robert L. Joss Lona L. Jupiter Executive Vice President Representative Offices Argentina: Buenos Aires Brazil: Sao Paulo Mexico: Mexico City Singapore Venezuela: Caracas 47
- WTLLS FARGO & COMPANY THE INTERNATIONAL NONBANK SUBSIDIARIES ADVISORY COUNCIL Wells Fargo Ag Credit The International Advisory Councti uvas AdolfKracht established in 1977 to provide advice Ihrtner Englewood, Colorado and counselin the international sphere Bankhaus b1crck, Einck and Company Michael J.Gillfillan, Pres. i dent ofbusiness of Wells Fargo Bank. Afunich, West Germany Wells Fargo Busincas Credit Chairman: Roger D. Lapham, Jr.
Dallas, Texas Will am 1. M. 'Ibrner, Jr. Director, Wells Fargo & Company Thomas D. Drennan, Pres,i dent Chairman and blanaging Director Chairman and ChiefExecutive Officer Consclidated-Bathurst Limited Rama Corporation, Limited Wells Fargo Capital Markets, Inc. Afontreal, Quebec, Canada Ibris, FTance San Francisco, California Charles A. Greenberg, President Angelo Calmon de sa Dr. Saburo Okita President and Chief Executive OfJicer . Chairman ' Wells Fargo Credit Corporation B.tnco Economico, S. A. Institutefor Domestic and vxdor, Bak, Brad Internan'ona& hey Studes Scottsdale, Arizona Larry S. Crawford, President 'I"P"" Edward Carlson Chairman Emeritus The Rt. lion. Lord Sherfield, Wells Fargo Insurance Services / UAL, Incorporated Gr.B, GM.G. Central Western Insurance Company Chicago, Illinois Retired Chairman, Wells Fargo Limited San Francisco, California London, England James G. Jones, President G6ran Ennerfelt President and ChiefExecutive Officer Wells Fargo Investment Advisors A. Johnson & Company San Francisco, California Stockholm, Sunien Frederick L.A. Grauer, President Sir Campbell Fraser Wells Fargo leasing Corporation Chairman Stock Exchange Listings San Francisco, California SC8 * #I " E ' New York Stock Exchange Theodore J. Rogenski, President E "# "' E"8I#" Trading Symbol: WFC Pacific Stock Exchange Wells l'argo Realty Advisors Eugenio Garza-Laguera Trading Symbol:WFC Chairman ofthe Board London Stock Exchange Los Angeles, Californ,ai Valores Industriales Frankfurter B6rse Fredrick W. Petri, President Monterrey, N.L., Aftxico Transfer Agent and Registrar of Stock Wells Fargo Realty Finance George S. Ish.iyama San Francisco, California Manufacturers llanover Trust President Company ofCalifornia George A.Tillotson, President Ishiyama Corporation San Francisco, Cahfornia 50 California Street San Francisco, California 94111 Wells Fargo Securitics Cicarance Corporation Ahmed Juifali Co-Transfer Agentand Co. Registrar Afanagmg Director Manufacturers llanover Trust New York, New York E. A.Juffali& Brothers Company of New York Barry X. Lynn, President Jedda, Saudi Arabia P.O. Box 2493S, Church Street Station New York, New York 20249 The Rt. lion. Lord Kadooric, C.B.E., J.P. Sir Elly Kadoorie and Sons Notice to Shareholders Ilong Kong The annual meeting of Wells Fargo
& Company will be held at 2 p.m.
on Tuesday, April 15.198 6 at 464 California Street, San Francisco, California. 48
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pi ,N ' a '$~ , " -l u A r h.. , > , D ..e,- I ^ 6 4 * ? r- ..A 4- .,q ? ? , 5_ Y .v.)'. -_ +' 3 ) y d < x 9 ' :,, 4 . M. I a 3., ;j, _ .+ , _' ' ' ' . ,. e T %. y -i - . b ?, I _, y,. 4 'n s . , * * . , t. e+ ,' e . * - ide$f$$$M$9MGM, Dkf@23@hM@Md$IIkD$$$k' fj$$ kip [ . l l l WETJR FARGO & COMPANY 1985 FORM 10-K l f g -mm W __= -] -^$ -- M = SECURITIES AIO EXCHAME C3MISSICN Washington, D.C. 20549 Q M Form 10-K m Annual Report Pursuant to Section 13 or 15(d) of M the Securities Exchange Act of 1934 For the fiscal year onded Decerter 31, 1985 Ccxmission file nurter 1-6214 u NEILS FA100 & CCNPANY Q . (Exact name of Registrant as specified in its charter) 6 ?? E A California corporation No. 94-1686959 (State or other jurisdiction of (I.R.S. Enployer N incorporation or organization) Identification No.) M 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) , M Registrant's telephone nunter, including area code: 415-396-0123 M Securities registered pursuant to Section 12(b) of the Acts g 2N Name of Each Exchange _=_--_1 Title of Each Class on Nhich Registered -4 M Cormon Stock, par value $5 New York Stock Exchange Pacific Stock Exchange $= Adjustable Rate Cunulative New York Stock Exchange O Preferred Stock, Series A 3 7-7/8% Sinking Fund Debentures New York Stock Exchange = Due 1997 Pacific Stock Exchange d 8.60% Debentures Due 2002 New York Stock Exchange 3 9-1/2% Notes Due 1993 New York Stock Exchange g 11.40% Notes Due 1987 New York Stock Exchange a 12.30% Notes Due 1990 New York Stock Excharxje 3 14-1/2% Notes Due 1991 New York Stock Exchange _e_ Floating Rate Extendable Notes New York Stock Exchange M Due 1992, First and Second Series q Floating Rate Subordinated Capital New York Stock Exchange g-Notes Due 1996 @ w Securities registered pursuant to Section 12(g) of the Act: Q =x 3-1/4% Convertible Capital Notes Due 1989 - Registered with the Board j of Governors of the Federal Reserve System by Wells Fargo Bank, N.A. -Q 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 4 Act of 1934 during the preceding 12 months (or for such shorter period that g the registrant was required to file such reports), and (2) has been subject to -,m: such filing requirements for the past 90 days. Yes V' No q M As of February 14, 1986, the latest practicable date, 21,190,192 -- shares of conmon stock were outstanding. 'Ite aggregate market value (based on T the closing price on the New York Stock Exchange on February 14, 1986) of ccxmon stock of Hella Fargo & Conpany held by nonaffiliates was approximately Q -: $1,647 million. Documents Incorporated by Reference -5 3 Portions of the 1985 Arnual Report to Shareholders - Incorporated into Parts = I, II and IV. 3"iE M Proxy Statement dated March 10, 1986 for the 1986 Annual Meeting of E Shareholders - Incorporated into Part III. p = =w 4= 1 a EGM 10-K OOSS-REFERENCE INDEX Page Form Annual Proxy 10-K Report (l) Statement (2) PART I Item 1. Business Description of Business 3-10 7-45 - Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 11-14 9-12 - Investment Portfolio 15 30 - Ioan Portfolio 15-16 15-19,28 - Sumary of Loan Loss Experience 17 16,28,38 - Deposits 12-13,18 - - Return on Equity ard Assets - 8 - Short-Term Borrowings 18 - - Item 2. Properties 19 - - Item 3. Legal Proceedings - 41 - Item 4. Submission of Matters to a Vote of Security Holders (3) - - - Executive Officers of the Registrant 20 - - PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - 8,23,29 - Item 6. Selected Financial Data - 7 - Item 7. Management's Discussion and Analysis of Finan-cial Condition and Results of Operations - 7-23 - Item 8. Financial Statements and Supplementary Data - 24-45 - Item 9. Disagreements on Accounting and Financial Disclosure (3) - - - PART III Item 10. Directors and Executive Officers of the Registrant 20 - 4-9 Item 11. Executive Compensation - - 3-4,10-12,15-20 Item 12. Security Ownership of Certain Beneficial Owners and Management - - 4-9 Item 13. Certain Relationships and Related Transactions - - 12-14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-23 24-45 - SIGNA'IURES 24 - - (1) 1985 Annual Report to Shareholders, portions of which are incorporated by reference into Form 10-K. (2) Proxy Statement dated March 10, 1986 for the 1986 Annual Meeting of Shareholders, incorporated by reference into Form 10-K. (3) None.. 2 DESCRIPPIN OF BUSINESS General , Wells Fargo & Company (Parent) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Based on assets at December 31, 1985, it was the 13th largest bank holding company in the United States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank). % e nonbank subsidiaries of the Parent provide equipment lease, real estate and agricultural financing; originate and service real estate loans for investors; advise a real estate investment trust; provide consumer, accounts receivable and inventory financing; and provide credit insurance to borrowers from certain of the Parent's subsidiaries. Wells Fargo & Company and its subsidiaries are hereinafter referred to as the Company. W e Parent was incorporated in California on November 15, 1968 and, pursuant to a plan of reorganization effective February 28, 1969, the Bank became a subsidiary of the Parent. . On February 7, 1986, the Company entered into a definitive stock purchase agreement with Midland Bank plc (Midland) and certain Midland affiliates providing for the acquisition by the Company of all the issued and outstanding co: mon stock of Crocker National Corporation (Crocker) . The [ proposed acquisition is discussed in note 16 to the financial statements on page 42 of the Annual Report. Additional information regarding the proposed acquisition of Crocker, including the stock purchase agreement, is included in the Company's report on Form 8-K included as Exhibit 28 to this Form 10-K. Subsequent to the original financing assumptions in note 16 and Exhibit 28, the Company agreed on March 13, 1986 to sell 4,025,000 shares of cormon stock in an underwritten public offering at a public offering price of $81 per share. In addition, the Company currently expects to issue to Midland 4.9% of the total number of shares of copmon stock outstanding at closing of the proposed acquisition (giving effect to the issuance of conmon stock to Midland) in partial payment of the purchase price. For this purpose, the common stock issued to Midland will be valued at $81 per share. As a result of these issuances, the Company would issue approximately $430 million in conmon stock. Consequently, the Company has reduced the amount of preferred stock it expects to issue in connection with the Crocker acquisition to approximately $250 million and the anount of debt securities it expects to issue in connection with the Crocker acquisition to up to approximately $400 million. The Company believes that the effect of these changes on the pro forma condensed combined income statement is not material. We amount of equity and debt securities to be issued may further change depending on specific plans developed for integrating Crocker's assets as well as oi market conditions. We Bank History and Growth We Bank is the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. W e California banking business was separated from the express business in 1905 and was merged in 1960 with American Trust Company, another of the oldest banks in the western United States. % e Bank became Wells Fargo Bank, N.A., a national banking association, in 1968. Its head office is located in San Francisco, California. 3 l I As of December 31, 1985, the Bank operated 314 branch offices, of which 224 were in Northern California, 86 in Southern California and 4 overseas. We following table shows selected information for the Bank: December 31, (in millions) 1985. 1984 1983 1982 1981 Ioans $20,139 $19,070 $17,268 $17,188 $15,834 Assets $23,521 $24,035 $23,802 $22,125 $20,880 Deposits $19,758 $20,438 $20,685 $18,419 $17,226 Staff (full-time equivalent) 12,900 13,800 15,000 16,000 17,500 Number of branch offices '314 33". 380 394 403 Banking Services Retail Banking. Retail banking activities constitute the largest single portion of the Bank's business. W e Bank, through the Retail Banking Group, provides a full range of consumer banking services in California, including savings and time deposits, checking accounts, credit card services, consumer loans, home mortgage loans and safe deposit facilities. We Bank's real estate first mortgage loan portfolio primarily consists of loans secured by 1-4 family residential properties. At December 31, 1985, approximately 40 percent of such loans were California VIR (variable interest rate) mortgages. Consumer lending services include automobile, personal, marine, student, aircraft, hcme equity and lines of credit loans, as well as automobile leasing. We Bank offers full bankcard services for its cardholders and for merchants who accept credit cards. At December 31, 1985 and 1984, the Bank had MasterCard cardholder accounts of 873,000 and 756,000, respectively, and VISA cardholder accounts of 312,000 and 282,000, respectively. In addition, the Bank processes bankcard transactions for approximately 15,000 merchant locations throughout California and several other states. W e Bank offers WellsServiccO, an electronic system that provides check and credit card processing for merchants, as well as point-of-sale transaction processing for the e Were are approximately 8,500 WellsServicc@ merging terminals debit card throughout market. California and several other states. In 1983, the Bank, along with four other California banks, formed a nonprofit mutual benefit corporation (Interlink Network) to develop a point-of-sale electronic funds transfer switch. Interlink became operational in April 1985 and by year end was processing over 70,000 transactions per month. 4 %e Bank also offers Express Sto[ automated teller machines (Ams) . Bank customers may use these machines to make deposits, withdrawals and many other transactions normany handled by a bank teller, 24 hours a day, seven days a week. At December 31, 1985, there were 783 A m s in service statewide. In December 1985, Wens Fargo Bank joined MasterTeller, a nationally shared Am network with over 5,000 Ams. With over 80 percent of the Ams located outside of California, this system provides the Bank's cardholders the ability to withdraw cash at any MasterTener Am nationwide. In addition, the Bank offers payro n and tax services to small businesses. Currently, these services are provided to over 4,000 small businesses headquartered in California. Comercial Banking. %e Commercial Banking Group services the middle market, small businesses and high net worth individuals. % e Group concentrates on the manufacturing and distribution industries and emphasizes apparel, entertainment and agribusiness financing. %e Group provides revolving lines of credit, term loans, project financing, trade facilities, deposit, cash management and business services through 22 commercial banking regions located in key market areas throughout California. Trade finance centers are located in San Francisco and Los Angeles. Corporate Banking. The Corporate Banking Group provides services to large corporations, including those involving camercial loans, de. mand deposit accounts, remittance and exchange and cash management. Operations are conducted from the Group's San Francisco and Los Angeles offices as well as from its four loan production offices in Atlanta, Chicago, Dallas and New York. In March 1985, the Group discontinued its foreign operations after the sale of approximately $40 million in assets of its Canadian subsidiary, which had been involved in deposit taking and lending activities. Real Estate Lending. W e Real Estate Industries Group primarily provides interim comercial and residential construction loans to builders and developers in California and is responsible for the Bank's relationships with title companies. The Group's camercial loan portfolio principally consists of lines of credit and short-term loans to developers. %e Group has loan production offices in eight cities in Northern and Southern California. International Banking. International activities include accepting deposits, making loans, creating acceptances, placing deposits in foreign banks, buying and selling foreign exchange, issuing letters of credit, collecting and transferring money and arranging loan syndications. The International Banking Group conducts its activities from its San Francisco and Los Angeles offices as well as from its branches in Hong Kong, . Nassau, Seoul and Tokyo. The Bank maintains representative offices in Buenos 1.1 * -., . , ,j, Aires, Caracas, Mexico City, Sao Paulo and Singapore. In January 1985, the Ms f Ccznpany converted its Buenos Aires branch into a representative office and :. transferrad certain branch assets and liabilities to a local Argentine bank in ,1 N. - which the company acquired a minority interest. g@h:lp ' 3 5 k,$ %e Bank has an International Banking Facility in San Francisco, which extends credit to and accepts deposits from foreign customers and certain other internationally related institutions. % e Bank also owns a subsidiary, Wells Fargo International Limited, based in Georgetown, Grand Cayman. % is subsidiary is active in lending and merchant banking outside the f United States. 1 In 1985, the Company sold its Milan branch and closed its Iondon branch, the New York office of its Edge Act subsidiary (Wells Fargo Bank International) and representative offices in Madrid, Manila, Taipei, Bangkok, Jakarta and Kuala Lumpur. This restructuring focuses the company's international resources on providing domestic and international trade services to customers in the West. The Bank holds equity investments of less than 50 percent of the capital stock of six banks and financial institutions in Europe, Latin America and the Pacific Basin. Four of these are held by Wells Fargo International Affiliates Corporation, a wholly-owned subsidiary of the Bank. International banking is subject to special risks, such as foreign exchange rate fluctuations, exchange controls and the changing economic, political and regulatory policies of foreign governments. Economic factors, such as changing oil prices, disparities in inflation rates among trading countries, volatile interest rates and economic stagnation in certain countries, have added to the uncertainties involved in international lending. Repayments of interest and principal on international credits as well as the value of the Company's equity investments overseas can be affected by such risks and uncertainties. In order to minimize risk from fluctuations in foreign exchange rates, the Company either requires repayment in U.S. dollars or hedges substantially all of its foreign currency position through forward contracts. Where loans are repayable in U.S. dollars, there is the risk that a country's foreign exchange reserves may not be sufficient to enable the borrower to repay its loan. % e Company also has procedures to minimize its exposure to cross-border credit risk. A Country Review Comittee, which includes senior officers of the International and Economics departments of the Bank, analyzes each country where the Company has or may have exposure in order to assess the cross-border risk. Based on the Committee's assessments, International Banking Group management recomends specific country limits. Total revenue, income before income taxes, net income and total identifiable assets by geographic area at December 31, 1985, 1984 and 1983 and for the yects then ended are presented in note 11 to the financial statements on page 38 of the Annual Report. Trust and Investment Services. % e Bank administers estates and personal trusts and provides custody and investment services to individuals and nonprofit organizations. It also administers pension and profit sharing funds. Municipal, Government and Money Market Securities. The Bank trades for its own account and sells to customers U.S. Government obligations and other money market instruments, such as bankers' acceptances. It is a member of selling groups fer new issues of federal agency obligations and it trades and sells such isues in the secondary market. 6 %e Bank also participates as a member of syndicates that underwrite bonds issued by California public authorities and acts as a dealer in the secondary market for tax-exempt securities. - Nonbank Subsidiaries Leasing Wells Fargo Leasing Corporation (WFIC) was established in 1971. It had outstanding investments in financing transactions of $582 million at December 31, 1985. We primary business of WFIC is leasing equipnent. In some cases (typically nontax-oriented leases), the full value of the equipment is recovered over the full payout term of the lease. In other cases (typically tax-oriented leases), the value of the equignent is recovered from J a combination of the lease payments and the ultimate sale of the equipnent at the end of the lease term. WFIf directly originates transactions with end 't a users as well as offers sales-aid leasing products to customers of equipnent vendors. In addition, WFIf engages in brokering and servicing leases for third parties. hTIC has its headquarters in San Francisco and has marketing offices in New York, Sacramento and Ios Angeles. Mortgage Banking Wells Fargo Realty Finance Corporation (hTRF) is engaged in comercial mortgage banking, comercial brokerage and servicing comercial -- real estate loans for investors. At December 31, 1985, WFRF had a total servicing portfolio of $1.6 billion, which included $.2 billion of the Bank's .. comercial loans, and had six loan production offices, which are located primarily in California. NFRF engages primarily in brokerage of permanent comercial loans to i 7 investors. WFRF also maintains its own loan portfolio, which totaled $243 million at December 31, 1985. In the first quarter of 1985, the Company sold its residential mortgage banking subsidiary, Wells Fargo Mortgage Company, as discussed on ' - page 13 of the Annual Report. Realty Advisors Wells Fargo Realty Advisors (hTRA), based in Ios Angeles with 12 regional offices, provides advisory and other services to Wells Fargo Mortgage and Equity Trust (Trust), a publicly held real estate investment trust. he Trust invests in a portfolio of real estate interests consisting of mortgage loans and equity investments in real estate. h e advisory agreement pursuant to which the services are rendered is renewable annually by the Trust and may _ l be terminated by either party. ;- - In addition, advisory and other services are provided to the Wells V-Q%2 gy"H Fargo Real Estate Bluity Fund, which provides employee benefit trusts with a , stb. ' means for investing in real estate, and the Wells Fargo Property Unit Trust, which provides United Kingdom pension funds with a means for investing in j(Q.J.* k@ 7 United States real estate. j ? W..' t. .. hTRA also maintains its own loan portfolio, which was $1.6 billion at 4 December 31, 1985. gp r :;g - 7 %.) Investment Advisors Wells Fargo Investment Advisors (hTIA), which was previously a division of the Bank, became a nonbank subsidiary early in 1985. hTIA managed approximately $30 billion in funds for pension plans and large institutions at December 31, 1985, making it the nation's largest manager of index funds. Index funds match the performance of broad segments of the stock and bond markets. Business Credit Wells Fargo Business Credit (WFBC) was established ,in 1978 and provides comercial loans primarily to wholesalers and manufacturers. Such loans are collateralized by accounts receivable, inventory and other business assets. WFBC is headquartered in Dallas with full service regional offices in Atlanta, Baltinore, Chicago, Dallas, Kansas City, Los Angeles and New York. At December 31, 1985, the loan portfolio of WFBC totaled $626 million. Consumer Credit Wells Fargo Credit Corporation (hTOC) was established in 1978. WFCC is headquartered in Scottsdale and has offices in Atlanta, Baltimore, Chicago, Denver, Dallas, Oklahoma City, Phoenix, Salt Lake City and Tulsa. WECC offers home equity loans, small comercial loans, automobile leasing, revolving credit lines and home improvement loans. At Decenber 31, 1985, the loan portfolio of WFCC totaled $1.0 billion. Agricultural Credit Wells Fargo Ag Credit (hTAC) was established in 1980 and provides financing to agricultural producers and processors. WFAC is headquartered in Denver and has offices in Atlanta, Billings, Memphis and San Antonio. At December 31, 1985, the loan portfolio of WFAC totaled $152 million. Credit Life Insurance Central Western Insurance Company (CWIC) was established in 1978. Headquartered in Phoenix, CWIC reinsures credit life and disability insurance sold to installment loan borrowers of the Bank and WFT . Wells Fargo Insurance Services, organized in 1979, performs an agency function for the activities of CWIC and also acts as agent for sales of mortgage redemption insurance to borrowers of the Bank and NEOC. Other 'Ihe Company has other wholly-owned subsidiaries that provide various banking-related services. In the aggregate, these subsidiaries are not material to the Company's assets and net income. Comitments and Lines of Credit In the normal course of business, the Company extends contractaal loan comitments to customers for fees or under compensating balance arrangements. Comitments generally have fixed expiration dates ranging from six months to seven years. Lines of credit are made available for various purposes, including short-term borrowings and financing of bankers' acceptances and letters of credit, and are generally subject to cancellation. Additional information regarding comitments and contingent liabilities is presented in note 15 to the financial statements on page 41 of the Annual Report. 8 Competition The banking business is highly competitive and has become increasingly so in recent years. The Bank competes with domestic and foreign banks for deposits, loans and other banking business. In addition, other financial intermediaries, such as savings and loans, money market mutual funds, credit unions and multinational financial services companies, compete with the Bank in certain aspects of its business. Federal legislation adopted in recent years has increased competition. See " Supervision and Regulation" below for further discussion of such legislation and the competitive environment in which the Bank operates. %e other subsidiaries of the Parent also experience competition in their activities, arployees At December 31, 1985, the Company had approximately 14,000 employees (full-time equivalent, excluding hourly employees and unpaid leaves), approximately 12,900 of whom were employed by the Bank. Monetary Policy %e earnings of the Company are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities in the U.S. and abroad. In particular, the Federal Reserve System regulates the national supply of money and credit in order to influence general economic conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings, setting reserve requirements against deposits and regulating maximum interest rates payable on certain time and savings deposits. Wese policies have a significant influence on the overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. Supervision and Regulation Under the Bank Holding Company Act, the Parent is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Further, the Act restricts the activities in which the Company may engage and the activities of any company in which the Parent owns more than 5 percent of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks and activities so closely related to banking as determined by the Board of Governors to be proper incidents thereto. Under the Act, the acquisition of substantially all of the assets of any domestic bank or the ownership or control of more than 5 percent of its voting shares by a bank holding company is subject to prior approval by the i Board of Governors. In no case, however, may the Board approve the acquisition by the Parent of the voting shares of, or substantially all assets of, any bank located outside of California unless such acquisition is specifically authorized by the statutes or laws of the state in which the bank to be acquired is located or the Federal Deposit Insurance Corporation arranges the acquisition under its authority to aid financially troubled banks. 9 l % e Bank is subject to certain restrictions under the Federal Reserve f Act, including restrictions on any extension of credit to its affiliates. In particular, the Parent and its nonbank subsidiaries are prohibited from borrowing from the Bank unless the loans are secured by specified collateral. Such secured loans and other regulated investments made by the Bank are limited in amount as to the Parent or to any of its nonbank subsidiaries to 10 percent of the Bank's capital and surplus and, in the aggregate to all such entities, to 20 percent of the Bank's capital and surplus. here are various requirements and restrictions in the laws of the United States and California affecting the Bank and its operations, including the requirement to maintain reserves against deposits; restrictions on the nature and amount of loans that it may make; and restrictions relating to its investments, its activities in connection with the distribution of securities and the places at which it may operate branches. W e Bank, as a national bank, is subject tc regulation and examination by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Operations in other countries are subject to various restrictions and to the supervision of various regulatory authorities under the laws of such countries. In addition, dividends payable by the Bank to the Parent without the express approval of % office of the Comptroller of the Currency are limited to the Bank's net profits (as defined) for the preceding two years plus net profits up to the date of any dividend declaration. Under this formula, the Bank can declare additional dividends in 1986 of approximately $290 million of its undistributed earnings at December 31, 1985 plus net profits for 1986 up to the date of any such dividend declaration. %e Comptroller of the Currency also has authority to prohibit a national bank from engaging in what in his opinion constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the national barA in question, that the Comptroller could claim that the payment of dividends might under som circumstances be such an unsafe or unsound practice. Major regulatory changes affecting the Bank, banking and the financial services industry in general have occurred in the last several years and can be expected to occur increasingly in the future. Federal banking legislation since 1980 has deregulated interest rate ceilings on deposits at banks and thrift institutions and has increased the types of accounts that can be offered. Generally, the effect of these changes has been to increase the Bank's interest expense on its traditionally important sources of consumer deposits. In addition, federal banking legislation has narrowed the functional distinctions among financial institutions. Wrifts have expanded consumer and comercial banking power. Non-depository institutions can be expected to increase the extent to which they act as financial intermediaries, particularly in the area of consumer credit services. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system. Furthermore, the geographic constraints on portions of the financial services industry can be expected to continue to erode. %ese changes create significant opportunities for the Bank and the company, as well as the financial services industry, to compete in financial markets on a less regulated basis. W ey also suggest that the Company and particularly the Bank will face new and major competitors in geographic and product markets in which their operations historically have been protected by banking regulations. 10 ANALYSIS OF CHANGES IN IlffEREST DIFFERENfIAL The following table allocates the changes in net interest income (taxable-equivalent basis) to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities, segregated between dcznestic and foreign operations. Because of the numerous simultaneous balance and rate changes during any period, it is not possible to precisely allocate such changes between balances and rates. For this table, changes that are not due solely to either balance changes or rate changes are allocated equally to these two categories. Year erwied Decerter 31, 19o5 over 1904 1964 over 1963 (in rnillions) volume Rate Total volume Rate ittal DLMSTIC CFFJWTIO6 Increase (decrease) in interest and fee incore: Interest-earning daposits $ (8.3) $ 1.5 $ (6.8) $ (1.9) $ .4 $ (1.5) Investant securities: U.S. Treasury securities 24.8 (8.7) 16.1 43.0 2.8 45.8 Securities of othe U.S. governnent agencies and corporations (3.6) (.4) (4.0) (5.9) (.2) (6.1) obligations of states and political sutx]ivisions (5.0) (.1) (5.1) (5.7) (.3) (6.0) Other securities 14.1 (6.1) 8.0 22.9 1.7 24.6 Trading account securities 12.5 (4.6) 7.9 2.6 1.9 4.5 Federal funds sold (15.6) (7.2) (22.8) 14.3 3.7 18.0 Loans: Cermercial, financial, and agricultural 38.9 (137.4) (98.5) 84.4 65.8 l'20.2 Real estate construction-related 128.0 s(71.8) 56.2 69.3 22.5 91.8 seal estate mortgage (24.5) (3.5) (28.0) 1.9 1.5 3.4 Consumer 152.4 (13.3) 139.1 71.7 12.9 84.6 Irase finaneiry) 6.0 2.9 8.9 (5.9) (3.5) (9.4) Fees and sundry interest -- (.2) (.2) -- (2.1) (2.1) Total increase (decrease) 319.7 (248.9) 70.8 290.7 107.1 397.8 Increase (decrease) in interest ex[ense: Deposits: Savirgs deposits (7.0) (.2) (7.2) (14.1) 3.6 (10.5) im acxxonts 2.7 .2 2.9 5.5 (1.0) 4.5 Market rate checking 2.4 (3.5) (1.1) 4.3 ( . ) 4.1 Kirket rate savirus 44.3 (94.7) (50.4) 13.8 7.3 21.1 , Savings certificates 57.7 (83.8) (26.1) 111.0 13.0 124.0 Certificates of deposit (19.0) (.4) (19.4) (31.7) .6 (31.1) Other tine deposits (35.6) (4.6) (40.2) .5 5.6 6.1 Funds borrowed 22.1 (28.6) (6.5) (9.5) 13.8 4.3 Corrercial paper (17.7) (47.6) (65.3) 41.3 27.2 68.5 Senior and subordinated debt: l Senior debt 40.3 (23.3) 17.0 39.1 (10.8) 28.3 Subordinated debt 111.9 (15.1) 96.8 25.6 12.1 37.7 Funds transferred to foreign operations (10.41 37.4 27.0 26.4 (22.0) 4.4 'Ibtal increase (decrease) 191.7 (264.2) (72.5) 212.2 49.2 261.4 Increase in amrtized gain on interest rate hedaing -- 17.8 17.8 -- 16.2 16.2 Increase in domestic interest differential 128.0 33.1 161.1 78.5 74.1 152.6 IURPIGN OFT 3%TIWS Increase (aecrease) in intuest armi fee income: Interest-earning dep) sits (34.7) (18.1) (5- (45.1) 8.8 (36.3) Foreign loans (49.7) (47.6) (9- (.6) 33.8 33.2 Fees and surviry interest -- M) __j -- (2.2) (2.2) Total increase (decrease) (84.4) (65.8) 22) (45.7) 40.4 (5.3) Increase (decrease) in interest expense: Deposits in foreign of fices (73.1) (23.4) (96.5) (16.4) 5.8 (10.6) OtM r deposits (10.0) - (10.0) 1.3 1.6 2.9 Furmis transferred from domestic operations 10.4 (37.4) (27.0) (26.4) 22.0 (4.4) Total increase (decrease) (72.7) (60.8) (133.5) (41.5) 29.4 (12.1) Increase (decrease) in foreign interest differential (11.7) (5.0) (16.7) (4.2) 11.0 6.8 Increase in derestic and foreign interest differential $116.3 LJM ),t.4M 4 @@ $159.4 11 AVERAGE BALANCES, Y m IE (ThXABLE-EQUIVAGNT BASIS) AIO RMES PAID 1985 1984 1983 Interest Interest Interest ' Average yields / income / Averaje Yields / income /- ' Average yields / inccmie/ . (in sillions) balance rates expense balance rates expense balance rates expense DCD8BFIC WERATICBS Earning assets: Interest-earning deposits 8 117 11.04% $ 12.9 $ 105 10.114 $ 19.7 $ 214 9.914 $ 21.2 Investment soci*ities U.S. Treasury securities 882 9.71 85.6 641 10.85 69.5 233 10.19 23.7 Securities of other U.S. goverraient agencies and corporations 20 7.70 1.6 65 8.57 5.6 133 8.81 11.7 Obligations of states and political sundivisions - 162 8.78 14.2 218 8.83 19.3 282 8.% 25.3 Other securities 289 15.12 43.6 202 17.60 35.6 67 16.35 11.0 Total investment securities D 10.72 145.0 D 11.54 130.0 715 10.03 71.7 Trading acx:ount securities 266 8.56 22.8 137 10.88 14.9 111 9.39 10.4 rederal funds sold 210 8.30 17.4 374 10.75 40.2. 233 9.53 22.2 toanse Owchl, financial, and . ~ n ic6; ural . 7,840 10.71 839.4 7,504 12.50 937.9 6,803 . 11.58 787.7 Red esta mnstruction-related 3,746 11.38 426.2 2,721 13.60 370.0 2,194 12.68 278.2 Real e c *f sortgage 4,760 11.10 528.3 4,980 11.17 556.3 4,962 11.14 552.9 Consute 3,690 14.74 544.0 2,671 15.16 404.9 2,190 14.63 320.3 taase tirCriq 915 14.20 130.0 872 13.S8 121.1 914 14.27 130.5 rees ard P ac .'cerest - - 90.1 - 90.3 -- - 92.4 Total loar. JTa "E~ET 12.21 MM 13.23- 2,480.5 ~1T,MT 12.67 2,162 0 htal c ei.nv -ining assets $22,897 12.04 2,756.1 $20,580 3.05 2,685.3 $18,336 12.43 2,237.5 Funding sources Interest-bearing liabilities: Deposits: Savings deposits $ 1,381 5.50 75.9 $ 1,507 5.51 83.1 $ 1,768 5.29 93.6 foi accounts 1,429 5.12 73.1 1,376 5.10 70.2 1,270 5.18 65.7 ~ Market rate checking 326 5.75 18.7 287 6.89 19.8 225 6.98 15.7 Market rate savings 5,327 6.63 353.3 4,742 8.51 403.4 4,577 8.35 382.3 Savings certificates 5,920 9.24 547.2 5,343 10.73 573.3 4,295 10.46 449.3 ' Certificates of deposit 278 13.94 38.8 414 14.06 58.2 640 13.94 89.3 Other time deposits 265 9.98 26.4 603 11.04 66.6 598 10.12 60.5 h tal interest-bearing deposits 14,926 7.59 1,133.1 14,272 8.93 1,274.6 "TETTJ 8.65 1,156.4 Fonds borrowed 1,321 7.62 100.7 1,070 10.01 107.2 1,171 8.78 102.9 Coronercial paper 1,951 8.23 160.5 2,139 10.56 225.8 1,720 9.15 157.3 Senior and subordinated debt Senior debt 1,797 10.64 191.l' 1,441 12.08 174.1 1,141 12.78 145.8 Subordinated debt 1,562 8.73 136.3 385 10.28 39.5 39 4.54 1.8 h tal senior and subordinated debt 3,3S9 9.75 327.4 1,826 11.70 213.6 1,180 12.52 147'T Funds transferred to foreign operations 1 645) (8.45) 139.0) 1 537) (10.80) 166.0) 1 797) (9.48) 170.4) Total interest-bearing liabilities , 7.95 , . , 9.31 , . , 8.91 1,(393.8 Portion of noninterest-bearing fugling sources 2,985 - - 2,810 - - 2,689 - - h tal h uestic funding sources $22,897 6.91 1,582.7 $20,580 8.04 1,655.2 $18,336 7.60 1,393.8 Amrtized gain on interest rate hedging 37.2 19.4 3.2 immestic spread and interest differential 5.294 $1,210.6 5.10% $1,049.5 4.894 $ 896.9 (continued on next page) l l l 12 i- , 4 3 1955 1954 1953 Interest Interest Interest Average Yields / incase / Average Yields / incmas/ Average Yields / incose/ (in millions) halance rates expense balance rates exasnee balance rates e osnee 70sEIQi OPERATIONS (2) Earning assets: Interest-earnirs deposits $ 392 8.62t $ 33.8 -$ 731 11.846 8 86.6 $ 1,128 10.904 $ 122.9 roteign loans . 2,427 11.28 273.7 2,834 13.09 371.0 .2,839 11.90 337.8 Feek and se dry interest -- - 1.7 -- - 1.8 - - 4.0 Total foreign earning assets 8 2,819 10.97 - 309.2 $ 3,%5 12.89 459.4 $3,%7 11.71 464.7 Medirq sources: . Interest-bearing liabilities: Depnsits in foreign offices 8 1,135 9.88 112.2 $ 1,820 11.46 208.7 - 8 1,966 11.16 219.3 Other deposits . - - - 94 10.61 10.0 81 8.77 7.1 nmde transferred from dcmestic operations 1 645 8.45 139.0 1,537 10.80 166.0 1,797 9.48 170.4 total interest-bearing liabilities , 9.04 251.2 3,451 11.15 384.7 3,844 10.32 396.8 Portion of noninterest-bearing fading sources 39 - -- 114 - -- 123 - -- Total foreign fading sources $ 2,819 8.91 251.2 $ 3,565 10.79 384.7 8 3,967 10.00 396.8 Poreign spread and interest differential 2.064 $ 58.0 2.104 3 74.7 1.714 $ 67.9 IDESTIC APD FOREION OPERATIOS Earning assets $25,716 11.924 $3,065.3 $24,145 13.02t $3,144.7 $22,303 12.344 $2,752.2 Funding sources $25,716 7.13 1,833.9 $24,145 8.45 2,039.9 $22,303 8.03 1,790.6 Amortized gain on interest rate hedgire 37.2 19.4 3.2 Dcuestic and foreign spread and interest differential 4.934 $1,268.6 4.664 $1,124.2 4.334 $ %4.8 ' NONINIDEST-EM5fING ASSEIS Cash and due frna banks 8 1,639 $ 1,712 $ 1,713 Other (3) 1,214 1,376 1,422 - Total noninterest-earnirq assets .$ 2,853 $ 3,088 4 3,135 NOIINIERESF-BEARIIC FUOING SCGUS . Deposits $ 3,366 3 3,422 ,8 3,420 Other liabilities 1,103 1,247 1,267 Stockholders' equity 1,408 1,343 1,260 Noninterest-bearing funding sources used to fund earning assets (3,024) (2,924) (2,812) Total net noninterest-bnarirq fmdirq sources $ 2,853 $ 3,088 $ 3,135 torAL ASSEIS $28,569 $27,233 $25,436 (1) Ncnaccrual and restructured loans and related income are included in their respective loan categories. (3) Ibr Securities and Exctiarge Ozenission pirposes, foreign operations are transactions with a customer who is dcniciled outside of the United States. (3) Includes the average allowance for loan losses of $336 million, $222 million and $197 million in 1985, 1984 and 1983, respectively. 13 AVERAGE BAIANCES, Ymm ('mXABLE-EQUIVALDff BASIS) AND RATES PAID - EOURIH QUARER Ouarter erded Decenter 31, 1985 1964 Interest Interest Average Yields / incme/ Average Yields / inome/ (in willions) balance rates expense balance rates expense FWNItG ASSI"15 Interest-earntrs deposits $ 536 8.86% $ 12.0 $ 504 11.18% $ 14.2 Investment securities: U.S. Treasury securities 1,134 9.03 25.8 659 10.83 17.9 Securities of other U.S. goverrsnent agencies and corporations 20 7.73 .4 53 8.43 1.1 m ligations of states and political subdivisions 142 8.72 3.1 198 8.83 4.4 Other securities 380 14.31 13.6 203 17.40 8.8 Total investment securities 1,676 10.19 42.9 1,113 11.% T Trading account securities 206 9.41 4.8 166 9.83 4.1 Federal funds sold 208 8.23 4.3 350 9.88 8.7 toans: Ccuamercial, financial, and agricultural 7,854 10.28 203.5 7,789 12.39 242.5 Real estate corstruction-related 3,955 10.82 107.6 3,109 13.03 101.7 Real estate sortgage 4,658 10.95 127.5 4,887 11.20 136.8 Constsner 4,058 14.51 147.5 2,910 15.51 113.0 Imase financing 996 15.40 38.4 856 13.71 29.4 Foreign 2,177 10.23 56.1 2,792 14.05 98.6 Fres and sundry interest - -- 23.3 -- -- 23.3 Total loans 23,698 11.83 703 9 22,343 13.30 ~T6.f %tal earning assets $26,324 11.62 767.9 $24,476 13.10 804.5 MNDItG SOURCES Interest-bearirq liabilities: Deposits: Savings deposits 8 1,406 5.50 19.5 $ 1,423 5.50 19.7 tKM accounts 1,335 5.14 17.3 1,407 5.11 18.1 Market rate checkirn 343 5.42 4.7 287 6.88 5.0 Market rate savings 5,426 6.16 84.3 4,731 8.42 100.2 Savings certificates 5,990 8.64 130.5 5,861 11.00 162.0 Certificates of deposit 257 13.28 8.6 299 14.52 10.9 Other time deposits 227 9.49 5.4 500 11.30 14.2 Deposits in foreign offices 847 9.59 20.5 1,711 11.13 47.8 %tal interest-bearing deposits 15,831 7.29 290.8 16,219 9.27 377.9 Furds borrowed 1,582 7.61 30.5 999 9.06 22.7 Carmercial paper 1,806 7.64 34.8 1,863 10.16 47.6 Senior and subordinated debt: Senior debt 1,925 10.29 49.5 1,512 11.80 44.6 Subordinated debt 1,935 8.62 41.7 893 10.02 22.4 Total senior and subordinated debt 3,860 9.45 91.2 2,405 11.14 67.0 htal interest-bearing liabilities 23,079 7.75 447.3 21,486 9.55 515.2 Portion of noninterest-bearing funding sources 3,245 - -- 2,990 - - Mtal funding sources $26,324 6.80 447.3 $24,476 8.38 515.2 Amortized gain on interest rate hedging 7.6 15.9 Spread and interest differential 4.994 $328.2 4.984 *305.2 tmINITREST-FWWItG ASSEIS Cash and due from banks $ 1,573 $ 1,749 Other 1,157 1,450 70tal noninterest-earnirn assets $ 2,730 $ 3,199 tmINITREST-8EARItG RNDItG SOURCES Deposits $ 3,513 $ 3,474 Other liabilities 1,024 1,393 Stockholders' equity 1,439 1,322 Noninterest-bearing funding sources used to fund earning assets (3,245) (2,990) Total net noninterest-bearing fundirq sources $ 2,730 $ 3,199 1 URAL ASSEIS $29,054 $27,675 14 INVESDENT POESTOLIO 39GURITIES AND YmnR (BXABM-EQUIVALENT BASIS) Decermer 31, 1985 Re:naininq maturity Average _ _ _ _ remaining maturity . After one year After five years %tal Average (in yrs. Che year or less through five years through ten years After ten years (in millions) amunt yield - ms.) Amount Yield Amunt Yield Amount Yield Amunt Yield IOCE VAllE ~ . U.S. Treasury securities . $1,134.8 8.64% 3 $127.7 7.51% _ $542.4 8.72% $464.7 ' 8.864- $ -- -t Securities of other U.S. government agencies and corporations 19.6 7.73 12-4 .5 11.60 6.0 9.44 - - 13.1 6.81 (bligations of states and political subdivisions 135.2 8.77 4-3 33.7 9.18 45.6 8.77 44.2 8.66 11.7 7.o9 Other bands, notes and . debentures 6.1 8.59 6-2 4.3 7.33 .1 - 9.50 .1 ~ 9.25 1.6 11.95 TH57 8.64 3-10 j)JM 7.86 Mid 8.73 ji&Q, 8.84 W 7.64 Deserve Bank stuck 400.4 h tal investment securitles M J,d ANALYSIS OF IDPM POEUTOLIO Decenter 31, 1985 Over one year throm h five years Over five years Float % Floating and and One year Predeter- adjustable Predeter- adjustable December 31, (in millions) or less mined rate rate mined rate rate Total 1984 1983 1982 1981 Selected loan maturities (1): Commercial,' financial, and agricultural $6,041.3 $ 706.8 C1,361.0 $ 85.5 $ 280.3 $ f,474.9 $ 8,055.0
- 6,859.0 $ 6,641.3 $ 5,316.8 Real estate construction-r: lated (2) .
1,828.5 250.6 1,687.4 185.2 234.5 4,186.2 3,303.5 2,288.2 2,161.0 2,139.4 Real estate mortgage loans (exc1 Ming first mortgage loans secured by 1-4 family residential properties) 252.5 311.2 352.6 302.3 291.2 1,509.8 1,462.3 1,371.8 1,161.4 1,140.8 Fortign: Governments and official institutions 673.4 803.8 728.9 620.2 474.1 Banks and other financial institutions 457.1 687.4 906.0 929.3 654.4 Omnercial and industrial 881.7 1,244.2 1,243.7 1,226.9 960.2 'Ibtal foreign 944.8 5.5 759 3 .8 301 8 2,012 2 2,735.4 2,878.1 2,776.4 2,088 7 Total selected loan maturities 19di7,d M jid{g,d E7R &lDld 16,183.1 15,556.2 13,397.1 12,740.1 10,685.7 Other loan categories: Real estate first mortgage loans secured by 1-4 family residential properties (3) 3,109.6 3,400.0 3,602.3 4,462.6 4.539.2 Penthly payment (3) 1,074.7 795.4 719.2 1,085.0 1,343.5 Credit card 1,298.1 908.6 580.3 481.6 460.0 Other revolving credit 310.3 225.2 131.7 71.3 56.1 Real estate junior lien mortgage loans secured by 1-4 famil/ residen-tial properties (3) 1,523 7 1,152.8 942.6 -- -- Total constuner 4,206.8 3,082.0 W 1,637.9 1,859.6 14ase financing 1,114.7 855.7 894.4 927.9 893.2 'ittal loans $24.614.2 $22.893.9 $20.2b7.6 S19.768.5 $17.977.7 (1) Based on receining contractual maturities. (2) Inc1Mes ' standing loans," which are loans sacured primarily by cxmpleted and operational real estate with terms generally not in excess cf five years. Such loans provide the custcaner a means of bridging the time gap between the conscruction financing period and the permanent or long-term finaneirq. (3) Effective January 1,1983, second mortgages and other junior lien loans to irdividuals that are secured by 1-4 family residential properties have been classified as 'real estate junior lien mortgage loans secured by 1-4 f.amily residential properties." In prior years, portions of these balances were included in the real estate first mortgage loan and monthly payment loan categories. lears prior to 1983 have not oeen reclassified, as ccurlete information is not available. However, it is estimated that junior liens at Decerber 31, 1982 would have included approximately $580 million of loans which have been classified as real estate first mortgage loans secured by 1-4 family residential properties and approximately $300 million of loans clastified as monthly payment loans. 15 ANALYSIS OF IDAN PORTFOLIO (continued) 'Ihe Conpany restricts unusually large loan concentrations within the portfolio and attempts to minimize risk through diversification. Except as shown in the Analysis of Loan Portfolio table on the preceding page, the Company did not have loans to any one industry group that exceeded 10 percent of total loans at December 31, 1985. IDANS 90 DAYS OR PORE PASP DUE Loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories, were as follows: Decenber 31, (in millions; 1985 1984 1983 1982 1981 Conrnercial, financial, and wricultural $ 46.1 $33.9 $ 97.4 $ 69.8 $ 95.5 Real estate mnstruction-related 14.3 3.6 83.4 95.3 73.3 Real estate mortgage 42.0 41.8 30.5 47.2 32.1 Constrer 43.5 14.0 9.7 16.9 10.2 Lease financing .2 -- 3.6 .1 .6 Foreign 1.5 .4 88.9(1) 14.8 .4 'Ibtal M (2L,2 M $21412 a j21L1 (1) Included approximately $30 million of loans to private sector Wnezuelan borrower:3 for which all past-due cash was fully collateralized with dollars in the United States. Also included approximately $45 million of loans to public sector Venezuelan torrowers which were 90 days or more past due as to principal, for which interest was substantially cutrent and active negotiations to correct the past due status were in process. EN M Dacenter 312 (in millions) 1985 1984 1983 1982 1981 Domestic $18.4 $17.4 $40.2 $20.7 $69.3 Foreicn -- -- -- -- 24.6 Total jl@,1 $124,9 $$a,,, 2 32,03,2 12 1,2 EOREG'NE INIEREST If interest due on all nonaccrual and restructured loans had been accrued at the original contract rates, it is estimated that income before income taxes would have been greater by the anount show in the following table: Yaar ended Ier 31, 1985 (in millions) Dampstic Foreign Total Interest that would have been recorded uruler original terms $64.6 $27.3 $91.9 Gross interest remrded 12.0 23.0 35.8 Foregone interest M W $%.1 l 16 J MM M IOM4 TMW Year ended Decenter 31, (in millions) 1985 1984 1983 1982 1981 Balance, beginning of year $260.3 $199.6 $190.5 $153.1 $141.82 Provision for loan losses 371.8 194.6 121.1 115.4 63.4 loan charge-offs: Comercial, financial, and agricultural 127.4 102.0 92.5 55.1 25.4 Real estate m nstruction-related .5 3.6 ' .4 1.1 .3 Real estato 1-4 family (1) 1.4 1.6 1.4 1.0 .5 Other real estate sortgage loans 7.5 4.7 - .6 .2 h thly payeent 10.9 7.8 12.4 20.3 22.4 Credit card and related plans 49.9 13.5 10.6 14.7 18.9 Imase financing 11.8 7.8 8.9 8.5 7.4 Foreign- 27.8 20.1 9.4 3.2 3.3 tbtal loan charge-offs 237 2 161.1 135.6 104.5 78.4 Ioan recoveries: Comercial, financial, and agricultural 11.1 13.9 7.6 9.4 6.3 Real estate contruction-related .2 - -- -- - Real estate 1-4 family -- .1 - - - Other real estate mortgage loans .1 .2 .2 .2 .3 Monthly payment - 4.3 5.9 8.2 10.2 12.0 Credit card and related plans 4.4 3.8 4.5 4.9 4.2 Imase financing 2.5 2.9 2.6 2.1 2.6 Foreign 3.0 1.0 .6 .2 .9 ibtal loan recoveries 25.6 N 23.7 27.0 26.3 Net loan charge-offs 211.6 133.3 111.9 77.5 52.1 Other deductions 3.0 .6 .1 .5 - Balance, end of year jg2.1 j2jQa}, jgja1 jl2Qal jl1]d Allowance as a preentage of total loans @ M ,,2331 2- E Net loan charge-offs as a percentage of cverage loans outstanding 2 ,,4321 ,,,13,1 ,,d21 ,,a}Q1 (1) Includes loan charge-offs for both first mortgaae loans and junior lien mortgage loans secured by 1-4 family residential properties. Ar.rnr%TICE OF TIE ALIDNhNCE FOR IOMg TORm Pursuant to a regulatory requirement, the table below provides a breakdown of the allowance for loan losses by loan category. 'Ihe unallocated portion of the allowance is evaluated in light of portfolio growth and concentrations, lending policies, delinquency trends and general economic conditions as part of the overall evaluation of the adequacy of the allowance. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. Decent)er 31, (in millions) 1985 1984 1983 1982 1981 comercial, financial, and agricultural $104.8 $ 95.9 $ 88.9 $ 79.5 $ 50.0 Real estate construction-rehted 34.8 22.5 13.7 15.5 17.2 Real estate first mortgage loans secured by 1-4 family residential properties (1) .4 .4 .6 2.8 4.8 Other real estate nortgage loans 5.4 5.8 6.3 6.8 5.7 Monthly payment and other revolving credit (1) 14.8 13.6 16.7 16.5 15.3 Credit card 85.0 22.0 12.0 15.0 17.6 Imase financing 15.2 8.5 6.2 8.0 6.3 Pbreign 45.2 30.9 24.9 24.1 13.1 hilocated portion of the allowance (2) 111.9 60.7 30.3 22.3 23.1 Total j412a1 J23Qa), jJJ,241 9 jJ191,1 }}.}),d (1) Effective January 1,1983, secord mortgages ard other junior lien loans to individuals that are secured by 1-4 family residential properties have been inclided in the nonthly payment and other revolving credit category. In prior years, portions of these balances were included in the real estate first mortgage loan category. See note (3) to the Analysis of toan Portfolio table on page 15 for further expantion of the presentation in prior years. (2) this anount ano anf unabsorbed portion of the allocated allowance is also available for any of the above listed loan categories. 17 DEPOSITS Information regarding maturities of domestic time certificates of deposit and other domestic time deposits issued in amounts of $100,000 or more follows (based on time remaining until maturity): l (in millions Decenter 31, 1985 l Domestic time deposits: I . 3 nonths or less $1,155.2 Over 3 through 6 nonths 387.6 Over 6 through 12 months 333.3 Over 12 months 205.5 'Ibtal domestic time deposits M Time certificates of deposit and other time deposits issued by foreign offices in amounts of $100,000 or more represent a majority of total foreign deposit liabilities as of December 31, 1985. SIORP 'IEIN BORRONINGS Outstanding amounts of selected short-term borrowings were as follows: Year ended Decent >er 31, (in millions) 1985 1984 1983 FEIE!RM. R206 BOtIOED Average anount outstanding $ 624.3 $ 500.0 $ 860.0 Daily average rate 7.934 10.07% 8.814 Highest nonth-erd balance $ 885.2 $ 692.0 $1,542.0 Year-erd balanm $ 859.8 3 526.0 $ 467.2 Rate on outstardirgs at year erd 10.60% 8.47% 9.54% SIGRITY REMEDIASE M RE3BENFS Average anount outstarding $ 610.9 $ 500.0 $ 215.0 Daily average rate 7.23% 9.89% 8.91% Highest nonth-erd balan $1,013.2 $ 620.0 $ 412.0 Year-erd balance $ 940.2 3 437.3 $ 389.5 Rate on outstardirgs at year end 5.74% 7.934 9.82% GME3CIAL PAPER Average anomt outstanding $1,950.6 $2,139.0 $1,720.0 Daily average rate 8.234 10.564 9.15% Highest month-erd balance $2,107.7 $2,651.0 $2,356.0 tear-erd balance $1,436.2 $1,783.9 $1,706.2 Rate on outstardings at year end 7.74% 8.91% 9.84% l Comercial paper represents an obligation of the Parent with original maturities not exceeding 270 days. 18 l j mmunus j l The Conpany owns and leases various properties primarily in the downtown financial district of San Francisco and other locations throughout California. % e nonbank subsidiaries lease various properties in locations- l throughout the United States. W e Bank owns a 12-story headquarters building in downtown San l Francisco occupied almost entirely by administrative staff, a 137,000 square -I foot warehouse in South San Francisco for support. services and a 297,000 square foot data processing center in El Monte, California. In addition, the Bank leases approximatiely 1,429,000 square feet of office space for data -processing support and various administrative departments in nine buildings in San Francisco and three other major locations in the San Francisco Bay area. In 1985, the Bank leased approximately 370,000 square feet of office space in downtown Ios Angeles, a portion of which is sublet. W is facility is occupied by most of the Bank's Southern California administrative departments and is under a long-term lease. W e Bank owns the land and buildings occupied by 148 of the branch offices and leases another 166 branch offices. %e leases are generally for terms not exceeding 30 years. 19 k l EMBCUTIVE CFFIOBS OF THE REGISTRANT For purposes of this item, executive officers of the Parent and the. Bank are the menbers of the Senior Management Comnittee, listed below. . Nane Office held M
- Carl E. 9eichardt . Gairman and Gief Executive Officer 54 Paul Hazen' President and Chief Operating Officer 44
'Lhomas H. Boughey Executive Vice President 46 R. 'Ihomas Decker Executive Vice President 48 Gordon S. Grout Executive Vice President -48 John F. Grundhofer Executive Vice President 46 Jack L. Hancock Executive Vice President 55 E. Alan Holroyde Executive Vice President 45 Charles M. Johnson Executive Vice President 44 Robert L. Joss Executive Vice President 44 Frank N. Newman Executive Vice President and G ief Financial Officer 43 - Clyde W. Ostler Executive Vice President and General Auditor 39 Fredrick W. Petri Executive Vice President 39 David M. Petrone Executive Vice President 41 - Guy Ibunsaville, Jr. Executive Vice President, G ief Counsel and Secretary 42 Dale R. Walker Executive Vice President 43 William F. Zuendt Executive Vice President 39 '1here is no family relationship among the above officers. 'Ihe principal occupation of each of the executive officers during the past five years has been as an officer of the Parent, the Bank or one of the Parent's other subsidiaries, except Mr. Hancock, who has been with the Conpry since February 1982. Prior to that, he wa; a Senior Vice President of Gemical Bank. All executive officers of the varent and the Bank serve at the pleasure of the directors. 20 a a 73 EXHIBITS, FIMNCIAL SMEEBENr murzwRR AE REPORES Ott F0Ett 8-K (a) Financial Statements, Schedules and Exhibits:- (1) 'Ihe following financial statements and related notes to the financial statements and accountants' report thereon, included in the 1985 Annual. Report to Shareholders, are incorporated herein by . reference. Page nunber references are to the Annual Report. Financial statements of Wells Fargo & Conpany and Subsidiaries: , Page Consolidated Statement of Income t- for the years ended n= = har 31, 1985, 1984 and 1983........ 24 Consolidated Balance Sheet as of December 31, 1985 and 1984............................ 25 '_ Consolidated Statement of Changes in Stockholders' Equity for the years ended D= = har 31, 1985, 1984 ang! 1983........ 26' Consolidated Statement of Changes in Financial Position for the years ended December 31, 1985, 1984 and 1983........ 27 Notes to Financial Statements................................. 28 Accountants' Report........................................... 43 Supplemental Quarterly and Annual Financial Data. .; . . . . . . . . . . . . 44 (2). Financial Statement Schedules, filed as part of Exhibit 28 to this .
- - Form'10-K
Unaudited pro forma condensed conbined financial information of the - 3 Coupany and Crocker National Corporation for 1985 Audited financial statements of Crocker National Corporation as of j Decenber 31, 1985 and 1984 and for each of the three years in the
- period' ended December 31, 1985 (3) Exhibits
Exhibit number Description 1(a) Distribution Agreement dated May 6,1985 between the Parent and Salomon Brothers Inc relating to the Parent's Medium-Term Notes, incorporated by reference to Exhibit 1(a) , of Form 10-Q for the quarter ended March 31, 1985 (b) Distribution Agreement dated May 6,1985 between the Parent and Merrill Lynch, Pierce, Fenner & Smith Incorporated relating to the Parent's Medium-Term Notes, incorporated by reference to Exhibit 1(b) of Form 10-0 for the quarter ended March 31, 1985 (c) Finder Agreement dated May 6, 1985 between the Parent and Wells Fargo Bank, N.A. relating to the Parent's Medium-Term Notes, incorporated by reference to Exhibit 1(c) of Form 10-0 for the quarter ended March 31, 1985 2 S6:x:k Purchase Agreement among Midland Bank plc, Midland California 11oldings Limited, Midland America Corporation and l Wells Fargo & Company, dated February 7,1986, incorporated by. reference to Exhibit 2 of Form 8-K filed February 18, 1986 , 21 s ' ~ fExhibit " nimber Description I3(a) . Res'tated Articles of ' Incorporation' dated April 25,'1980, inccn.-@ rated by reference to Exhibit 4(a) of Registration f Statement No. 33-3390 filed February 18, 1986: (b) Certificate of Determination of Preferences of Adjustable - Rate Ctmanlative Preferred Stock,: Series A, incorporated by f , reference to Exhibit 4 of Form 10-0 for the quarter ended a March 31,:1983s (c):_ .By-laws of Wells Fargo & Conpany effective'May. 21,' 1985,' incorporated by reference to Exhibit-4(c) of Registration Statement No. 33-3390. filed February 18,11986 , l , 4 -- .the Coupany hereby agrees to furnish upon request to the . ' j - Consnission.a copy of each instrument defining the rights of . holders of senior ~and subordinated debt. of;the Coupany 10(a) Executive-Incentive Pay Plan * (b)- Supplemental Benefits Plan . . (c). Executive Survivor Income Plan, incorporated by reference to Exhibit 10(c) of Form 10-K for the year ended December-31, 1983 , (d) Stock Option-Plan * (e) Stock Option and Appreciation Plan * . (f) Restricted Share Rights Plan, incorporated by reference to~ Exhibit 10(j) of Form 10-K- for the year ended December 31, '1981 (g) Equity Incentive Plan, incorporated,by reference to Exhibit 7, - _19(a) of Form '10-Q for the quarter ended March 31, 1982 (h) Deferral Plan for Directors, incorporated by reference to Exhibit 10(h) of Form 10-K for the year ended December 31, 1983 (i) Stock Bonus Plan, incorporated by reference to Exhibit 10(i) of Form 10-K for the year ended Decenber 31, 1984 (j) Executive Ioan Plan, incorporated by reference to Exhibit 10(j) of Form 10-K for the year ended December 31, 1984 11 - Conputation of Earnings Per Conunon Share
- 12 Computation of Ratios of Earnings to Fixed Charges
- 13 1985 Annual Report to Shareholders 22 Subsidiaries of the Registrant 24 (a) Consent of Peat, Marwick, Mitchell & Co. (b) Consent of Arthur Andersen & Co. 28 Form 8-K filed February 18, 1986 l l *In accordance with Rule 24 of the Securities and Exchange Conunission's Rules F of Practice, these % = ants are being refiled with this Form 10-K, because they were originally filed more than five years ago. 22 a ' ~ w - ' y , [(b); ~The Conpany filed the following reports on Form 8-K during the fourth quarter of 1985 and through the date hereof in-1986: . (1)' Form 8-K filed October 16,Il985 under Item 5, which included the ~ News Release that announced'the Conpany's financial results for the ' quartem and nine months' ended Septenber 30, 1985 (2): Form 8-K_ filed January. 22, 1986lunder Item 5, which included the _. News Release that announced the Coupany's financial results for the, . quarter and year. ended December 31, 1985 (3); Pbrm 8-K filed' February 11,--1986 under Item 5, which included the-News Rele=Wthat ~ announced the Conpany's agreement with Midland Bank'plc.for the purchase of Crocker National Corporation ~ '_(4) ' Form 8-K filed February 18,1986 under Items 5.and 7, which included unaudited pro forma-condensed combined financial:information of.the Conpany and Crocker. National Corporation for '1985 and audited financial statements of Crocker National Corporation.'for 1985 -(5) Form 8-K filed March-11,'~1986' under' Item 7, which included audited financial statements of the Conpany for 1985 SMTUS OF PRIOR DOCLM!NTS 'Ihe Wells Fargo (Conpany Annual Report on Form 10-K for the year -ended W W r 31,1985, at1the time of filing with the Securities and ~ Exchange Commission, shall modify and supersede all~ prior documents filed pursuant to Sections -13,14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K.: l 23 SIGOGLEBS Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 1986. NEILS FAIGO & CDIPANY By: FRANK'A. MOESLEIN Frank A. Moeslein (Senior Vice President and Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 18, 1986: CARL E. REICHARDP Chairman and Chief Execu- IOGER D. IAPHAM, JR. Director (Carl E. Reichardt) tive Officer (Principal (Roger D. Lapnan, Jr.) Executive Officer) ARTAY MIILER Director FRANK N. NE5@lAN Executive Vice President (Arjay Miller) (Frank N. Newnan) and Chief Financial Officer (Principal PAUL A. MILLER Director Financial Officer) (Paul A. Miller) l FRANK A. M~ES2IN Senior Vice President and RCBERT T. NAHAS Director (Frank A. Moeslein) Controller (Principal (Robert T. Nahas) l Accounting Officer) l PTIFN M. NEDNAN Director l' WILLIAM R. BREUNER Director (Ellen M. Newman) (William R. Breuner) B. RDGNAR PAUISDI Director JAMES F. DICKA9N Director (B. Regnar Paulsen) (James F. Dickason) A'IHER103 PfUMER Director l JAMES K. DOBEY Director (Atherton Phleger) (James K. Dobey) l HARRY O. REINSCH Director PAUL HAZEN Director (Harry O. Reinsch) (Paul Hazen) DNALD B. RICE Director ROBERT K. JAEDICKE Director (Donald B. Rice) (Robert K. Jaedicke) l WILSON RILES Director DONALD M. ICIL Director (Wilson Riles) ( (Donald M. Koll) j HENRY F. TRIONE Director ! MTRY E. LANIGAR Director (Henry F. Trione) (Mary E. Lanigar) { JCHN A. YOUNG Director j (John A. Young) 24
- q
,s. f e 1 WETJS FARGO & COMPANY l er }? ." l ll THIRD QUARTER 1986 FORM 10-Q l: le l p-- ,.p-F -# SECURITIES AND EXCHANGS COPMISSION 7 -Washington, D.C. 20549 FM M 10-Q QUARIERLY REPORP UNDER SECTION 13 OR 15(d) , OF ' HIE SECURITIES EXCHANGE ACT OF 1934 For the' quarter ended September 30, 1986 Comission file number 1-6214 ELLS FARGO & COMPANY (Exact.name of. registrant as specified in its charter) California 94-1686959 (State or other jurisdiction of (I.R.S. Enployer incorporation or organization) Identification No.)
- 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code)
( Registrant's telephone nunber, including area code: (415) 396-0123 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 V No Indicate the number of shares outstanding of each of the issuer's classes of comon stock, as of the latest practicable date. Shares Outstanding October 31, 1986 Conmon stock, $5 par value 26,814,604 e i 1 s FOIN 10-Q TAB G OF 00tm NPS PARP I - Financial Information Item 1. Financial Statements Page Consolidated Statement of Income 3 Consolidated Balance Sheet 4 Consolidated Statement of Changes in Stockholders' Equity 5 Consolidated Statement of Changes in Financial Position 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Ke7 Financial Information 8 Overview 8 Earnings Performance 9 " Balance Sheet Analysis 14 - Other Financial Information 21 I PARP II - Other Information Item 6. Exhibits and Reports on Form 8-K 22 Signature 22 'Ihe information furnished in these interim statements reflects all adjustments and accruals which are, in the opinion of management, necessary for a fair statement of the results for such periods. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. 2 y , E ' PARP I - FINANCIAL ~ INFOINATION J . lElls FAND & 03@ANY Ato SLESIDIARIES T GNSOLIDN11!D STATIM!NT OF INCDE . Quarter Nine months ended Septester 30, ended September 30, (in thousands) 1986 1985 1986 1985 IN1EREST IIEDE Ioans $930,203 $692,539 $2,410,763 $2,112,680 Interest-earning deposits 27,550 11,682 58,775 34,686 Investment securities: Taxable 14,991 33,044 51,358 79,654-Exenpt from federal income taxes 423 1,722 3,730 5,778 Trading account securities 4,550 5,977 9,173 17,478~ Federal funds sold' 4,956 3,221 11,759 13,119 Total interest income 982,673 748,185 2,545,558 2,263,395 Iff1EREGT D(PENSE Deposits 398,762 299,199 995,562 954,567 Short-term borrowings 36,755 65,684 139,705 195,883 Senior and subordinated debt 95,485 83,525 285,557 236,169 Total interest expense 531,002 448,408 1,420,824 1,386,619 Amortized cain on interest rate hedging 8,309 12,065 17,572 29,641 / PET IN1EREST INO3E 459,980 311,842 1,142,306 906,417 Provision for loan losses 76,495 89,159 246,538 266,405 Net interest income after provision for loan losses -383,485 222,683 895,768 640,012 N3(INIERESP INCDE 5' Service charges on deposit accounts 46,414 27,205 109,349 80,664 Domestic fees and comissions 32,472 23,489 80,522 64,625 Trust and investment services income 28,115 14,415 62,983 40,908 Investment securities gains (losses) (193) 29,625 24,162 35,122 Sale of a mortgage banking subsidiary -- -- -- 50,152-Other . 24,934 3,930 43,352 17,289 Total noninterest income 131,742 98,664 320,368 288,760 IGINIERESP EXPENSE Salaries . 149,776 105,351 368,577 312,797 Employee benefits 45,030 24,769 111,653 74,390 Net occupancy 45,781 22,024 96,443 64,366 Fquipment 32,408 18,235 75,832 55,898 Other 116,569 69,845 269,534 197,132 Total noninterest expense 389,564 240,224 922,039 704,583 IIEDE BEFORE IlEDE TAX EXPENSE 125,663 81,123 294,097 224,189 Incme tax expense (includes taxes of $(42), $15,089, $6,035 and $18,096 on investment securities transactions) 48,232 32,572 98,938 83,205 NET INO3E ' ,77.431 $ 48.551 $ M95.159 $ 140.984 IEF ItKDE APPLICAR[E 'IO CIM40N S'IOCK ' , 72.074 $ 45.644 $ 182.565 $ 131.215 f ' PER (D9M SIARE 7 Net incme 5 2.70 $ 2.12 $ 7.31 $ 6.12 % Dividends declared n .68 $ .60 $ 2.04 $ 1.80 Average <ximon shares outstanding (in thousands) 26.703 21.510 24.973 21.426 'Ihe acconpanying notes are an integral part of these statements. .~ 3 ELIS FAKD & CCMPANY AND SUBSIDIARIES ENSOLIDNITD BAIANCE SHEEP ( September 30, June 30, December 31, Septerter 30, (in thousands) 1986 1986 1985 1985 ASSUIS Cash and due from banks $ 3,343,982 $ 3,299,692 $ 1,402,162 $ 1,329,941 Interest-earning deposits 1,354,745 1,228,471 534,511 559,902 Investment securities (market value $1,356,182, $803,114, $1,675,112 and $1,746,807) 1,365,054 812,744 1,696,070 1,783,032 Trading account securities 263,931 190,545 146,658 235,476 Federal funds sold 35,300 216,075 39,650 62,300 Loans 34,460,791 35,938,198 24,614,173 23,699,559 Allowance for loan losses 694,327 693,245 417,520 384,122 Net loans 33,766,464 35,244,953 24,196,653 23,315,437 Premises and equipnent, net 664,100 665,494 444,408 433,614 Due from customers on acceptances 312,987 300,633 254,871 273,227 Goodwill 498,060 493,070 14,934 15,238 Accrued interest receivable 283,176 257,562 222,549 265,143 Other assets 800,929 854,243 476,928 412,097 Total assets $42.688.728 $43.563.482 $29.429.394 $28.685.407 LIABILITIES AND STOC1001DERS' IUJITY . Deposits: Noninterest-bearing -- dcznestic $ 7,046,718 $ 7,134,465 $ 3,693,697 $ 3,694,498 Noninterest-bearing -- foreign 11,169 64,089 8,411 12,288 Interest-bearing -- domestic 24,272,511 24,478,244 15,111,602 14,815,081 ' Interest-bearing -- foreign 626,577 802,006 687,590 774,010 Total deposits 31,956,975 32,478,804 19,501,300 19,295,877 Short-term borrowings: Ebderal funds borrowed and repur-chase agreements 980,055 943,887 1,800,058 1,181,412 Camercial paper outstanding 1,209,614 1,825,398 1,436,227 1,693,305 Other 37,880 210,515 108,898 354,722 Total short-term borrowings 2,227,549 2,979,800 3,345,183 3,229,439 Acceptances outstanding 312,987 300,638 255,225 273,498 Accrued interest, taxes and other expenses 632,256 614,116 373,187 545,103 Senior debt 2,388,444 2,294,752 2,129,663 1,835,992 Other liabilities 502,077 495,236 310,290 298,325 38,020,288 39,163,34T 25,914,874 25,478,234 Subordinated debt 2,382,136 2,180,044 2,056,560 1,780,373 'Ibtal liabilities 40,402,424 41,343,390 27,971,434 27,258,607 Stockholders' equity: Preferred stock 405,000 405,000 150,000 150,000 Cosmon stock -- $5 par value, authorized 75,000,000 sharest issued and outstanding, 26,773,992 shares, 26,578,460 shares, 21,139,311 shares and 21,180,465 shares 133,870 132,892 105,697 105,902 Additional paid-in capital 574,237 562,890 158,190 160,442 Retained earnings 1,180,124 1,126,256 1,050,993 1,019,534 Equity adjustment from foreign currency translation (6,927) (6,946) (6,920) (9,078) , Total stockholders' equity 2,286,304 2,220,092 1,457,960 1,426,800 Total liabilities and stock-holders' equity $42.688.728 $43.563.482 $29.429.394 $28.685.407 'Ihe accerpanying notes are an integral part of these statements. 4 F M!21.S FAIGO & CCMPANY AIO SLEBSIDIARIES
- , CNBOLIDAT1!D SMTDE!NT OF QiANGES IN S10CEHntmtS' EUJITY Nine months.
ervied September 30, #' (in thousands) - 1986 1985 t Balance, beginning of period $1,457,%0 $1,343,670 4 Net income 195,159 140,984 # Preferred stock issued, net of issuance costs 250,401 -- Coninon stock issued in public offerings 431,733 -- Coninon stock iscued under enployee benefit and dividend reinvestment plans 15,678 8,230 Exercise of warrants and conversion of convertible notes _ 1,405 3,331 Common stock repurchased -- (21,294) Preferred stock dividends (12,594) (9,769) Common stock dividends (53,434) (38,419) Equity adjustment from foreign currency translation (7) 67 Balance, end of period $2.286.304 $1. 426. 800 000GOLIDATED STATDENT OF CHANGES IN FINANCIAL POSITIN Nine months ended September 30, (in thousands) 1986 1985 Financial resources provided by (applied to): Operations: Net income $ 195,159 $ 140,984 Noncash charges (credits): Provision for loan losses 246,538 266,405 Depreciation and amortization 62,925 47,484 ,- Deferred income tax provision (28,883) 31,067 Financial resources provided by operations 475,739 485,940 Cash dividends declared (66,028) (48,188) Net financial resources provided by operations 409,711 437,752 Deposits and other financing activities: Noninterest-bearing deposits 3,355,779 (214,998) Interest-bearing deposits 9,099,896 (690,362) Short-term borrowings (1,117,634) 431,341 Senior and subordinated debt 584,331 896,094 Preferred stock issued, net of issuance costs 250,404 -- Coninon stock issued in public offerings 431,733 -- Common stock issued under enployee benefit and dividend reinvestment plans 15,678 8,230 Exercise of warrants and conversion of convertible notes 1,405 3,331 Coninon stock repurchased -- (21,294) Financial resources provided by deposits and other financing activities 12,621,592 412,342 Other activities: Cash and due from banks (1,941,820) 719,040 Net additions to premises and equipnent (275,254) (24,436) Goodwill (490,489) -- Other assets (324,001) (36,971) Accrued interest, taxes and other expenses 287,952 53,543 Other liabilities 191,787 64,631 Other, net (60,988) 18,286 Financial resoutces provided by (applied to) other activities (2,612,813) 794,093 Increase in financial resources invested in earning assets $10.418.490 $ 1. 644,187 - Increase (decrease) in earning assets: Interest-earning deposits $ 820,234 $ 127,274 Investment securities (331,016) 694,489 Trading account securities 117,273 36,862 < Federal funds sold (4,350) (162,724) Net loaris 9,816,349 948,286 Increase in earning assets $10.418.490 jj, dig The acconpanying notes are an integral part of these statements. 5 a - ~ .s ~ ELLS 'FAIGO & CCEPANY AND SUBSIDIARIES E NOTES TO FINANCIAL STATBENTS - .g
- Note'l -'ASquisition of Crocker National' Corporation
~ ~ On May 30,1986, the Conpany acquired from Midland Bank plc 'all the
- issued and outstanding'comon stock of Crocker National Corporation;(Crocker),
a bank holding conpany whose principal. subsidiary was Crocker National Bank.
- On the acquisition dater Crocker and Crocker National 5 Bank were combined with
- and began operating under the names of Wells Fargo & Company and Wells Fargo- , Bank,-respectively.. The aggregate purchase price paid to Midland at closing was - $1.1 billion,'in cash. The. acquisition was partially funded by approximately $682 million in. net proceeds from sales of consoon and preferred stock. The acquisition was accounted for as a purchase transaction. Accordingly, the Conpany's consolidated financial statements: include Crockerfs results of operations beginning June 1, 1986. . Purchase accounting adjustments have been made, based upon freliminary estimates and assunptions, to reflect p estimated: fair values with respect to Crocker's assets and liabilities'at the , g , acquisition date. The resulting' fair value adjustments are being amortized - [ - over the estimated remaining lives of-the respective assets'or. liabilities. l The excess of purchase price over fair value of net assets acquired.-(goodwill) is being amortized using the straight-line method over 25 years. Certain fair . #m value estimates and, correspondingly, goodwill will change.as additional ~ information, such as coupleting the identification and measurement of
- preacquisition contingencies, is obtained.
p The following unaudited pro forma condensed combined statement of , income for the nine months ended September 30, 1986 and11985 is presented in accordance with the Securities and Exchange Conmission's rules and regulations to reflect the acquisition of Crocker as if it had been consununated on January 1, 1985. The pro forma amounts are not necessarily indicative of what would have occurred or will occur in tb future, primarily due to operating efficiencies and cost reductions thc' ave been or are expected to be achieved following the acquisition. Nine months ended Sept aber 30, (in millions) 1986 1985 Interest income $3,268 $3,820 / Interest expense 1,881 2,412 ./ Amortized gain on interest rate hedging 17 28 Net interest ircome 1,404 1,436 Provision for loan losses 335 351 Net interest income after provision for loan losses 1,069 1,085 Noninterest income 438 466 Noninterest expense 1,220 1,290 Income tax expense 90 91 Incone before extraordinary item 197 170 Extraordinary item - tax henefit of loss carryforward 5 5 Net income jM Net income applicable to ccanon stock j L3 , Per conunon share [. Income before extraordinary item Net income 7 l-' l Average coninon shares outstanding (in thousands) lbS2 2Q71 i-
- l. 6 t
c o J 1 Note 2'- Preferred Stock t n At- September 30,'1986, 10,000,000 shares'of nonconvertible preferred ; stock here authorized.and 4,501,800 shares were issued and outstanding, off , s l which 1,501,800 shares were issued during 1986 as described below. t , .- . Adjustable Rate Cumulative Preferred Stock, Series B: In connection ~with the _ acquisition of Crocker, the Conpany -issued -in an April .1986 public -offering 1,500,000jshares with a~ stated value of $50 per share. These shares are: redeemable between May 15,-1991 and May 14,:19%, at the option of the Conpany, at a redenption price of $51.50 per share and, thereafter, at $50.00 J -per: share plus accrued and unpaid dividends. Dividends are. cumulative and payable' quarterly on February 15, May 15, August 15 and November.15 of each year. - For each quarterly period, the dividend rate is_76% 'of the highest of 1 the Treasury-bill discount rate, 10 year constant maturity Treasury security.
- ' yield or 20-year constant maturity Treasury bond yield, but limited to a- ,
F minimum of 5.5% and a maximum of 10.5% per annum. The average annualized dividend rate was 5.7% during the nine months ended September 30, 1986. 4 I Market Auction Preferred Stock, Series I, II and III: In connection. with the acquisition of Crocker, the Conpany issued in a May_1986 public offering a total.of 1,800 shares with a liquidation preference of $100,000 per share. These ' shares are. redeemable on dividend payment dates, at the option of the Conpany, at a redenption price of $100,000 per share plus accrued and unpaid dividends. Dividends are cumulative and payable every 49 days on > specified dividend payment dates. Rates are determined every 49 days by - auction and will generally not be greater than 110% of the "AA" Conposite Consnercial Paper Rate. The average annualized dividend rate was.4.5% during the nine months ended September 30, 1986. All preferred shares rank senior to consnon shares both as to -dividends and liquidation preference but have no general voting rights. i ' Note 3 - Consnon Stock Split f On October 21, 1986, the Board of Directors approved a 2-for-1 conmon
- . stock split in the form of a 100 percent stock dividend payable January 20, F 1987 to holders of record as of December 31, 1986. As the consununation date I- has not yet occurred, the financial statements have not been restated to i- reflect the stock split.
Upon consunination of the stock split, the Conpany's outstanding + ' shares will increase from approximately 27 million shares to approximately t; 54 million shares. Also, approximately $135 million will be transferred from additional paid-in capital to consnon stock. ' 1 p . i l 4 j . 7 MANAGDIENr'S ANALYSIS OF FINANCIAL OPERATIONS - KEY FINANCIAL INmRMATION Percentage charge Ouarter ended September 30, 1986 from: Nine months ended SeptembE 30, June 30, Septerter 30, June 30, Septenter 30, Septentier 30, Septenber 30 Percentage 1985 1986 1985 1986 1995 change (in millions) 1986 1986 FOR THE PERIOD Net income $77.4 566.1 $48.6 17% 594 $195.2 $141.0 38% Per connon share Net income 2.70 2.33 2.12 16 27 7.31 6.12 19 Dividends declared 68 .68 .60 - 13 2.b4 1.83 13 PforITABItx1T PATIOS (annualized) Net incme to average total assets .724 .77% .68% (6) 6 .744 .66% 12 Net income applicable to common stock to averale ccmron stock-holders' equity 15.50 13.94 14.21 11 9 14.64 13.98 5 AT PERIOD D O Imns $34,461 $35,938 $23,700 (4) 45 $34,461 823,709 45 Assets 42,689 43,563 28,685 (2) 49 42,689 28,685 49 Stoc' holders' equity 2,286 2,220 1,427 3 60 2,286 1,427 60 Primary capital (1) 3,466 3,210 2,155 8 61 3,466 2,155 61 Total capital (2) 6,079 5,713 3,918 6 55 6,079 3,918 55 Couron shares outstanding (in thousands) 26,774 26,578 21,180 1 26 26,774 21,180 26 Dook value per ccanon share $70.27 $68.29 $60.28 3 17 $70.27 $60.28 17 I CAPITAL RATICS AT PERICD DO aquity to assets 5.36% 5.104 4.97% 5 8 5.36% 4.974 8 Primry capital to assets 8.00 7.26 7.42 10 8 8.00 7.42 8 Total capital to assets 14.03 12.92 13.48 9 4 14.03 13.48 4 (D908 S'IUCK PRICE Hioh $114-1/4 $106-1/4 $61-3/4 $114-1/4 $62 !as 95 86-3/8 51-3/4 61-3/8 45-1/2 Period end 98 106-1/4 52-5/8 98 52-5/8 (1) Based on regulatory concepts, primary capital ($3,466 million at Septenter 30, 1986) is defined as stockholders' equity ($2,286 million), qualifying mandatory convertible debt ($535 million, net of Note Ibnd) and allowance for loan losses ($645 million, exclusive of allocated transfer risk reserves). At Septenter 30, 1986, standby letters of credit were $2.3 billion, or 65 percent of Frimry capital. (2) Based or regulatory concepts, total capital ($6,079 million at Septenter 30, 1986) is defined as primary capital, certain senior and subordinated debt of the Parent and its nonbank subsidiaries ($2,568 million) and subordinated notes of the Bank ($45 million). OVERVIEW Net income in the third quarter of 1986 was $77.4 million, an increase of 59 percent over the $48.6 million earned in the third quarter of 1985. Net income per share was $2.70, up 27 percent from $2.12 in the third quarter of 1985. Net income in the first nine months of 1986 was $195.2 million, or $7.31 per share, compared with $141.0 million, or $6.12 per share, in the same period of 1985. This represents increases of 38 percent in net income and 19 percent in net income per share. The 1986 results include the earnings of the former - Crocker National Corporation (Crocker) beginning June 1,1986. The percentage increases in net income per share were lower than the percentage increases in net income primarily due to the issuance of 5.3 million shares of comnon stock - in March and April 1986 in connection with the acquisition of Crocker. 8 .1 x On May 30, 1986, the Conpany acquired from Midland Bank plc all the issued and outstanding consnon stock of Crocker, a bank holding coupany whose principal subsidiary was Crocker National Bank. On the acquisition date, *- Crocker and Crocker National Bank were combined with and began operating under the names of Wells Fargo & Conpany and Wells Fargo Bank, respectively. The acquisition was' accounted for as a purchase transaction. Accordingly, the Conpany's consolidated financial statements include Crocker's - results of operations beginning June 1, 1986. 'lhe acquisition of Crocker contributed to substantially all of the significant increases in income, expense, assets and liabilities, when comparing periods before and after the acquisition. An increase in net interest income, as well as realizing economies of scale associated with the Crocker acquisition, contributed to the earnings performance. Net interest income on a taxable-equivalent basis was $487.2 million in the third quarter, up 49 percent from the same period of 1985. It - was $1,207.1 million in the first nine months of 1986, an increase of 27 percent over a year earlier. Individual conponents of net interest income and spread are presented in the rate / yield table on page 10. The Conpany's provision for loan losses in the third quarter of 1986 was $76.5 million, conpared with $77.5 million in the second quarter of 1986 / . and $89.2 million in the third quarter of 1985. In the first nine months of 1986, the provision was $246.5 million, conpared with $266.4 million in the , same period of 1985. The allowance for loan losses increased to 2.01 percent t - of total loans at September 30, 1986, compared with 1.93 percent at June 30, 1986 and 1.62 percent at September 30, 1985. In the third quarter of 1986, return on average assets was .72 percent, up fran .68 percent a year earlier. Return on average common equity was 15.50 percent, compared with 14.21 percent in the third quarter of 1985. The ratios of primary capital and total capital to assets increased over last year. Primary capital was 8.00 percent of assets at September 30, 1986, conpared with 7.42 percent at the er.d of the third quarter of 1985. The majority of the increase in primary capital was due to the issuance of comnon and preferred stock in March and April 1986. Total capital was 14.03 percent of assets at September 30, 1986, conpared with 13.48 percent at the end of the third quarter of 1985. Primary contributors to the inprovement in total capital were the issuance of common and preferred stock and, since the end of the third quarter of 1985, a net increase of $595 million in subordinated debt. EARNINGS PERNRMMCE In this Form 10-Q, Wells Fargo & Conpany (Parent) and its subsidiaries are referred to as the Conpany. Net income of the nonbank subsidiaries was . $30.6 million and $17.1 million in the first nine months of 1986 and 1985, i respectively. A significant portion of the increase over 1985 was due to sales proceeds in excess of equipment lease residual values. l - i l 9 =. , F AVFJWZ RAIAiCES, Y!EII6 (TAXADIE-ECUIVAIJNP DASIS) AND RATES PAID Ouarter ended Septet er 30, 1966 1965 Interest Interest *. Average Yields / income / Average Yields / income / (in millions) balance rates expense balance rates expense FNNING ASSE15 Interest-earnirq depsits $ 1,616 6.734 $ 27.4 $ 515 8.996 $ 11.7 Investment securities: U.S. Treasury securities 453 7.70 '8.8 1,095 9.28 25.6 ' Securities of other U.S. government agencies and corporations 36 8.00 .7 20 - 7.68 .4 m ligations of states and p11tical subdivisions 133 8.48 2.8 151 8.77 3.3 Other securities . 307 11.88 9.1 307 15.25 11.7 Total investe nt securities 929 9.21 21.4 1,573 10.37 41.0 Tra8ing account securities 288 6.90 5.0 320 7.49 6.0 Federal furris sold 317 6.20 5.0 161 7.% 3.2 toans: Copenercial, financial, and agricultural l' 370 8.85 253.6 7,634 10.40 200.0 Real estate construction-related 5,043 9.20 116.9 3,795 10.92 104.2 - Real estate mortgaqe 7,053 10.73 189.3 4,744 11.08 131.4 Consume 7,971 13.26 265.1 3,863 14.58 141.1 lease finaneirn 1,107 12.57 34.8 920 13.83 31.8 Foreign 2,17e 8.24 45.2 2,331 11.11 65.3 Fees and sundry interest -- -- 37.0 -- - 24.3 Total loans '34,722 10.80 941.9 23,287 11.94 698.1 htal earnirq assets $37,872 10.52 1,000.7 $25,856 11.71 760.0 EUOING SOUICES Interest-hearing liabilities: Deposits: . Savims deposits $ 2,902 5.50 40.2 $ 1,391 5.50 19.3
- t m accounts 2,508 4.94 31.2 1,415 5.12 18.3 Market rate checking 499 5.03 6.3 329 5.44 4.5 Market rate savings 8,037 5.04 102.0 5,384 6.32 85.8 i Savirns certificates 8,784 7.16 158.5 5,946 9.00 134.8 .'
Certificates of deposit 1,301 7.95 26.0 278 13.11 9.6 Other time derosits 410 7.68 8.0 247 9.81 6.1 Deposits in foreign offices 757 8.04 15.3 827 9.98 20.8 1etal interest-tearing depnsits 25,198 6.10 387.5 15,817 7.50 _ 299.2 Funds borrowed 1,017 5.91 15.2 1,481 7.44 27.8 Corrnercial parer 1,346 6.36 21.6 1,864 8.10 38.1 Senior arri sutxardinated debts Senior debt 2,431 9.55 58.1 1,722 10.48 45.1 Subordinated debt 2 302 6.57 18.1 1,682 8.45 35.5 htal senior and subordinatevi debt Y7Ti 8.10 96.2 3,404 9.48 80.6 htal interest-hearing liabilities 32,294 6.40 520.5 22,566 7.85 445.7 Portion of noninterest-twarity fundirq sources 5,578 -- -- 3,290 -- -- htal fundirn sources $17,872 5.46 520.5 $25,856 6.85 445.7 Amrtized gain on interest rate te.1ging .08 7.0 .18 12.1 Spread arvi net interest income on a taxable-equivalent basis 5.148 $ 447.2 5.044 $326.4 FKNINTERE.bT-EAIN1?O ASSEIS Cash arti due from banks $ 2,897 $ 1,585 Other 2,011 1,130 htal nnninterest-earninre assets S 4,90H $J73 taNitfITJ<EST-tEARIFE FUOlto SOUlGS Deposits $ 6,892 $ 3,336 Other liabilitie* 1,344 1,238 Stockholders' t<ruity 2,250 1,431 Nonanterest-tearity fundtry sources used to furri earnirn ansets (5,678) (3,240) Total net noninterest+tearity fundirn a sources $ 4,90s $ 2,715 1UTAL ASSPrS $42,730 $28,571 1he averaqe prim rate of Wells Farqo Darik was 7.fmt armi 9.506 for tre quarters ersk*i Septernher 30, 1986 and 1985, respectively, and 8.60% arm $ 10.07% for the nine months crawd beptenter 30, 1986 and 1945, reslectively. 10 i l _?' Nine months ended September 30, 1986 1985 .4 Interest Interest / Average Yields /- incoue/ ' Average Yields / incoue/ . balance rates expense ' balance rates expense $ 1,079 7.264 $ 58.6 $ 499 9.294 8 34.7 523 8.20 32.1 797' 10.03 - 59.8 27 - 7.86 - 1.6 21 7.69 1.2 138 8.76 9.1 168 8.79 11.1 320 12.76 30.6 258 15.53 30.1 1,008 - 9.72 73.4 '1,244 10.% 102.2 184 6.99 : 9.6 286 8.35 17.9 . 231 6.82 11.8 211 8.33 13.1 l 9,707 9.39 681.5 7,835 10.85 636.0 i 4,655- 9.89 344.4 3,675' 11.58 318.6 5,658 - 10.82 459.1 4,795 11.14- 400.8 5,959 13.98 624.4 3,567 14.83 396.5 1,113 12.49 104.2 888 13.76 91.6 2,090 9.22 144.2 2,511 .11.58 217.5 ' -- -- 85.6 -- -- 68.5 29,182 11.18 - 2,443 4 ~77,'DT 12.22 2,129.5 - $31,684 10.94 2,596.8 $25,511 12.03 2,297.4 / $ 2,050 - 5.51' 84.4 $ 1,372 5.50 - 56.4 1,886 5.02 70.9 1,460 5.11 55.8 417 5.23 16.3 320 5.87 14.1 6,616 5.56 275.1 5,294 6.79 268.7 t . 7,369 7.66 422.1 5,897 9.45 416.7 i 707 9.26- 49.0 286 14.14 30.2 326 8.15 19.9 278 '10.12 21.0 t 742 7.64 42.4 1,232 9.95 91.7 20,113 '6.51 980.1 16,139 7.91 954.6 1,182 ~6.54 57.8 1,233 7.62 70.3 1,559 7.02 81.9 1,999 8.41 125.8 2,252 9.86 166.5 1,653 10.71 132.8 2,171 7.37 119.7 1,437 8.78 94.6 4,423 8.54 286.2 3,090 9.82 227.4 27,277 6.89 -1,406.0 22,461 8.20 1,378.1 4,407 -- - 3,050 - -- $31,684 5.93 1,406.0 $25,511 7.22 1,378.1 .07 16.3 .15 29.6 5.084 $1,207.1 4.964 $ 948.9 $ 2,156 $ 1,662 1,541 1,233 j $ 3,697 $ 2,895 $ 4,929 $ 3,317 1,219 1,230 1,956 1,398 (4,407)- (3,050) ' *- $ 3,697 $ 2,895 $35,381 $28,406 4 , 11 , -- - ._. _ _ _ . . . _ . _ _ ,_ , - _ - - . _ _ . _ . _ . - _ _ ~ . - _ - . . _. NET IMPElEST INCOPE AND SPREAD . 1 -Net interest income on a taxable-equivalent basis was $487.2 million 'in the third quarter of 1986, up 49 percent over the same quarter _of 1985. '- The interest rate spread was 5.14%,10 basis points higher than in the third quarter of 1985. For the first nine months of 1986, net interest income was . -$1,207.1 million, up 27 percent over the'same period of 1985. The spread for the first nine months was 5.08%,12 basis points higher than last-year. 1- Net interest income in the consolidated statement of income in the i third quarter and first nine months of 1986 was increased by approximately
- $11 million and $16 million, respectively, of amortization of purchase accounting adjustments relating to Crocker's assets and' liabilities. On a taxable-equivalent basis, this amortization was approximately $24 million and
$34 million in the third quarter and first nine months of 1986, respectively. 'Ibe factors that influenced the inprovement in net interest income ~ and spread in the third quarter of 1986 conpared with the third quarter of .1985 are discussed below. These factors were essentially the same as those ' that influenced the year-to-date inprovement. Growth _in earning assets in the third quarter of 1986 contributed to the inprovement in net interest income. Total loans averaged $34.7 billion ~ i during the third quarter of 1986, an increase of 49 percent over the same i , j quarter of 1985. Average consumer loans were up 106 percent and the ! comercial, financial and agricultural (consnercial) portfolio and the real estate mortgage loan portfolio each increased 49 percent. %, Substantially all of the increase in consumer loans occurred in real estate junior lien mortgage, credit card and monthly payment loans. Real [ estate junior lien mortgage. loans averaged $3.3 billion, an increase of 135 percent; credit card loans averaged $2.1 billion, 'an increase of 76 percent over the third quarter of 1985; and mor.thly payment loans averaged $1.8 billion during the third quarter, an increase of 87 percent. The increase in , the conmercial portfolio reflected growth in middle-market loans. Most of the increase in real estate mortgage loans occurred in the 1-4 family mortgage i loan portfolio. I' Average core deposits increased 66 percent to $29.6 billion in the l_ third quarter of 1986 compared with 1985, primarily because of increases in noninterest-bearing deposits, savings certificates and market rate savings. ! Core deposits funded 69 percent and 62 percent of the Company's average total l assets in the third quarters of 1986 and 1985, respectively. The Conpany's spread inproved 10 basis points in the third quarter of 1986 conpared with 1985. Contributing to the inprovement were the increase in i the percentage of noninterest-bearing funding sources used to fund earning l assets, as well as the change in mix of earning assets. The use of interest i rate futures, which is discussed on page 21, resulted in an amortized gain on L interest rate hedging of $8.3 million in the third quarter of 1986 and $12.1 . 1 million a year ago. 12 .-. NONINTEREST INCOME ne table below shows the major conponents of noninterest income. 4 Quarter ended Septenber 30, Nine months ended September 30, Percentage Perm ntage (in millions) 1986 1985 change 1986 1985 change Service charges on deposit accounts $ 46.4 $27.2 71% $109.3 $ 80.7 364 Domestic fees and comissions 32.5 23.5 38 80.5 64.6 25 Trust and investent services income 28.1 14.4 95 63.0 40.9 54 Investment securities gains (losses) ( .2) 29.6 - 24.2 35.1 Trading account profits ard comissions (31) 2.9 4.3 (33) 15.5 9.7 61 International fees, comunissions and foretqn exchange 6.0 5.2 17 13.2 10.9 21 Sale of a mortgage banking subsidiary -- - -- - 50.2 - All other 16.0 (5.5) - 14.6 (3.3) -- Total jyl2 3g3.2 34 jgggd 1J19.1 11 % e third quarter and year-to-date increases in domestic fees and conunissions were primarily due to higher credit card merchant fees, letter of credit fees, domestic loan syndication fees and safe deposit income. he year-to-date increase was partially offset by lower mortgage servicing fees due to the sale of Wells Fargo Mortgage Company (WENC) in March 1985. We
- largest conponent of domestic fees and consnissions was credit card merchant fees, which were $7.5 million and $5.1 million in the third quarters of 1986 and 1985, respectively, and $17.5 million and $13.5 million in the first nine l
U months of 1986 and 1985, respectively. Investment securities gains in the third quarter of 1985 included a gain of $27.9 million from the sale of U.S. Treasury securities. I In the first nine months of 1986, investment securities gains and trading account profits and commissions primarily resulted from sales of U.S. Treasury securities. W e investment securities gains were partially offset by a purchase accounting adjustment of $12.1 million resulting from sales of Crocker's investment securities in the second quarter of 1986. Due to the net-of-tax presentation required by purchase accounting, this $12.1 million adjustment was offset by a $12.1 million reduction in incone tax expense. Most of the increase in "all other" income in the third quarter of 1986 compared with 1985 resulted from sales proceeds in excess of eqaignent lease residual values of $11.0 million and from the recognition of $9.1 million in gains from sales of cost method equity investments. hese increases were partially offset by $4.9 million of third quarter 1986 purchase accounting adjustments relating to Crocker. Due to the net-of-tax presentation required by purchase accounting, these adjustments were mostly offset by a reduction in income tax expense of $4.7 million. In addition to the items discussed in the preceding paragraph, the year-to-date increase in "all other" income reflected the recognition in the second quarter of 1985 of $9.3 million in net closing costs associated with restructuring the Company's international activities. h is increase was reduced by a $10.8 million decrease in gains on sales of various branches and premises and $14.1 million of 1986 purchase accounting adjustments relating to Crocker. Due to the net-of-tax presentation required by purchace accounting, the purchase accounting adjustments were mostly offset by a $13.9 million reduction in income tax expense. 13 ' NONINTEREST EXPENSE ' The table below shows the major conponents of noninterest expense. 3, uuarter ended September 30, Nine unntns ended September 30, (in millions) 1986 1985 chenae 1986 1985 Salaries $149.8 $105.4 . 42% $368.6 $312.8 188 Ihployee benefits - 45.0 24.8 82- 111.7 74.4 50 Net occigaancy 45.8 22.0 108 - 96.4 64.4 50 Equipment _ 32.4 18.2 - 78 75.8 55.9 36 Postage, stationery and sugplies 15.6 9.2 69 37.0 30.0 23 Telephone and telegragin 11.8 7.9 ' 49 29.4 24.1 22 Other real estate- 14.4 3.0 378 27.5 9.8 182 Professional services 8.9 - 5.5 61 21.5 16.7 28 Advertising 6.1 4.8 26 16.7 13.5 24 Contract services 7.5 4.9 52 17.7 14.0 26 Travel and entertairusent 5.1 4.2 20 13.9 13.0 7 Federal deposit insurance 6.3 3.7 72 14.6 10.2 43 operating losses 5.9 5.9 - 13.8 10.1 38 Outside data processing - 5.3 3.9 37 12.1 11.4 7 Insurance 5.5 3.6 52 11.3 5.4 111 Protection 3.6 2.2 68 8.8 7.1 24 Goodwill amortization 5.3 .3 --
- 7. 4 .9 704 All other~ 15.3 10.7 44 37.8 30.9 22 Total 3Mh1 &&g.2 62 M AIOLE 31 The third quarter and year-to-date increases in salaries expense reflected the additional personnel resulting from the acquisition of Crocker. ,
The Conpany's full-time equivalent staff was approximately 21,500 at'
- September 30,1986 (excluding Crocker teaporary staff of 800), conpared with 14,100.at September 30, 1985. A significant portion of the enployee benefits expense increases in the. third quarter and first nine months of 1986 conpared
~ with the same periods ~of 1985 was due to higher expenses relating to enployee stock ownership plans. The third quarter and year-to-date increases in net costs.related to other real estate primarily resulted from the reappraisal of agricultural-related properties. INCOE TAXES The Conpany's effective income tax rate for the third quarter of 1986 was 38%, conpared with 40% for the same quarter of 1985. The effective rates for the first nine months of 1986 and 1985 were 34% and 37%, respectively. The 1986 rates are lower primarily due to the effect of purchase accounting as described on page 13. The effective rate for the first nine months of 1985 reflected the capital gains rate applied to the gain on the sale of WIC. BALANCE SHEET ANALYSIS The Conpany's consolidated balance sheet is presented on page 4. Total assets of the nonbank subsidiaries were $4.9 billion at September 30,
- 1986,- $4.8 billion at Decent >er 31,1985 and $4.6 billion at September 30, 1985.
14 IGN PORrf0LIO A co g arative period-end loan table is presented below. Average loan .. . balances are presented on page 10. Except as shown in the table below, the Coupany did not have loans to any one industry group that exceeded 10 percent of total loans at Septentier 30, 1986. 6 Septenter 30, June 30, Deanber 31, September 30, (in millions) 1986 1986 1985 1985 Domestic Camercial, financial, and aaricultural (1) $11,215.7 $12,239.7 $ 8,474.9 $ 7,975.0 Real estate mnstruction-related 5,153.5 5,070.2 4,186.2 3,806.2 Real estate first mortgage loans secured by 1-4 family residential properties 4,663.6 4,839.6 3,10 9.6 3,181.0 Other real estate mortgage loans (2) 2,340.9 2,321.4 1,509.8 1,533.0 1btal real estate mortgage loans 7,004.5 7,161.0 4,619.4 4,714.0 Monthly, payment 1,795.7 1,871.1 1,074.7 1,003.8 Credit card 2,084.3 2,111.8 1,298.1 1,219.3 Other revolving credit 746.6 749.8 310.3 290.8 Real estate junior lien mortgaae loans secured by 1-4 family residential goperties 3,253.1 3,406.5 1,523.7 1,458.1 Total constener 7,879.7 8,139.2 4,206.8 3,972.0 lease financing 1,095.4 1,119.2 1,114.7 938.6 Foreten Governments and official institutions 747.3 665.0 673.4 728.6 Banks and other financial institutions 584.2 646.8 457.1 481.7 Comercial and industrial (3) 780.5 897.1 881.7 1,083.4 Total foreign 2,112.0 2,208.9 2,012.2 2,293.7 'Ibtal loans $34.460.8 jlL21gd jltgid jud22d (1) Includes agricultural loans of $818 million, $905 million, $700 million and $736 million at Septenber 30, 1986, June 30, 1986, Decenter 31, 1985 and Septenber 30, 1985, respectively. 'Ihese loans include loans to finance agricultural production, fisheries and forestries and other loans to farmers. 6 (2) Includes agricultural loans secured by real estate of $143 million, $142 million, $125 million and $109 million at Septenter 30,1986, June 30,1986, Decenber 31, 1985 and Septenter 30, 1985, respectively. (3) Includes conmercial enterprises that are majority-owne3 by central governments. 'Ihe decrease in connercial loans at Septentier 30, 1986 conpared with June 30, 1986 primarily reflected the Coupany's decision to not renew certain Crocker loans. NONACCRUAL IGNS, RESTIOC'IURED IGNS AND OIEER REAL ESTATE Septenter 30, June 30, Decenter J1, September 30, (in millions) 1986 1986 1985 1985 l Nuna:crual loans: Consercial, financial, ard agricultural (1) $542.8 $ 580.8 $463.0 $375.5 Real estate construction-related 164.8 193.7 51.0 45.9 Psal estate mortgage (2) 64.9 42.8 49.5 35.5 Consumer 4.5 5.6 3.6 6.0 Lease financiraj 15.4 12.7 9.5 9.7 Foreign 179.8 180.4 194.8 216.5 Total runaccrual loans W $1dMd jl21d jig 2d Restructured loans jlfd $1Qd $1Li jlld Nonaccrual ard restructured loans as a percentaje of total loans 2d1 2d1 jd1 2d1 Other real estate (ORE) (3) lllid $liQd {l11d 1111d Nonaccrual and restructured loans aM ORE as a percentage of total loans aM ORE jd1 jd1 jd1 jd1 * (1) includes agricultural loans of $233 million, $290 million, $180 million aM $92 million at Septenter 30, 1986, June 30, 1986, December 31, 1985 and September 30, 1985, respectively. (2) Incitdes agricultural loans secured by real estate of $16 million, $19 million, $24 million ard $8 million at Septenter 30,1986, June 30,1986, Decenter 31, 1985 and Septemter 30, 1985, respectively. (3) includes agricultural-related properties of $100 million, $104 million, $94 million and $85 million at September 30, 1986, June 30, 1986, Decemtwr 31,1985 ard Septemter 30, 1985, respectively. 15 Crocker nonaccruals represented substantially all of the increase'in - commercial nonaccruals and approximately 30 percent of the increase in real estate construction-related nonaccruals at Septenber 30, 1986 conpared with ,* December 31, 1985. For this same period, substantially all of the increase in consnercial agricultural nonaccruals and approximately 30 percent of the increase in other real estate was attributable to Crocker. Foreion nonaccruals decreased at September 30, 1986 conpared with a year earlier, reflecting the return to accrual status of loans to borrowers in Argentina and charge-offs of Mexican private sector loans, partially offset by increases in nonaccrual loans to borrowers in Costa Rica and Peru. Interest on nonaccrual and restructured loans that was recognized as income amounted to $3.4 million and $7.1 million in the third quarters of 1986 and 1985, respectively, and $11.2 million and $31.2 million in the first nine months of 1986 and 1985, respectively. A significant portion of the declines was due to a decrease in average foreign nonaccrual loans. Loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories, were $232.9 million at Septenber 30, 1986, $253.0 million at June 30, 1986, $147.6 million at Decenber 31,1985 and $126.3 million at Septenber 30, 1985. Most of the increase at Septenber 30, 1986 conpared with December 31, 1985 was attributable to Crocker. All loans in this category are both well secured and ; in the process of collection or are 1-4 family residential real estate loans or consumer loans that are exenpt under regulatory rules from being classified as g nonaccrual. , ALLONhNCE FOR IDAN IO6SES Changes in the allowance for loan losses are shown in the table below. Quarter ;./. Nine months ended Septenter 30, June 30, september 30, september 30, september 30, (in millions) 1986 1986 1985 1986 1985 Balance, beginning of period $693.2 $453.0 $341.1 $417.5 $260.3 Crocker's allowance at aajuisition date -- 241.7 - 241.7 - Provision for loan losses 76.5 77.5 89.2 246.5 266.4 Net loan charge-offs: Cmmercial, financial, and agricultural 35.2 41.3 31.1 97.3 77.1 Peal estate 1.4 1.5 3 7.2 8.1 Monthly payment 2.9 3.3 1.3 7.2 3.4 Credit card and related plans 27.4 21.0 13.0 68.7 *26.2 trase financing 2.3 2.6 1.7 7.0 6.6 roteign 6.2 1.4 1.5) 16.2 20.4 'Ibtal net loan charge-offs (1) 75.4 ~71 T . '70T3 ~1T1- g Other deductions -- 7.9 .3 7.8 .8 Balarre, end of period (2) g&1 g22.1 M ggd M Allowance as a percentage of total loans 2 Q11 M 11 M21 g ig M 2g (1) incitztes reaweries of $25.0 million, $8.0 million arul $7.2 million in the quarters eruled Septanber 30, 1986, J m e 30, 1986 and September 30, 1985, respectively, and $39.3 million arul $20.5 million in the nine months ended September 30, 1986 and 1985, respectively. (2) Includes allocated transfer risk reserves of $49.3 million, $49.8 million and $15.2 million at , September 30, 1986, Jtsie 30, 1986 and Septenter 30, 1985, respectively, i 16 We largest component of the increase in year-to-date net charge-offs in the comercial portfolio was higher charge-offs of agricultural loans. Year-to-date net charge-offs of agricultural-related loans (included in both the comercial and real estate mortgage loan portfolios) were $37.0 million in 1986 and $32.6 million in 1985. W e majority of the increase in loan loss recoveries in the third quarter of 1986 compared with both the second quarter of 1986 and third quarter of 1985 occurred in the comercial loan portfolio. CROSS-BORDER OrffSTANDINGS We following table shows the Conpany's cross-border outstandings to borrowers in individual countries that accounted for .75 percent or more of total assets at Septenber 30, 1986 or December 31, 1985. Outstandings are defined as loans, interest-earning time deposits with other banks, other interest-earning investments, accrued interest receivable, acceptances and other monetary assets that are denominated in dollars or other nonlocal currency. Country distributions are based on the location of the obligor or investment, except (1) for cross-border outstandings guaranteed by a third party, in which case the country is that of the guarantor, and (2) when tangible liquid collateral is held outside the foreign country, in which case the country is that in which the collateral is located. Loans made or ! deposits placed with the branch of a bank outside the bank's home country are considered outstandings of the home country. O banks and Governments other Conriercial anri of ficial financial and (in millions) institutions (1) institutions industrial Total Mexico (2) Septentier 30, 1986 $346 $ 43 $198 $587 Decentier 31, 1985 352 45 209 606 Brazil Septemtwr 30, 1986 396 213 12 621 December 31, 1985 356 235 12 603 Venezuela Septenter 30, 1986 116 35 82 233 Decent;er 31, 1985 117 43 99 259 Se tember 30, 198+) -- 609 J00 809 Decemoer 31, 1945 -- 292 65 357 (1) Ireludes comercial enterprises that are najority-owned ty central governments. (2) 'Ite Conpan/ also h31 aaproximately $41 million and $39 million at September 30, 1986 arvJ Deestjer 31, 1985, respectively, in standby letters of credit in sunort of Moxican entities, substantia 11 all of which were in the privat? sector. Starsiby letters of credit in $Jpport of entitiea in other Lattr American countries were not s.gnificant. At September 30, 1986, the only other countries in which the Conpany had outstandings equaling or exceeding .25 percent of total assets were Italy ($143 million or .33 percent of total assets) and Argentina ($139 million or .33 percent of total assets) . As has been widely reported, borrowers in various foreign countries have experienced serious economic and/or political difficulties in meeting scheduled payments of interest and principal on their debt. In the event of further deterioration in these countries, additional loans may be placed on nonaccrual status, reserved for or charged off under Company policies and bank regulatory requirements. In late 1985 and the first half of 1986, there was a 17 significant decline in the worldwide price of oil. This decline has i contributed to new money requests by Mexico as described below. It is ..
- j. possible that declining oil revenue of other oil-exporting countries, such as Venezuela, may result in requests for new borrowings from conumercial. banks' and concessionary interest rates on existing and new debt; however, the Company is ..
unable to predict what the precise nature of any new borrowings or interest rates may be. i ~ l Mexico i. During the first nine months of 1986, there was a net decrease of $6 I million in cross-border outstandings to Mexican public sector borrowers due to i principal payments received of $12 million, partially offset by a $6 million reclassification of private sector outstandings to public sector outstandings. Accrued interest was $4 million at both September 30, 1986 and December 31, 4 1985. During the first nine months of 1986, the Conpany received $21 million of interest payments and accrued $21 million of interest income. There was no j- other significant revenue from public sector borrowers reported as income . during this period. At September 30, 1986, there were no loans to public sector borrowers on nonaccrual status. In the second quarter of 1986, the Mexican government's creditor banks agreed to an additional six-month extension of $1 billion in principal payments that were due in April and May 1986. These payments, which were i originally due in October and November 1985, were payable as the result of a , , l prepayment provision contained'in a March 1985 amendment to a March 1983
- $5 billion new money agreement with the Mexican government. The Mexican
; government has requested an additional three-month extension for these 4 i payments, which are due during the fourth quarter of 1986. The creditor banks are presently considering this request. f In July 1986, the Mexican government signed agreements covering i economic policy goals-and new borrowings with the International Monetary Fund I and several other governmental finance organizations. These organizations agreed to lend up to $7.0 billion of additional funds to Mexico over the l period 1986 to 1987. Related to this agreement, in October 1986, the Mexican ! government and the Bank Advisory Group reached final agreement on the terms l-under which Mexico's creditor banks would provide $7.7 billion in additional
- loans over the same period of time. The Conpany's estimated share of these i new loans is approximately $83 million. Subject to final approval from the creditor banks, the terms of the new loans would require payments over 12
- years, with interest only payments due the first five years, at an interest i rate of 13/16% over the London Interbank Offered Rate (LIBOR).
In August 1986, the Mexican government and the Bank Advisory Group agreed with the World Bank and certain foreign creditors of Mexico to the
- terms of a $1.6 billion bridge loan. The World Bank and other governmental
- finance organizations have disbursed $850 million of this bridge loan. ,
i Disbursement of the remaining $750 million, of which $500 million would be i provided by creditor banks, is contingent upon the acceptance of the $7.7 1 billion package discussed above by 90% of the creditor banks. If accepted,
- j funds received from the $7.7 billion package would be used to pay off the bridge loan. The Conpany's share of this bridge loan would be approximately
! $8 million. , ) ! On September 30, 1986, the Bank Advisory Group and the Mexican } government agreed to a rescheduling of $43.7 billion of previously rescheduled j public debt. Under the previous rescheduling agreement, the debt was payable over 14 years through 1998, at interest rates ranging from 7/8% over prime to 18 ' l-1/4% over prime. Under the new terms, the debt is payable over 20 years, with interest only payments due the first seven years. %e two parties also agreed to a rate reduction for $8.8 billion in existing new money facilities which were signed in 1984 and 1983 and are due beginning in 1989. Under the prevwaus terms, the interest rate was 1-1/8% over prime. W e new interest rate for both the rescheduled debt and the new money facilities is 13/16% over LIBOR. Ali cd the terms are subject to approval by the creditor banks. The Company's outstandings in Mexico include approximately $240 million and $80 million of the rescheduled debt and the new money facilities, respectively. %e Company believes that the effects of the rescheduling and rate reduction on it will not be material. At September 30, 1986, the Conpany had $9 million of private sector loans in Mexico on nonaccrual status. Brazil During the first nine months of 1986, the Company had a net increase in cross-border outstandings to borrowers in Brazil of $18 million due to a net increase in revolving-type loan and acceptance facilities of $22 million, partially offset by net charge-offs of $4 million. Accrued interest receivable was $10 million at both September 30, 1986 and December 31, 1985, as the Conpany received $45 million of interest payments and accrued $45 2 million of interest income. At September 30, 1986, total Brazilian loans on nonaccrual status were $7 million, all to private sector borrowers. In September 1986, the Brazilian government's foreign creditors agreed on the rescheduling terms of the 1985 and 1986 maturities of medium-term debt and the extension of the 1986 Interbank and Trade Connitment Letters. W e 1985 maturities have been refinanced for seven years, with repayments beginning in five years. %e 1986 maturities have been deferred under interim measures until 1987. We Conpany's share of the 1985 and 1986 maturities is approximately $113 million. W e interest rates on both the 1985 and 1986 maturities have been changed to 1-1/8% over LIBOR from 1-3/4% over prime. W e Company believes that the effect of this change on it will not be material. ne 1986 Interbank and Trade Connitment Letters, of which $195 million is included in the Company's outstandings, have been extended to March 1987. Venezuela In February 1986, the Company signed agreements with the Republic of Venezuela and various public sector entities that will reschedule public sector debt falling due between March 22, 1983 and December 31, 1988. The Conpany's share of this debt totals $148 million. The rescheduling agreements provide for repayments totaling approximately $5 million to be received by the Conpany during the fourth quarter of 1986 and for further quarterly repayments of principal from the first quarter of 1987 through the second quarter of 1997. W e Company believes the effect of this rescheduling on it will not be , material. At September 30, 1986, total Venezuelan loans on nonaccrual status < were $8 million, all to private sector borrowers. 19 Argentina At September 30, 1986, total Argentinian loans on nonaccrual status ,, were $7 million, substantially all of which were to private sector borrowers. Argentina's creditor banks are presently considering the country's September 1986 request for an interim renewal, for periods of up to 180 days, of debt maturing tnrough March 1987. The renewal was requested in order to continue negotiations on the rescheduling of 1986 maturities. The terms of these reschedulings are expected to be similar to the terms of the August 1985 agreement, which rescheduled 1982 through 1985 maturities. 'Ihe Conpany believes that the effect of this new rescheduling on it will not be material. DEPOSITS Conparative period-end detail of total deposits is presented in the following table. September 30, June 30, December J1, September 30, (in millions) 1986 1986 1985 1985 Noninterest-bearimJ deposits 8 7,057.9 8 7,198.6 $ J,702.1 8 3,706.8 Interest-bearirg checking accounts 3,087.7 2,802.1 1,718.1 1,580.0 Savings accounts 11,205.9 10,805.5 6,876.5 6,773.5
- Savings certificates 8,488.2 8,987.0 6,060.8 5,951.9 .
Core deposits _ 29,839.7 29,793.2 18,357.5 18,012.2 Certificates of deposit 1,169.2 1,415.8 232.3 266.9 Other time deposits 321.5 467.8 223.9 242.8 Interest-bearing deposits- foreign 626.6 802.0 687.6 774.0 h Total deposits M j]2dILA 31LjQ1.2 &lL23L1 SENIOR AND SUBORDINATED DEBP During the first nine months of 1986, the Parent issued $200 million of Floating Rate Subordinated Capital Notes due 1998 (included in primary capital), $200 million of unsecured senior 8% notes due 1993 (included in total capital), $100 million of unsecured 8-3/4% Subordinated Notes due 1996 (included in total capital), $226 million of unsecured senior fixed-rate Medium-Term Notes due 1986 through 1996 and $58 million of unsecured senior 16-1/8% New Zealand Dollar Notes due 1989. The Parent assumed from Crocker approximately $140 million of unsecured senior debt (included in total capital) . Also during the first nine months of 1986, senior debt of approxi-mately $410 million matured or was redeemed. l l k , s 20 ( ASSETP/ LIABILITY MANAGDENP
- h table below shows the Conpany's interest rate r.ensitivity based on average balances for September 1986. Asset and liability maturities reflect the effects of interest rate swaps. Assets and liabilities are categorized by remaining interest rate maturities rather than by principal maturities of obligations.
(in billions) Averages for September 1986 Net assets Net assets (liabilities) (liabilities) as a Remaining interest minus o t rate maturity Assets eaulty column 2) assets 1-29 days $ 5.6 $ 7.9 $ (2.3)' Prime-based 12.8 -- 12.8 . 2.4 (5.4)t}5.6 30.1 , Market rate savings -- 8.0 (8.0)[ (18.8) 30-179 days 4.8 4.9 ( .1)J (.3) a 180-364 days 1.4 1.3 .1 .3 1-5 years 6.0 2.6 3.4 ) 8.0 1 over 5 years 4.2 1.1 3.1 ' (2.5) 7.3 (5.9) Nonmarket 7.8 16.8 (9.0), (21.2) . Total M2.1 M2.1 E . Approximately 80 percent of the Bank's prime-based loan portfolio is $' funded by market rate savings and six-month consumer deposits. 'Ihe Bank uses interest rate futures to shorten the effective maturity of a portion of these deposits to the overnight to three-month range, which management believes will provide more stable and more profitable spreads between prime-based loans and the rates on those funding sources. 'Ihe one-year-and-over net liability position was $2.5 billion for September 1986 (5.9 percent of total assets), compared with a net liability position of $1.2 billion for June 1986 (2.7 percent of total assets) and a net asset position of $800 million for Decenber 1985 (2.7 percent of total assets) . 'Ihe majority of the change for September 1986 conpared with June 1986 was due to an increase in noninterest-sensitive deposits. 'Ihe change for Septenber 1986 conpared with Decenber 1985 was primarily due to the addition of Crocker balances. CTIHER FINANCIAL INFOINATION On October 21, 1986, the Board of Directors approved a 2-for-1 connon stock split in the form of a 100 percent stock dividend. 'Ihe Board also increased the quarterly dividend on conson stock to $.78 a share, up 15 percent from $.68 a share. After the stock split, the dividend will be $.39 a share. Both the additional shares due to the stock split and the increased quarterly
- dividend are payable on January 20, 1987 to shareholders of record as of December 31, 1986. After the stock split, the Conpany's outstanding shares will increase from approximately 27 million shares to approximately 54 million shares.
21 PART II - OINER INFOINATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4 The Conpany hereby agrees to furnish upon request to the Ceaunission a copy, of each instrument defining the rights of . holders of senior and subordinated debt of the Conpany. 11 Conputation of Earnings Per Consnon Share 28 Conputation of Ratios of Earnings to Fixed Charges. The ratios of earnings to fixed charges, including interest on deposits, were 1.20 and 1.16 for the nine months ended September 30, 1986 and 1985, respectively. 'Ihe ratios of earnings to fixed charges, excluding interest on deposits, were 1.65 and 1.50 for the nine months ended September 30, 1986 and 1985, respectively. (b) The Company filed the following reports on Form 8-K during the . third quarter of 1986 and through the date hereof * (1) July 16, 1986 under Item 5, containing the News Releases g that announced the Conpany's financial results for the quarter ended June 30, 1986 (2) October 22, 1986 under Item 5, containing the News Releases that announced the Company's financial results for the quarter ended September 30, 1986 and the Conpany's declaration of a 2-for-1 consnon stock split and increased quarterly dividend on conunon stock SIGNA'IURE 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, 1986. 'ELIE FANGO & COMPANY By: FRANK A. MOESIEIN Frank A. Moeslein ' Senior Vice President and Controller (Principal Accounting Officer) 22}}