WELLS FARGO & COMPANY AND SUBSIDIARIES
FINANCIALRESULTS
In addition to the acquisition ofBarclays in 1988, we expandedour wholesale, retail, real estatelending and investment management businesses and improvedour profitability. The Companyearned $512.5 million, or $9.20per share, up from $50.8 million, or $.52 per share, in 1987.Excluding the effects of specialadditions to the allowance forloan losses made in connectionwith loans to developing countries,Wells Fargo would have earned$382.6 million, or $6.69 pershare, in 1987.
This increase in profitsallowed us to augment ourcommon equity base and toraise the quarterly dividend oncommon stock twice during theyear, from $.50 to $.60 to $.75per share, effective with thefourth quarter dividend payableon Janua.ry 20, 1989.
Several factors accounted forthe Company's earnings gain. In1987, Wells Fargo chose to setaside large reserves to deal withpotential losses from our loansto developing countries, whichsharply reduced net income.Having thus addressed thedeveloping country loans problem, Wells Fargo returned to alower loan loss provision in1988, more in keeping with ourrecent loss experience.
Other factors that contributedto our earnings increase included
industry restructuring is providing good business opportunitiesfor well-managed institutions.
Wells Fargo, for example, hasand will continue to participatein this process of industryrestructuring. Our acquisitionof Barclays Bank of California(Barclays) on May 31,1988and prior acquisitions in 1987and 1986 have i.ncreased ourcustomer base and resulted ineconomies of scale that arebenefiting our customers andshareholders.
LETTER TO SHAREHOLDERS
SEATED.
CARL E. REICHARDT. CHAIRMANSTANDING·
PAUL HAZEN. PRESIDENT
cluding savings and loans, and16,000 credit unions. Theseinstitutions have competedaggressively for customers sincefinancial services deregulationbegan in the early 1980s.Clearly, not all of them havebeen or can be successful.
Resolving the current crisisof over-capacity will meanchanges and potential coststo financial institutions and,possibly, to the nation's taxpayers. Neither of these prospectsis encouraging. Yet, the current
During 1988, the publicbecame more aware of thepotential costs of rescuing ailing5&Ls. Much has been writtenalready about S&Ls' difficulties,which arose from a variety ofsources, including problem assets,balance sheet mismatches andoperating inefficiencies.
The problems of inefficiencyand over-capacity are not limitedto S&Ls; they remain industrywide. Today, the U. 5. has morethan 13,000 commercial banks,3,800 savings associations, in-
he year 1988 saw an acceleration in changes in
the financial servicesindustry. Near-record numbersof banks and savings and loaninstitutions (5&Ls) experiencedfinancial difficulty, and theindustry grappled with problemsof over-capacity and loan quality.
Throughout this unsettledperiod, however, Wells Fargocontinued to provide goodreturns to our shareholders.Drawing upon the large reserveswe had built up in 1987, wesystematically removed problemdeveloping country loans fromour books, while continuing toexpand our key businesses.Moreover, we were able to setnew standards for customerservice levels that will helpensure the future profitabilityof Wells Fargo.
RECENTDEVELOPMENTS
the positive effects the interest lend to those companies with a Approximately 70% of our offices have the experience and proved to be a successful Twenty-four hour banking has important changes within ourrate envil'onment had on the proven track record of operating commercial real estate loans are CAPITAL authority to provide their cus- inaugural for this effort, which been a success, judging by how retail system are continuing toCalifornia deposit base and rising success. We have structured an in California, a dynamic and
STRENGTH tomers with a "one stop shop- serves businesses seeking loans frequently our customers use it. increase the number of Cali-domestic loan demand. In HLT portfolio that is broadly diversified economy that con- ping" approach to meeting their of up to $250,000. Today, After only a year, Wells Fargo fornia households bankingaddition, Wells Fargo continued diversified; far example, we now tinues to outperform most other
The special additions to the
financial needs. This strategy Wells Fargo is committing even Express Agents are getting more with Wells Fargo.to focus on expense control. As lend to 25 different industry regions of the country. Moreover, proved successful again in 1988, greater resomces to serving than 75,000 calls a day. This sur-a result, the Company kept non- groups. In addition, our HLT absorption rates of newly con- resulting in an increased share the business needs of Cali- passes the number of daily callsinterest expense at year-earlier portfolio is predominantly structed office buildings, as mea- allowance for loan losses made
in this important market segment. fornia's burgeoning market some nationwide airline reserva-levels, even after absorbing the secured by collateral. sured by occupancy rates, have in 1987 also contributed to
Wells FaI'go has a history of of more than 500,000 small tion systems receive. Impor- REAL
integration costs of the Barclays Looking at HLT lending improved over the past 18 months an increase that year in thecommitment to California's companies. tantly, thousands of customers ESTATE
acquisition. from a broader perspective, the in the California market. Even Company's primary and totalagriculture industry through are calling during the nontradi-
Reflecting net income's current restructuring that is Texas, one of the most severely capital. In 1988, the chaI'gesserving the credit requirements tional banking hours between
Wlls Fargo enjoyed anotheryear-to-year gain, two important going on in corporate America is overbuilt markets, has slowly made to the loss allowanceof producers, food processors 9 p.m. and 6 a.m. and on week-
profitability ratios climbed not a new phenomenon. Since started to rebound. Approxi- resulting from sales of develop-and other agricultural business RETAIL ends-whenever it is easiest for year of increased market share
during the year. Return on aver- the late 1800s, U. S. business has mately 3% of Wells Fargo's con- ing country loans reduced thecompanies. During 1988, BANKING them to do theil' banking. in the commercial real estate
age common stockholders' equity witnessed several distinct periods struction loans are in Texas.level of both primary and total
Wells Fargo became the nation's Service is sometimes invisible lending market. These gains(ROE) rose to 23.99%, up of intense merger activity- Many of the other major com-
capital. However, Wells FaI'go'slargest agricultural bank. Look- In 1988, Wells Fargo empha-
and, therefore, customers may translated into strong growth infrom 1.47% in 1987. Retum on followed by equally dramatic mercial real estate markets are
common equity continued toing forwaI'd, there is the poten- take it for granted. That is the both loan outstandings and
average assets (ROA) climbed to divestitures. The HLT activity starting to stabilize. However, wegrow in 1988 through increases
tial for continued profitable sized providing quick and case with our Express Stop auto- profits. The close relationships1.14%, up from .n%. However, occmring today is in many ways anticipate the overbuilt condi-
in retained earnings. Commongrowth in agribusiness with convenient service to our more mated teller machines (ATMs). we have forged with key devel-
excluding the effects of special a reaction to the creation of con- tion will persist for some time.equity as a percent of total assets
improvement in the agricultural than 1.5 million checking house- Today, more than 70% of our opers over the years is contribut-additions to the allowance for glomerates in the 1960s that During 1988, we reduced our
increased to 4.. 66% in 1988,economy and in California farm holds. In the branches, this customers bank at Wells Fargo ing significantly to our ongoing
loan losses, ROE and ROA brought disparate companies medium- and long-term expo-from 4.17% in 1987.
land values. meant shorter waiting time for Express Stops each month, and success in the real estate area,Recently, the Federal Reserve
2would have been 17.39% and together under one organiza- sure to developing countries by
Board and other internationalNationally, Wells Fargo tellers. It also meant that cus- the average customer completes Although there is concern over
3.85%, respectively, in 1987. tional umbrella. It remains to $1.4 billion, to $245 million, or remained an active participant tomers participated in improving more than seven transactions some troubled real estate mar-
be seen what long-term effects one-half of 1% of om total assets.banking regulators finalized
in the credit markets that are service levels: more than monthly. Customers use the kets, such as Texas and Arizona,the current restructurings will The reduction in exposure was
guidelines for assessing capitalfinancing the recapitalization 300,000 customers helped us system frequently because it we remain confident of the
have on American industry. accomplished principally through adequacy. Wells Fargo's risk-of American businesses. As measme waiting time, and many works-reliably. With at least overall quality of our portfolio.
CREDIT Another area of public inter- loan sales and charge-offs.based capital ratio, as calculated
previously mentioned, Wells took the time to tell us what they two machines at most locations,QUALITY est in 1988 was real estate. For Losses on the sale of developing
under these guidelines, alreadyFargo's portfolio of these thought of Wells Fargo. customers are assured of com-
many years, Wells Fargo has country loans totaled $621 millionexceeds the standard that has
loans has performed well Round-the-clock banking pleting their banking trans-
Recently, considerable
been a major provider of during the year. These lossesbeen established for 1992.
both in terms of credit quality became a reality for our custom- actions, 24 hours a day, INVESTMENT
construction-related loans to were charged against the allow- and return. ers when we introduced 24-hour Nowhere is service more MANAGEMENT
public attention has focused on commercial real estate developers. ance for loan losses, which had In addition to credit services, person-to-person telephone evident than in our branches.the subject of banks' involve- We recognize that this business been significantly increased last WHOLESALE your Company provided cor- service in January 1988. For During 1988, the typical Wells
Wlls Fargo has strong,ment with highly leveraged is cyclical and will continue to year to address the developing BANKING porations with non-lending years, Wells Fargo had offered Fargo customer saw more newacquisition or restructuring face ups and downs. Currently, country loan problem. services, such as cash manage- some services by phone during faces where he or she banked as specialized expertise in manag-transactions (HLTs)-popularly many commercial markets nation- While Wells Fargo no longer
In 1988, we continued to
ment products. This past year daytime hours, but these had we staffed peak hours with "flex- ing investments for individuals,called "leveraged buyouts." wide are overbuilt-particularly lends directly to foreign govern- brought improvements in been limited to simple trans- time" tellers. By adding more businesses and pension funds.
We share bank regulators' with office buildings and hotels. ments and corporations in both the level and quality of actions such as account balance than 2,000 tellers only when The Private Banking Groupconcerns that HLT lending and However, Wells Fargo remains developing countries, we are
expand our role as a majorservice provided to these non- inquiries. With 24-hour person- our customers needed them, we specializes in personal asset
the attendant higher debt levels comfortable with the overall strongly committed to providingprovider of credit and financial
borrowing customers. to-person banking, customers actually reduced our full-time management, trust services,could create loan portfolio credit quality of our real estate trade sen,ices for our domestic
services to businesses in Califor-The 1987 creation of the can talk to a Wells Fargo Express teller staff while improving retirement products and banking
problems. However, given the portfolio, and we continue to customers, principally in Cali-nia and beyond. Wells Fargo's
Business Banking Division Agent who can perform more service levels, ensuring that no services for high net-worthdifferent approaches to HLT carefully monitor the portfolio. fornia. Of these California cus-
commercial banking offices, setre-established the commer- than 100 transactions while customer need wait longer than individuals. Wells Fargo Invest-
lending, not all banks will be tomers, about half are clients ofup to be much like independent cial lending capacity of our on the line-almost everything five minutes. These and other' ment Advisors (WFIA), a wholly-
uniformly affected. Wells Fargo, our Commercial Banking Group.banks, focus on serving entrepre-
retail branches. This past year one used to have to visit a owned subsidiary, is the largestas an active palticipant in the
neurs and their employees inbranch to do. index fund manager in the U.S.
HLT market, has taken care to mid-sized companies in Califor- and is one of the largest moneynia. The bankers that staff these managers in the world.
FINANCIAL REVIEW
WELLS FARGO & COMPANY AND SUBSIDIARIES
OVERVIEW
TABLE 1 ISIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
(in millions) 1988 1987 1986 1985 1984 1983 % Change Five-year1988/1987 compound
growthrate
rNCO~fESTATEMENT
Net interest income (2) $1,972.1 $1,801.6 $1,493.7 $1,220.2 $1,069.5 $915.0 9% 17%Provision for loan losses 300.0 892.0 361.7 371.8 194.6 121.1 (66) 20Noninterest income (2) 682.2 600.0 574.8 395.7 270.6 279.5 14 20Noninterest expense 1,519.1 1,520.5 1,315.2 943.8 886.6 843.7 - 12Net income 512.5 50.8 273.5 190.0 169.3 154.9 909 27Per common share
Net income $9.20 $ .52 $5.03 $4.15 $3.42 $3.01 - 25Dividends declared 2.45 1.67 1.41 1.24 1.08 .99 47 20
BALANCE SHEET
Loans $37,670 $36,791 $36,771 $24,614 $22,894 $20,268 2% 13%
Allowance for loan losses 752 1,357 734 417 260 200 (45) 30Assets 46,617 44,183 44,577 29,429 28,184 27,018 6 12Senior debt 923 1,574 2,019 2,130 1,709 1,494 (41) (9)
Subordinated debt 1,994 2,250 2,392 2,057 1,012 39 (11) 120Stockholders' equity 2,579 2,248 2,343 1,458 1,344 1,348 15 14
4
Both Private Banking andWFIA have enjoyed consistentsuccess in managing clients' fundsduring these recent unsettledtimes in the financial markets.Through them, we are recognized globally as innovators inintroducing new investmentproducts, including liquiditymanagement, asset allocationand index funds.
The year 1988 was a periodof strong loan growth for PrivateBanking, complementing itsinvestment expertise and enablingus to provide comprehensivefinancial services to our customers. In addition, Private Bankinglaunched a new line of mutualfunds-the Overland ExpressFunds-available through theWells Fargo retail branches.Overland Express Funds allowcustomers with a minimum initialinvestment of only $2,500 tochoose among several investment options, not normally available through their neighborhoodbranch bank. By having thesefinancial services close at hand,we will be able to meet thebroader financial needs of ourretail customers.
WFIA specializes in themanagement of index funds andprocess-driven investmentstrategies for institutional investment clients. In 1988, WFIAintroduced several new globalstrategies, including asset allocation and tilted index fundsbased on the Japanese securitiesmarkets and global index fundsthat span the world's governmentbond markets. Along with thesenew products, WFIA experiencedrapid growth in internationalequity indexing and introducedcurrency hedging strategies
tailored to our clients' globalinvestment needs.
WFIA's increasingly globalfocus reflects our emphasis onboth facilitating U.S. investors'needs abroad as well as assistingnon-U.S. investors to meet theirindexing needs in world markets.WFIA's development of international funds contributed to anincrease in assets under management during 1988, whichrose to over $60 billion at yearend, an increase of approximately 20% from a year earlier.
Today, WFIA and PrivateBanking are leaders in their fieldsin terms of assets under management. As a company, Wells Fargohas been able to realize significant economies from runningboth operations on a very largescale. Our customers, too, havefound that size can bring servicebenefits and strong investmentperformance.
SOUTHERNCALIFORNIA
Ilroughout 1988, Wells Fargocontinued to expand its presencein the robust Southern Californiamarket, serving both businessesand consumers through ourclose to 200 branches, sevenprivate banking offices and nineregional commercial bankingoffices located there.
Southern California has someof the best growth prospectsof anywhere in the nation andthe world, according to our
economists. By the year 2010,Southern California's output isexpected to more than double toreach more than $770 billion,and the region will account forapproximately 60% of the California economy. While growthwill take place over a broadrange of industI)' groups, service industries are expectedto show some of the strongestgains, and small- and mediumsized start-up businesseswill proliferate.
Wells Fargo remains preparedto meet the financial needsof this dynamic region. And,we will continue to commit theresources necessary to carryout our Southern Californiaexpansion.
BOARD OFDIRECTORS
~onRiles retired from theBoard of Directors in 1988 afterII years of service and was nameda director emeritus. We aregrateful for his fme contributionsto this Company throughout histenure and are pleased that wewill continue to benefit from hisinsight and experience in hisemeritus position.
Wells Fargo was deeplysaddened by the death, onNovember 6, 1988, of AthertonPhleger, 62, who had served asa director for 17 years. Throughhis years of dedicated work onbehalf of Wells Fargo, Mr. Phlegerprovided the Company withinvaluable counsel. He is greatlymissed by all of us.
THANKYOU
On behalf of Wells Fargo'smanagement, we wish to thankoW' customers for their businessand their candor in 1988-fortelling us when we were doing agood job and when we were not.We also want to thank our Boardof Directors for their guidanceand our fine staff for their hal·dwork in can)'ing out the Barclaysintegration and for contributingso whole-heartedly to Wells Fm'gossuccess. Finally, as we look forward to a prosperous 1989, wewish to thank our shareholdersfor the confidence they continueto show in the Company.
Carl E. ReichardtChairman
Paul HazenPresident
Mm'ch 1, 1989
N-
et income in 1988 was $512.5 million, or $9.20 pershare, compm'ed with $50.8 million, or $.52 per
...... -. share, in 1987. The 1987 amounts reflected two special additions, totaling $589 million, to the allowance for loanlosses made in connection with loans to developing countries.Without the effect of the special additions and their related taxbenefits, 1987 net income would have been $382.6 million, or$6.69 per common share.
Return on average assets (ROA) was 1.14% and return onaverage common equity (ROE) was 23.99% in 1988, up from.11% and 1.47%, respectively, in 1987. Excluding the aftertax impact of the special additions, ROA would have been'.85% and ROE would have been 17.39% in 1987.
The Company acquired BaI'clays Bank of California(Barclays) on May 31,1988. The acquisition did not have amaterial effect on 1988 net income or the year-end 1988balance sheet.
Several major factors contributed to the 1988 em'ningsgains. Unlike a year ago, there were no special additions to theallowance for loan losses. Net interest income on a taxableequivalent basis increased 7% to $2.0 billion in 1988, as thenet interest margin increased 33 basis points to 4.96%. The
increase in net interest margin resulted from continued favorable business conditions in California and an improvement inthe mix of earning assets and funding sources. The change inmix reflected higher domestic loan volumes, sales of developing country loans on nonaccrual status and the acquisition ofBm·clays. The Company also continued its efforts to controlcosts; noninterest expense in 1988 was essentially unchangedfrom last year.
Average earning assets were relatively unchanged in 1988compared with 1987, reflecting an increase in average loansthat was mostly offset by a decrease in interest-em'ning deposits. The average volume of loans in 1988 was $37.0 billion,3% higher than 1987, mostly due to increases of 13% in realestate construction-related loans and 7% in real estate mortgage loans that were partially offset by a 27% decrease in foreign loans. The average volume of core deposits in 1988 was$31.3 billion, 5% higher than 1987. Core deposits, whichconsist of non interest-bearing deposits, interest-bearingchecking accounts, savings accounts and savings certificates,funded 70% of the Company's average total assets in 1988,compm'ed with 66% in 1987. 5
(1) ReOeetslhe acquisition of Crocker Nalionu.l Corporation beginning June 1, 1986.(2) Due to the loan fee reclassification discussed in Note 2 to the Financial Statements, net interest income decreased while noninterest income increased by $129.7 million in 1987 und
$1l5.2 million in 1986. Years prior 10 1986 have not been reclassified as complele informalion is nOI available.
EARNINGS PERFORMANCE
• Net inlercsl margin
'I.
•
• • •4.75 4.96... 4.63 ......
The 7% improvement in net interest income in 1988reflected the 33 basis point increase in the net interest margin.Approximately 21 basis points of the increase in the net interest margin was due to a higher spread between prime-basedloans and their funding sources. In addition, the increase inthe net interest margin was due to an improvement in the mixof earning assets and funding sources that reflected higherdomestic loan volumes, sales of developing country loans onIlonaccrual status and the acquisition of Barclays. In 1988,the yields on average total loans and earning assets increased46 basis points and 40 basis points, respectively, while therate paid on average total funding sources increased 11 basispoints. The rate paid on interest-bearing deposits, the largestfunding source, increased 22 basis points.
Total average earning assets were relatively unchanged in1988 compared with 1987; however, there was an increase inaverage loans that was mostly offset by a decrease in interestearning deposits. Partly resulting from the May 31,1988acquisition of Barclays, loans averaged $37.0 billion during1988, an increase of 3% over 1987. (See additional discussionin the Loan Portfolio section.)
NET INTEREST MARGIN
7
4
8
6
10
12%
88
• Rute on total funding sources
87
(%)
• Yield on earning assets
86
Net interest income is the difference between interestincome (which includes yield-related loan fees) and interestexpense. Net interest income on a taxable-equivalent basiswas $2,007.6 million in 1988, an increase of 7% over$1,869.7 million in 1987. Net interest income on a taxableequivalent basis is higher than net interest income on the consolidated statement of income because it reflects adjustmentsfor income on certain securities and loans that is exempt fromfederal income taxes ($26.4 million in 1988 and $43.7 million in 1987), as well as adjustments [or the net-of-tax accounting related to the acquisition of Crocker National Corporation(Crocker) ($9.1 million in 1988 and $24.4 million in 1987),which is discussed further under Income Taxes. The taxableequivalent adjustments are based on the federal statutory taxrate (34% and 40% for 1988 and 1987, respectively) andapplicable state taxes. (Net interest income, net interest mal'gin and noninterest income for 1987 and 1986 reflect reclassifications to conform with Statement of Financial AccountingStandards No. 91 (FAS 91), as discussed in Note 2 to theFinancial Statements. The reclassifications did not affect 1987or 1986 net income. The adoption of FAS 91 did not have amaterial effect on 1988 net income.)
Net interest income in 1988 did not include any interestreceived on medium- and long-term Brazilian loans. Suchinterest was recognized as a reduction of the loss on sale ofloans, which is charged against the allowance for loan losses,or applied against principal.
Net interest income on a taxable-equivalent basis expressedas a percentage of average total earning assets is referred to asthe net interest margin, which represents the average net effective yield on earning assets. For 1988, the net interest marginwas 4.96%,33 basis points higher than 1987. Individualcomponents of net interest income and net interest margin arepresented in Table 3.
NET INTEREST INCOME
~{~IlSFargo & Company (Parent) is a bank holdingcompany whose principal subsidiary is Wells Fargo
Bank, N.A. (Bank). In addition, the Parent, through itsnonbank subsidiaries, provides consumer, real estate and agri-cultural financing and manages funds for pension plans, institutions and foundations. In this Annual Report, Wells Fargo &Company and its subsidiaries are referred to as the Company.Nearly 100% of the consolidated net income for 1988 wascontributed by the Bank.
I TABLE2 I
RATIOS AND PER COMMON SHARE DATA
Year ended December 31,
(1) Based on regulatory concepts, primary capital ($3,815 million at December 31.1988) is defined as stockholders' equity ($2.579 million), qualifying mandatory
convertible debt (8484 million. net of note fund and dedicated stockholders' equity
discussed on page 34) and allowance for loan losses ($752 million).
(2) Based on regulatory concepts, total capital ($5,727 million at Dcccmber 31, 1988) is
defined as primary capital, certain senior and subordinated debt of the Parent
(81.868 million) and subordinated notes of the Bank ($44 million).
(3) Dividends declared per common share as a percentage of net income per
common share.
(4) Based on daily closing prices listed on the New York Stock Exchange Composite
Transaction Reporting System.
1988 1987 1986
PROFITABILITY RATIOS
Net income to average total assets (ROA) 1.14% .ll% .73%
Net income applicable to commonstock to average commonstockholders' equity (ROE) 23.99 1.47 14.81
Net income to average stockholders'
equity 21.06 2.21 13.37
CAPITAL RATIOS
At year end:
Common stockholders' equityto assets 4.66% 4.17% 4.35%
Stockholders' equity to assets 5.53 5.09 5.26
Primary capital to assets (1) 8.05 8.90 7.85
Total capital to assets (2) 12.09 14.01 13.47
Average balances:Common stockholders' equity
to assets 4.52 4.23 4.62
Stockholders' equity to assets 5.43 5.13 5.47
Primary capital to assets 8.80 8.26 7.98
Total capital to assets 13.51 13.57 14.35
PER COMMON SHARE DATA
Dividend payout (3) 27% 321% 28%
Book value $41.38 $34.93 $36.11
Market prices (4):High $70% $59% $57'/8
Low 43% 37% 30%
Year end 60% 43 50%
At December 31, 1988, common equity to total assets was4.66%, compared with 4.17% at December 31,1987; primary capital was 8.05% of total assets at December 31,1988,compared with 8.90% a year earlier; and total capital was12.09%, compared with 14..01%. A discussion of risk-basedcapital guidelines is on page 17.
Reflecting increased fee income from deposit accounts, noninterest income was $682.2 million in 1988, compared with$600.0 million in 1987. Noninterest expense was $1,519.1 million in 1988, compared with $1,520.5 million in 1987.
The Company's 1988 provision for loan losses was$300.0 million, compared with $892.0 million in 1987.Excluding the special additions, the provision was $303.0 million in 1987. During 1988, domestic net charge-offs were$196.5 million, or .55% of average domestic loans, comparedwith $247.0 million, or .72%, during 1987. Foreign netcharge-offs were $102.5 million in 1988, compared with$16.5 million in 1987. The 1988 amount included a$77.8 million charge-off of previously mandated allocatedtransfer risk reserves for loans to developing countries.
In addition to net charge-offs, the Company substantiallyreduced its cross-border outstandings to developing countriesthrough loan sales in 1988. These sales, as well as swapsinvolving the exchange of approximately $9 million book valueof the Company's loans for other developing country loans,resulted in a charge of $620.8 million against the allowancefor loan losses. Loan sales were substantially responsiblefor a net reduction of $1.4 billion in the Company's mediumand long-term cross-border outstandings to developingcountries, resulting in $245 million of such outstandings atDecember 31, 1988.
The Company's allowance for loan losses was $752.1 million, or 2.00% of total loans, at December 31,1988, compared with $1,357.2 million, or 3.69% of totalloans, atDecember 31, 1987. At year-end 1988, the allowance couldbe viewed as covering 60% of the Company's $245 million inmedium- and long-term cross-border outstandings to developing countries. Assuming 60% coverage, approximately 1.6%of the Company's $37.4 billion of remaining loans was alsocovered by the allowance. However, the total allowanceremains available to absorb losses inherent in the Company'sentire portfolio.
Total nonaccrualloans, restructured loans and other realestate (ORE) were $1,028.0 million, or 2.7% of total loansand ORE, at December 31, 1988, compared with $1,589.1 million, or 4.3%, at December 31,1987. Domestic nonaccrualloans, restructured loans and ORE were $924.4 million, or2.5% of total domestic loans and ORE, at year-end 1988,compared with $877.7 million, or 2.5%, a year earlier.Reflecting sales and charge-offs of developing country loans,foreign nonaccrualloans decreased to $103.6 million atDecember 31, 1988, compared with $711.4 million atyear-end 1987.
6
~_T~ABLE 3
AVERAGE BALANCES, YIELDS AND RATES PAID(TAXABLE·EQUIVALENT BASIS)
(in millions) 1988 1987 1986 1985 1984
Averagebalance
Yields!rates
Interestincomelexpense
Averagebalance
Yields!rates
Interestincome!expense
Averagebalance
Yields!rates
Interestincome!expense
Averagebalance
YieldsIrates
Inlcrestincomelexpense
Averagebalance
Yields!rates
Interestincomelexpense
EARNING ASSETS
Interest-earning depositsInvestmentseeurities:
U.S. Treasury securitiesSecurities of other U.S. government agencies
and corporationsObligations of states and political subdivisionsOther securities
Total investment securitiesTrading account securitiesFedcral funds soldLoans:
Commercial, financial and agriculturalReal estate construction-relatedReal estate mortgageConsumerLease financingForeignFees and sundry interest
Total loans (1) (2)
Total earning assets
$ 134
860
1,96683
348
3,2575376
12,4456,8167,6167,2361,3281,545
36,986
$40,506
7.66%
7.52
8.727.41
10.66
8.587.067.09
10.0910.3610.3512.83
9.506.04
10.54
10.36
$ 10.2
64.6
171.56.2
37.2
279.53.85.3
1,256.1706.1788.3928.7126.293.3
3,898.7
4,197.5
$ 918
716
1,866101499
3,182121123
12,2626,0547,0957,2391,2582,126
36,034
$40,378
10.83%
7.25
8.617.76
10.24
8.536.336.26
9.339.72
10.3212.5910.72
5.75
10.08
9.96
$ 99.4
52.0
160.77.8
51.1
271.67.67.7
1,143.8588.7732.2911.4134.8122.2
3,633.1
4,019.4,
$ 1,210
585
170135332
1,222190198
10,0914·,8265,9686,4081,1152,101
30,509
$33,329
6.94%
7.88
8.668.67
12.16
9.246.886.71
9.309.89
10.7513.2912.23
8.96
10.60
10.38
$ 84.0
46.1
14.711.740.4
112.913.013.3
938.3477.4641.9851.4136.4188.2
3,233.6
3,456.8
$ 509
882
20162289
1,353266210
7,8403,7464,7603,690
9152,427
23,378
$25,716
9.17%
9.71
7.708.78
15.12
10.728.568.30
10.7111.3811.1014.7414.2011.28
12.12
11.92
$ 46.7
85.6
1.614.243.6
145.022.817.4
839.4426.2528.3544.0130.0273.7
91.8
2,833.4
3,065.3
$ 926
641
65218202
1,126137374
7,5042,7214,9802,671
8722,834
21,582
$24,145
11.48%
10.85
8.578.83
17.60
11.5410.8810.75
12.5013.6011.1715.1613.8813.09
13.22
13.02
$ 106.3
69.5
5.619.335.6
130.014.940.2
937.9370.0556.3404.9121.1371.0
92.1
2,853.3
3,144.7
4.63% $1,869.7
(.02) (5.4) .06 21.4
4.75% $1,581.6
9
83.170.219.8
403.4573.3
58.276.6
208.7
1,493.3225.8107.2
2,039.9
174.139.5
---213.6
---2,039.9
.09 19.4
4.66% $1,124.2
8.45
5.515.106.898.51
10.7314.0611.0011.46
9.2310.5610.01
12.0810.28
11.70
9.61
$ 1,5071,376
2874,7425,343
414697
1,820
16,1862,1391,070
1,441385
1,826
21,2212,924
$24,145
75.973.118.7
353.0547.2
38.826.4
112.2
1,245.3160.5100.7
191.1136.3
327.4-
1,833.9
1,833.9
.14 37.2
4.93% $1,268.6
7.13
5.505.125.756.639.24
13.949.989.88
7.758.237.62
10.648.73
9.75
8.08
$ 1,3811,429
3265,3275,920
278265
1,135
16,0611,9511,321
1,7971,562
3,359
22,6923,024
$25,716
126.9101.3
22.3367.9564.7
72.624.853.9
1,334.4109.4
78.5
1,896.6
216.4157.9
374.3
1,896.6
5.69
5.304.815.055.347.429.008.067.52
6.276.766.30
9.687.10
8.39
6.63
$ 2,3932,107
4426,8837,609
807308717
21,2661,6191,245
2,2352,225
4,460
28,5904,739
$33,329
173.7164.6
338.3
2,144.3
2,144.3
205.9115.5
17.4396.0529.6
75.315.586.0
1,441.2209.8155.0
5.31
9.557.11
8.18
6.12
5.013.964.025.056.508.608.036.90
5.596.697.63
$ 4,1112,914
4327,8478,145
876193
1,247
25,7653,1342,031
1,8192,316
4,135
35,0655,313
$40,378
110.3164.8
275.1
5.3
2,195.2
2,195.2
221.7124.8
14.3444.3610.747.612.474.1
1,549.9186.1184.1
$2,007.6
9.177.76
8.27
6.28
4.993.934.005.556.849.007.417.06
5.817.487.43
4.96%
5.42
.02
$ 4,4473,176
3588,0078,925
529168
1,049
26,6592,4882,477
1,2042,124
3,328
34,9525,554
$40,506
FUNDING SOURCES
Interest-bearing liabilities:Deposits:
Savings depositsNOW accounlsMarket rate checkingMarket rate savingsSavings certificatesCertificates of depositOther time depositsDeposits in foreign offices
Total intcrest-bearing depositsCommercial paperOlher shorl-term borrowingsSenior and subordinaled debt:
Senior debtSubordinated debt
Total senior and subordinated debt
Total interest-bearing liabilitiesPortion of noninterest-bearing funding sources
Total funding sources
Amortized gain (loss) on interest rate hedging
Net inlcreslmargin and nct interest income on ataxable-equivalent basis
8
NON INTEREST-EARNING ASSETS
Cash and due from banksOther (3)
Total noninterest-eal'lling assets
$ 2,4781,869
$ 4,347
$ 2,5691,907
$ 4,476
$ 2,3531,692
$ 4,045
$ 1,6391,214
$ 2,853
$ 1,7121,376
$ 3,088
NONTNTEREST-BEARJNG FUNDING SOUHCES
DepositsOther I.iabilitiesPreferred stockholders' equityCommon stockholders' equityNoninterest-bearing funding sources used to
fund earning assets
Net noninterest-bearing funding sources
$ 6,3861,082
4052,028
(5,554)
$ 4,347
$ 6,3001,187
4051,897
(5,313)
$ 4,476
$ 5,4631,275
3191,727
(4,739)
$ 4,045
$ 3,3661,103
1501,258
(3,024)
$ 2,853
$ 3,4221,247
1501,193
(2,924)
$ 3,088
TOTAL ASSETS $44,853 $44,854 $37,374 $28,569 $27,233
The average prime rate of Well. Fargo Bank was 9.32%,8.21%,8.33%,9.93% and 12.03% for 1988, 1987,1986,1985 and 1984, respectively.
(1) Due to the loan fcc reclassification discussed in Note 2 to the Financial Stalements, intere.1 income on loans for 1987 and 1986 decrcased by $129.7 million and $115.2 million,
respectively, and L11e net interest margin dccrCWicd by 32 basis points und 34 basis points, respectively. Loan fees and sundry interest arc nol shown separately for 1988, 1987 or
L986 clue 10 this reclassification. Years prior to 1986 have 1101 been reclassified as complete information is not available.
(2) Nonnccrual and restructured loans and related income are included in their respective loan categories.
(3) Ineludes the average allowance for loan los.es of $1,149 million, $1,020 million, $587 million, $336 million and $222 million in 1988, 1987,1986, 1985 and 1984, respectively.
NON INTEREST INCOME
The table below shows the major components of non-
interest income.
TABLE 4
NONINTEREST INCOME
(in millions) Year ended December 31, 0/0 Change
1988 1987 1986 1988/ 1987/1987 1986
Domestic fees andcommissions (1) $278.2 $270.8 $232.1 3% 17%
Service charges on18deposit accounts 219.6 180.6 153.0 22
Trust and invcslmentservices income 153.7 156.5 90.1 (2) 74
Income from equity(36)investmcnts 36.1 24.5 38.4 47
Intemational fecs,commissions andforcign exchange 16.9 18.5 17.8 (9) 4
Trading account profits20.3 (4)(losses) and commissions (3.1) 19.5
Investment securitiesgains (losses) (4.3) (12.9) 29.4 (67)
10 AU other (14.9) (57.5) ~) (74) 813
Total $682.2 $600.0 $574.8 14 4
(I) Due to the 103n fcc rcclu!isificaLioll discusseu in Note 2 to (he Finunciul Slatements.
domestic fcc!:! und commissions incrcnscd by $129.7 million und $115.2 million for
1987 und 1986. respccliveIj'.
The two largest components of domestic fees and commissions were credit card merchant fees (including interchangefees), which were $65.4 million and $64.5 million in 1988and 1987, respectively, and credit card membership fees,which were $31.7 million and $33.7 million in 1988 and1987, respectively. There were 1.7 million cardholder
accounts at year-end 1988.Most of the increase in service charges on deposit accounts
in 1988 compared with 1987 was due to rate increases on certain items, which increased income by approximately $18 million, and an increase in the number of checking accountcustomers, which increased income by approximately $10 million. The increase in customers partially resulted from the
acquisition of Barclays.In 1988 and 1987, the majority of the income from equity
investments, which are accounted for using the cost method,resulted from gains on sales of equity positions related tohighly leveraged transactions.
The decline in trading account profits (losses) and commissions in 1988 compared with 1987 resulted substantially fromthe Company's decision to discontinue most of its tradingaccount activity.
If it were not for the net-of-tax accounting related toCrocker, "all other" noninterest income would have been$10.2 million in 1988 and $6.0 million in 1987. Income taxexpense (benefit) would have been correspondingly higher(lower), resulting in no effect on net income.
NONINTEREST EXPENSE
The table below shows the major components of noninterest expense.
TABLE
NONINTEREST EXPENSE
(in millions) Year ended December 31. % Change
1988 1987 1986 1988/ 1987/1987 t986
Salaries S 619.8 $ 599.3 $ 526.0 3% 14%
Employee benefits 152.4 151.5 148.1 1 2
Net occupancy 166.8 178.7 143.7 (7) 24
Equipment 135.8 132.9 108.0 2 23
Postage, stationeryand supplics 52.6 56.5 50.3 (7) 12
Telecommunications 43.7 51.9 41.7 (16) 25
Advcrtising andpromotion 41.4 27.0 24.9 53 9
ProCcssional services 38.8 34.2 27.8 14 23
Contract services 25.4 24.7 27.0 3 (9)
Operating loses 25.0 35.9 15.2 (30) 137
Federal depositinsurance 24.5 25.1 20.7 (2) 21
Travel andentertainment 24.2 21.4 20.4 13 5
GoodwiU amortization 22.7 22.4 13.0 1 72
Other real eslate 20.6 37.4 36.0 (45) 4
Outside dataprocessing 16.3 19.0 17.4 (14) 9
Escrow and collec-tion agency fees 15.7 13.6 ll.4 15 19
Insurance 14.5 20.3 16.5 (29) 23
Protection 13.1 16.1 13.1 (19) 23
AU other 65.8 52.6 54.0 25 (2)---
Total $1,519.1 $1,520.5 $1,315.2 16
Approximately $9 million of the 1988 increase in salariesexpense was due to the Company's "We're in Good Company"program, which rewarded most employees with a $500 cashbonus in 1988, and another $9 million was due to the additional personnel resulting from the acquisition of Barclays.The Company's full-time equivalent staff, including hourlyemployees, was approximately 19,700 at December 31, 1988,compared with approximately 20,100 at December 31, 1987.
The slight increase in employee benefits expense in 1988compared with 1987 reflected a $14 million increase in healthand other types of employee benefits expense that was mostlyoffset by a $13 million decrease in expenses relating to executive stock option plans.
A majority of the increase in advertising and promotionexpense in 1988 compared with 1987 resulted from highe;'consumer product advertising.
The decrease in ORE expense in 1988 compared with1987 reflected a $15 million decrease in ORE write-downsand an $8 million increase in gains on sales of ORE.
INCOME TAXES
Income tax expense for 1988 was 39% of pretax income; theincome tax benefit for 1987 was 568% of the pretax loss. If itwere not for net-of-tax accounting, the Company's effectiveincome tax expense rates would have been 42% in 1988 and43% in 1987, as described below.
The acquisition of Crocker in May 1986 was a businesscombination accounted for as a purchase transaction. Accordingly, Crocker's assets and liabilities were revalued to fairvalue at the time of acquisition, net of the related tax effects.The resulting pretax income and expense amounts recognizedrelated to these assets and liabilities include the previouslyrecorded income tax effects. To make the components of the1988 income statement comparable with an income statementthat does not include net-of-tax accounting, these tax effectsof $47.8 million would have to be added to the income taxexpense line forl988. Correspondingly, $47.8 million wouldhave to be added to income before income tax expenseas follows: $9.1 million increase to net interest income,$25.1 million increase to noninterest income and $13.6 million decrease to noninterest expense. Reflecting these changes,the Company's pretax income and income tax expense wouldhave been $883.0 million and $370.5 million, respectively,resulting in the same net income of $512.5 million. If the1987 results were adjusted to exclude the effect of net-of-taxaccounting, the Company would have had pretax incomeof $88.9 million and income tax expense of $38.1 million,resulting in the same net income of $50.8 million. (For more
information on income taxes, refer to Note 11 to the FinancialStatements.)
The Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 96(FAS 96), Accounting for Income Taxes, in December 1987.This Statement changes the method of computing incometaxes for financial statement purposes by adopting the liability(or balance sheet) method under which the net deferred taxliability or asset is based on the tax effects of the differencesbetween book and tax bases of the various balance sheetassets and liabilities. Under this method, the computation ofthe net deferred tax liability or asset gives current recognitionto changes in tax laws and rates. The Statement supercedesAccounting Principles Board Opinion (APB) No. n, Accounting for Income Taxes, under which the net deferred tax liability or asset was an accumulation of annual adjustments basedon the tax effects of the book and tax income statementdifferences and was not adjusted for subsequent changes intax rates.
FAS 96 is effective in 1990; earlier implementation is permitted. Financial statements for years prior to the year ofadoption may be restated to conform with the requirements ofthe Statement. The effect of applying FAS 96 on the amount ofthe net deferred tax asset or liability at the beginning of theyear adopted or the earliest year restated is to be reflected asan adjustment to earnings for that year.
The Company has not yet determined whether to adoptFAS 96 before 1990 or whether to restate any prior financialstatements. The Company estimates that, if the principles ofthe Statement had been applied at December 31,1988, theCompany's net deferred tax asset of $42 million would havebeen eliminated and a net deferred tax liability of approximately $8 million would have existed at December 31, 1988.This adjustment would have resulted in a correspondingcharge of approximately $50 million recorded as an expenseof either the current or prior periods, due to the Statement'smore restrictive criteria for the recognition of deferred taxassets than under current APB Opinion No. n principles.
11
BALANCE SHEET ANALYSIS
J35 34 36 34 35
14 17 15 18 19100%
121 19 19 20 21
14 17 21 19 204
I 5 3 3 l12 8 6 6 41
84 85 86 87 88
• Commercial
• Renl estate construcLion-related • Real c8lalc mortgage Consumer
• Leose [","ncing • Fnreign
- -
TABLE.....;;.6__
HIGHLY LEVERAGED TRANSACTION
LOAN PORTFOLIO
r TABLE7 IHIGHLY LEVERAGED TRANSACTION
LOAN PORTFOLIO BY INDUSTRY
(in millions) December 3].1988
Tol.) Numberamount of
Loan range outslanding lrunsaclions
$ 1-20 $ 332 3121-40 966 3141-60 740 1561-80 153 281-100 528 6Over $100 416 3
Total $3,135-88 3-- - I
However, the Company estimates that during 1988 it receivedfees of approximately $64 million related to HLT loansand that approximately $35 million ofHLT loan fees wererecognized as gross revenues (interest income and noninterestincome). HLT fees that have been received prior to andincluding 1988 and that have not yet been recognized asincome (deferred loan fees) totaled approximately $52 millionat December 31, 1988.
I TABLE8 JHIGHLY LEVERAGED
TRANSACTION LOAN PORTFOLIO
BY LOAN RANGE AMOUNT
HLT loans contributed higher revenues than that whichwould have been earned if the resources had been redeployedto other corporate loans. Based on an assumption that othercorporate loans, on average, generate approximately one-halfless in loan fees and bear interest rates that are 150 basispoints less than HLT loans, the Company estimates that 1988gross revenues would have been approximately 1% lower and1988 net income would have been approximately 7% lower ifresources used for HLT loans had been redeployed to othercorporate loans. The net income effect would be less if noninterest expenses unique to HLTs were considered.
In addition to the $3.1 billion in senior loans, the Companyhad both direct and indirect mezzanine (subordinated, highyielding debt) and equity investments relating to HLTs. AtDecember 31, 1988, mezzanine investments totaled approximately $114 million and equity investments totaled approximately $85 million. The largest single investment was $14 million. These investments are subject to a formal review process.
10.2%6.96.56.26.16.16.15.24.94.94.54.13.83.83.63.43.43.32.64.4
$2,163582390
$3,135
100.0%
December 31.1988
December 31, 1988
Loans in connection wilh:
Leveraged buyoutsRecapitalizationsLeveraged acquisitions
Tolal (1)
(in millions)
(I) Includes $356 million of working capital loans.
At December 31, 1988, there were no HLT loans on nonaccrual or restructured status or past due over 90 days andstill accruing. Furthermore, there was no ORE resulting fromHLT loans at year-end 1988, nor were there any charge-offs ofHLT loans during the past five years. At year-end 1988, theCompany had approximately $91 million ofHLT loans to aborrower in bankruptcy proceedings. The Company believesat the present time that these loans are secured by the assetsof the borrower.
HLTs generally provide fees (typically 1%-2% of the commitment) and interest rates (typically prime plus 1.5% orLIBOR plus 2.5%) that are higher than most other corporateloans. The Company does not aggregate fees relating to HLTloans separately from its other corporate financing activities.
Industry:
Manufacturing-industrial and commercial machineryManufacturing-glass and concreteRetail-foodRetail-restaurantManufacturing- miscellaneousManufacluring-electricalHealth servicesManufacturing-textileManufacturing-paperWholesale-foodMedia and broadcastingTransportationRelail-apparel and department sloresManufacturing-transportation equipmentRetail-furnitureRetail-drugstoresManufacturing-furnitureManufacturing-printingRetail-building materialsOther (six industries)
Total
HIGHLY LEVERAGED TRANSACTIONS
The Company's loan portfolio includes loans made to companies involved in highly leveraged transactions (HLT). An HLTis the purchase or recapitalization of a company by a financingpackage consisting largely of debt. A loan is consideredHLT-related until the credit has performed satisfactorily for acertain length of time and specific leverage and cash flowrequirements, which are established by the Company, are met.This definition excludes certain loans when these result fromongoing lending activities and are not viewed as a singlefmancing transaction but as part of a continuing relationship.The Company's HLT loans totaled $3.1 billion and $2.8 billion at December 31, 1988 and 1987, respectively. Approximately 22% of the year-end 1988 HLT loan portfolio wascontractually scheduled to be repaid within one year. TheCompany is also committed to lend an additional $1.4 billionrelating to HLTs at year-end 1988 and had other HLTs at various stages of discussion or preliminary commitment subject todocumentation and other conditions. A breakdown of theCompany's $3.1 billion HLT loan portfolio at December 31,1988 by type of transaction is presented in Table 6.
The HLT loan portfolio is subject to both a formal approvalprocess and an ongoing review by senjor management andcommittees of the Company. In addition, the Company hasestablished Limitations regarding the maximum amount ofHLT outstandings and commitments allowed based on theCompany's primary capital. Management ensures the HLTloan portfolio is broadly diversified by industry, as shown inTable 7. The average HLT loan at December 31, 1988 was$36 million. Table 8 summarizes the loan range amounts ofthe HLT portfolio at year-end 1988.
estate mortgage loans increased 7%. The increase occurredfairly evenly between those loans secured by 1-4 familyresidential properties and those secured by other properties.Foreign loans decreased 27%, substantially due to sales andcharge-offs of developing country loans.
Commercial, financial and agricultural (commercial) loansof $13.1 billion at December 31, 1988 increased by $.7 billionfrom a year earlier, primarily due to growth in middle-marketloans. Also, consumer loans of $7.5 billion at year-end 1988increased by $.4 billion from year-end 1987, mostly due togrowth in real estate junior lien mortgage loans.
Included in the commercial portfolio were agriculturalloans of $683 million and $631 million at December 31, 1988and 1987, respectively. Agricultural loans include loans tofinance agricultural production, fisheries and forestries andother loans to farmers. Agricultural loans that are primarilysecured by real estate are included in real estate mortgageloans; such loans were $200 million and $189 million atDecember 31, 1988 and 1987, respectively.
A comparative schedule of average loan balances is presentedin Table 3; year-end balances are presented in Note 5 to theFinancial Statements.
Loans averaged $37.0 billion in 1988, an increase of3%over 1987. Real estate construction-related loans, whichgenerally have maturities of five years or less, incl'eased 13%,primarily due to loans made to finance the construction ofcommercial and single-family residential properties. Real
(%)
LOAN MIX AT YEAR END
INVESTMENT SECURITIES
LOAN PORTFOLIO
comparison between the year-end 1988 and 1987balance sheets is presented below. Excluding inter
company balances, the Bank, nonbank subsidjaries and Parent represented approximately 94%, 4% and 2%,respectively, of consolidated total assets at December 31,1988.
Investment securities were $4.0 billion at December 31, 1988,a 12% increase over 1987. Substantially all of the increasewas the result of purchases of Government National MortgageAssociation securities. These securities were purchased topartially reduce the one-year-and-over net liability positionrelating to interest rate sensitivity. (Note 4 to the FinancialStatements shows the composition of the investment portfolio
by type of issuer.)
12
(1) Includes agrieuhuralloans 01$134 million, $157 million, $223 million, $180 million and $64 million al December 31,1988,1987,1986,1985 and 1984, respectively.(2) Includes agrieuhuralloans secured by real estale of$14 million, $12 million, $19 million, $24 million and $22 million at December 31,1988,1987,1986.1985 and 1984.
respectively.(3) Includes agricultural-related properties of $94 million, $108 million, $112 million, $94 million and $46 million 01 December 31, 1988,1987, 1986.1985 and 1984, respectively.
TABLE 9
NONACCRUAL LOANS. RESTRUCTURED LOANS AND OTHER REAL ESTATE
a loan as nonaccrual or restructured does not necessarilyindicate that the principal of the loan is uncollectible in wholeor in part. (Note 1 to the Financial Statements describes theCompany's policies relating to nonaccrual and restructuredloans and ORE.)
pared with a year earlier was due to an increase of $81 millionin commercial properties in Texas, Colorado and Arizona, partially offset by sales of hotels with a carrying value of $34 million and agricultural-related properties with a carrying valueof $21 million.
Substantially all of the decrease in foreign nonaccrualloans at year-end 1988 compared with 1987 was due to sales
and charge-offs of developing country loans.Interest on nonaccrual and restructured loans that
was recognized as income amounted to $16.7 million and$25.1 million in 1988 and 1987, respectively.
Table 10 shows loans contractually past due 90 days ormore as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category
15
CROSS-BORDER OUTSTANDINGS
The provision for loan losses in 1988 was $300.0 million.The 1987 provision was $892.0 million, reflecting specialadditions totaling $589.0 million that were made in connection with loans to developing countries. During 1988, total netcharge-offs were $299.0 million, compared with $263.5 million in 1987. As a percentage of total average loans outstanding, net charge-offs were .80% in 1988 and .73% in 1987.Excluding the effect of the ATRR charge-off, the ratio wouldhave been .60% in 1988. Domestic net charge-offs in 1988were $196.5 million, compared with $247.0 million in 1987.As a percentage of average domestic loans outstanding, domestic net charge-offs were .55% in 1988 and. 72% in 1987. Thedecrease was primarily due to a lower ratio of commercial netcharge-offs to average commercial loans in 1988.
Net charge-offs of commercial loans decreased by $37.4 mil·lion in 1988 compared with 1987, substantially due to a decline in net charge-offs of agricultural loans. Net charge-offs(recoveries) of agricultural-related loans (included in both thecommercial and real estate mortgage loan portfolios) were$(4.7) million in 1988 and $44.3 million in 1987.
Net charge-offs offoreign loans in 1988 were $102.5 million, compared with $16.5 million in 1987. The 1988 increasewas due to the charge-off of developing country loans, including the charge-off ofloans that were covered by the ATRR.
Loan loss recoveries were $84.8 million in 1988, compared with $73.5 million in 1987.
Loans are charged off when classified as a loss by eitherinternal loan examiners or regulatory examiners. Additionally,any loan that is past due as to principal or interest and that isnot both well secured and in the process of collection is generally charged off (to the extent that it exceeds the net realizablevalue of any related collateral) after a predetermined period oftime that is based on loan category.
At December 31, 1988, the allowance could be viewed ascovering 60% of the Company's $245 million in medium- andlong-term cross-border outstandings to developing countries.Assuming 60% coverage, the allowance also covered approximately 1.6% of the Company's remaining loans of $37.4 billion. However, the total allowance remains available to absorblosses inherent in the Company's entire portfolio.
There were no countdes in which the Company had crossborder outstandings that accounted for. 75% or more of totalassets at December 31,1988. Cross-border outstandings toborrowers in countries that accounted for 1% or more of totalassets at December 31,1987 or 1986 are shown in Table 11.
.4
$33.93.6
41.814.0
1985 1984
December 31,
$ 46.114.342.043.5
.21.5
$147.6 $93.7
1986
$ 71.111.265.462.9
1.73.7
$216.0
19871988
$ 34.6 $ 51.530.7 6.126.9 41.335.9 35.3
2.1 1.3
$130.2 $135.5
(in millions)
Commercial, financial and
agricultural
Real eslale construction-related
Real eslalc mortgage
Consumer
Lease financing
Foreign
Tolal
are both well secured and in the process of collection or areconsumer loans or 1-4 family residential real estate loansthat are exempt under regulatory rules from being classifiedas nonaccrual.
TABLE 10
LOANS 90 DAYS OR MORE
PAST DUE AND STILL ACCRUING
ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses,including net charge-offs by loan category, is presented inNote 5 to the Financial Statements. At December 31, 1988,the allowance for loan losses was $752.1 million, or 2.00% oftotal loans, compared with $1,357.2 million, or 3.69%, atDecember 31, 1987. In 1988, the Company charged off thoseloans to developing countries that were covered by allocatedtransfer risk reserves (ATRR) of $77.8 million. Accordingly,there were no such reserves included in the allowance for loanlosses at year-end 1988, compared with $65.9 million atDecember 31, 1987.
The Company's determination of the level of the allowanceand, correspondingly, the provision for loan losses rests uponvarious judgments and assumptions including, but not necessarily limited to, general economic conditions, loan portfoliocomposition and prior loan loss experience. The Companyconsiders the allowance for loan losses of $752.1 million adequate to cover losses inherent in loans, commercial and realestate loan commitments and standby letters of credit outstanding at December 31, 1988. No assurance can be giventhat the Company will not in any particular period sustain loanlosses that are sizable in relation to the amount reserved, orthat subsequent evaluations of the loan portfolio, in light ofconditions and factors then prevailing, will not require significant changes in the allowance for loan losses.
2.4%
3.6%
1984
2.8%
$87.6
$17.4
$822.2
$572.3
$249.9
$467.3
$382.426.243.7
.614.4
December 31,
3.9%
1985
2.6%
3.4%
$18.4
$576.6
$959.1
$169.3
$764.3
$194.8
$463.051.049.5
3.69.5
2.1%
3.5%
1986
3.0%
$13.8
$255.4
$319.6
$500.5115.4
68.84.0
12.8
$701.5
$1,290.3
$1,034.9
4.3%
1987
1.6%
2.5%
$11.7
$317.3
$877.7
$711.4
$417.958.950.215.4
6.3
$548.7
$1,589.1
$10.3
2.5%
2.7%
1988
1.6%
$103.6
$334.7
$335.7173.747.018.24.8
$579.4
$924.4
$1,028.0
NONACCRUAL LOANS. RESTRUCTURED
LOANS AND OTHER REAL ESTATE
Other real eslale (ORE) (3)
Domestic nonaccrual and restructured loans
as a percentage of total domestic loans
Tolal nonaccrualloans, restructured loans and ORE
Domestic nonaccrual loans:
Commercial, financial and agricultural (1)
Real estate construction-related
Real estate mortgage (2)
Consumer
Lease financing
Total domestic nonaccrualloans
Domestic nonaccrualloans, restructured loans and ORE
as a percentage of lolal domestic loans and ORE
Restructured loans (all domestic)
Foreign nonaccrualloans
Total nonaccrualloans, restructured loans and
ORE as a percentage of total loans and ORE
Domestic nonaccrualloans, restructured loans and ORE
(in millions)
Table 9 presents comparative data for nonaccrualloans,restructured loans and ORE. Management's classification of
Commercial nonaccruals decreased at December 31, 1988compared with a year earlier, mostly due to repayments of$92 million and charge-offs of $79 million, partially offset byadditional loans placed on nonaccrual status during 1988 of$114 million. The decrease occurred in a variety of industries.The increase in real estate construction-related nonaccrualloans at December 31,1988 compared with 1987 was due toan increase in loans used to finance the construction of commercial buildings located in California and several other states.Further increases in this nonaccrual category may occur untileconomic conditions and occupancy rates in different regional
markets improve.Most of the increase in ORE at December 31, 1988 com-
14
CORE DEPOSITS AT YEAR END-
($ BILLIONS)
; $35 33.031.0 30.0
:~o
25
20 18.0 18.4
15
10
5
0 -84 85 86 87 88
(1) Outstandings arc defined os loans, interest-earning time deposits with olher banks.
other interest-earning investments, accrued interest receivable, acceptances, olher
monetary assets that arc denominated in dollars or other nooloenl currency and local
currency outstandings Ihal are neither hedged nor funded by local currency liabili
ties. CounLry distributions are based on the location of the obligor or invcslmcnl ,
except (1) for cross-border oULslnndings guaranteed by a third party. in which case
the country is that of the guarantor, and (2) when tangible liquid collateral is heldoutside the foreign country, in which case the country is that in which the collateral is
localed. Loans made or deposits placed wilh a branch of R bunk outside the bankshome country arc considered otllslundings of the home country.
(2) Includes commcrcinJ enterprises that are majority-owned by central governments.
TABLE 1 1
CROSS-BORDER OUTSTANDINGS
AT YEAR END (1)
(in millions) Governments Banks and Commercial 'lolal 0/0 ofand official other and lotalinstitutions financial inuustrial assets
(2) im3litutions
Brazil
1988 $129 $102 $- $231 .5%
1987 414 167 11 592 1.3
1986 404 178 12 594 1.3
Mexico
1988 45 20 15 80 .2
1987 390 34 180 604 1.4
1986 355 40 192 587 1.3
TABLE 12
1
17
8
o
4
12
16%
8887
• Primary capilal/assets
8685
CAPITAL RATIOS AT YEAR END
• Total capital/asselS
84
• COl11mon stockholders' equity/asscts
datory convertible debt, subordinated and unsecured seniordebt and the allowance for loan losses, all subject to limitationsby the guidelines. Tier 2 capital is limited to the amount ofTier 1 capital. The Company's Tier 1 and Tier 2 capital atDecember 31, 1988 were each approximately $2.0 billion,resulting in total capital of approximately $4.0 billion.
Under the guidelines, one of four risk weights is applied tothe different balance sheet assets, primarily based on the relative credit risk of the counterparty. Off-balance sheet items,such as loan commitments, are also applied a risk weight, afterapplying one of four credit conversion factors to these items todetermine a balance sheet equivalent amount. The credit conversion factors are primarily based on the likelihood of theoff-balance sheet item becoming an asset. The risk weightsand credit conversion factors are 0%, 20%, 50% and 100%.
At December 31, 1988, the Company's risk-weighted assetswere approximately $44.3 billion, consisting of risk-weightedbalance sheet assets of approximately $37.7 billion and riskweighted off-balance sheet items of approximately $6.6 billion. Risk-weighted balance sheet assets of approximately$37.7 billion were less than total assets of $46.6 billion on tbeconsolidated balance sheet as a result of weighting certaintypes of assets at less than 100%; such assets substantiallyconsisted of claims on or guaranteed by the U.S. governmentor its agencies, 1-4 family first mortgage loans and cash anddue from banks. The risk-weighted off-balance sheet amountsubstantially consisted of commitments to make or purchaseloans (risk-weighted $5.1 billion) and standby letters of credit
The Company utilizes a variety of measures to evaluate capitaladequacy. Common stockholders' equity was 4.66% of totalassets at December 31, 1988, compared with 4.17% atyear-end 1987. Primary capital was 8.05% of total assets atDecember 31, 1988, compared with 8.90% at the end of1987. Total capital was 12.09% of total assets, comparedwith 14.01% at the end of 1987. Primary and total capitaldecreased in 1988 compared with 1987, primarily due to adecline in the allowance for loan losses resulting from the salesof developing country loans. The decline in the allowance waspartially offset by an increase in retained earnings. Thedecrease in total capital also reflected a decline in senior andsubordinated debt in 1988 compared with 1987.
Management reviews the various capital measures monthlyand takes appropriate action to ensure that they are withinestablished internal and external guidelines. Managementbelieves that its current capital and liquidity positions arestrong and exceed guidelines established by industry regulators, and that its capital position is adequate to support itsvarious businesses. Management also monitors the extentand term of standby letters of credit relative to its capital position. At December 31, 1988, standby letters of credit were$1.6 billion, or 41% of primary capital.
CAPITAL ADEQUACY
RISK-BASED CAPITAL
In January 1989, the Federal Reserve Board (FRB) and theOffice of the Comptroller of the Currency (OCC) issued finalrisk-based capital guidelines for bank holding companies andnational banks, respectively; the FRB's and OCe's guidelinesare similar. The FRB is the primary regulator for the Companyand the OCC is the primary regulator for Wells Fargo Bank,N.A. The FRB's guidelines are based on a f"amework developed jointly by authorities from the 12 leading industrialcountries for application to banking organizations in thosecountries. The guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balancesheet exposures. The FRB has decided for now to retainexisting primary and total capital ratio requirements. Theguidelines require minimum risk-based capital ratios byDecember 31, 1990 and more restrictive ratios by year-end19~2. Under transition rules, the guidelines for computing theratIo (for example, items allowed to be counted as capital) alsobecome more restrictive by 1992. The discussion below isbased on these more restrictive 1992 guidelines.
There are two categories of capital under the guidelines.:i~r 1 capital includes common stockholders' equity and qual~ymg preferred stock, less goodwill. Tier 2 capital generallymcludes preferred stock not qualifying as Tier 1 capital, man-
$ 6,330.03,414.5
11,970.28,290.4
30,005.1690.2159.2
1,465.3
$32,319.8
1988 1987
$ 7,112.53,729.8
12,650,59,549.0
33,041.8487.1163.9
1,376.0
$35,068.8
Noninterest-bearing deposits
Interest-bearing checking accounts
Savings accounts
Savings certificates
Core deposits
Certificates of deposit
Other time deposits
Interest-bearing deposits-foreign
Total deposits
DEPOSITS
(in millions) December 31.
DEPOSITS
Comparative detail of average deposit balances are presented
in Table 3; year-end balances are presented in Table 12.Average core deposits and average total deposits increased
5% and 3%, respectively, in 1988 compared with 1987,mostly due to an increase in savings certificates and savingsaccounts. Average core deposits funded 70% and 66% of theCompany's average total assets in 1988 and 1987, respectively.Average core deposits funded 74% of the Bank's average total
assets in both 1988 and 1987.Core deposits and total deposits increased 10% and 9%,
respectively, at December 31, 1988 compared with 1987.These increases resulted from the factors mentioned above, aswell as a $.8 billion increase in noninterest-bearing deposits,
partially due to the acquisition of Barclays,
At December 31, 1988, Brazilian and Mexican crossborder outstandings included $54 million and $66 million ofmedium- and long-term outstandings, respectively. Brazilianloans on nonaccrual status totaled $54 million, $416 millionand $7 million at December 31, 1988, 1987 and 1986,respectively. Mexican loans on nonaccrual status were $12 million, $70 million and $29 million at year-end 1988, 1987 and
1986, respectively.Total cross-border outstandings to developing countries
were $457 million at December 31,1988, or .98% of totalassets, compared with $1,911 million, or 4.3% of total assets,
at December 31,1987. Included in the $457 million atDecember 31, 1988 were $245 million of medium- and longterm cross-border outstandings. The decline from 1987 was
substantially due to loan sales and charge-offs.
Savings certificates
• Lnlerest-bcnring checking accounls
• Savings accounts
• Noninleresl-bcnring deposits
16
....
COMPARISON OF 1987 VERSUS 1986
TABLE 13
rities of obligations. For example, a new five-year loan with arate that is adjusted every 180 days would have a remaininginterest rate maturity ofl80 days. In 60 days, the same loanwould have a remaining interest rate maturity of 120 days.
""'IIIIl~~, income in 1987 w.. $50.8 millioo, 0' $.52 pmcommon share. This result reflected two special
....... ..... additions, totaling $589 million, to the allowance forloan losses made in connection with loans to developing countries. Without the effect of the special additions and theirrelated tax benefits, net income would have been $382.6 million, or $6.69 per common share. In 1986, net income was$273.5 million, or $5.03 per common share.
In 1987, return on average assets (ROA) was .n% andreturn on average common equity (ROE) was 1.47%. Excluding the impact of the special additions, ROA would have been.85% and ROE would have been 17.39%. In 1986, ROA andROE were .73% and 14.81%, respectively.
The 1986 results include the earnings contribution fromCrocker beginning June 1. Crocker was acquired on May 30,1986. When comparing 1987 income and expense with 1986,substantially all of the significant increases reflected the acquisition of Crocker, except for the increase in the provision forloan losses due to the special additions.
The Company's results in 1987 reflected an increase in netinterest income. Despite a decrease in the net interest marginto 4.63% in 1987 from 4.75% in 1986, net interest income on
19
Management has made certain judgments and approximations in assigning assets and liabilities to rate maturity categories: (1) the remaining maturities of fIXed-rate loans havebeen estimated based on recent repayment patterns ratherthan on contractual maturity; (2) "nonmarket" assets includenoninterest-earning assets, credit card outstandings andnonaccrual and restructured loans; "nonmarket" liabilitiesinclude savings deposits, interest-bearing checking accounts,noninterest-bearing deposits, other noninterest-bearing liabilities and equity; and (3) asset and liability maturities reflect theeffects of interest rate swaps.
The one-year-and-over net liability position was $1.4 billionfor December 1988 (3.0% of total assets), compared with$1.1 billion for December 1987 (2.4% of total assets).
a taxable-equivalent basis increased 18% to $1.9 billion in1987, due to average earning assets being 21% higher than1986. The 12 basis point decrease in the net interest margin to4.63% in 1987 was mostly due to Brazilian loans placed onnonaccrual status in March 1987 and a decrease in the percentage of noninterest-bearing funding sources used to fundearning assets (noninterest-bearing funding sources funded13% of earning assets in 1987, compared with 14% in 1986),partially offset by an increase in the yield on commercial loans.
Loans averaged $36.0 billion during 1987, up 18% over1986. The commercial portfolio increased 22%, real estateconstruction-related loans increased 25%, real estate mortgage loans increased 19% and consumer loans increased13%. The commercial portfolio increase reflected growth incorporate and middle-market loans. The increase in realestate construction-related loans primarily resulted from loansmade to finance the construction of commercial properties.The majority of the increase in real estate mortgage loansoccurred in the 1-4 family mortgage loan portfolio. Growth inreal estate junior lien mortgage loans and credit card loansaccounted for most of the increase in consumer loans.
Net assets(liabilities) as a %
of lotal assets
(17.4)%]'33.4
(17.9) 1.7%
3.61.3
12.0 }8.9 (3.0)
(23.9)
$ (8.1) )15.5(8.3) $.8
1.7.6
5.6 }4.1 (1.4)
(ILl)
Averages for December 1988
Net assets(liabilities)
(column] minus
column 2)
$ 9.8
8.35.21.22.5
.518.7
$46.2
Liabilitiesand
equity
Assels
$1.715.5
6.91.88.14.67.6
$46.2
INTEREST RATE SENSITIVITY
(in billions)
Hemaininginterest rate
maturity
Tolal
1-29 days
Prime-basedMarkel rate savings30-179 days180-364 days1-5 yearsOver 5 yearsNonmarket
The principal objectives of asset/liability management are tomanage the sensitivity of net interest spreads to potentialchanges in interest rates and to enhance profitability in waysthat promise sufficient reward for understood and controlledrisk. Specific asset/liability strategies are chosen to achieve anappropriate trade-off between average spreads and the variability of spreads. When management decides to maintainmaturity imbalances, it does so on the basis of statistical studies of interest rates of different maturities. Funding positionsare kept within predetermined limits designed to ensure thatrisk-taking is not excessive and that liquidity is properlymaintained.
The Company hedges primarily to reduce mismatches inthe rate maturity of certain loans and their funding sourcesthrough the use of interest rate futures. Gains and losses onthese futures contracts are deferred and amortized over theexpected loan or funding source holding period.
Approximately 60% of the Company's prime-based loanportfolio is funded by market rate savings. The remainder isfunded by various short-term borrowings and other deposits.The Company uses interest rate futures to shorten the averageeffective maturity of these funding sources to the overnight tothTee-month range, which management believes will providemore stable and more profitable spreads between primebased loans and the rates on their funding sources.
The use of interest rate futures resulted in an amortizedgain on interest rate hedging of $6.7 million in 1988 and in anamortized loss of $4.8 million in 1987.
Table 13 shows the Company's interest rate sensitivitybased on average balances for December 1988. Interest ratesensitivity measures the interval of time before earning assetsand interest-bearing liabilities respond to changes in marketrates of interest. Assets and liabilities are categorized by remaining interest rate maturities rather than by principal matu-
ASSET/LIABILITY MANAGEMENT
unissued debt securities of $773 million at December 31, 1988.(Refer to Note 7 to the Financial Statements for a schedule ofoutstanding senior and subordinated debt as of December 31,1988 and 1987.)
To accommodate future growth and current businessneeds, the Company has a capital expenditure program. Capital expendituTes for 1989 are estimated at $130 million foradditional automation equipment for branches, relocation andremodeling of Company facilities and routine replacement offumiture and equipment. The Company will fund these expendituTes from various ources, including retained earnings ofthe Company and borrowings of various maturities.
LIQUIDITY MANAGEMENT
Liquidity refers to the Company's ability to maintain a cashflow adequate to fund operations and meet obligations andother commitments on a timely and cost-effective basis.
In recent years, core deposits have provided the Companywith a sizable source of relatively stable and low-cost funds.The Company's average core deposits, senior and subordinated debt and stockholders' equity funded 83% and 81% ofits average total assets in 1988 and 1987, respectively. Thesignificant increase in core deposits in 1988 was partially offset by a reduction in senior and subordinated debt. During1988, senior debt of $649 million matured or was redeemed,of which $208 million was previously included in total capital.Subordinated debt of $229 million was redeemed in 1988, ofwhich $50 million was previously included in primary capitaland the remainder in total capital.
The majority of the remaining funding was provided byshort-term borrO\vings, which substantially consisted of commercial paper, federal funds borrowed and sales of securitiesunder repurchase agreements. In 1988, short-term borrowings averaged $5.0 billion, compared with $5.2 billion in1987. Other sources of liquidity include maturity extensionsof short-term borrowings, sale or runoff of both short-terminterest-earning deposits and other assets and confirmed linesof credit from banks. The Company believes that liquidityis further provided by its ability to raise funds in a variety ofdomestic and international money and capital markets.
Commercial, real estate and foreign loans totaled $28.8 billion at December 31, 1988. Of these loans, $12.7 billionmatures in one year or less, $8.1 billion matures in over oneyear thl"Ough five years and $8.0 billion matures in over fiveyears. Of the $16.1 billion that matures in over one year,$10.3 billion has floating or adjustable rates and $5.8 billionhas predetermined rates.
Under shelf registration statements filed with the Securitiesand Exchange Commission, the Company had registered but
(risk-weighted $1.4 billion). (Refer to Note 14 to the FinancialStatements for further discussion of off-balance sheet items.)
The guidelines require a minimum total risk-based capitalratio of 7.25% by the end ofl990 and 8.00% by the end of1992, with half of the total capital in the form of Tier 1 capital.Based on the guidelines applicable to 1989, the Company'srisk-based Tier 1 ratio at December 31, 1988 was approximately 6.45% and its total risk-based capital ratio wasapproximately 11.05%. Based on the 1992 guidelines, theCompany's risk-based Tier 1 ratio at December 31,1988 wasapproximately 4.57% and its total risk-based capital ratio wasapproximately 9.15%.
18
--_.~----------- -
GENERAL INFORMATION
I
21
PRICE RANGE OF COMMON STOCK
QUARTERLY
($)
$7570'1.
68
I58 1/. 581'1 59% 59% II I
56% 56 I 58112 58%
52'12
I I 5050'/.
47'/.44'12 43%
37%
25lQ 2Q 3Q 4Q lQ 2Q 3Q 4Q
1987 1988
•indicates closing price al end of quarter
Indicates closing price at end or yenr
PRICE RANGE OF COMMON STOCK
ANNUAL
o
25
50
$75
88
70';'
87
59%
37%
86
($)
571'.
30'1.
22'1.
85
32'/0
24%
84
IS';'
I ..., ommon ,Io,k of the Company i",..ded on the New~ York Stock Exchange, the Pacific Stock Exchange,'---- the London Stock Exchange and the Frankfurter
Borse. The high, low and end-of-period annual and quarterlyclosing prices of the Company's stock as reported on theNew York Stock Exchange Composite Transaction ReportingSystem are presented in the graphs. The number of holdersof record of the Company's common stock was 28,189 as ofJanuary 31, 1989.
Common dividends declared per share totaled $2.45 in1988, $1.67 in 1987 and $1.41 in 1986. In the second quarterofl988, the common stock quarterly dividend was increasedfrom $.50 per share to $.60 per share and, in the fourth quarter, it was increased to $.75 per share. The Company intendsto continue its present policy of paying quarterly cash dividends to stockholders. Future dividends will be determined bythe Company's Board of Directors in light of the earnings andfinancial condition of the Company.
In 1988, the Company repurchased 751,836 shares ofcommon stock. Additional repmchases will be made fromtime to time pmsuant to a Board of Directors authorizationthat allows shares to be repurchased in relation to the numberof shares issued or expected to be issued under variousbenefit plans and the Company's dividend reinvestment plan.Further repmchases of stock may be authorized from time totime for other corporate purposes.
I
in expenses relating to executive stock option plans, substantially due to a decrease in the market price of the Company'scommon stock. Net costs related to ORE of $37.4 million in1987 were relatively unchanged compared with 1986, reflecting an increase in costs related to the operation of ORE,mostly offset by an increase in gains on sales of ORE.
If it were not for net-of-tax accounting, the Company's 1987effective income tax rate would have been 43%, and the 1986rate would have been 42%.
The provision for loan losses in 1987 was $892.0 million,including special additions totaling $589 million that weremade in connection with loans to developing countries. The1986 provision was $361. 7 million. During 1987, domesticnet charge-off's were $247.0 million, compared with$253.1 million during 1986. As a percentage of domesticaverage loans outstanding, domestic net charge-off's were.72% in 1987 and .89% in 1986. The decrease was primarilydue to a lower ratio of net charge-offs to average commercialloans in 1987. Foreign net charge-offs were $16.5 million in1987, compared with $25.9 million in 1986. The allowancefor loan losses at the end of 1987 increased to $1.4 billion,or 3.69% oftotalloans, compared with $734.0 million, or2.00% of total loans, at the end ofl986.
Total nonaccrualloans, restructured loans and ORE were$1,589.1 million, or 4.3% of total loans and ORE, at December 31, 1987, compared with $1,290.3 million, or 3.5%, atDecember 31, 1986. Domestic nonaccrualloans, restructmedloans and ORE were $877.7 million, or 2.5% of total domestic loans and ORE, at December 31, 1987, compared with$1,034.9 million, or 3.0%, at December 31, 1986. Commercial nonaccruals decreased 17%, mostly due to a net declinein agricultural- and energy-related nonaccrualloans. Thedecrease resulted from a combination of charge-offs, repayments and transfers to ORE. Real estate construction-relatednonaccruals decreased 49%, primarily due to repayments andtransfers to ORE, partially offset by additional loans placed onnonaccrual status during 1987. Foreign nonaccruals increasedto $711.4 million at year-end 1987, from $255.4 millionat year-end 1986, due mostly to the placement of certainBrazilian loans on nonaccrual status.
Reflecting the after-tax effect of the special additions tothe allowance, common stockholders' equity was 4.17% oftotal assets at December 31,1987, compared with 4.35% atDecember 31, 1986. Primary capital was 8.90% of totalassets at December 31, 1987, compared with 7.85% atDecember 31, 1986. Total capital was 14.01% of total assets,compared with 13.47% at the end ofl986. The primaryand total capital increases were primarily due to the specialadditions. The increase in total capital was partially offset by adecrease in subordinated debt.
Although average commercial loans increased in 1987compared with 1986, the 1987 year-end balance of $12.4 billion decreased by $.8 billion from year-end 1986. The declinereflected the sale of $395 million of Wells Fargo BusinessCredit's commercial loans in July 1987. Also, consumer loansof $7.1 billion at year-end 1987 decreased by $.7 billionfrom year-end 1986, primarily due to a decline in monthlypayment loans.
Core deposits averaged $29.7 billion in 1987, a 19%increase compared with 1986, primarily due to an increase insavings accounts. (A schedule of average loan and depositbalances for 1987 and 1986 is shown in Table 3.)
Investment securities averaged $3.2 billion in 1987, asubstantial increase from $1.2 billion in 1986. Most of theincrease was the result of purchases of Government NationalMortgage Association securities.
In 1987, other short-term borrowings averaged $5.2 billion, an 80% increase over 1986. These additional borrowingswere used to fund an increase in long-term earning assets.
Noninterest income was $600.0 million in 1987, comparedwith $574.8 million in 1986. Trust and investment servicesincome increased 74% to $156.5 million in 1987, primarilydue to fees generated by the personal trust business acquiredfrom Bank of America on April 1, 1987. A significant portionof the growth was also due to additional funds invested by newand existing customers and higher stock prices during muchof the year, as fees are generally based on the value of assetsmanaged. In 1987, domestic fees and commissions increased17% to $270.8 million, mostly due to increases in credit cardmerchant fees, letter of credit fees and loan syndication fees.Investment securities losses were $12.9 million in 1987, compared with gains of $29.4 million in 1986. The 1987 lossesresulted from a write-down of certain preferred stock and the1986 gains primarily resulted from sales of U.S. Treasurysecurities. If it were not for the net-of-tax accounting related toCrocker, 1986 investment securities gains would have been$41.2 million; 1987 and 1986 "all other" income would havebeen $6.0 million and $19.5 million, respectively. The 1987decrease in "all other" income l"eflected a decline in salesproceeds in excess of equipment lease residual values.
Noninterest expense was $1.5 billion in 1987, a 16%increase over 1986. Salaries expense increased 14% in 1987,reflecting the additional personnel resulting from the May 30,1986 acquisition of Crocker. The Company's full-time equivalent staff, including hourly employees, was approximately20,100 at December 31, 1987, compared with approximately22,100 at December 31, 1986 and approximately 14,200 atMarch 31, 1986. The additional personnel from the Crockeracquisition also increased employee benefits expense. However, employee benefits expense only increased 2% in 1987,as the increase due to Crocker was mostly offset by a decrease
20
·
CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED BALANCE SHEET
WELLS FARGO & COMPANY AND SUBSIDIARIES WELLS FARGO & COMPANY AND SUBSIDIARIES
(in millions) Year ended December 31, (in millions) December 31,
1988 1987 1986 1988 1987
ASSETS
Cash and due from banks $ 2,563.2 $ 1,954.4INTEREST INCOME Interest-earning deposits 322.1 365.3Loans $3,882.8 $3,606.8 $3,191.7 Investment securities (market value $3,799.8 and $3,414.4) 3,970.4 3,555.3Interest-earning deposits 10.2 99.4 84.1 Trading account securities - 46.3Investment securities: Federal funds sold 27.0 .1
Taxable 264.7 246.7 84.3Loans
Exempt from federal income taxes 4.0 4.1 4.5 37,670.0 36,791.1
Trading account securities 3.8 7.6 12.4Allowance for loan losses 752.1 1,357.2
Federal funds sold 5.3 7.7 13.3 Net loans 36,917.9 35,433.9
Total interest income 4,170.8 3,972.3 3,390.3 Premises and equipment, net 688.0 706.0
INTEREST EXPENSEDue from customers on acceptances 244.9 235.8
Deposits 1,560.3 1,463.5 1,358.8Goodwill 373.4 397.0
Short-term borrowings 370.2 364.8 187.9Accrued interest receivable 365.7 316.0
Senior and subordinated debt 274.9 337.6 373.2Other assets 1,143.9 1,173.2
Total interest expense 2,205.4 2,165.9 1,919.9Total assets $46,616.5 $44,183.3
Amortized gain (loss) on interest rate hedging 6.7 (4.8) 23.3 LIABILITIES AND STOCKHOLDERS' EQUITY
NET INTEREST INCOME 1,972.1 1,801.6 1,493.7 Deposits:
Provision for loan losses 300.0 892.0 361.7 I Noninterest-bearing-domestic $ 7,105.5 $ 6,321.4
Net interest income after provision for loan losses 1,672.1 909.6 1,132.0II Noninterest-bearing-foreign 7.0 8.6
22 Interest-bearing-domestic 26,580.3 24,524.5 23NONINTEREST INCOME Interest-bearing- foreign 1,376.0 1,465.3Domestic fees and commissions 278.2 270.8 232.1Service charges on deposit accounts 219.6 180.6 153.0
Total deposits 35,068.8 32,319.8
Trust and investment services income 153.7 156.5 90.1 Short-term borrowings:. Investment securities gains (losses) (4.3) (12.9) 29.4 Federal funds borrowed and repurchase agreements 2,207.2 1,763.3Other 35.0 5.0 70.2 Commercial paper outstanding 2,747.7 2,915.5
Total noninterest income 682.2 600.0 574.8Other 47.4 69.1;
NONINTEREST EXPENSETotal short-term borrowings 5,002.3 4,747.9
Salaries 619.8 599.3 526.0 Acceptances outstanding 244.9 237.0Employee benefits 152.4 151.5 148.1 Accrued interest payable HO.l 132.7Net occupancy 166.8 178.7 143.7 Senior debt 923.0 1,574.0Equipment 135.8 132.9 108.0 Other liabilities 693.9 674.6Other 444.3 458.1 389.4 42,043.0 39,686.0
Total noninterest expense 1,519.1 1,520.5 1,315.2 Subordinated debt 1,994.1 2,249.7
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 835.2 (10.9) 391.6 Total liabilities 44,037.1 41,935.7Income tax expense (benefit) 322.7 (61.7) 118.1 Stockholders' equity:
NET INCOME $ 512.5 $ 50.8 $ 273.5 Preferred stock 405.0 405.0
NET INCOME APPLICABLE TO COMMON STOCK $ 486.7 $ 28.0 $ 255.7Common stock-$5 par value, authorized 150,000,000 shares;
issued and outstanding 52,546,310 shares and 52,756,692 shares 262.7 263.8PER COMMON SHARE Additional paid-in capital 389.7 415.0Net income $ 9.20 $ .52 $ 5.03 Retained earnings 1,528.2 1,171.0
Dividends declared $ 2.45 $ 1.67 $ 1.41Cumulative foreign currency translation adjustments (6.2) (7.2)
Average common shares outstanding 52.9 53.8 50.9Total stockholders' equity 2,579.4 2,247.6
Total liabilities and stockholders' equity $46,616.5 $44,183.3
The accompanying notes arc an integral part of these statements. The accompanying notes are an integral part of these statements.
.
5
-
CONSOLIDATED STATEMENT OF CHANGES INSTOCKHOLDERS' EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS,
WELLS FARGO & COMPANY AND SUBSIDIARIES WELLS FARGO & COMPANY AND SUBSIDIARIES
(in millions) Preferred Common Additional Retained Foreign Total (in millions) Year ended December 31, 1988stock stock paid-in earnings currency stockholders'
capital translation equityCash flows from operating activities:
Net income $ 512.5
BALANCE DECEMBER 31, 1985 $150.0 $105.7 $158.2 $1,051.0 $(6.9) $1,458.0Adjustments to reconcile net income to net cash provided by operating activities:
Net income-1986 273.5 273.5Depreciation and amortization 142.7Provision for loan losses
Preferred stock issued, net of300.0
Provision for deferred taxes 166.5issuance costs 255.0 (4.7) 250.3 Net decrease in trading account securities
Common stock issued in public46.3
Net increase in accrued interest receivable (40.7)offerings 26.7 405.0 431.7 Net decrease in accrued interest payable
Common stock issued under employee(26.2)
benefit and dividend reinvestmentOther, net 24.9
plans 1.4 18.2 19.6Net cash provided by operating activities 1,126.0
Exercise of warrants and conversion Cash flows from investing activities:
of convertible notes .3 1.3 1.6 Proceeds from sales and collections of investment securities 1,303.5Foreign currency translation adjustments Purchase of investment securities (1,583.7)
(net of income tax expense of $.1) .1 .1 Principal collections and sales ofloans (excluding credit card) 60,931.92-for-l common stock split 134.2 (134.2) - Loans (excluding credit card) made to customers (61,975.3)
Preferred stock dividends (17.8) (17.8) Net decrease in credit card loans 78.9Common stock dividends (74.3) (74.3) Cash and cash equivalents acquired from purchase of Barclays, net of cash paid 115.8
Net change 255.0 162.6 285.6 181.4 .1 884.7Other, net (135.0)
BALANCE DECEMBER 31, 1986 405.0 268.3 443.8 1,232.4 (6.8) 2,342.7Net cash used by investing activities (1,264.4)
Net income-1987 50.8 50.8Cash flows from financing activities:
24 Net increase in noninterest-bearing deposits, interest-bearing checking accounts,Common stock issued under employee 2
benefit and dividend reinvestmentsavings accounts and foreign interest-bearing deposits 880.1
plans 2.3 19.4 21.7Proceeds from other deposits 9,568.5
Exercise of warrants and conversionPayments for other deposits (8,812.1)
i Net increase in short-term borrowingsof convertible notes .2 .4- .6 221.0
Common stock repurchased (7.0) (48.6) (55.6)Repayment of senior and subordinated debt (877.9)
Preferred stock dividends (22.8) (22.8)Issuance of common stock 23.5
I Repurchase of common stockCommon stock dividends (89.4) (89.4) (49.9)
Foreign currency translation adjustmentsCash dividends paid (141.5)
(net of income tax benefit of $.3) (.4) (.4)Other, net (80.8)
Net change - (4.5) (28.8) (61.4) (.4) (95.1)Net cash provided by financing activities 730.9
BALANCE DECEMBER 31, 1987 405.0 263.8 415.0 1,171.0 (7.2) 2,247.6Net change in cash and cash equivalents 592.5
Net income-1988 512.5 512.5Cash and cash equivalents at beginning of year (1) 2,319.8
Common stock issued under employee Cash and cash equivalents at end of year (1) $ 2,912.3
benefit and dividend reinvestmentplans 2.4 20.3 22.7 Supplemental disclosures of cash flow information:
Exercise of warrants .3 .5 .8 Cash paid during the year for:
Foreign currency translation adjustments Interest, net of amount capitalized $ 2,231.6(net of income tax expense of $.4) 1.0 1.0 Income taxes $ 217.2
Common stock repurchased (3.8) (46.1) (49.9)Preferred stock dividends (25.8) (25.8) In connection with the acquisition of Barclays:
Common stock dividends (129.5) (129.5) Fair value of assets acquired $ 1,317.6
Net change - (1.1) (25.3) 357.2 1.0 331.8Cash paid (125.7)
BALANCE DECEMBER 31, 1988 $405.0 $262.7 $389.7 $1,528.2 $(6.2) $2,579.4Fair value of liabilities assumed $ 1,191.9
--- --- ---The accompanying notes are an integral part of these statements.
(1) Cash and cash equivalents consist of cash and due from banks, interest-earning deposits and federal funds sold.
The accompanying notes are an integral part of these statements.
--
CONSOLIDATED STATEMENT OF CHANGES INFINANCIAL POSITION
WELLS FARGO & COMPANY AND SUBSIDIARIES
,...NOTES TO FINANCIAL STATEMENTS
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOT E
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Year ended December 31,(in millions)
1987 1986 r.J
1
26
Financial resources provided by (applied to):
Operations:Net incomeNoncash charges (credits):
Provision for loan lossesDepreciation and amortization
Provision for deferred taxes
Financial resources provided by operations
Cash dividends declared
Net financial resources provided by operations
Deposits and other financing activities:Noninterest-bearing depositsInterest-bearing depositsShort-term borrowingsSenior and subordinated debtPreferred stock issued, net of issuance costsCommon stock issued in public offeringsCommon stock issued under employee benefit and dividend
reinvestment plansExercise of warrants and conversion of convertible notes
Common stock repurchased
Financial resources provided by (applied to) deposits and
other financing activities
Other activities:Cash and due from banksNet additions to premises and equipmentNet change in goodwill
Other assetsOther liabilitiesOther, net
Financial resources provided by (applied to) other activities
Increase in financial resources invested in earning assets
Increase (decrease) in earning assets:Interest-earning depositsInvestment securitiesTrading account securitiesFederal funds soldNet loans
Increase in earning assets
The accompanying notes are an integral part of these statements.
$ 50.8 $ 273.5
892.0 361.7113.2 84.9
(329.6) 17.8
726.4 737.9(112.2) (92.1)
614.2 645.8
(1,711.4) 4,339.31,038.4 9,152.21,211.8 190.9
(587.8) 225.3
- 250.3
- 431.7
21.7 19.6.6 1.6
(55.6) -
(82.3) 14,610.9
1,008.0 (1,560.2)(128.5) (295.8)
78.9 (496.4)(272.3) (424.0)
87.6 343.75.2 (93.7)
778.9 (2,526.4)
$1,310.8 $12,730.3
$ 93.9 $ (263.1)1,010.3 848.9
(71.8) (28.5)(10.4) (29.1)
288.8 12,202.1
$1,310.8 $12,730.3
"
-
he accounting and reporting policies of Wells Fargo &Company and Subsidiaries (Company) conform with gen-
_ ..... erally accepted accounting principles and prevailingpractices within the banking industry. Certain amounts in thefinancial statements for prior years have been reclassified toconform with the current financial statement presentation.The following is a description of the more significant policies.
CONSOLIDATION
The consolidated financial statements of the Company includethe accounts of Wells Fargo & Company (Parent), Wells FargoBank, N.A. (Bank) and the nonbank subsidiaries of the Parent.
On May 30,1986, the Company acquired CrockerNational Corporation (Crocker). The acquisition was a business combination accounted for as a purchase transaction.Accordingly, the consolidated financial statements includeCrocker's results of operations beginning June 1,1986, andCrocker's assets and liabilities at the time of acquisition wererevalued to fair value, net of the related tax effects.
Foreign branches and significant majority-owned subsidiaries are consolidated on a line-by-line basis. Significantintercompany accounts and transactions are eliminated inconsolidation. Other subsidiaries and affiliates in which thereis at least 20% ownership are generally accounted for by theequity method and investments where there is less than 20%ownership are carried at cost. These investments are reportedin other assets; related income, including disposition gainsand losses, is included in noninterest income.
SECURITIES
Trading account securities are carried at market value.Realized and unrealized gains or losses are reported in noninterest income.
Debt securities held for investment purposes are carried atcost, adjusted for amortization of premium and accretion ofdiscount. Gains and losses on the sale of investment securitiesare reported using the identified certificate method. Marketable equity securities held for investment purposes are carriedat cost. Declines in value that are considered other than temporary are recorded as losses on investment securities.
Nonmarketable securities acquired for various reasons,such as troubled debt restructurings, are included inother assets.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulateddepreciation and amortization. Capital leases are included inpremises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization are computed primarilyusing the straight-line method. Estimated useful lives range upto 40 years for buildings, 3-10 years for furniture and equipment and up to the lease term for leasehold impmvements.Capitalized leased assets are amortized on a straight-line basisover the lives of the respective leases, which generally rangefrom 20-35 years.
LOANS
Loans are reported at the principal amount outstanding, net ofunearned income. Unearned income, which includes deferredfees net of deferred direct incremental loan origination costs,is amortized to interest income generally over the contractuallife of the loan using an interest method or the straight-linemethod if it is not materially different.
NONACCRUAL LOANS
Unless both well secured and in the process of collection,loans, other than consumer loans for which no portion of theprincipal has been charged off, are placed on nonaccrual status when a loan becomes 90 days past due as to interest orprincipal, when the full timely collection of interest or principal becomes uncertain or when a portion of the principalbalance has been charged off. Real estate 1-4 family loansoriginated in the Company's consumer lending units areplaced on nonaccrual status when they become 180 days pastdue as to interest or principal, regardless of security. When aloan is placed on nonaccrual status, the accrued and unpaidinterest receivable is reversed and the loan is accounted for onthe cash or cost recovery method thereafter, until qualifying
for return to accrual status.
27
,...
NOT E
2
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ADOPTED IN 1988
RESTRUCTURED LOANS
In cases where a borrower experiences financial difficultiesand the Company makes certain concessionary modificationsto contractual terms, the loan is classified as a restructuredloan. If the borrower's ability to meet the revised pay-ment schedule is uncertain, the loan is classified as a non
accrual loan.
ALLOWANCE FOR LOAN LOSSES
The Company's determination of the level of the allowance forloan losses rests upon various judgments and assumptions,including, but not necessarily limited to, general economicconditions, loan portfolio composition and prior loan lossexperience. The Company considers the allowance for loanlosses adequate to cover losses inherent in loans, commercialand real estate loan commitments and standby letters ofcredit outstanding.
OTHER REAL ESTATE
Net deferred income taxes receivable (payable), includedin other assets (liabilities), result from certain items beingaccounted for in different time periods for financial reportingpurposes than for income tax purposes.
INTEREST RATE FUTURES
The Company hedges primarily to reduce mismatches in therate maturity of certain loans and their funding sourcesthrough the use of interest rate futures. Gains and losses onthese futures contracts are deferred and amortized over theexpected loan or funding source holding period. This amortization is included in a separate component of net interestincome, amortized gain or loss on interest rate hedging. Futurescontracts obtained for hedging assets in the trading portfolioare marked to market and gains and losses are included innoninterest income.
NET INCOME PER COMMON SHARE
I,
I
FAS 91
Effective January 1, 1988, the Company adopted Statement ofFinancial Accounting Standards No. 91 (FAS 91), Accountingfor Nonrefundable Fees and Costs Associated with Originatingor Acquiring Loans and Initial Direct Costs of Leases. FAS 91,which was applied only to transactions entered into after January 1, 1988, requires the deferral and amortization of certainfees and direct incremental loan origination costs. The adoption of FAS 91 did not have a material effect on net income, ascompared with net income that would have been recognizedunder accounting policies in effect prior to FAS 91.
FAS 91 also specifies whether certain fee income should beclassified as part of interest income or noninterest income'. Toenhance the comparability of the 1988, 1987 and 1986 consolidated statement of income, amounts previously recordedin 1987 and 1986 as interest income on loans ($129.7 millionand $1l5.2 million for 1987 and 1986, respectively) were
reclassified to domestic fees and commissions. The reclassification had no impact on 1987 or 1986 net income.
FAS 95
For the year ended December 31, 1988, the Companyadopted Statement of Financial Accounting Standards No. 95(FAS 95), Statement of Cash Flows. This new financial statement categorizes cash flows by activity (operating, investing,financing); primarily focuses on gross cash flows; and replacesthe statement of changes in financial position, which focusedon sources and uses of financial resources and the net changein the balance sheet amounts. As permitted by FAS 95, theCompany has presented a statement of cash flows for 1988and a statement of changes in fmancial position for 1987 and1986.
28
Other real estate, consisting of real estate acquired as a resultof troubled debt restructurings and excess real estate, is carried at the lower of cost or fair value and is included in otherassets. When the property is acquired, any excess of the loanbalance over fair value of the property is charged to the allowance for loan losses. Subsequent write-downs, if any, and disposition gains and losses are included in noninterest expense.
GOODWILL
Net income per common share is computed by dividing netincome (after deducting dividends on preferred stock) by theaverage number of common shares outstanding during theyear. The impact of common stock equivalents and otherpotentially dilutive securities is not material. NOT E
3
CASH, LOAN AND DIVIDEND RESTRICTIONS
29
Goodwill, representing the excess of purchase price over thefair value of net assets acquired, results from acquisitionsmade by the Company. Substantially all of the Company'sgoodwill is being amortized using the straight-line methodover 20 years.
INCOME TAXES
The Company files a consolidated federal income tax return.Consolidated or combined state tax returns are filed in certainstates, including California. Income taxes are generally allocated to individual subsidiaries as if each had filed a separatereturn. Payments are made to the Parent by those subsidiarieswith net tax liabilities on a separate return basis. Subsidiarieswith net tax losses and excess tax credits receive payment forthese benefits from the Parent.
I
I
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i!
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Federal Reserve Board regulations require reserve balanceson deposits to be maintained by the Bank with a FederalReserve Bank. The average required reserve balance was
approximately $1.1 billion in both 1988 and 1987.The Bank is subject to certain restrictions under the Fed
eral Reserve Act, including restrictions on any extension ofcredit to its affiliates. In particular, the Bank is prohibitedfrom lending to the Parent and its nonbank subsidiaries unlessthe loans are secured by specified collateral. Such securedloans and other regulated investments made by tne Bank arelimited in amount as to the Parent or to any of its nonbanksubsidiaries to 10% of the Bank's capital and surplus (asdefined) and, in the aggregate to all such entities, to 20% ofthe Bank's capital and surplus. The Bank's capital and surplusat December 31, 1988 was $3.0 billion.
Dividends payable by the Bank to the Parent without theexpress approval of the Office of the Comptroller of the Currency are limited to the Bank's net profits (as defined) for thepreceding two years plus net profits up to the date of any dividend declaration. Under this formula, the Bank can declaredividends in 1989 of approximately $310 million of itsundistributed net profits at December 31, 1988 plus undistributed net profits for 1989 up to the date of any such dividend declaration. Dividends declared by the Bank to the
Parent in 1988 were $169.1 million.
-~-----------
INVESTMENT SECURITIES
NOT E
nLOANS AND ALLOWANCE FOR LOAN LOSSES
The following table provides the major components of investment securities and a comparison of book and market values: The following is a summary of the major categories of the loanportfolio at the end of the last two years:
Changes in the allowance for loan losses were as follows:
(in millions) December 31,
1988 1987 1986
Book volue Morket volue Book value Market value Book value Market value
U.S. Treasury securities :$ 858.4 $ 829.0 $ 861.0 $ 846.7 $ 673.4 $ 682.4Securities of other U.S. government agencies and Corporations 2,487.5 2,357.7 1,967.8 1,856.6 1,248.2 1,256.2Obligations of states and political subdivisions 73.5 67.7 92.5 81.4 119.0 112.0Other bonds, notes and debentures 61.5 61.9 132.9 132.6 32.5 33.9Corporate and Federal Reserve Bank stock 489.5 483.5 501.1 497.1 471.9 465.8
--- --- --- --- --- ---'Iotal investment securities $3,970.4 $3,799.8 $3,555.3 $3,414.4 $2,545.0 $2,550.3
.~--- --- = --- = ---L
Vear ended December 31,
(1) Net of recoverie. of$84.8 million, $73.5 million and $56.4 million in 1988, 1987and 1986, respectively.
30
The market value of U.S. n'easury securities, securities ofother U.S. government agencies and corporations and certainother securities is determined based on current quotations.The market value of obligations of states and political subdivisions is determined based on current quotations, whereavailable. Where current quotations are not available, marketvalue is determined based on the present value of future cashflows, adjusted for the quality rating of the securities andother factors.
Dividend income of $25.3 million, $29.2 million and$25.7 million in 1988, 1987 and 1986, respectively, isincluded in taxable income on investment securities in the
consolidated statement of income.The book value of investment securities pledged to
secure trust and public deposits and for other purposes asrequiTed or permitted by law was $684 million, $1,603 million and $224 million at December 31, 1988, 1987 and1986, respectively.
IL
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(in millions) December 31,
1988 1987
DOMESTIC
Commercial, financial and agricultural $13,126.3 $12,430.7
Real estate construction-related 7,033.1 6,514.5
Real estate first mortgage loans securedby 1-4 family residential properties 5,133.9 4,647.4
Other real eslate mortgage loans 2,895.5 2,644.0
Total real estate mortgage loans 8,029.4 . 7,291.4
Credil card 2,105.4 2,020.1Other revolving Credit 619.7 656.2Monthly payment 1,369.2 1,371.8Real estate junior lien mortgage
loans secured by 1-4 familyresidential properties 3,417.4 3,048.2
Total consumer 7,511.7 7,096.3
Lease financing 1,374.2 1,335.3
FOREIGN
Governments and official institutions 202.0 1,172.8Banks and other financial institutions 73.8 230.9Commercial and industrial (1) 319.5 719.2
Total foreign 595.3 2,122.9
lotalloans (net of unearned
income of $465.9 and $430.2) $37,670.0 $36,791.1
(1) Includes commercial enterprises thal arc majority.owned by cenLTal governments.
Certain directors and executive officers of the Company,certain entities to which they are related and certain of theirrelatives were loan customers of the Company during 1988and 1987. Substantially all such loans were made in the ordinary course of business on normal credit terms, includinginterest rate and collateralization, and none represent morethan a normal risk of collection. Such loans were $202.4 million at December 31, 1988 and $203.3 million at December31, 1987. During 1988, additional loans of$120.1 millionwere made and payments of $121.0 million were received.
Credit card merchant fees (including interchange fees)represented the largest component of domestic fees andcommissions and amounted to $65.4 million, $64.5 millionand $56.0 million in 1988, 1987 and 1986, respectively.
(in millions)
Balance, beginning of year
Barclays' allowance at acquisition date
Crocker's allowance al acquisition date
Provision for loan losses
Net loan charge-offs:
Commercial, financial and agriculturalReal eslate construction-related
Real estate 1-4 family fLrst
mortgage loansOther real estate mortgage loans
Tolal real eslale mortgage loans
Credit card
Other revolving creditMonthly payment
Real estate 1-4 family junior lienmortgage loans
Tolal consumer
Lease financing
Total domestic net loan charge-offs
Foreign
Total nel loan charge-offs (1)
Losses on the sale Or swap ofdeveloping country loans
Other deductions
Balance, end of year
Domestic net loan charge-offs as a
percentage of average domestic loans
Total nel loan charge-offs as a
percentage of average total loans
Allowance as a percentage oflotalloans
1988
$1,357.2
14.7
300.0
67.525.5
1.32.9
4.2
76.27.76.5
2.9
93.3
6.0
196.5102.5
299.0
620.8
$ 752.1
.55%
.80%
2.00%
1987
$ 734.0
892.0
104.911.4
1.25.3
6.5
90.110.612.0
4.0
116.7
7.5
247.016.5
263.5
5.3
31,357.2
.72%
.73%
3.69%
1986
$417.5
241.7
361.7
115.63.9
1.111.2
12.3
88.98.1
11.4
1.2
109.6
11.7
253.125.9
279.0
7.9
$734.0
.89%
.91%
2.00%
3
-~---------~ ..Jj --- --------
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"I
NOT E
I 71
SENIOR AND SUBORDINATED DEBT
NOT E
6
(in millions) Year ended December 31,--------
]988 1987 1986
DOMEST]C
Interestlhat would have been recorded
under original terms $60.3 $ 60.4 $83.0 ~
Gross interest recorded 7.4 13.9 16.4-- --- --
Total domestic foregone interest 52.9 46.5 66.6-- --- --
1<'OREIGN
Interest that would have been recorded
under original terms 53.0 69.5 19.2
Gross interest recorded (J) 9.3 11.2 5.5-- --- --
Total foreign foregone interest 43.7 58.3 13.7-- --- --
Total foregone interest $96.6 $104.8 $80.3-- =
The following is a summary of the major categories of senior and subordinated debt (reflecting unamortized debt discount andpremium where applicable). Notes to the summary are on the next page.
$ 61.8 $ 65.0- 100.0- 99.4
100.0 100.099.9 99.999.6 99.4
- 67.064.2 64.2
215.2 425.6
- 159.14.5 6.6
645.2 1,286.2---
45.3 50.453.9 53.886.0 88.6
4.1 5.5
189.3 198.3---
6.433
-82.1 89.5
88.5 89.5
923.0 1,574.0---
1987
December 31,
1988
SENIOR
Intermediate-term (original malurities from 1-12 years)Parent:
16'/8% New Zealand Dollar Notes due 1989 (NZ $100.0 face amount) (I)12.30% Noles due 1990 (2)14'h% Notes due 1991 (2)8% Notes due 1993 (2)8% Notes due July 15,1993 ($100.0 face amount) (3)9'h% Notes due 1993 ($100.0 face amount) (2)Floating Rale Extendable Notes due 1988Floating Ralc Extendable Notes due 1992 (4)6.875% 10 12.05% Medium-Term Notes due 1988 through 1996
Subsidiaries:Zero Coupon Notes due 1988Other noles
Total intermediate-term senior debt
Long-term (original maturities of more than 12 years)Parent:
8%% Debentures due 1997 ($45.0 face amount) (5)8.60% Debentures due 2002 ($54.4 face amount) (5)Other notes
Noles payable by subsidiaries
TOlallong-term senior debt
Obligations under capilalleases (Note 14):ParentSubsidiaries
Total obligations under capital leases
Total senior debt
SUBORDINATED
(in millions)
I
I
l
(1) Does nol include interest received in ]988 and ]987 of$49 mimon and $10 million,respectively, on medium- and long-term Brazilian loans. (The 1988 amounl includedinterest earned in 1987.) Such interest was recognized in ]988 as a reduction of
the loss on sale of loans, which is charged Dgainsllhe aUowance for lonn losses. or
applied aguinst principal.
If interest due on all nonaccrual and restructured loanshad been accrued at the original contract rates, it is estimatedthat income before income taxes would have been greater bythe amounts shown in the following table:
(1) In ]988, Ihe Camllony charged off thase loons to developing countries Ihut werecovered by allocated transfer risk reserves.
Domestic nonaccrual and restructured loans were$589.7 million and $560.4 million at December 31, 1988and 1987, respectively. Foreign nonaccrualloans were$103.6 million and $711.4 million at year-end 1988 and1987, respectively. Related commitments to lend additionalfunds at December 31,1988 were approximately $104 millionfor domestic nonaccrual and restructured loans and approximately $54 million for foreign nonaccrualloans.
(in millions) Year ended December 31,
1988 1987 1986
Balance, beginning of year $65.9 $55.4 $27.6
Provision 17.3 10.5 27.8
Charge-ofIs (I) 77.8 - -
Losses on the sale or swap of
developing country loans 5.4 - --- -- --Balance, end of year $ - $65.9 $55.4-- -- --
Changes in allocated transfer risk reserves, which areincluded in the allowance for loan losses, were as follows:
32
PREMISES AND EQUIPMENT
The following table presents comparative data for premisesand equipment:
(in mimons)
Land
Buildings
Furniture and equipment
Leasehold improvements
Premises leased under capital leases
Total
Less accumulated depreciation
and amortization
Ne hook value
December 3],-- --- ---
1988 1987
$ 48.1 $ 39.9301.6 352.1473.9 515.1210.0 179.5121.1 121.7
--- ---1,154.7 1,208.3
466.7 502.3--- ---$ 688.0 $ 706.0--- ---
Depreciation and amortization expense was $104.9 million, $90.8 million and $71.9 million for the years endedDecember 31, 1988, 1987 and 1986, respectively.
Intermediate-term (original maturilies from 1-12 years)Parent:
12%% Notes due 1991 ($101.0 face amount) (3) (6)127/0% Notes due 1991 (2) (3)13%% Notes due 1991 ($100.0 face amount) (3) (6)13.50% Notes due 1991 (2)8'.4% Noles due 1996 (2)Floating Rate Notes due 1992 (2) (6)Floating Rate Notes due 1994 (U.K. pounds sterling denominated £60.0 face amount) (2) (6) (7)Floating Rate Notes due 1994 (2) (6)Deutsche Mark Floating Rate Notes due 1995 (OM 300.0) (6) (8)Floating Rate Notes due 1996 ($100.0 face amount) (2) (9)Floating Rate Capital Notes due 1996 (2) (IO)
Floating Rate Notes due 1997 (2) (6)Floating Rate Notes due June 1997 ($100.0 face amount) (2) (11)Floating Rale Notes due July 1997 (2) (6) (II)
Floating Rate Capital Notes due 1997 (2) (6) (10)Floating Rate Capital Notes due 1998 (2) (6) (10)
Subsidiaries:Floating Rate Notes due 1996 (2)
Total intermediate-term subordinated debt
Long-term (original maturities of more than 12 years)Parent:
Floating Rate Notes due 2000 (2) (6)Notes payable by subsidiaries
1btallong-term subordinated debt
Total subordinated debt
Total senior and subordinated debt
102.4 102.9100.0 99.999.9 99.8
- 150.0100.0 100.0116.2 121.5108.5 113.2
99.7 106.7169.1 191.199.6 99.6
150.0 149.9187.0 192.099.9 99.9
100.0 100.0100.0 100.0200.0 200.0
- 50.0---1,832.3 2,076.5
118.0 128.143.8 45.1
161.8 173.2
1,994.1 2,249.7
$2,917.1 $3,823.7=-
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NOT E
8
PREFERRED STOCK
The principal payments, including sinking fund payments, on senior and subordinated debt are due as follows:
1989 1990 1991 1992 1993 Thereafter Tolal(in millions)
$167.3 $90.8 $335.0 $187.7 $310.0 $1.602.3 $2.693.1Parent
194.8 316.0 1,658.5 2,827.6218.3 97.9 342.134 Company
1 The Company has ~ntercd into a swap agreement whereby the Company receives New Zealand dollars sufficient to cover interest and principal ~n. the Notes and ~~kes payments in
( ) U.S. dollars covering inleresl and principal. The transaclion amount at thc dale of issue and swap was $58.3 million. The differenccs of $3.5 mill,on and $6.7 mIllion .1 Decembcr
31,1988 and ]987, respectively, were substantially clue to the foreign currency transaction adjustment.
(2) Initiall redcemablc in whole or in part,.t par, al various dates Ihrough March 1993. .. . .(3) The C:mpany has entered into an interest rate swap agreement whereby the Company receives flxed rate interest payments approxlluatcly equal 10 mlcrest 011 the NOles and makes
interest paymcnls based on a floating rale.
(4) Rcpayable in whole or in pari, al par. in 1989 allhe oplion oflhe holder.
(5) Assumed from Crockcr National Corporation. . . .(6) May be redeemed in whole, al par, at any lime in the event withholding taxes arc Imposed In the UllIted Statcs. .. . . .
(7) The Company has entered into a swap agreement whereby the Company receives pounds sterling sufficient to cover floaLlng .r~le II1leres'. and prinCipal on the ~~tC5 .and makes, . 'on
payments in U.S. dollars covering interest and principal. The transaction amount at the ~ate of. issue and swap \\IllS $74.0 million. The differences of 334.5 millIOn and $39.2 milli
at December 31,1988 und 1987. respectively, were due to the foreign currency transaction adjustment. ",. .
(8) Thcse notes are subject to 11 maximum interest rute of 8%. The Company has sold this interest rate cap under un agreement whereby It receives rued payments In ~eutsche ~arks
and makes puyments based on the amount by which a flouting rate exceeds 8%. The Company has also entered into a swap agreement \\'her~by the Company receIVes dC,~ls.che . 'I
marks approximate1y equal 10 interest and principal on the Notes and makes payments in U.S. dollars. The LranSU~lion amount at the d~te of I~slle and swap \'Ins $U 7.7 million. I Ie
differences of$51.4 million and $73.4 million al December 31.1988 and 1987, respectively, wcre due to the foreIgn currency transaclJon adjustment.
(9) Equity Commilment Notc•.
(10) Mandalory Equily Noles.(11) Subjecllo a muximum inlerest rule ofl3%.
The interest rates on floating rate notes are determinedperiodically by formulas based on certain money market rates,subject, in certain circumstances, to minimum or maximuminterest rates.
The Company's mandatory convertible debt, which is identified by notes (9) and (10) to the table on the preceding page,qualifies as primary capital, subject to certain regulatory limitations. The terms of the Equity Commitment Notes, whichtotaled $100 million (face amount) at December 31, 1988,require the Company to deposit proceeds from the issuance ofcapital securities into a note fund. The cumulative minimumproceeds to be deposited will be $67 million by 1992 and$100 million by 1996. As of December 31, 1988, $33 millionhad been deposited in a note fund and $33 million of stockholders' equity had been dedicated for future deposit to thenote fund. The terms of the Mandatory Equity Notes I'equirethe Company to sell or exchange with the noteholder theCompany's common stock, perpetual preferred stock or othercapital securities at maturity or earlier redemption of the notes.
Certain of the agreements under which debt has beenissued contain provisions that restrict the payment of dividends, the disposition of assets, the creation of property liensand the sale or merger of the Bank. The Company was in compliance with the provisions of the borrowing agreements atDecember 31, 1988.
I
At December 31,1988, 25,000,000 shares of preferred stockwere authorized and 4,501,800 shares were issued and outstanding as described below. All preferred shares rank seniorto common shares both as to dividends and liquidation preference but have no general voting rights.
ADJUSTABLE RATE CUMULATIVEPREFERRED STOCK. SERIES A
At December 31, 1988 and 1987, there were 3,000,000shares, or $150 million, of Series A preferred stock with aliquidation preference of $50 per share issued and outstanding. These shares are redeemable at the option of theCompany through March 31, 1993 at a redemption price of$51.50 per share and, thereafter, at $50.00 per share plusaccrued and unpaid dividends. Dividends are cumulative andpayable quarterly on March 31, June 30, September 30 andDecember 31 of each year. For each quarterly period, the dividend rate is 2.75% less than the highest of the three-monthTreasury bill discount rate, 10-year constant maturity Treasurysecurity yield or 20-year constant maturity Treasury bondyield, but limited to a minimum of 6% and a maximum of12% per annum. The average dividend rate was 6.4% during1988 and 6.3% during 1987 and 1986. Dividends of $9.6 million, $9.4 million and $9.5 million were declared in 1988,1987 and 1986, respectively.
ADJUSTABLE RATE CUMULATIVEPREFERRED STOCK, SERIES B
At December 31,1988 and 1987, there were 1,500,000shares, or $75 million, of Series B preferred stock with a liquidation preference of $50 per share issued and outstanding.These shares are redeemable at the option of the Companybetween May 15, 1991 and May 14,1996 at a redemptionprice of $51.50 per share and, thereafter, at $50.00 per shareplus accrued and unpaid dividends. Dividends are cumulativeand payable quarterly on February 15, May 15, August 15 andNovember 15 of each year. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasurybill discount rate, 10-year constant maturity Treasury securityyield or 20-year constant maturity Treasury bond yield, butlimited to a minimum of 5.5% and a maximum of 10.5% perannum. The average dividend rate was 6.9%, 6.4% and5.7% during 1988, 1987 and 1986, respectively. Dividends of$5.2 million, $4.8 million and $3.1 million were declared in1988,1987 and 1986, respectively.
MARKET AUCTION PREFERRED STOCK,SERIES I. II AND III
At December 31, 1988 and 1987, there were 1,800 shares, or$180 million, of this preferred stock with a liquidation preference of $100,000 per share issued and outstanding. Theseshares are redeemable at the option of the Company on dividend payment dates at a redemption price of $100,000 pershare plus accrued and unpaid dividends. Dividends arecumulative and payable every 49 days on specified dividendpayment dates. Rates are determined every 49 days by auction and will generally not be greater than 110% of the ''AA''Composite Commercial Paper Rate. The average dividendrate was 6.1%, 4.8% and 4.3% during 1988, 1987 and1986, respectively. Dividends of $11.0 million, $8.6 millionand $5.2 million were declared in 1988, 1987 and 1986,respectively.
35
~,...
I
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9
COMMON STOCK AND EMPLOYEE STOCK PLANS
I
Number of shares
Equity Inccntive Plan Othcr Plans
1988 1987 1988 1987
Options outstanding, beginning of year 1,067,320 910,760 29,044 65,318
Granted 333,000 444,773
Cancelled (10,330) (195,283)
Surrendered (10,020) (12,850)
Share withholding (2,694) (1,232)
Exercised (106,842) (80,080) (20,660) (36,274)
Options outstanding, end of year 1,270,434 1,067,320 7,152 29,044
Options exercisable, end of year 596,762 418,524 7,152 29,044
Shares available for grant, end of year 758,606 1,181,855
Price range of options:Outstanding $9.44-$54.50 $9.44-$55.38 $13.13 $13.13-$14.06
Surrendered or exercised $9.44-$55.38 $9.44-$33.50 $13.75-$14.06 $13.75-$14.06
COMMON STOCK
The following table summarizes common stock reserved andauthorized as of December 31, 1988:
Under the terms of mandatory convertible debt, theCompany must exchange with the noteholder, or sell, variouscapital securities of the Company as described in Note 7 to the
Financial Statements.In April 1987, the shareholders approved the Director
Option Plan. This plan allows participating directors to me anirrevocable election to receive stock options in lieu of theirretainer fees to be earned in the calendar year. The options
37
1987
130,146123,077(22,995)
(114,111)
116,117
1,385,138
Number of options
1988
116,117118,468(18,063)
(102,497)
114,025
1,284,733
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, employees of theCompany with at least one year of service, except executivevice presidents and above, are eligible to participate. The planprovides for an option price of the lower of market value atgrant date or 85% to 100% (as determined by the Board ofDirectors for each option period) of fair market value at theend of the option period, 12 months after the date of grant.For the current option period ending on July 31, 1989, theBoard approved a closing option price of 85% of fair marketvalue. The plan is noncompensatory and results in no expenseto the Company.
Transactions involving the Employee Stock Purchase Planare summarized as follows:
Options outstanding, beginning of yearGrantedCancelledExercised ($51.70 in 1988 and
$47.24 in 1987)
Options outstanding, end of year
Options available for grant, end of year
For information on other employee benefit stock ownershipplans, see Note 10.
The terms of options granted under the EIP and the OtherPlans originally provided that, when the option became exercisable, the optionee was allowed to surrender the option andreceive an appreciation payment based on the differencebetween the option price and the fair market value of the stockat date of surrender in the form of cash and common stock,provided that at least 50% of the appreciation payment be inshares of the Company's common stock based on the marketprice at date of surrender. Effective December 1987, for thoseoptionees who consented, the terms of the outstanding optionsgranted under the EIP and the Other Plans were modified sothat the optionee cannot surrender the option and receive anappreciation payment. As part of this change, all incentivestock options issued in 1987 were cancelled and new nonqualified options were issued under the EIP.
Effective January 1988, the terms of the EIP and the OtherPlans were modified to include a stock withholding feature toenable optionees to satisfy the minimum federal and state taxobligations arising from the exercise of nonqualified options.The holders of the options may elect to have the Companymake a cash payment directly in satisfaction of such tax withholding obligations in lieu of issuing shares.
Loans may be made, at the discretion of the Company, toassist the participants of the EIP and Other Plans in the acquisition of shares under options.
The holders of share rights that were issued in 1988 underthe EIP are entitled at no cost to 30% of the number of sharesof common stock represented by the share rights held threeyears after the share rights were granted, an additional 30%after four years and the final 40% after five years. The holdersof the share rights issued prior to 1988 are entitled at no costto the number of shares of common stock represented by theshare rights held by each person five years after the sharerights were granted. Upon receipt ofthe share rights, holdersare entitled to receive quarterly cash payments equal to thecash dividends that would be paid on the number of commonshares equal to the number of share rights. As of December31,1988, the EIP had 843,767 share rights outstanding to550 employees.
The amount of expense accrued for the EIP and OtherPlans was $.1 million, $13.0 million and $24.1 million in1988, 1987 and 1986, respectively. The lower 1988 expenseresulted from the modifications to the EIP and the OtherPlans discussed above.
OTHER PLANS
In conjunction with the adoption of the EIP in 1982, the StockOption Plan, Stock Option and Appreciation Plan and theRestricted Share Rights Plan (Other Plans) were amendedsuch that no additional awards or grants will be issued.
Transactions involving options of the EIP and Other Plansare summarized as follows:
EQUITY INCENTIVE PLAN
The Equity Incentive Plan (EIP) provides for the granting tokey employees of incentive stock options and nonqualifiedstock options as defined under current tax laws and restrictedshare rights. The options may be exercised for periods of upto 10 years from grant date, at the fair market value at time ofgrant. Options generally become fully exercisable three yearsfrom grant date. The total number of shares of common stockissuable under the EIP is 3,500,000 in the aggregate and700,000 in anyone calendar year.
EMPLOYEE STOCK PLANS
may be exercised for a period of 10 years from date of receipt;options become exercisable after one year at an exercise priceof $1.00 per share. At December 31, 1988, 1,476 optionswere outstanding under the plan.
2,894,1892,889,4721,752,2411,398,758
75,0006,3983,8793,273
9,023,21088,430,48052,546,310
150,000,000
Number of shares
Tax advantage planEquity incentive planDividend reinvestment planEmployee stock purchase planDirector option planStock bonus planStock option and appreciation planStock option plan
Total shares reservedShares not reservedShares issued and outstanding
Total shares authorized
36
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o NOT E
11
EMPLOYEE BENEFITSINCOME TAXES
1988
Amount %
$284.0 34.0%
59.5 7.1
(27.3) (3.3)(12.7) (1.5)
Current and deferred income tax provisions were as follows:
(in millions) Year ended December 31,
1988 1987 J986
Current:
Federal $108.2 $194.2 $ 51.6Slate and local 40.5 58.8 32.0Foreign 7.5 14.9 16.7
156.2 267.9 100.3
Deferred:Federal 115.9 (270.8) 18.2State and local 50.6 (58.8) (1.0)Foreign .6---
166.5 (329.6) 17.8--Tolal $322.7 $ (61.7) $U8.1
The Company's income tax provisions for 1988,1987 and1986 included $(1.8) million, $(5.1) million and $8.9 million,respectively, related to investment securities transactions.
The Company had deferred tax assets of $41.7 million and$183.6 million at December 31, 1988 and 1987, respectively,and a deferred income tax liability of $150.1 million atDecember 31, 1986.
Amounts for the current year are based upon estimatesand assumptions as of the date of this report and could varysignificantly from amounts shown on the tax returns as filed.Accordingly, the variances from the amounts previouslyreported for prior years are primarily the result of adjustmentsto conform to the tax returns as fIled.
The deferred income tax provisions are the result of certain
Year ended December 31,
1987 1986
Amount % Amount %
$ (4.3) (40.0)% $180.1 46.0%
.1 .5 21.1 5.4
(52.1) (479.4) (37.5) (9.6)(19.5) (179.9) (21.2) (5.4)
14.2 131.1(3.7) (34.0) (9.4) (2.4)
3.6 34.0 (15.0) (3.8)--$(61.7) (567.7)% $U8,] 30.2%=
(in millions) Year ended December 3J.----
1988 1987 1986
Higher (lower) loan loss deductionfor lax return purposes $230.7 $(363.6) $(45.0)
Lower lease financing incomefor lax return purposes 48.6 61.0 48.5
Alternative minimum lax credit (40.8)Cash basis accounling for lax
relurn purposes (1) (32.0) (37.7) 46.5Deferred income and expenses
recognized currently forlax relurn purposes (24.3) (10.4) (34.4)
Olher real eslalc adjuslmenls 11.4 (4.1) (12.7)Higher (lower) stale lax deduclion
for lax relurn purposes (11.2) 21.1 9.2Undistribuled earnings of
foreign subsidiaries (10.9) 9.8Olher ~) 4.1 ~)
Tolal $166.5 $(329.6) $ 17.8
items being accounted for in different time periods for financialreporting purposes than for income tax pmposes. The components of the deferred income tax provisions and the tax effectof each were as follows:
(1) Effeelive January 1.1987, the Company changed from Ihe usc aflhe cash receiptsand disbllfSCmenl'i method of computillg lux return income to the llccruullllclhod
due 10 enactment of the Tux Reform Act uf1986. The cumulative difference between
the cash basis and accrual Lasi!; of accounting wiU be included in lax return incomeover a [our-yeur period.
2.3
38.6%
The following is a reconciliation of the statutory federalincome tax provision and rate to the effective income taxprovision and rate:
19.2
$322.7Effective income tax provision and rate
(in millions)
Slatutory federal iJ1COme lax provision and raleChange in tax rate resulting from:
Siale and locallaxes On income, nel of federalincome lax benefil
Income and expense related 10 Crocker's assels andUabilitics accounted for net of tax
Tax-exempt income
Tax benefilrecognized on a portion of the provision forloan losses al1988 lax rates
Capilal gains rale differenceOther
The Tax Reform Act of 1986 eliminated the Employee StockOwnership Plan (ESOP) credit for compensation paid oraccrued after December 31,1986. The Company, therefore,terminated the ESOP in 1988 and plan assets were allocatedto participants in accordance with plan provisions.
The Company provides certain health care and life insurancebenefits for retired employees. The Company reserves its rightto terminate these plans at any time, but if they continue ineffect, substantially all of the Company's salaried employeesmay become eligible for these benefits if they reach retirementage while working for the Company. The health care and similar benefits for active and retll"ed employees are self-fundedby the Company or provided through Health MaintenanceOrganizations (HMOs). The Company recognized the cost ofhealth care benefits by expensing the annual claims and HMOpremiums totaling $46.8 million in 1988, of which $40.9 million was incurred for active employees and the remainder wasincurred for retirees; $37.8 million in 1987; and $30.6 million in 1986. The life insurance and similar benefits for activeand retired employees are provided through an insurancecompany. The Company recognizes the cost of these benefitsby expensing the annual insurance premiums, which were$1.0 million in 1988, of which $.9 million was incurred foractive employees; $1.1 million in 1987; and $1.2 million in1986. At December 31, 1988, the Company had approximately 19,800 active employees and 5,114 retirees. For yearsprior to 1988, the cost of providing health and life insurancebenefits for retirees was not separable from the cost of providing benefits for active employees.
EMPLOYEE STOCK OWNERSHIP PLAN
RETIREE HEALTH AND LIFE INSURANCE
under the plan. The Company's contributions are immediatelyvested and are tax deductible by the Company.
Employees direct the investment of their TAP funds andmay elect to invest up to 50% in the Company's common stock.
As a result of the Crocker acquisition, the Companyassumed the Crocker National Bank Savings Plan (CrockerSavings Plan). On August 1,1986, all Crocker Savings Planbalances were transferred to TAP, except for amounts attributable to the Crocker Real Estate Equity Fund (CREEF),which is in the process of liquidation, and employer contributions. Liquidation payments attributable to CREEF are beingtransferred to TAP on a quarterly basis as these paymentsbecome available. When CREEF is fully liquidated, theemployer contributions will be transferred to TAP.
(in millions) Year ended December 31,
1988 1987 1986
Retirement plan $29.4 $27.2 $25.2
Investment plan $12.9 $12.5 $11.3
All salaried employees who have at least one year of serviceare eligible to contribute up to 10% of their pretax base salaryto TAP through salary deductions under Section 40l(k) of theInternal Revenue Code. The Company makes matching contributions of up to 4% of employee base salary for those whohave at least three years of service and who elect to contribute
RETIREMENT PLAN
INVESTMENT PLAN
The Company has a defined contribution retll'ement plan withbasic Company contributions of 4% of employee base salaryand special transition contributions, related to the terminationof a prior defined benefit plan of the Company, ranging from.5% to 5% for eligible employees. The plan covers salariedemployees with at least one year of service and containsa vesting schedule graduated from 3-10 years of service.In compliance with the Tax Reform Act ofl986, the vestingschedule will be graduated from 3-7 years of service effectiveJanuary 1, 1989.
In addition, the Company makes retll'ement contributionsto the Tax Advantage Plan (TAP) of 2% of employee basesalary. All salaried employees with at least one year of serviceare eligible to receive these Company contributions, which areimmediately vested.
The Company assumed an obligation for Crocker's defmedbenefit pension plan, which covered substantially all formerCrocker employees, as a result of the acquisition. Benefitswere frozen as of the acquisition date. In 1988, the Companyreceived approval from the Internal Revenue Service to terminate Crocker's defined benefit pension plan effective as ofDecember 24, 1987. The defined benefit pension obligationof approximately $205 million as of December 31, 1987 wasextinguished by the purchase of a group annuity contract. Thetermination of the plan did not result in the recognition of again or loss.
Expenses relating to the retirement and investment plans were
as follows:
38
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12
-
The Company has not provided federal taxes on $89.7 mil
lion of undistributed earnings of a foreign subsidiary and
an affiliate, because the earnings are indefinitely reinvested
in those companies. If the earnings were distributed to the
Parent, federal taxes on them, less credit for foreign taxes,
would be provided at that time.
The Company's pretax income or loss includes approximately
$(244.5) million, $31.2 million and $31.0 million in income
(losses) recorded by its subsidiaries and branches located out
side of the U.S. in 1988, 1987 and 1986, respectively.
The acquisition of Crocker was a business combination
accounted for as a purchase transaction. Accordingly, Crocker's
assets and liabilities were revalued to fair value at the time of
acquisition, net of the related tax effects. The resulting pretax
income and expense amounts recognized related to these
assets and liabilities include the previously recorded income
tax effects. Thus, the relationship between pretax income
(loss) and income tax expense (benefit) for 1988,1987 and
1986 is not comparable with previous years or with other
companies that are not affected by net-of-tax accounting.
The allowance for loan losses related to foreign activities
includes specific reserves for private sector loans outstanding
and, at December 31, 1987 and 1986, allocated transfer risk
resenres. During 1988, the Company charged-off those loans
to developing countries that were covered by allocated transfer
risk reserves of $77.8 million. At December 31, 1987, the
allowance related to foreign activities also included two special
additions totaling $589 million that were substantially allocated
to Latin America and were made in 1987 in connection with
loans to developing countries. Although management has allo
cated a specific portion of the allowance to foreign loans, the
unallocated portion and any unabsorbed portion of the allocated
allowance are available for any loan category. Changes in theallowance were as follows:
-
(in millions)
Balance, beginning of year
Provision for toan losses
Gross charge-offsRecoveries
Net loan charge-off$Losses on the sale or swap of developing
country loansOther additions
Balance, end of year
Year ended December 3],
1988 ]987 1986
$674.5 $ 80.1 $45.2
54.9 610.9 60.6
113.7 21.8 30.6(11.2) (5.3) (4.7)
102.5 16.5 25.9
620.8
.2
$ 6.1 $674.5 $80.1
FOREIGN ACTIVITIES
The Company's foreign activities include international banking
operations conducted through its foreign and domestic (in millions) Tolal Income Nel Assels
branches, representative offices, subsidiaries, affiliates, anrevenue (loss) income at year
before (loss) endEdge Act subsidiary and an International Banking Facility. income
laxAs required by the Securities and Exchange Commission, the expense
40 Company reports its foreign activities on the basis of the(benefil)
domicile of the customer.$ $ (84.1) $ (50.3) $
Since the Company's foreign and domestic activities areLatin America 1988 70.6 452.1(1)
(including Mexico) 1987 92.9 (614.5) (330.5) 1,210.4integrated, an identification offoreign activities necessarily 1986 215.8 (9.1) (6.3) 1,876.4involves certain assumptions. For the years presented, such
assumptions include: Asia and 1988 28.9 9.3 5.6 403.3Pacific Basin 1987 87.7 24.8 13.3 692.6
1986 49.9 (1.1) (.8) 473.1(a) cost for capital funds is charged based on the amount
and nature of the assets funded; Europe 1988 2.9 (.3) (.2) 220.0
(b) adjustments are made for the difference between host 1987 63.9 48.3 26.0 117.7
country and U.S. tax rates;1986 20.7 .2 .2 143.6
(c) income and expenses are primarily allocated based on Other 1988 1.3 .6 .4 .1
the distribution of assets; 1987 2.6 (2.3) (1.2) 7.7
(d) the provision for loan losses is based on actual net 1986 2.7 .1 40.0
charge-offs during the year and an allocation of the Tolal foreign 1988 103.7 (74.5) (44.5) 1,075.5Company's allowance to a level management deems 1987 247.1 (543.7) (292.4) 2,028.4
appropriate for foreign loans; and 1986 289.1 (9.9) (6.9) 2,533.1
(e) foreign exchange trading activities in domestic and Domestic 1988 4,756.0 909.7 557.0 45,541.0foreign offices are included in foreign activities. 1987 4,320.4 532.8 343.2 42,154.9
1986 3,699.3 401.5 280.4 42,044.0
Selected financial data by geographic area at December 31,Total forcign 1988 $4,859.7 $ 835.2 $ 512.5 $46,616.5
1988,1987 and 1986 and for the years then ended follows: and domestic 1987 4,567.5 (10.9) 50.8 44,183.31986 3,988.4 391.6 273.5 44,577.1
(I) During 1988, the Company subslantially reduced ils assels in Latin America throughsales and charge-orrs of developing country loons.
NOT E
13
PARENT COMPANY
Condensed financial information of Wells Fargo & Company (Parent) is presented below:
CONDENSED STATEMENT CONDENSED 41OF INCOME BALANCE SHEET
(in millions) Year ended December 3], (in millions) December 31,1988 1987 1986 1988 ]987
INCOME ASSETS
Dividends from subsidiaries: Cash and due from WeUs Fargo Bank $ 1.0 $ 5.4WeUs Fargo Bank $169.1 $115.9 $ 87.7 Investment securities 496.1 500.5Nonbank subsidiaries 13.6 21.4 42.1 Loans
Inlerest income (primarily from subsidiaries) 280.6 332.7440.6 509.9 467.5 AUowance for loan lossesAmortized gain on inleresl rale hedging 1.2 4.2 5.0
---Noninterest income 25.6 6.7 70.1 Nelloans 276.4 327.7
--TOlal income 650.1 653.9 667.4 Loans and advances to subsidiaries:
Wells Fargo Bank 2,648.3 3,837.7EXPENSE Nonbank subsidiaries 1,646.8 1,563.3Interest on: Investment in subsidiaries:
Shorl-term borrowings 186.8 209.9 116.2 Wells Fargo Bank 2,599.3 2,255.9Senior and subordinated debt 255.6 299.2 333.5 Nonbank subsidiaries 155.7 141.7Indebtedness to nonbank subsidiaries 10.8 29.2 31.0 Other assets 532.1 439.8
Provision for loan losses (.8) 2.0 ---Total assets $8,355.7 $9,072.0Noninterest expense 26.2 5.8 7.1
Total expense---
478.6 546.1 487.8 LIABILITIES AND STOCKHOLDERS' EQUITYIncome before income tax cxpense (benefit)
Commercial paper outstanding $2,747.7 $2,915.5and undistributed income of subsidiaries 171.5 107.8 179.6 Other short-term borrowings 9.8 5.8
Income tax expense (benefit) (9.4) (24.2) 11.9 Senior and subordinated debt 2,782.6 3,467.9Equity in undistributed income of Indebtedness to nonbank subsidiaries 2.3 268.1
subsidiaries:Other liabilities 233.9 167.1
WeUs Fargo Bank 342.4 (51.0) 102.1 ---Nonbank subsidiaries (10.8) (30.2) 3.7 Total liabilities 5,776.3 6,824.4
--- Stockholders' equity 2,579.4 2,247.6NET INCOME $512.5 $ 50.8 $273.5
Total liabilities and stockholders' equity $8,355.7 $9,072.0
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14
COMMITMENTS AND CONTINGENT LIABILITIES
Vear endedDecember 31.1988
CONDENSED STATEMENT OFCHANGES IN FINANCIAL POSITION
In the normal course of business, there are various commitmentsoutstanding and contingent liabilities that are properly notreflected in the financial statements. Losses, if any, "esultingfrom these commitments are not anticipated to be material.The approximate amounts of such commitments are summarized below:
Standby letters of credit include approximately $300 million of participations purchased and are net of approximately$300 million of participations sold. Standby letters of creditare issued to cover performance obligations including thosewhich back financial instruments (financial guarantees). AtDecember 31, 1988, the Company had issued or pmchasedparticipations in financial guarantees of approximately$900 million for the following types of financial instruments:
(in millions) Capital Operatingleases leases
Year endcd December 31,
1989 $ 16.4 $126.71990 16.4 103.31991 16.3 91.71992 15.7 81.01993 15.5 76.1Thereafter 151.0 273.1
Total minimum Icase payments 231.3 $751.9
Executory costs (11.3)Amounts representing interest (131.5)
Present value of net minimumlease payments $ 88.5
4J
The Company is obligated under a number of noncancelable operating leases for premises and equipment with termsranging from 1-35 years, many of which provide for periodicadjustment of rentals based on changes in various economicindicators. The following table shows futme minimum payments under capital leases and noncancelable operating leaseswith terms in excess of one year as of December 31, 1988.
Total futme minimum payments to be received under noncancelable operating subleases at December 31, 1988 were
approximately $250 million; these payments are not reflectedin the table above.
Net rental expense for all operating leases was $104.2 million, $119.2 million and $96.9 million for the years endedDecember 31, 1988, 1987 and 1986, respectively.
In the normal course of business, the Company is at alltimes subject to numerous pending and threatened legalactions and proceedings, some for which the relief or damagessought are substantial. After reviewing with counsel pendingand threatened actions and proceedings, management considers that the outcome of such actions or proceedings willnot have a material adverse effect on stockholders' equity ofthe Company.
$ 1,600300
18,3005,2003,600
1989-19971989-19971989-19991989-1999
Malurity ranges
December 31, 1988
$400300100100
$900
(in millions)
Standby letters of credit
Commercial and similar lellers of creditCommitments to extend credit (I)
Commitments to purchase futures and forward contracts
Commitments to purchase foreign and U.S. currencies
(I) Excludes credit card nnd othcr revolving credit loans.
(in millions)
Tax-exempt industrial revenue/
development bondsLoans and investmentsCommercial paper
Other financial instruments
Total financial guarantees
Substantially all fees received from the issuance of financialguarantees are deferred and amortized on a straight-line basisover the term of the guarantee. The credit criteria for grantingthese instruments is the same as for loans.
The Company enters into interest !'ate swap,contractsprimarily as an asset/liability management strategy to reduceinterest rate risk. Interest rate swap contracts are the exchangeof interest payments, such as fIXed rate payments for floatingrate payments, based on a notional (underlying) principalamount. At December 31, 1988, the Company had interestrate swaps outstanding with a notional principal amount of approximately $2,100 million, of which the Parent's share was$1,600 million.
Vear ended Dcccmbcr 31,
1987 1986
$ 50.8 $ 273.5
2.0(12.5) 39.7
81.2 (105.8)
121.5 207.4
012.2) (92.1)
9.3 115.3
710.8 (40.9)(581.9) 263.2
48.2 (44.1)
250.3431.7
22.3 21.2
(55.6)
143.8 881.4
11.4 (15.4)
11.8 (761.9)(5.1) (237.6)
18.1 (1,014.9)
$ 171.2 $ (18.2)
$ 70.4 $ (812.7)
263.2 (3.5)(162.4) 798.0
$ 171.2 $ (18.2)
Increase (decrease) in earning assets:
Investment securities
Net loansLoans and advances to subsidiaries
Increase (decrease) in earning assets
Financial resources provided by (applied to):
Operations:
Net incomeNoncash charges (credits):
Provision for loan losses
Provision for deferred taxes
Equity in undistributed income
of subsidiaries
Financial resourccs providcd
by operations
Cash dividends declared
Nct financial resources provided
by opcrations
Other financing activities:
Short-term borrowings
Senior and subordinated debtIndebtedness to nonbank subsidiaries
Preferred stock issued, net of
issuance costs
Common stock issued in public offerings
Other common stock issued
Common stock repurchased
Financial resources provided by other
financing activities
Other activities:Cash and due from Wells Fargo Bank
Investment in subsidiaries
Other, net
Financial resources provided by(applied to) other activities
Increase (decrease) in financial resources
invested in earning assets
(in millions)
(.8)(8.6)
(331.6)6.0
177.5
875.0(874.7)258.6
(206.5)1,105.9
(25.6)(125.7)
(89.7)
917.3
(163.8)(662.2)(265.8)125.7
23.5(49.9)
(141.5)34.8
(1,099.2)
(4.4)5.4
$ 1.0
$ 512.5
CONDENSED STATEMENTOF CASH FLOWS
Cash flows from operating activities:
Net incomeAdjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan lossesProvision for deferred taxesEquity in undistributed income of subsidiaries
Other, net
Net cash provided by operating activities
Cash flows from investing activities:Proceeds from sales and collections
of investment securitiesPurchase of investment securiticsPrincipal collections and sales of loans
Loans made to customersNet decrease in loans and advances to subsidiaries
Investment in subsidiariesPurchase of Barclays
Other, net
Net cash provided by investing activities
Cash flows from financing activities:Net decrease in short-term borrowings
Repayment of senior and subordinated debtNet decrease in indebtedness to nonbank subsidiaries
Proceeds (rom sale of Barclays to Wells Fargo Bank
Issuance of common stock
Repurchase of common stock
Cash dividends paid
Other, net
Nct cash used by financing activities
Net change in cash and cash cquivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(in millions)
42
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44
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Wells Fargo& Company:
We have audited the accompanying consolidated balancesheet of Wells Fargo & Company and Subsidiaries as ofDecember 31, 1988 and 1987 and the related consolidatedstatements of income and changes in stockholders' equity foreach of the years in the three-year period ended December 31,1988, the consolidated statement of cash flows for the yearended December 31,1988 and the consolidated statement ofchanges in financial position for each of the years in the lwoyear period ended December 31, 1987. These consolidatedfmancial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.
We conducted our audits in accordance with generallyaccepted auditing standards. Those standards require thatwe plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financialposition of Wells Fargo & Company and Subsidiaries at December 31, 1988 and 1987, the results of their operations for eachof the years in the three-year period ended December 31,1988, their cash flows for the year ended December 31, 1988and changes in their financial position for each of the years inthe two-year period ended December 31,1987, in conformitywith generally accepted accounting principles.
As discussed in Note 2 to the financial statements, theCompany adopted in 1988 Statement of Financial AccountingStandards No. 95, Statement of Cash Flows.
Peat Marwick Main & Co.Certified Public Accountants
San Francisco, CaliforniaJanuary 17,1989
-- -
-
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QUARTERLY FINANCIAL DATA
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME- QUARTERLY
(in millions)i988 1987
Quarter ended Quarter endedMarch 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
INTEREST INCOME (1) $990.9 $1,005.4 $1,060.6 $1,113.8 $928.0 $ 984.8 $1,000.5 $1,059.0iNTEREST EXPENSE 528.6 534.6 558.9 583.2 497.3 540.2 550.9 577.5Amortized gain (loss) on interest rate hedging 6.0 3.5 ~) (1.8) 1.8 (4.9) (1.9) .2--NET INTEREST INCOME 468.3 474.3 500.7 528.8 432.5 439.7 447.7 481.7Provision for loan losses (2) 75.0 75.0 75.0 75.0 80.0 623.0 75.0 114.0Net interesl income (loss) arter provision for
loan losses 393.3 399.3 425.7 453.8 352.5 (183.3) 372.7 367.7NONINTEREST INCOME
Domestic fees and commissions (i) 59.3 78.5 68.0 72.4 61.4 72.5 68.4 68.5Service charges on deposil accounts 52.6 53.0 57.1 56.9 44.0 43.5 46.6 46.4Trust and inveslmenl services income 38.1 37.4 37.7 40.5 29.7 41.5 41.4 43.9Jnvestment securities gains (losses) (1.6) (.4) (.2) (2.1) (.2) 2.J .5 (15.2)Other (3) 7.8 .5 30.7 (4.0) (17.4) -~) 21.1 8.2--- --- ---Total noninterest income 156.2 169.0 193.3 163.7 117.5 152.7 178.0 151.8NONlNTEREST EXPENSESalaries 150.4 150.4 155.9 163.0 151.9 149.1 147.4 150.9Employee benefits 38.8 39.1 37.7 36.8 42.1 39.9 41.1 28.4Net occupancy 39.4 39.6 43.4 44.6 45.6 44.6 46.3 42.2Equipment 32.6 32.7 35.8 34.7 32.3 34.0 33.8 32.8Other 110.4 111.3 119.9 102.7 108.4 122.9 110.5 116.3
45---
Total noninterest expense 371.6 373.1 392.7 381.8 380.3 390.5 379.1 370.6INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 177.9 195.2 226.3 235.7 89.7 (421.1) 171.6 148.9Jncome tax expense (benefil) 57.5 70.8 94.6 99.7 11.4 (127.4) 16.6 37.7---- --- --- --- ---NET INCOME (LOSS) $120.4 $ 124.4 $ 131.7 $ 136.0 $ 78.3 $(293.7) $ 155.0 $ 111.2NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ll3.9 $ ll8.5 $ 125.2 $ 129.2 $ 73.1 $(299.2) $ 149.4 $ 104.8---PER COMMON SHARENet income (loss) $ 2.15 $ 2.24 $ 2.36 $ 2.45 $ 1.36 $ (5.56) $ 2.77 $ 1.95= --- --- =Dividends declared $ .50 $ .60 $ .60 $ .75 $ .39 $ .39 $ .39 $ .50--- = =Average common shares outstanding 52.9 52.9 53.1 52.8 53.7 53.8 54.0 53.7--------
(I) Due 10 (he 10811 fee rccJnssificution discussed in Note 2 10 the Financiul Statements, illtercsl income dccrea.!5cd while domestic fees and commissions incrensed by $30.3 million.$33.7 million, $33.4 miWoll and $32.3 mil~on for Ihe fIrst, second, third and fourth quarlers, respeclively, of1987.
(2) The second und fourth quarters of1987 include special provisions for louillosses of $550 million and $39 million, respeclively, mude in connection wilh loans 10 developing counlTics.(3) The firsl quarter ofl987 ineludes $(20.1) million related to the termination of a lellse obligation assumed witl. the purehILSe of Crocker.
----------------------
_'-c-------------------
INTERNATIONAL ADVISORY COUNCIL
The International Advisory Council was established in 1977 to provideadvice and counsel in the international sphere of Wells Fargo sbusiness.
Roger D. Lapham, lr.DirectorWells Fargo & CompanyChairman and Managing DirectorRama Corporation, Ltd.Paris, France
AdolfKracht
PartnerMerck, Fink and CompanyMunich, West Germany
The Rt. Hon. Lord SherfieldG.G.B., G.G.M.G.
House of LordsLondon, England
Irving S. Shapiro
Retired ChairmanDuPont CompanyWilmington, Delaware
The Rt. Hon. Lord Kadoorie,
G.B. E., l.P.
Sir Elly Kadoorie and SonsHong Kong
Geoffrey W. Taylor
ChairmanDaiwai Europe Bank PLCRetired Group Chief ExecutiveMidland Bank PLCLondon, England
Nonbank
Wells Fargo Ag CreditLarry Lewton, President
Wells Fargo Capital Markets, Inc.Charles A. Greenberg, President
Wells Fargo Credit CorporationLarry S. Crawford, President
Wells Fargo Insurance ServicesJames G. Jones, President
Wells Fargo Investment AdvisorsFrederick L.A. Grauer, Chairman
SUBSIDIARIES
Wells Fargo Leasing CorporationTheodore J. Rogenski, President
Wells Fargo Realty AdvisorsA. Larry Chapman, President
Wells Fargo Realty FinanceGeorge A. Tillotson, President
Wells Fargo Securities, Inc.William F. Aldinger III, President
Bank
Edward Carlson
Chairman EmeritusUnited Airlines
Seattle, Washington
Angelo Calman de S6
President and Chief Executive OfficerBanco Economico, S.A.Salvador, Bahia, Brazil
G6ran Ennerfelt
President and Chief Executive OfficerA. Johnson & CompanyStockholm, Sweden
Chairman:
William I. M. Turner, lr.Chairman and Chief Executive OfficerPPC Industrial Corp.
Montreal, Quebec, Canada
William R. Hewlett
Director EmeritusHewlett-Packard CompanyPalo Alto, California
Sir Gampbell Fraser
Chairman
Scottish Television PLCLondon, England
Eugenio Garza-Laguera
Chairman of the BoardValores IndustrialesMonterrey, N.L., Mexico
Scott R. Dunfrund
Albert F. EhrkeStephen A. EnnaPhillip R. EriksenElizabeth A. Evans
John P. FayLoran R. FiteDouglas K. FreemanChristine N. GarveyDennis P. GibbonsAlan C. GordonCharles A. GreenbergEdward D. Hall
William W. HendersonDonald J. Hen'emaIrma 1. Herron
Douglas P. HollowaySeawadon L. HoustonDavid A. HoytMichael R. JamesAndrew F. Kerr
John C. KilhefnerAlan J. KizorDavid F. KvederisYungS. Lew
Ely L. LichtJohn E. LindstedtBarry X. LynnLiam E. McGeeMichael M. McNickleRobin S. MidkiffFrank A. MoesleinRobert A. MooreMark L. Myers
Alan J. PabstDeborah PattersonMichael C. PesceKenneth E. PetersonAlan K. PribbleShepherd G. Pryor IVJohn M. Reardon
Lois R. HiceTheodore G. Hobinson, Jr.Steven P. RonzoneC. James Saavedra
Jackson L. SchultzFrederick S. TaffDrew A. TanzmanWilliam L. TimoneyT.Y. Hans TjianJoseph A. WahedG. Hardy WatfordPaul M. WatsonMary M. WikstromEdward G. ZaikDavid J. ZuercherRandall F. Zurbach
Executive Vice Presidents
William F. Aldinger IIIStephen G. CarpenterThomas J. DavisHonald E. EadieJames C. FloodMichael J. GiUfillanFrederick L.A. GrauerE. Alan HoL'oyde
Rodney L. JacobsCharles M. JohnsonJames G. JonesJack KopecPatrick W. LeahyDudley M. NiggClyde W. OstlerHonald S. ParkerFredrick W. PetriGuy Rounsaville, Jr.Michael D. Sczuka
Dale R. WalkerRaymond J. Walsh, Jr.Timothy W. WashburnKaren WegmannWill C. Wood
Vice Chairmen
John F. GrundhoferRobert L. JossDavid M. PetroneWilliam F. Zuendt
WELLS FARGO BANK, N.A.
Chairman andChiefExecutive Officer
Carl E. Reichardt
President andChief Operating Officer
Paul Hazen
Senior Vice Presidents
Leslie L. AhickAlexander M. AndersonGloria J. BennewitzKathleen A. BurkePatricia CallahanMary P. Cal'1'ycrRegina L. ChunRichard T. ClappHelen C. ClarkLouis M. CossoHarry L. CuddyDonald E. Dana
Michael J. Dasher11 resa A. DialP. Steve Dobel
, 48