<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-2979
-------------
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0449260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 1-800-411-4932
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
_____ ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
April 30, 1999
------------------
Common stock, $1-2/3 par value 1,652,827,974
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
<S> <C>
Consolidated Statement of Income.................................... 2
Consolidated Balance Sheet.......................................... 3
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income.......................................... 4
Consolidated Statement of Cash Flows................................ 5
Notes to Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Summary Financial Data..............................................15
Overview............................................................16
Operating Segment Results...........................................18
Earnings Performance................................................19
Net Interest Income...............................................19
Noninterest Income................................................21
Noninterest Expense...............................................22
Income Taxes......................................................25
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI..........26
Balance Sheet Analysis..............................................27
Securities Available for Sale.....................................27
Loan Portfolio....................................................29
Nonaccrual and Restructured Loans and Other Assets................29
Loans 90 Days Past Due and Still Accruing......................32
Allowance for Loan Losses.........................................33
Interest Receivable and Other Assets..............................34
Deposits..........................................................35
Capital Adequacy/Ratios...........................................36
Derivative Financial Instruments..................................37
Liquidity and Capital Management..................................38
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........39
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................41
SIGNATURE....................................................................43
</TABLE>
- --------------------------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for such periods. Such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q. The results
of operations in the interim statements are not necessarily indicative of the
results that may be expected for the full year. The interim financial
information should be read in conjunction with the Company's 1998 Annual
Report on Form 10-K.
This Form 10-Q includes forward-looking statements about the Company's
financial condition, results of operations, plans, objectives and future
performance and business. These statements generally include the words
"believe," "expect," "anticipate," "estimate," "may," "will" or similar
expressions that suggest the statements are forward looking in nature. These
forward-looking statements involve inherent risks and uncertainties. The
Company cautions readers that a number of factors--many of which are beyond
the control of the Company--could cause actual results to differ materially
from those in the forward-looking statements. Among these factors are changes
in political and economic conditions, interest rate fluctuations,
technological changes (including the "Year 2000" data systems compliance
issue), customer disintermediation, competitive product and pricing pressures
in the Company's geographic and product markets, equity and fixed income
market fluctuations, personal and commercial customers' bankruptcies,
inflation, changes in law, changes in fiscal, monetary, regulatory and tax
policies, monetary fluctuations, credit quality and credit risk management,
mergers and acquisitions, the integration of merged and acquired companies,
and success in gaining regulatory approvals when required.
Also, actual results may differ materially from those in the forward-looking
statements because of factors relating to the combination of the former Wells
Fargo and the former Norwest Corporation, including the following: expected
cost savings from the merger are not fully realized within the expected time
frame or additional or unexpected costs are incurred; and costs or
difficulties related to the integration of the former Wells Fargo and the
former Norwest Corporation are greater than expected.
1
<PAGE>
PART I - FINANCIAL INFORMATION
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Quarter
ended March 31,
-----------------------
(in millions, except per share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Securities available for sale $ 510 $ 459
Mortgages held for sale 258 170
Loans held for sale 99 91
Loans 2,579 2,661
Other interest income 42 58
-------- ---------
Total interest income 3,488 3,439
-------- ---------
INTEREST EXPENSE
Deposits 717 777
Short-term borrowings 208 171
Long-term debt 283 272
Guaranteed preferred beneficial interests in Company's
subordinated debentures 14 25
-------- ---------
Total interest expense 1,222 1,245
-------- ---------
NET INTEREST INCOME 2,266 2,194
Provision for loan losses 270 305
-------- ---------
Net interest income after provision for loan losses 1,996 1,889
-------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 344 305
Trust and investment fees and commissions 300 259
Credit card fee revenue 132 121
Other fees and commissions 238 221
Mortgage banking 327 276
Insurance 85 95
Net venture capital gains 112 59
Net gains (losses) on securities available for sale (2) 19
Other 191 178
-------- ---------
Total noninterest income 1,727 1,533
-------- ---------
NONINTEREST EXPENSE
Salaries 725 684
Incentive compensation 134 135
Employee benefits 199 188
Equipment 191 184
Net occupancy 186 189
Goodwill 104 104
Core deposit intangible 52 63
Net losses on disposition of premises and equipment 2 7
Other 749 742
-------- ---------
Total noninterest expense 2,342 2,296
-------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,381 1,126
Income tax expense 497 442
-------- ---------
NET INCOME $ 884 $ 684
-------- ---------
-------- ---------
NET INCOME APPLICABLE TO COMMON STOCK $ 875 $ 675
-------- ---------
-------- ---------
EARNINGS PER COMMON SHARE $ .53 $ .42
-------- ---------
-------- ---------
DILUTED EARNINGS PER COMMON SHARE $ .53 $ .41
-------- ---------
-------- ---------
DIVIDENDS DECLARED PER COMMON SHARE $ .185 $ .165
-------- ---------
-------- ---------
Average common shares outstanding 1,647.1 1,615.7
-------- ---------
-------- ---------
Diluted average common shares outstanding 1,664.2 1,639.1
-------- ---------
-------- ---------
- -----------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions, except shares) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 11,364 $ 12,731 $ 12,977
Federal funds sold and securities purchased
under resale agreements 869 1,517 483
Securities available for sale 35,801 31,997 31,148
Mortgages held for sale 11,717 19,770 12,408
Loans held for sale 5,630 5,322 4,585
Loans 108,108 107,994 105,141
Allowance for loan losses 3,161 3,134 3,066
-------- -------- --------
Net loans 104,947 104,860 102,075
-------- -------- --------
Mortgage servicing rights 3,627 3,080 3,113
Premises and equipment, net 3,130 3,130 3,320
Core deposit intangible 1,437 1,510 1,670
Goodwill 7,747 7,664 7,970
Interest receivable and other assets 15,161 10,894 11,104
-------- -------- --------
Total assets $201,430 $202,475 $190,853
-------- -------- --------
-------- -------- --------
LIABILITIES
Noninterest-bearing deposits $ 42,322 $ 46,732 $ 43,027
Interest-bearing deposits 90,018 90,056 87,121
-------- -------- --------
Total deposits 132,340 136,788 130,148
Short-term borrowings 17,270 15,897 15,626
Accrued expenses and other liabilities 9,396 8,537 7,261
Long-term debt 20,363 19,709 16,747
Guaranteed preferred beneficial interests in
Company's subordinated debentures 785 785 1,299
STOCKHOLDERS' EQUITY
Preferred stock 604 547 569
Unearned ESOP shares (145) (84) (108)
-------- -------- --------
Total preferred stock 459 463 461
Common stock - $1-2/3 par value, authorized
4,000,000,000 shares; issued 1,666,095,285 shares,
1,661,392,590 shares and 1,621,957,949 shares 2,777 2,769 2,703
Additional paid-in capital 8,733 8,673 7,893
Retained earnings 9,525 9,045 8,668
Cumulative other comprehensive income 307 463 404
Notes receivable from ESOP (3) (3) (8)
Treasury stock - 13,478,919 shares, 17,334,787 shares
and 11,502,502 shares (522) (651) (349)
-------- -------- --------
Total stockholders' equity 21,276 20,759 19,772
-------- -------- --------
Total liabilities and stockholders' equity $201,430 $202,475 $190,853
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Additional
Number of Preferred ESOP Common paid-in Retained
(in millions, except shares) shares stock shares stock capital earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 $543 $(80) $2,718 $8,126 $8,292
---- ----- ------ ------ ------
Comprehensive income
Net income 684
Other comprehensive income, net of tax:
Translation adjustments
Unrealized gains (losses) on securities
available for sale arising during the year
Reclassification adjustment for (gains) losses
on securities available for sale included
in net income
Total comprehensive income
Common stock issued 5,216,127 3 40 (58)
Common stock issued for acquisitions 136,950 16 (3)
Common stock repurchased 16,568,361 (18) (293)
Preferred stock issued to ESOP 35,000 35 (38) 3
Preferred stock released to ESOP 10 (1)
Preferred stock (8,577) converted
to common shares 206,467 (9) 2
Preferred stock dividends (9)
Common stock dividends (238)
Cash payments received on
notes receivable from ESOP
---- ----- ------ ------ ------
Net change 26 (28) (15) (233) 376
---- ----- ------ ------ ------
BALANCE MARCH 31, 1998 $569 $(108) $2,703 $7,893 $8,668
---- ----- ------ ------ ------
---- ----- ------ ------ ------
BALANCE DECEMBER 31, 1998 $547 $(84) $2,769 $8,673 $9,045
---- ----- ------ ------ ------
Comprehensive income
Net income 884
Other comprehensive income, net of tax:
Translation adjustments
Unrealized gains (losses) on securities
available for sale arising during the year
Reclassification adjustment for
(gains) losses on securities
available for sale included in net income
Total comprehensive income
Common stock issued 5,277,067 46 (86)
Common stock issued for acquisitions 6,114,830 8 11 (5)
Common stock repurchased 5,869,971
Preferred stock issued to ESOP 75,000 75 (80) 5
Preferred stock released to ESOP 19 (1)
Preferred stock (17,882) converted to common shares 509,396 (18) (1)
Preferred stock dividends (9)
Common stock dividends (304)
---- ----- ------- ------ ------
Net change 57 (61) 8 60 480
---- ----- ------- ------ ------
BALANCE MARCH 31, 1999 $604 $(145) $2,777 $8,733 $9,525
---- ----- ------- ------ ------
---- ----- ------- ------ ------
<CAPTION>
Notes Cumulative
receivable other Total
from Treasury comprehensive stockholders'
(in millions, except shares) ESOP stock income equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 $(10) $(275) $464 $19,778
---- ----- ---- -------
Comprehensive income
Net income 684
Other comprehensive income, net of tax:
Translation adjustments -- --
Unrealized gains (losses) on securities
available for sale arising during the year (48) (48)
Reclassification adjustment for (gains) losses
on securities available for sale included
in net income (12) (12)
-------
Total comprehensive income 624
Common stock issued 95 80
Common stock issued for acquisitions 4 17
Common stock repurchased (180) (491)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 9
Preferred stock (8,577) converted
to common shares 7 --
Preferred stock dividends (9)
Common stock dividends (238)
Cash payments received on
notes receivable from ESOP 2 2
---- ----- ---- -------
Net change 2 (74) (60) (6)
---- ----- ---- -------
BALANCE MARCH 31, 1998 $(8) $(349) $404 $19,772
---- ----- ---- -------
---- ----- ---- -------
BALANCE DECEMBER 31, 1998 $(3) $(651) $463 $20,759
---- ----- ---- -------
Comprehensive income
Net income 884
Other comprehensive income, net of tax:
Translation adjustments 1 1
Unrealized gains (losses) on securities
available for sale arising during the year (158) (158)
Reclassification adjustment for
(gains) losses on securities
available for sale included in net income 1 1
-------
Total comprehensive income 728
Common stock issued 282 242
Common stock issued for acquisitions 49 63
Common stock repurchased (221) (221)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 18
Preferred stock (17,882) converted to common shares 19 --
Preferred stock dividends (9)
Common stock dividends (304)
---- ----- ---- -------
Net change -- 129 (156) 517
---- ----- ---- -------
BALANCE MARCH 31, 1999 $(3) $(522) $307 $21,276
---- ----- ---- -------
---- ----- ---- -------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Quarter ended March 31,
----------------------------------
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 884 $ 684
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 270 305
Depreciation and amortization 299 466
Securities available for sale losses (gains) 2 (19)
Gains on sales of loans (13) (18)
Release of preferred shares to ESOP 18 9
Net increase in trading assets (1,079) (902)
Net (increase) decrease in accrued interest receivable (78) 3
Net increase in accrued interest payable 66 60
Originations of mortgages held for sale (27,799) (21,172)
Proceeds from sales of mortgages held for sale 36,009 18,533
Net increase in loans held for sale (308) (91)
Other assets, net (1,067) (298)
Other accrued expenses and liabilities, net 922 575
-------- --------
Net cash provided (used) by operating activities 8,126 (1,865)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 3,337 1,205
Proceeds from prepayments and maturities 2,757 2,287
Purchases (9,788) (6,509)
Net cash paid for acquisitions (213) (23)
Net decrease (increase) in banking subsidiaries' loans resulting from originations
and collections 1,596 (398)
Proceeds from sales (including participations) of banking subsidiaries' loans 816 1,179
Purchases (including participations) of banking subsidiaries' loans (645) (53)
Principal collected on nonbank subsidiaries' loans 648 1,980
Nonbank subsidiaries' loans originated (2,087) (1,829)
Proceeds from sales of foreclosed assets 51 27
Net decrease in federal funds sold and securities purchased
under resale agreements 648 566
Other, net (2,777) (7)
------- --------
Net cash used by investing activities (5,657) (1,575)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (5,405) 2,402
Net increase in short-term borrowings 1,229 2,328
Proceeds from issuance of long-term debt 5,530 300
Repayment of long-term debt (4,873) (884)
Proceeds from issuance of common stock 242 80
Repurchase of common stock (221) (491)
Net decrease in notes receivable from ESOP -- 2
Payment of cash dividends on preferred and common stock (313) (247)
Other, net (25) (154)
------- --------
Net cash provided (used) by financing activities (3,836) 3,336
------- --------
NET CHANGE IN CASH AND DUE FROM BANKS (1,367) (104)
Cash and due from banks at beginning of quarter 12,731 13,081
------- --------
CASH AND DUE FROM BANKS AT END OF QUARTER $ 11,364 $ 12,977
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 1,156 $ 1,142
Income taxes $ 494 $ 48
Noncash investing and financing activities:
Transfers from loans to foreclosed assets $ 54 $ 71
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS COMBINATIONS
On November 2, 1998, Norwest Corporation changed its name to "Wells Fargo &
Company" upon the merger (the Merger) of the former Wells Fargo & Company
(the former Wells Fargo) into a wholly-owned subsidiary of Norwest
Corporation. Norwest Corporation as it was before the Merger is referred to
as the former Norwest.
Under the terms of the Merger agreement, stockholders of the former Wells
Fargo received 10 shares of common stock of the Company for each share of
common stock owned. Each share of former Wells Fargo preferred stock was
converted into one share of the Company's preferred stock. These shares rank
on parity with the Company's other shares of preferred stock as to dividends
and upon liquidation. Each outstanding and unexercised option granted by the
former Wells Fargo was converted into an option to purchase common stock of
the Company based on the agreed-upon exchange ratio.
The Merger was accounted for as a pooling of interests and, accordingly, the
information included in the financial statements presents the combined
results as if the Merger had been in effect for all periods presented.
Certain amounts in the financial statements for prior years have been
reclassified to conform with the current financial statement presentation.
As a condition to the Merger, the Company was required by regulatory agencies
to divest stores in Arizona and Nevada having total deposits of approximately
$1 billion and total loans of approximately $100 million. In the fourth
quarter of 1998, the Company entered into contracts to sell these stores.
These sales were completed in April. The Company anticipates that it will
realize a net gain on these transactions, the amount of which will be
determined in the second quarter.
In connection with the Merger, the Company recorded approximately $600
million of restructuring charges in the fourth quarter of 1998. A
severance-related reserve of $280 million was included in this amount.
Approximately 630 employees, totaling $50 million in severance-related
benefits, were in the severance process as of March 31, 1999. The
restructuring charges also included approximately $250 million related to
dispositions of owned and leased premises held for sale or remarketing and
$70 million of other charges, of which approximately $15 million was applied
as of March 31, 1999. The suspension of depreciation on these assets held for
disposition reduced occupancy and equipment expense by $4 million in the
first quarter of 1999.
The Company regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the Company
does not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed. The Company had three pending
transactions as of April 1, 1999 with total assets of approximately $700
million, and anticipates that approximately $183 million in total
consideration will be paid, principally in cash, upon consummation of these
transactions. The
6
<PAGE>
pending transactions, subject to approval by regulatory agencies, are
expected to be completed by the third quarter of 1999.
Transactions completed in the three months ended March 31, 1999 include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Common
Cash shares Method of
(in millions, except share amounts) Date Assets paid issued Accounting
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mid-Penn Consumer Discount Company
(Philadelphia, Pennsylvania) (F) January 21 $ 11 $ -- 200,720 Purchase
Century Business Credit Corporation
(New York, New York) (W) February 1 342 213 -- Purchase
Metropolitan Bancshares, Inc.
(Aurora, Colorado) (C) February 23 64 -- 700,881 Purchase
Mercantile Financial Enterprises, Inc.
(Brownsville, Texas) (C) February 26 779 -- 4,702,695 Pooling of interests*
Riverton State Bank Holding Company
(Riverton, Wyoming) (C) March 12 81 -- 510,534 Purchase
------ ----- ---------
$1,277 $213 6,114,830
------ ----- ---------
------ ----- ---------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Pooling of interests transaction was not material to the Company's
consolidated financial statements; accordingly, previously reported results
have not been restated.
C - Community Banking Group; F - Norwest Financial; W - Wholesale Banking Group
7
<PAGE>
2. PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock and
4,000,000 shares of preference stock, both without par value. All preferred
shares outstanding rank senior to common shares both as to dividends and
liquidation preference but have no general voting rights. No preference
shares have been issued under this authorization.
The table below is a summary of the Company's preferred stock at March 31,
1999, December 31, 1998 and March 31, 1998. A detailed description of the
Company's preferred stock is provided in Note 11 to the audited consolidated
financial statements included in the Company's 1998 Annual Report on Form
10-K.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued and outstanding Carrying amount (in millions) Adjustable
---------------------------------- -------------------------------- dividends rate
MAR. 31, Dec. 31, Mar. 31, MAR. 31, Dec. 31, Mar. 31, -----------------
1999 1998 1998 1999 1998 1998 Minimum Maximum
--------- --------- --------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable-Rate Cumulative, Series B
(Liquidation preference $50) 1,500,000 1,500,000 1,500,000 $ 75 $ 75 $ 75 5.5% 10.5%
6.59%/Adjustable-Rate Noncumulative
Preferred Stock, Series H
(Liquidation preference $50) 4,000,000 4,000,000 4,000,000 200 200 200 7.0 13.0
Cumulative Tracking
(Liquidation preference $200) 980,000 980,000 980,000 196 196 196 9.30 9.30
1999 ESOP Cumulative Convertible
(Liquidation preference $1,000) 58,787 -- -- 59 -- -- 10.30 11.30
1998 ESOP Cumulative Convertible
(Liquidation preference $1,000) 8,740 8,740 29,498 9 9 30 10.75 11.75
1997 ESOP Cumulative Convertible
(Liquidation preference $1,000) 18,810 19,698 20,220 19 20 20 9.50 10.50
1996 ESOP Cumulative Convertible
(Liquidation preference $1,000) 21,466 22,068 22,644 21 22 23 8.50 9.50
1995 ESOP Cumulative Convertible
(Liquidation preference $1,000) 20,016 20,130 20,510 20 20 20 10.00 10.00
ESOP Cumulative Convertible
(Liquidation preference $1,000) 9,661 9,726 9,956 10 10 10 9.0 9.0
Unearned ESOP shares (1) -- -- -- (145) (84) (108) -- --
Less Cumulative Tracking
held by subsidiary
(Liquidation preference $200) 25,000 25,000 25,000 5 5 5 9.30 9.30
--------- --------- --------- ---- ---- ----
Total 6,592,480 6,535,362 6,557,828 $459 $463 $461
--------- --------- --------- ---- ---- ----
--------- --------- --------- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans," the Company recorded a corresponding charge to
unearned ESOP shares in connection with the issuance of the ESOP Preferred
Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred
Stock are committed to be released.
8
<PAGE>
3. EARNINGS PER COMMON SHARE
The table below presents earnings per common share and
diluted earnings per common share and a reconciliation of the numerator and
denominator of both earnings per common share calculations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Quarter ended March 31,
-----------------------------
(in millions, except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 884 $ 684
Less: Preferred stock dividends 9 9
-------- --------
Net income applicable to common stock $ 875 $ 675
-------- --------
-------- --------
EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 875 $ 675
-------- --------
-------- --------
Average common shares outstanding (denominator) 1,647.1 1,615.7
-------- --------
-------- --------
Per share $ .53 $ .42
-------- --------
-------- --------
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 875 $ 675
-------- --------
-------- --------
Average common shares outstanding 1,647.1 1,615.7
Add: Stock options 15.4 21.3
Restricted share rights 1.7 2.1
-------- --------
Diluted average common shares outstanding
(denominator) 1,664.2 1,639.1
-------- --------
-------- --------
Per share $ .53 $ .41
-------- --------
-------- --------
- ------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
4. OPERATING SEGMENTS
The Company has identified four distinct lines of business for the purposes
of management reporting: Community Banking, Wholesale Banking, Norwest
Mortgage and Norwest Financial. The results are determined based on the
Company's management accounting process, which assigns balance sheet and
income statement items to each responsible operating segment. This process is
dynamic and somewhat subjective. Unlike financial accounting, there is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles. The management
accounting process measures the performance of the operating segments based
on the management structure of the Company and is not necessarily comparable
with similar information for any other financial institution. The Company's
operating segments are defined by product type and customer segments. Changes
in management structure and/or the allocation process may result in changes
in allocations, transfers and assignments. In that case, results for prior
quarters would be restated to allow comparability. Internal expense
allocations are independently negotiated between operating segments and,
where possible, service and price is measured against comparable services
available in the external marketplace.
THE COMMUNITY BANKING GROUP offers a complete line of diversified financial
products and services to individual consumers and small businesses with
annual sales up to $10 million in which the owner is also the principal
financial decision maker. The Group also offers investment management and
other services to institutions, retail customers and high net worth
individuals, insurance and securities brokerage through affiliates and
venture capital financing. This includes the Stagecoach and Advantage
families of mutual funds as well as personal trust, employee benefit trust
and agency assets. Loan products include lines of credit, equipment and
transportation (auto, recreational vehicle, marine) loans as well as equity
lines and loans. Other credit products and financial services available to
small businesses and their owners include receivables and inventory
financing, equipment leases, real estate financing, SBA financing, cash
management, payroll services, retirement plans, medical savings accounts and
credit and debit card processing. Consumer and business deposit products
include checking, savings deposits, market rate accounts, Individual
Retirement Accounts (IRAs) and time deposits.
Community Banking provides access to customers through a wide range of
channels. The Group encompasses a network of traditional banking stores,
banking centers, in-store banking centers, business centers and ATMs.
Additional services include 24-hour telephone centers, Telephone Banking
Centers and the National Business Banking Center. Online banking services
include Wells Fargo's Online Financial Services, the Company's personal
computer banking service, and Business Gateway, a personal computer banking
service exclusively for the small business customer.
THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of
$5 million and maintains relationships with major corporations throughout the
United States. The Wholesale Banking Group provides a complete line of
commercial and corporate banking services. These include traditional
commercial loans and lines, letters of credit, equipment leasing,
international trade facilities, foreign exchange services, cash management
and electronic products. The Group includes the majority ownership interest
in the Wells Fargo HSBC Trade Bank which provides
10
<PAGE>
trade and the Export-Import Bank of the United States (EXIMBANK) (a public
agency of the United States offering export finance support programs for
American-made products) financing, letters of credit and collection services.
The Group also supports the commercial real estate market with products and
services such as construction loans for commercial and residential
development, land acquisition and development loans, secured and unsecured
lines of credit, interim financing arrangements for completed structures,
rehabilitation loans, affordable housing loans and letters of credit.
Secondary market services are provided through the Real Estate Capital
Markets Group. Its business includes senior loan financing, mezzanine
financing, financing for leveraged transactions, purchasing distressed real
estate loans and high yield debt, origination of permanent loans for
securitization, loan syndications and commercial real estate loan servicing.
NORWEST MORTGAGE'S activities include the origination and purchase of
residential mortgage loans for sale to various investors as well as providing
servicing of mortgage loans for others.
NORWEST FINANCIAL includes consumer finance and auto finance operations.
Consumer finance operations make direct loans to consumers and purchase sales
finance contracts from retail merchants from offices throughout the United
States and Canada and in the Caribbean and Latin America. Automobile finance
operations specialize in purchasing sales finance contracts directly from
automobile dealers and making loans secured by automobiles in the United
States and Puerto Rico. Credit cards are issued to its consumer finance
customers through two credit card banks. Norwest Financial also provides
accounts receivable, lease and other commercial financing and provides
information services to the consumer finance industry.
THE RECONCILATION COLUMN includes the Company's investment securities
portfolio, goodwill and the nonqualifying core deposit intangible, the
difference between the provision for the line groups and the Company
provision for loan losses, the net impact of transfer pricing loan and
deposit balances, the cost of external debt, the elimination of intergroup
noninterest income and expense, and any residual effects of unallocated
systems and other support groups. It also includes the impact of
asset/liability strategies the Company has put in place to manage interest
rate sensitivity at the enterprise level.
11
<PAGE>
The following table provides the results for the Company's four major operating
segments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Recon- Consoli-
(income/expense in millions, Community Wholesale Norwest Norwest ciliation dated
average balances in billions) Banking Banking Mortgage Financial column (6) Company
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
NET INTEREST INCOME (1) $1,539 $348 $ 67 $324 $ (12) $2,266
PROVISION FOR LOAN LOSSES (2) 153 36 3 75 3 270
NONINTEREST INCOME (3) 1,096 243 316 73 (1) 1,727
NONINTEREST EXPENSE (3) 1,468 195 271 237 171 2,342
------ ---- ----- ---- ----- ------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 1,014 360 109 85 (187) 1,381
INCOME TAX EXPENSE (BENEFIT) (4) 341 133 40 31 (48) 497
------ ---- ----- ---- ----- ------
NET INCOME (LOSS) $ 673 $227 $ 69 $ 54 $(139) $ 884
------ ---- ----- ---- ----- ------
------ ---- ----- ---- ----- ------
Quarter ended March 31, 1998
Net interest income (1) $1,547 $330 $ 38 $322 $ (43) $2,194
Provision for loan losses (2) 167 33 1 96 8 305
Noninterest income (3) 948 276 259 74 (24) 1,533
Noninterest expense (3) 1,478 204 214 218 182 2,296
------ ---- ----- ---- ----- ------
Income (loss) before income
tax expense (benefit) 850 369 82 82 (257) 1,126
Income tax expense (benefit) (4) 315 148 30 30 (81) 442
------ ---- ----- ---- ----- ------
Net income (loss) $ 535 $221 $ 52 $ 52 $(176) $ 684
------ ---- ----- ---- ----- ------
------ ---- ----- ---- ----- ------
QUARTER ENDED MARCH 31, 1999
AVERAGE LOANS $ 65 $ 33 $ 1 $ 9 $ -- $ 108
AVERAGE ASSETS 99 41 27 11 21 199
AVERAGE CORE DEPOSITS 113 10 5 -- -- 128
RETURN ON EQUITY (5) 46% 29% 18% 14% --% 17%
Quarter ended March 31, 1998
Average loans $ 63 $ 32 $ 1 $ 9 $ -- $ 105
Average assets 97 38 19 10 19 183
Average core deposits 108 9 4 -- -- 121
Return on equity (5) 29% 27% 20% 16% --% 14%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net interest income is the primary source of income for most of the
operating segments. Net interest income is the difference between actual
interest earned on assets (and interest paid on liabilities) owned by a
group and a funding charge (and credit) based on the Company's cost of
funds. Operating segments are charged a cost to fund any assets (e.g.,
loans) and are paid a funding credit for any funds provided (e.g.,
deposits). The interest spread is the difference between the interest rate
earned on an asset or paid on a liability and the Company's cost of funds
rate. (Norwest Mortgage's net interest income comprises interest revenue of
$269 million and $191 million for the first quarter of 1999 and 1998,
respectively, and interest expense of $202 million and $153 million for the
first quarter of 1999 and 1998, respectively.)
(2) The provision allocated to the operating segments is based on actual
provisions and adjusted in certain lines of business for management's
current assessment of what would have been a normalized net charge-off
ratio for these businesses. In any particular year, the actual net
charge-offs can be higher or lower than the normalized provision allocated
to those operating segments that were adjusted. The difference between the
normalized provision for these lines of business and the consolidated
Company provision is included in the reconciling column.
12
<PAGE>
(3) Community Banking's charges to the product groups are shown as noninterest
income (intersegment revenues) to the physical distribution channels and
noninterest expense (intersegment expenditures) to the other operating
segments. They amounted to $11 million and $13 million in the first quarter
of 1999 and 1998, respectively. These charges are eliminated in the
reconciling column in arriving at the consolidated Company totals for
noninterest income and expense. All other noninterest revenues and expenses
are derived from external sources.
(4) Taxes vary by geographic concentration of revenue generation. Taxes as
presented are also higher than the consolidated Company's effective tax
rate as a result of taxable-equivalent adjustments that primarily relate
to income on certain loans and securities that is exempt from federal
and applicable state income taxes. The offsets for these adjustments are
found in the reconciliation column.
(5) Equity is allocated to the operating segments based on an assessment of the
inherent risk associated with each business so that the returns on allocated
equity are on a risk-adjusted basis and comparable across operating
segments.
(6) The material items in the reconciliation column related to the revenue
(i.e., net interest income plus noninterest income) and net income consist
of Treasury activities, eliminations and unallocated items. Revenue includes
Treasury activities of $51 million and $24 million; eliminations of $(20)
million and $(35) million; and unallocated items of $(44) million and $(56)
million for the first quarter of 1999 and 1998, respectively. Net income
includes Treasury activities of $30 milllion and $17 million; eliminations
of $(6) million and $(13) million; and unallocated items of $(163) million,
and $(180) million for the first quarter of 1999 and 1998, respectively. The
material items in the reconciliation column related to noninterest expense
include goodwill and nonqualifying CDI amortization of $126 million and $133
million for the first quarter of 1999 and 1998, respectively. The material
items in the reconcilation column related to average assets include
investment securities in Treasury of $13 billion and $10 billion and
goodwill and nonqualifying CDI of $8 billion and $9 billion for the first
quarter of 1999 and 1998, respectively.
13
<PAGE>
5. MORTGAGE BANKING ACTIVITIES
Mortgage banking activities include Norwest Mortgage and mortgage banking
activities in other operating segments.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The outstanding balances of mortgage loans
serviced for others were $257 billion at March 31, 1999 and $212 billion at
March 31, 1998.
The following table summarizes the changes in capitalized mortgage loan
servicing rights:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Quarter ended March 31,
-----------------------
(in millions) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of quarter $3,144 $3,112
Originations 265 130
Purchases 249 146
Amortization (294) (171)
Other, principally hedge activity 327 (40)
------ ------
3,691 3,177
Less valuation allowance 64 64
------ ------
Balance, end of quarter $3,627 $3,113
------ ------
------ ------
- -------------------------------------------------------------------------------------
</TABLE>
The fair value of capitalized mortgage servicing rights included in the
consolidated balance sheet at March 31, 1999 was approximately $3.7 billion,
calculated using discount rates ranging from 500 to 700 basis points over the
ten-year U.S. Treasury rate.
There were no changes in the valuation allowance for capitalized mortgage
servicing rights for the quarters ended March 31, 1999 and 1998.
14
<PAGE>
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
% Change
Quarter ended Mar. 31, 1999 from
------------------------------- -------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE QUARTER
Net (loss) income $ 884 $ (194) $ 684 --% 29 %
Net income (loss) applicable to common stock 875 (203) 675 -- 30
Earnings (loss) per common share $ .53 $ (.12) $ .42 -- 26
Diluted (loss) earnings per common share .53 (.12) .41 -- 29
Dividends declared per common share .185 .185 .165 -- 12
Average common shares outstanding 1,647.1 1,642.4 1,615.7 -- 2
Diluted average common shares outstanding 1,664.2 1,642.4 1,639.1 1 2
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.80% -- % 1.51% -- 19
Net income applicable to common stock to
average common stockholders' equity (ROE) 17.33 -- 14.20 -- 22
Efficiency ratio (1) 58.7% 90.2 % 61.6% (35) (5)
Average loans $107,834 $107,324 $ 105,398 -- 2
Average assets 198,723 197,772 183,267 -- 8
Average core deposits 128,133 127,810 121,247 -- 6
Net interest margin 5.58% 5.60 % 5.87% -- (5)
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE AMORTIZATION AND BALANCES
("CASH" OR "TANGIBLE") (2)
Net income (loss) applicable to common stock $ 1,008 $ (66) $ 812 -- 24
Earnings (loss) per common share .61 (.04) .50 -- 22
Diluted earnings (loss) per common share .61 (.04) .50 -- 22
ROA 2.17% -- % 1.91% -- 14
ROE 34.38 -- 31.99 -- 7
Efficiency ratio 54.9 86.1 57.3 (36) (4)
AT QUARTER END
Securities available for sale $ 35,801 $ 31,997 $ 31,148 12 15
Loans 108,108 107,994 105,141 -- 3
Allowance for loan losses 3,161 3,134 3,066 1 3
Goodwill 7,747 7,664 7,970 1 (3)
Assets 201,430 202,475 190,853 (1) 6
Core deposits 127,996 132,289 125,528 (3) 2
Common stockholders' equity 20,817 20,296 19,311 3 8
Stockholders' equity 21,276 20,759 19,772 2 8
Tier 1 capital (3) 12,765 12,412 11,685 3 9
Total capital (Tiers 1 and 2) (3) 17,009 16,733 15,908 2 7
Capital ratios
Common stockholders' equity to assets 10.33% 10.02 % 10.12% 3 2
Stockholders' equity to assets 10.56 10.25 10.36 3 2
Risk-based capital (3)
Tier 1 capital 8.23 8.08 8.19 2 --
Total capital 10.97 10.90 11.15 1 (2)
Leverage (3) 6.74 6.58 6.74 2 --
Book value per common share $ 12.60 $ 12.35 $ 11.99 2 5
Staff (active, full-time equivalent) 91,352 92,178 89,376 (1) 2
COMMON STOCK PRICE
High $ 40.44 $ 40.88 $ 43.88 (1) (8)
Low 32.13 30.19 34.75 6 (8)
Quarter end 35.06 39.94 41.56 (12) (16)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The efficiency ratio is defined as noninterest expense divided by the
total of net interest income and noninterest income.
(2) Nonqualifying core deposit intangible (CDI) amortization and average
balance excluded from these calculations are, with the exception of the
efficiency ratio, net of applicable taxes. The after-tax amounts for the
amortization and average balance of nonqualifying CDI were $29 million
and $863 million, respectively, for the quarter ended March 31, 1999.
Goodwill amortization and average balance (which are not tax effected)
were $104 million and $7,734 million, respectively, for the quarter
ended March 31, 1999.
(3) See the Capital Adequacy/Ratios section for additional information.
15
<PAGE>
OVERVIEW
On November 2, 1998, Norwest Corporation changed its name to "Wells Fargo &
Company" upon the merger (the Merger) of the former Wells Fargo & Company
(the former Wells Fargo) into a wholly owned subsidiary of Norwest
Corporation. Norwest Corporation as it was before the Merger is referred to
as the former Norwest. The Merger was accounted for as a pooling of interests
and, accordingly, the information included in the financial review presents
the combined results as if the Merger had been in effect for all periods
presented. Certain amounts for prior quarters in the financial review have
been reclassified to conform with the current financial statement
presentation.
Wells Fargo & Company is a $201 billion diversified financial services
company providing banking, mortgage and consumer finance through about 6,000
stores and other distribution channels throughout North America, including
all 50 states and elsewhere internationally. It ranked seventh in assets at
March 31, 1999 among U.S. bank holding companies. In this Form 10-Q, Wells
Fargo & Company together with its subsidiaries are referred to as the Company
and Wells Fargo & Company alone is referred to as the Parent.
Net income for the first quarter of 1999 was $884 million, compared with $684
million for the first quarter of 1998. Diluted earnings per common share for
the first quarter of 1999 were $.53, compared with $.41 for the first quarter
of 1998.
Return on average assets (ROA) was 1.80% and return on average common equity
(ROE) was 17.33% for the first quarter of 1999, compared with 1.51% and
14.20%, respectively, for the first quarter of 1998.
Diluted earnings before the amortization of goodwill and nonqualifying core
deposit intangible (CDI) ("cash" or "tangible" earnings) were $.61 per share
for the first quarter of 1999, compared with $.50 for the first quarter of
1998. On the same basis, ROA was 2.17% and ROE was 34.38% for the first
quarter of 1999, compared with 1.91% and 31.99%, respectively, for the first
quarter of 1998.
Net interest income on a taxable-equivalent basis was $2,281 million for the
first quarter of 1999, compared with $2,210 million for the first quarter of
1998. The Company's net interest margin was 5.58% for the first quarter of
1999, compared with 5.87% for the first quarter of 1998.
Noninterest income increased to $1,727 million for the first quarter of 1999,
compared with $1,533 million for the first quarter of 1998. The increase was
primarily due to net gains on sales of mortgages, net venture capital gains
and higher trust and investment fees and commissions. A significant portion
of the increase was offset by higher amortization of mortgage servicing
rights.
Noninterest expense totaled $2,342 million for the first quarter of 1999,
compared with $2,296 million for the first quarter of 1998. The efficiency
ratio was reduced to 58.7% for the
16
<PAGE>
first quarter of 1999, compared with 61.6% for the same quarter of 1998. The
Company expects to meet its pre-Merger target of approximately $650 million
in annual pre-tax cost savings not later than 36 months after Merger
consummation. About 25% of the cost savings are expected to be achieved
within the first year.
The provision for loan losses was $270 million in the first quarter of 1999,
compared with $305 million in the first quarter of 1998. During the first
quarter of 1999, net charge-offs were $273 million, or 1.03% of average total
loans (annualized), compared with $310 million, or 1.19%, during the first
quarter of 1998. The allowance for loan losses was $3,161 million, or 2.92% of
total loans, at March 31, 1999, compared with $3,134 million, or 2.90%, at
December 31, 1998 and $3,066 million, or 2.92%, at March 31, 1998.
At March 31, 1999, total nonaccrual and restructured loans were $704 million,
or .7% of total loans, compared with $710 million, or .7%, at December 31,
1998 and $721 million, or .7%, at March 31, 1998. Foreclosed assets amounted
to $212 million at March 31, 1999, $167 million at December 31, 1998 and $205
million at March 31, 1998.
The Company's direct credit risk related to the ongoing volatility of the
financial markets in Asia and, more recently, Latin America is predominantly
short-term in nature and is relatively insignificant. However, the primary
risk to the Company is the long-term effect of the Asian and Latin American
financial markets on the economy of the U.S. and the Company's borrowers.
Understanding this risk is more difficult and depends on the passage of time.
To date, while certain domestic sectors to which the Company has direct
credit exposure have been adversely impacted by the disruptions in Asian
financial markets, the results have not been material enough to create any
significant credit losses for the Company.
At March 31, 1999, the ratio of common stockholders' equity to total assets
was 10.33%, compared with 10.02% at December 31, 1998 and 10.12% at March 31,
1998. The Company's total risk-based capital (RBC) ratio at March 31, 1999
was 10.97% and its Tier 1 RBC ratio was 8.23%, exceeding the minimum
regulatory guidelines of 8% and 4%, respectively, for bank holding companies.
The Company's ratios at March 31, 1998 were 11.15% and 8.19%, respectively.
The Company's leverage ratio was 6.74% at March 31, 1999 and 1998, exceeding
the minimum regulatory guideline of 3% for bank holding companies.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, which will be effective for
the Company's financial statements for periods beginning January 1, 2000.
This Statement requires companies to record derivatives on the balance sheet,
measured at fair value. Changes in the fair values of those derivatives would
be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is
that the hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows. The Company has not yet
determined
17
<PAGE>
when it will implement the Statement nor has it completed the complex
analysis required to determine the impact on the financial statements.
OPERATING SEGMENT RESULTS
COMMUNITY BANKING'S net income increased to $673 million in the first quarter of
1999 from $535 million in the first quarter of 1998, an increase of 26%. Net
interest income declined by $8 million. A significant portion of the decrease in
net interest income was due to the run-off and sales of credit card receivables
and a decline in the former Wells Fargo real estate mortgage loans. Other loan
portfolios remained stable. The provision for loan losses decreased by $14
million. A significant portion of the $148 million increase in noninterest
income was due to net venture capital gains and higher trust and investment fees
and commissions.
WHOLESALE BANKING'S net income increased to $227 million in the first quarter
of 1999 from $221 million in the first quarter of 1998, an increase of 3%.
Net interest income increased to $348 million, compared with $330 million in
the first quarter of 1998. Average outstanding loan balances grew to $33
billion in the first quarter of 1999 from $32 billion in the first quarter of
1998, primarily as a result of growth in the asset-based lending, specialized
financial services and commercial loan businesses. Noninterest income
decreased to $243 million from $276 million. The decrease is primarily due to
lower acquisition, development and construction investment income as well as
lower gains from equity investments. The decrease was partially offset by
increased trading income, service charges, fees and commissions, and foreign
exchange gains. Noninterest expense decreased to $195 million from $204
million due to gains on the sale of foreclosed assets. Also, during the first
quarter of 1999, Wholesale Banking completed the acquisition of Century
Business Credit Corporation, which contributed to a $5 million increase in
net interest income and a $1 million increase in noninterest income.
NORWEST MORTGAGE'S net income for the first quarter of 1999 increased by $17
million, or 33%, compared with the first quarter of 1998. The increase was
principally due to increased mortgage loan fundings and growth in the
servicing portfolio. Fundings were $28 billion for the first quarter of 1999,
compared with $21 billion for the first quarter of 1998. The increase in
funding volume was predominantly due to growth in the third party origination
business. The percentage of fundings attributed to mortgage loan refinancing
was approximately 58% for the first quarter of 1999, compared with 57% for
the same quarter in 1998. The servicing portfolio increased to $257 billion
at March 31, 1999 from $212 billion at March 31, 1998. The weighted average
coupon on loans in the servicing portfolio was 7.3% at March 31, 1999
compared with 7.7% a year earlier. Total capitalized mortgage servicing
rights amounted to $3.6 billion, or 1.41%, of the servicing portfolio at
March 31, 1999, compared with $2.8 billion, or 1.33%, at March 31, 1998. The
increase was largely due to portfolio growth, net of amortization and an
increase in deferred hedge losses. Amortization of capitalized mortgage
servicing rights was $294 million for the first quarter of 1999, compared
with $153 million for the first quarter of 1998. The increase in amortization
was largely due to increased assumed prepayments and increased balances of
capitalized mortgage servicing associated with a larger servicing portfolio.
Combined gains on sales of mortgages and servicing rights were $183 million
for the first quarter of 1999, compared with $37 million for
18
<PAGE>
the first quarter of 1998. The increase is largely due to more favorable
market conditions as well as increased levels of loan sales in the first
quarter of 1999.
NORWEST FINANCIAL'S net income was $54 million in the first quarter of 1999,
compared with $52 million in the first quarter of 1998, an increase of 4%.
Net interest income increased $2 million, or 1%, due to an increase in
earning assets which was substantially offset by a decrease in the net
interest margin. The net interest margin decreased 66 basis points from the
first quarter of 1998 reflecting a change in the portfolio mix combined with
market pressures on yields. The provision for loan losses decreased 22% in
the first quarter of 1999 mostly due to reduced charge-offs at Island
Finance. Norwest Financial's noninterest expense increased $19 million, or
9%, from the first quarter of 1998 primarily due to acquisitions.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $2,281 million in the
first quarter of 1999, compared with $2,210 million in the first quarter of
1998. The Company's net interest margin was 5.58% in the first quarter of
1999, compared with 5.87% in the first quarter of 1998. The decrease in the
net interest margin was primarily due to lower yields on consumer and
commercial loans as well as higher balances of lower yielding investment
securities and mortgages held for sale, partially offset by decreased rates
on consumer deposits.
Interest income included hedging income of $47 million in the first quarter
of 1999, compared with $20 million in the first quarter of 1998. Interest
expense included hedging expense of $26 million in the first quarter of 1999,
compared with $20 million in the same quarter of 1998.
Individual components of net interest income and the net interest margin are
presented in the rate/yield table on the following page.
Loans averaged $107.8 billion in the first quarter of 1999, compared with $105.4
billion in the first quarter of 1998.
Investment securities averaged $32.2 billion during the first quarter of 1999, a
16% increase from $27.7 billion in the first quarter of 1998.
Average core deposits were $128.1 billion and $121.2 billion and funded 64%
and 66% of the Company's average total assets in the first quarter of 1999
and 1998, respectively.
19
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Quarter ended March 31,
------------------------------------------------------------
1999 1998
-------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- -----------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 1,160 5.01% $ 14 $ 1,197 5.59% $ 17
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies 4,716 5.63 65 4,817 6.02 71
Securities of U.S. states and political subdivisions 1,686 8.30 33 1,513 8.56 31
Mortgage-backed securities:
Federal agencies 19,655 6.72 326 17,477 7.21 308
Private collateralized mortgage obligations 3,308 6.75 56 2,400 6.87 41
-------- ------ ------- ------
Total mortgage-backed securities 22,963 6.72 382 19,877 7.17 349
Other securities 2,843 6.07 42 1,445 5.26 19
-------- ------ ------- ------
Total securities available for sale 32,208 6.58 522 27,652 6.93 470
Loans held for sale (3) 5,561 7.24 99 4,746 7.70 91
Mortgages held for sale (3) 15,407 6.71 258 9,790 6.97 170
Loans:
Commercial 34,875 8.53 735 31,769 9.22 723
Real estate 1-4 family first mortgage 11,263 8.90 251 13,331 8.67 285
Other real estate mortgage 16,731 9.03 373 16,359 9.24 373
Real estate construction 3,902 9.36 90 3,368 9.54 79
Consumer:
Real estate 1-4 family junior lien mortgage 10,784 9.31 248 9,807 10.77 261
Credit card 5,549 13.64 189 6,428 14.95 240
Other revolving credit and monthly payment 16,683 11.76 489 18,137 11.95 540
-------- ------ ------- ------
Total consumer 33,016 11.27 926 34,372 12.28 1,041
Lease financing 6,574 7.88 129 5,110 8.41 107
Foreign 1,473 21.05 77 1,089 20.50 56
-------- ------ ------- ------
Total loans (4) 107,834 9.65 2,581 105,398 10.19 2,664
Other 2,420 4.72 30 2,659 6.09 42
-------- ------ -------- ------
Total earning assets $164,590 8.59 3,504 $151,442 9.20 3,454
-------- ------ -------- ------
-------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 2,723 .90 7 $ 2,641 1.64 11
Market rate and other savings 55,578 2.37 325 51,370 2.62 331
Savings certificates 27,062 4.90 327 28,062 5.30 367
Other time deposits 3,714 5.13 47 4,186 5.54 57
Deposits in foreign offices 1,047 4.20 11 783 5.01 10
-------- ------ ------- ------
Total interest-bearing deposits 90,124 3.23 717 87,042 3.62 776
Short-term borrowings 17,556 4.80 208 12,729 5.46 171
Long-term debt 18,887 6.01 283 16,946 6.43 272
Guaranteed preferred beneficial interests in Company's
subordinated debentures 785 7.53 15 1,299 7.80 25
-------- ------ -------- ------
Total interest-bearing liabilities 127,352 3.88 1,223 118,016 4.27 1,244
Portion of noninterest-bearing funding sources 37,238 -- -- 33,426 -- --
-------- ------ -------- ------
Total funding sources $164,590 3.01 1,223 $151,442 3.33 1,244
-------- ------ -------- ------
-------- --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (5) 5.58% $2,281 5.87% $2,210
----- ------ ------ ------
----- ------ ------ ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 11,239 $ 10,749
Goodwill 7,734 8,022
Other 15,160 13,054
-------- --------
Total noninterest-earning assets $ 34,133 $ 31,825
-------- --------
-------- --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 42,770 $ 39,174
Other liabilities 7,652 6,337
Preferred stockholders' equity 462 462
Common stockholders' equity 20,487 19,278
Noninterest-bearing funding sources used to
fund earning assets (37,238) (33,426)
-------- --------
Net noninterest-bearing funding sources $ 34,133 $ 31,825
-------- --------
-------- --------
TOTAL ASSETS $198,723 $183,267
-------- --------
-------- --------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The average prime rate of the Company was 7.75% and 8.50% for the
quarters ended March 31, 1999 and 1998, respectively. The average
three-month London Interbank Offered Rate (LIBOR) was 5.00% and 5.66%
for the quarters ended March 31, 1999 and 1998, respectively.
(2) Interest rates and amounts include the effects of hedge and risk
management activities associated with the respective asset and liability
categories.
(3) Yields are based on amortized cost balances.
(4) Nonaccrual loans and related income are included in their respective
loan categories.
(5) Includes taxable-equivalent adjustments that primarily relate to income
on certain loans and securities that is exempt from federal and
applicable state income taxes. The federal statutory tax rate was 35%
for both quarters presented.
20
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Quarter
ended March 31,
------------------- %
(in millions) 1999 1998 Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 344 $ 305 13%
Trust and investment fees and commissions:
Asset management and custody fees 184 161 14
Mutual fund and annuity sales fees 90 75 20
All other 26 23 13
------ ------
Total trust and investment fees and commissions 300 259 16
Credit card fee revenue 132 121 9
Other fees and commissions:
Cash network fees 58 51 14
Charges and fees on loans 76 71 7
All other 104 99 5
------ ------
Total other fees and commissions 238 221 8
Mortgage banking: (1)
Origination and other closing fees 113 109 4
Servicing fees, net of amortization (45) 56 --
Net gains on sales of mortgages 200 54 270
Other 59 57 4
------ ------
Total mortgage banking 327 276 18
Insurance 85 95 (11)
Net venture capital gains 112 59 90
Net gains (losses) on securities available for sale (2) 19 --
Income from equity investments accounted
for by the:
Cost method 33 50 (34)
Equity method 21 15 40
Net gains on sales of loans 13 18 (28)
Net losses from dispositions of operations (1) (3) (67)
All other 125 98 28
------ ------
Total $1,727 $1,533 13%
------ ------ ---
------ ------ ---
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See page 18 for discussion of Norwest Mortgage noninterest income.
The increase in trust and investment fees and commissions for the first
quarter 1999 was primarily due to an overall increase in mutual fund
management fees, reflecting the overall growth in the fund families' net
assets. The Company managed 85 mutual funds consisting of $53.3 billion of
assets at March 31, 1999 that included 42 Stagecoach Funds ($28.9 billion)
and 43 Norwest Advantage Funds ($24.4 billion), compared with 80 mutual funds
consisting of $45.6 billion of assets at March 31, 1998 that included 37
Stagecoach Funds ($24.5 billion) and 43 Norwest Advantage Funds ($21.1
billion). The Company also managed or maintained personal trust, employee
benefit trust and agency assets of approximately $397 billion and $367
billion at March 31, 1999 and 1998, respectively.
The increase in net venture capital gains was due to the sales of certain
venture capital securities whose market value had increased since the time
the investments were made. Sales of venture captial securities generally
relate to the timing of holdings becoming publicly traded and subsequent
market conditions, causing venture capital gains to be unpredictable in nature.
21
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Quarter
ended March 31,
-------------------
%
(in millions) 1999 1998 Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries $ 725 $ 684 6 %
Incentive compensation 134 135 (1)
Employee benefits 199 188 6
Equipment 191 184 4
Net occupancy 186 189 (2)
Goodwill 104 104 --
Core deposit intangible:
Nonqualifying (1) 46 56 (18)
Qualifying 6 7 (14)
Net losses on dispositions of premises
and equipment 2 7 (71)
Operating losses 29 39 (26)
Outside professional services 73 58 26
Contract services 90 73 23
Telecommunications 61 58 5
Outside data processing 76 49 55
Advertising and promotion 50 54 (7)
Postage 57 54 6
Travel and entertainment 55 49 12
Stationery and supplies 39 41 (5)
Insurance 36 38 (5)
Security 21 22 (5)
All other 162 207 (22)
------ ------
Total $2,342 $2,296 2 %
------ ------ ----
------ ------ ----
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Amortization of core deposit intangible acquired after February 1992
that is subtracted from stockholders' equity in computing regulatory
capital for bank holding companies.
The increase in salaries and employee benefits was partly due to an increase
in active full-time equivalent (FTE) staff. The Company's FTE staff was
91,352 at March 31, 1999, compared with 89,376 at March 31, 1998.
A significant portion of the increase in outside data processing was due to
the outsourcing of credit card processing in the third quarter of 1998 and
increased volume due to acquisitions.
During the first quarter of 1999, the former Norwest and the former Wells
Fargo continued with their enterprise-wide project to prepare the Company's
systems for Year 2000 compliance. The Year 2000 issue relates to computer
systems that use two digits rather than four to define the applicable year
and whether such systems will properly process information when the year
changes to 2000. "Systems" includes hardware, networks, system and
application software, and commercial "off the shelf" software, and embedded
technology such as date impacted processors in automated systems such as
elevators, telephone systems, security systems, vault systems, heating and
cooling systems and others. Priority is given to "mission critical" systems.
A system is considered "mission critical" if it is vital to the successful
continuation of a core business activity.
22
<PAGE>
The former Norwest's Year 2000 readiness project is divided into four phases
- - Phase I: a comprehensive assessment and inventory of applicable software,
system hardware devices, data and voice communication devices and embedded
technology to determine Year 2000 vulnerability and risk; Phase II: date
detection on systems to determine which systems must be remediated and which
systems are compliant and require testing only, determination of the
resources and costs, and the development of schedules; Phase III: repair,
replacement and/or retirement of systems that are determined not to be Year
2000 compliant, and planning the integration testing for those systems that
have interfaces with other systems both internal and external to the Company,
such as customers and suppliers; and Phase IV: integration testing on
applicable systems to validate that interfaces are Year 2000 compliant and
contingency planning. The former Norwest has substantially completed Phases
I, II and III of its Year 2000 project.
The former Wells Fargo uses a four-phase plan for achieving Year 2000
readiness. The Assessment Phase (Phase I) determines which computers,
operating systems, applications and facilities require remediation and
prioritizing those remediation efforts. This has been completed except for
the on-going assessment of new systems. The Renovation Phase (Phase II)
corrects or replaces any non-compliant hardware, software or facilities. This
phase has been substantially completed. All renovated software, both in-house
applications and vendor software, was placed back into production before the
Validation Phase (Phase III). The Validation Phase, which tests in-house
systems, vendor software and service providers, is in process. During Phase
IV, the Implementation Phase, remediated and validated code will be tested in
interfaces with customers, business partners, government institutions and
others.
It is anticipated that the Company will have substantially completed the
unfinished phases discussed in the preceding two paragraphs by June 30, 1999.
In addition to the four phases described above, each of the former Norwest
and the former Wells Fargo have on-going awareness programs to communicate
Year 2000 matters to employees and customers.
The Company's Year 2000 Project Office oversees the Year 2000 efforts of the
Company and all of its subsidiaries. Representatives from other areas of the
Company, including the law department, audit, risk management and corporate
communications, provide support for the Year 2000 project. In addition, as a
financial services organization, the Company is under the supervision of
federal regulatory agencies which have provided guidelines and are performing
ongoing monitoring of the Year 2000 readiness of the Company.
The Company may be affected by the Year 2000 compliance issues of governmental
agencies, businesses and other entities who provide data to, or receive data
from, the Company, and by entities, such as borrowers, vendors, customers and
business partners, whose financial condition or operational capability is
significant to the Company. The Company's Year 2000 project also includes
assessing the Year 2000 readiness of certain customers, borrowers, vendors,
business partners, counterparties and governmental entities and the testing of
major external interfaces with third parties which the Company has determined
are critical. Using a combination of surveys and direct communication, the
Company has evaluated its major credit customers, assessed their Year 2000
efforts, and incorporated any identified Year 2000 customer risks into the
Company's credit risk analysis processes.
23
<PAGE>
In addition to assessing the readiness of external parties, the Company is
developing business resumption contingency plans for its core business
systems which will include plans to mitigate the effects of any internal
operational problems or any problems caused by counterparties whose failure
to properly address Year 2000 issues may adversely affect the Company's
ability to perform certain functions. These business resumption contingency
plans are being implemented by using existing Business Continuity Plans which
have been augmented with Year 2000 scenarios. The contingency plans will be
validated and subject to review by a qualified, independent party, such as an
internal auditor or an employee who was not involved directly in developing
such plans. Regulatory required plans for the turn-of-the-century weekend,
December 31, 1999 through January 3, 2000, will be completed and tested
during the third quarter of 1999.
The Company currently estimates that its total cost for the Year 2000 project
will approximate $315 million. Through March 31, 1999, the Company has
incurred charges of $233 million related to its Year 2000 project including
$31 million in the first quarter of 1999. Charges for the former Norwest
include the cost of internal staff redeployed to the Year 2000 project, as
well as external consulting costs and costs of accelerated replacement of
hardware and software due to Year 2000 issues. Charges for the former Wells
Fargo include the cost of external consulting and costs of accelerated
replacement of hardware and software, but do not include the cost of internal
staff redeployed to the Year 2000 project. The Company does not believe that
the redeployment of internal staff for the former Wells Fargo will have a
material impact on the financial condition or results of operations for the
Company.
The previous paragraphs contain a number of forward-looking statements. These
statements reflect management's best current estimates, which were based on
numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other third parties, and additional factors. There can
be no guarantee that these estimates, including Year 2000 costs, will be
achieved, and actual results could differ materially from those estimates. A
number of important factors could cause management's estimates and the impact
of the Year 2000 issue to differ materially from what is described in the
forward-looking statements contained in the above paragraphs. Those factors
include, but are not limited to, uncertainties in the cost of hardware and
software, the availability and cost of programmers and other systems
personnel, inaccurate or incomplete execution of the phases, ineffective
remediation of computer code, and whether the Company's customers, vendors,
competitors and counterparties effectively address the Year 2000 issue.
If Year 2000 issues are not adequately addressed by the Company and
significant third parties, the Company's business, results of operations and
financial position could be materially adversely affected. Failure of certain
vendors to be Year 2000 compliant could result in disruption of important
services upon which the Company depends, including, but not limited to, such
services as telecommunications, electrical power and data processing. Failure
of the Company's loan customers to properly prepare for the Year 2000 could
also result in increases in problem loans and credit losses in future years.
Notwithstanding the Company's efforts, there can be no assurance that the
Company or significant third party vendors or other significant third parties
will adequately address their Year 2000 issues. The Company is continuing to
assess the Year 2000 readiness of third parties but does not know at this
time
24
<PAGE>
whether the failure of third parties to be Year 2000 compliant will have a
material effect on the Company's results of operations, liquidity and
financial condition.
The forward-looking statements made in the foregoing Year 2000 discussion
speak only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
The Year 2000 disclosures contained in this Form 10-Q are designated as Year
2000 Readiness Disclosures related to the Year 2000 Information and Readiness
Disclosure Act.
INCOME TAXES
The Company's effective income tax rate was 36% for the first quarter of
1999, compared with 39% for the first quarter of 1998. The lower effective
rate resulted from a reduction of state income tax and an increase in
charitable donations of appreciated securities.
25
<PAGE>
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
The following table reconciles reported earnings to net income excluding
goodwill and nonqualifying core deposit intangible amortization ("cash" or
"tangible") for the quarter ended March 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Quarter ended
(in millions, except per share amounts) March 31, 1999
- ----------------------------------------------------------------------------------------------------------
Amortization
-------------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income tax expense $1,381 $104 $ 46 $1,531
Income tax expense 497 -- 17 514
------ ----- ---- ------
Net income 884 104 29 1,017
Preferred stock dividends 9 -- -- 9
------ ----- ---- ------
Net income applicable to common stock $ 875 $104 $ 29 $1,008
------ ----- ---- ------
------ ----- ---- ------
Earnings per common share $ .53 $.06 $.02 $ .61
------ ----- ---- ------
------ ----- ---- ------
Diluted earnings per common share $ .53 $.06 $.02 $ .61
------ ----- ---- ------
------ ----- ---- ------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and related balances for the quarter ended
March 31, 1999 were calculated as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Quarter ended
(in millions) March 31, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROA: A / (C-E) = 2.17%
ROE: B / (D-E) = 34.38%
Efficiency: (F-G) / H = 54.89%
Net income $ 1,017 (A)
Net income applicable to common stock 1,008 (B)
Average total assets 198,723 (C)
Average common stockholders' equity 20,487 (D)
Average goodwill ($7,734) and after-tax nonqualifying core deposit intangible ($863) 8,597 (E)
Noninterest expense 2,342 (F)
Amortization expense for goodwill and nonqualifying core deposit intangible 150 (G)
Net interest income plus noninterest income 3,993 (H)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
These calculations were specifically formulated by the Company and may not be
comparable to similarly titled measures reported by other companies. Also,
"cash" or "tangible" earnings are not entirely available for use by
management. See the Consolidated Statement of Cash Flows for other
information regarding funds available for use by management.
26
<PAGE>
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major components of
securities available for sale (there were no securities held to maturity at the
end of the periods presented):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
1999 1998 1998
-------------------- ------------------- -------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities of U.S. Treasury and
federal agencies $ 7,629 $ 7,582 $ 3,260 $ 3,287 $ 8,479 $ 8,493
Securities of U.S. states and
political subdivisions 1,867 1,968 1,683 1,794 1,615 1,704
Mortgage-backed securities:
Federal agencies 20,085 20,314 20,539 20,804 16,890 17,277
Private collateralized mortgage obligations (1) 3,313 3,313 3,420 3,440 2,378 2,390
------- ------- ------- ------- ------- -------
Total mortgage-backed securities 23,398 23,627 23,959 24,244 19,268 19,667
Other 1,929 1,922 1,879 1,899 717 607
------- ------- ------- ------- ------- -------
Total debt securities 34,823 35,099 30,781 31,224 30,079 30,471
Marketable equity securities 393 702 386 773 278 677
------- ------- ------- ------- ------- -------
Total $35,216 $35,801 $31,167 $31,997 $30,357 $31,148
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Substantially all private collateralized mortgage obligations are AAA rated
bonds collateralized by 1-4 family residential first mortgages.
The securities available for sale portfolio includes both debt and marketable
equity securities. At March 31, 1999, the securities available for sale
portfolio had an unrealized net gain of $585 million, or less than 2% of the
cost of the portfolio, comprised of unrealized gross gains of $798 million
and unrealized gross losses of $213 million. At December 31, 1998, the
securities available for sale portfolio had an unrealized net gain of $830
million, comprised of unrealized gross gains of $919 million and unrealized
gross losses of $89 million. At March 31, 1998, the securities available for
sale portfolio had an unrealized net gain of $791 million, comprised of
unrealized gross gains of $843 million and unrealized gross losses of $52
million. The unrealized net gain or loss on securities available for sale is
reported on an after-tax basis as a separate component of cumulative other
comprehensive income in stockholders' equity.
27
<PAGE>
For the quarter ended March 31, 1999, the sales of securities in the
securities available for sale portfolio resulted in a realized net loss of $2
million, comprised of realized gross losses of $17 million and realized gross
gains of $15 million. The sales of securities in the securities available for
sale portfolio resulted in a realized net gain of $19 million, comprised of
realized gross gains of $24 million and realized gross losses of $5 million
for the quarter ended March 31, 1998. The Company may decide to sell certain
of the securities available for sale to manage the level of earning assets
(for example, to offset loan growth that may exceed expected maturities and
prepayments of securities).
The weighted average expected maturity of the debt securities portion of the
securities available for sale portfolio was 5 years and 1 month at March 31,
1999. Expected remaining maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
penalties.
At March 31, 1999, mortgage-backed securities, including collateralized
mortgage obligations (CMOs), represented $23.6 billion, or 66% of the
Company's securities available for sale portfolio. The CMO securities held by
the Company (including the private issues) are primarily shorter-maturity
class bonds that were structured to have more predictable cash flows by being
less sensitive to prepayments during periods of changing interest rates. As
an indication of interest rate risk, the Company has estimated the effect of
a 200 basis point increase in interest rates on the value of the
mortgage-backed securities and the corresponding expected remaining
maturities. Based on this rate scenario, mortgage-backed securities would
decrease in fair value from $23.6 billion to $21.9 billion and the expected
remaining maturity of these securities would increase from 4 years and 8
months to 6 years and 8 months.
28
<PAGE>
LOAN PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
% Change
Mar. 31, 1999 from
----------------------
MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31,
(in millions) 1999 1998 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 35,232 $ 35,450 $ 32,416 (1)% 9%
Real estate 1-4 family first mortgage 11,328 10,709 12,589 6 (10)
Other real estate mortgage 16,903 16,668 16,329 1 4
Real estate construction 3,942 3,790 3,423 4 15
Consumer:
Real estate 1-4 family junior lien mortgage 10,786 10,691 10,073 1 7
Credit card 5,394 5,795 6,232 (7) (13)
Other revolving credit and monthly payment 16,392 16,902 17,727 (3) (8)
-------- -------- --------
Total consumer 32,572 33,388 34,032 (2) (4)
Lease financing 6,645 6,380 5,231 4 27
Foreign 1,486 1,609 1,121 (8) 33
-------- -------- --------
Total loans (net of unearned income,
including net deferred loan fees, of
$2,951, $2,967 and $2,899) $108,108 $107,994 $105,141 -- % 3%
-------- -------- -------- -- --
-------- -------- -------- -- --
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans (1)(2) $703 $709 $712
Restructured loans (3) 1 1 9
---- ----- ----
Nonaccrual and restructured loans 704 710 721
As a percentage of total loans .7 % .7 % .7 %
Foreclosed assets 212 167 205
Real estate investments (4) 1 1 4
---- ----- ----
Total nonaccrual and restructured loans
and other assets $917 $878 $930
---- ----- ----
---- ----- ----
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes loans that are contractually past due 90 days or more as to
interest or principal, but are both well-secured and in the process of
collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as
nonaccrual.
(2) Of the total nonaccrual loans, $335 million, $388 million and $435 million
at March 31, 1999, December 31, 1998 and March 31, 1998, respectively, were
considered impaired under FAS 114 (Accounting by Creditors for Impairment
of a Loan).
(3) In addition to originated loans that were subsequently restructured, there
were loans of $23 million for the periods presented that were purchased at
a steep discount whose contractual terms were modified after acquisition.
The modified terms did not affect the book balance or the yields expected
at the date of purchase. Of the total restructured loans and loans
purchased at a steep discount, $23 million were considered impaired under
FAS 114 for the periods presented.
(4) Represents the amount of real estate investments (contingent interest loans
accounted for as investments) that would be classified as nonaccrual if
such assets were loans. Real estate investments totaled $130 million, $128
million and $162 million at March 31, 1999, December 31, 1998 and March 31,
1998, respectively.
29
<PAGE>
The Company generally identifies loans to be evaluated for impairment under
FAS 114, Accounting by Creditors for Impairment of a Loan, when such loans
are on nonaccrual or have been restructured. However, not all nonaccrual
loans are impaired. Generally, a loan is placed on nonaccrual status upon
becoming 90 days past due as to interest or principal (unless both
well-secured and in the process of collection), when the full timely
collection of interest or principal becomes uncertain or when a portion of
the principal balance has been charged off. Real estate 1-4 family loans
(both first liens and junior liens) are placed on nonaccrual status within
120 days of becoming past due as to interest or principal, regardless of
security. In contrast, under FAS 114, loans are considered impaired when it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement, including scheduled
interest payments. For a loan that has been restructured, the contractual
terms of the loan agreement refer to the contractual terms specified by the
original loan agreement, not the contractual terms specified by the
restructuring agreement. Not all impaired loans are necessarily placed on
nonaccrual status. That is, restructured loans performing under restructured
terms beyond a specified performance period are classified as accruing but
may still be deemed impaired under FAS 114.
For loans covered under FAS 114, the Company makes an assessment for
impairment when and while such loans are on nonaccrual, or the loan has been
restructured. When a loan with unique risk characteristics has been
identified as being impaired, the Company will measure the amount of
impairment using discounted cash flows, except when the sole (remaining)
source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted
cash flows. Additionally, some impaired loans with commitments of less than
$1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment
in the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. FAS 114
does not change the timing of charge-offs of loans to reflect the amount
ultimately expected to be collected.
30
<PAGE>
In accordance with FAS 114, the table below shows the recorded investment in
impaired loans and the related methodology used to measure impairment for the
periods presented:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impairment measurement based on:
Collateral value method $289 $329 $372
Discounted cash flow method 60 67 62
Historical loss factors 9 15 24
---- ---- ----
Total (1)(2) $358 $411 $458
---- ---- ----
---- ---- ----
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes accruing loans of $23 million purchased at a steep discount for
the periods presented whose contractual terms were modified after
acquisition. The modified terms did not affect the book balance nor the
yields expected at the date of purchase.
(2) Includes $165 million, $155 million, and $143 million of impaired loans
with a related FAS 114 allowance of $64 million, $37 million and $41
million at March 31, 1999, December 31, 1998 and March 31, 1998,
respectively.
The average recorded investment in impaired loans was $366 million and $438
million during the first three months of 1999 and 1998, respectively. Total
interest income recognized on impaired loans was $2 million and $4 million
during the first three months of 1999 and 1998, respectively, which was
primarily recorded using the cash method.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on nonaccrual. Under the cash method,
contractual interest is credited to interest income when received. This
method is used when the ultimate collectibility of the total principal is not
in doubt. Under the cost recovery method, all payments received are applied
to principal. This method is used when the ultimate collectibility of the
total principal is in doubt. Loans on the cost recovery method may be changed
to the cash method when the application of the cash payments has reduced the
principal balance to a level where collection of the remaining recorded
investment is no longer in doubt.
The Company anticipates normal influxes of nonaccrual loans as it further
increases its lending activity as well as resolutions of loans in the
nonaccrual portfolio. The performance of any individual loan can be affected
by external factors, such as the interest rate environment or factors
particular to a borrower such as actions taken by a borrower's management. In
addition, from time to time, the Company purchases loans from other financial
institutions that may be classified as nonaccrual based on its policies.
31
<PAGE>
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The following table shows loans contractually past due 90 days or more as to
interest or principal, but not included in the nonaccrual or restructured
categories. All loans in this category are both well-secured and in the
process of collection or are real estate 1-4 family first mortgage loans or
consumer loans that are exempt under regulatory rules from being classified
as nonaccrual because they are automatically charged off after being past due
for a prescribed period (generally, 180 days). Notwithstanding, real estate
1-4 family loans (first liens and junior liens) are placed on nonaccrual
within 120 days of becoming past due and such nonaccrual loans are excluded
from the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
MAR. 31, Dec. 31, Mar. 31,
(in millions) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 28 $ 9 $ 20
Real estate 1-4 family first mortgage 13 17 40
Other real estate mortgage 44 41 30
Real estate construction 8 6 3
Consumer:
Real estate 1-4 family junior lien mortgage 5 32 40
Credit card 112 133 156
Other revolving credit and monthly payment 90 104 94
---- ---- ----
Total consumer 207 269 290
---- ---- ----
Total $300 $342 $383
---- ---- ----
---- ---- ----
- ------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------
Quarter ended March 31,
-----------------------
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, BEGINNING OF QUARTER $3,134 $3,062
Allowances related to business combinations, net 30 9
Provision for loan losses 270 305
Loan charge-offs:
Commercial (81) (58)
Real estate 1-4 family first mortgage (1) (5)
Other real estate mortgage (8) (3)
Real estate construction -- (1)
Consumer:
Real estate 1-4 family junior lien mortgage (9) (6)
Credit card (110) (141)
Other revolving credit and monthly payment (127) (179)
------ ------
Total consumer (246) (326)
Lease financing (11) (12)
Foreign (15) (10)
------ ------
Total loan charge-offs (362) (415)
------ ------
Loan recoveries:
Commercial 13 25
Real estate 1-4 family first mortgage 1 4
Other real estate mortgage 17 11
Real estate construction -- 1
Consumer:
Real estate 1-4 family junior lien mortgage 3 2
Credit card 13 15
Other revolving credit and monthly payment 36 42
------ ------
Total consumer 52 59
Lease financing 3 3
Foreign 3 2
------ ------
Total loan recoveries 89 105
------ ------
Total net loan charge-offs (273) (310)
------ ------
BALANCE, END OF QUARTER $3,161 $3,066
------ ------
------ ------
Total net loan charge-offs as a percentage
of average loans (annualized) 1.03% 1.19%
------ ------
------ ------
Allowance as a percentage of total loans 2.92% 2.92%
------ ------
------ ------
- ---------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
The largest category of net charge-offs in the first quarter of 1999 was credit
card loans. This category comprised 36% and 41% of total net charge-offs in the
first quarter of 1999 and 1998, respectively. During the first quarter of 1999,
credit card gross charge-offs due to bankruptcies were $39 million, or 35%, of
total credit card gross charge-offs, compared with $53 million, or 42%, in the
fourth quarter of 1998 and $55 million, or 39%, in the first quarter of 1998. In
addition, credit card loans 30 to 89 days past due and still accruing totaled
$187 million at March 31, 1999, compared with $154 million at December 31, 1998
and $255 million at March 31, 1998.
The Company considers the allowance for loan losses of $3,161 million adequate
to cover losses inherent in loans, commitments to extend credit and standby
letters of credit at March 31, 1999. The Company's determination of the level of
the allowance and, correspondingly, the provision for loan losses rests upon
various judgments and assumptions, including general economic conditions, loan
portfolio composition, prior loan loss experience and the Company's ongoing
examination process and that of its regulators.
INTEREST RECEIVABLE AND OTHER ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonmarketable equity investments $ 2,426 $ 2,392 $ 1,971
Government National Mortgage Association (GNMA)
pool buy outs 2,074 1,624 968
Trading assets 1,839 760 2,204
Interest receivable 1,140 1,062 1,083
Foreclosed assets 212 167 205
Certain identifiable intangible assets 241 212 226
Due from customers on acceptances 133 128 100
Interest earning deposits 131 113 105
Other 6,965 4,436 4,242
------- ------- -------
Total interest receivable and other assets $15,161 $10,894 $11,104
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Income from nonmarketable equity investments accounted for using the cost
method was $33 million and $50 million in the first quarter of 1999 and 1998,
respectively.
The increase in GNMA pool buyouts was due to additional advances made to GNMA
mortgage pools that are guaranteed by the Federal Housing Administration or
by the Department of Veterans Affairs (collectively, "the guarantors"). These
advances are made to buy out government agency-guaranteed delinquent loans,
pursuant to the Company's servicing agreements. The Company, on behalf of the
guarantors, undertakes the collection and foreclosure process. After the
foreclosure process is complete, the Company is reimbursed for substantially
all costs incurred, including the advances, by the guarantors.
34
<PAGE>
Trading assets consist predominantly of securities, including corporate debt
and U.S. government agency obligations. The increase at March 31, 1999
compared with December 31, 1998 was primarily due to an increase in U.S.
Treasury bills and U.S. Treasury notes. Income from trading assets was $42
million and $44 million in the first quarter of 1999 and 1998, respectively.
Amortization expense for certain identifiable intangible assets included in
other assets was $12 million and $22 million in the first quarter of 1999 and
1998, respectively.
The increase in "Other" from December 31, 1998 was primarily due to increases
in certain income tax and bond customer receivables.
DEPOSITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in millions) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing $ 42,322 $ 46,732 $ 43,027
Interest-bearing checking 3,265 2,908 3,444
Market rate and other savings 55,754 55,152 51,271
Savings certificates 26,655 27,497 27,786
-------- -------- --------
Core deposits 127,996 132,289 125,528
Other time deposits 3,758 3,753 4,199
Deposits in foreign offices 586 746 421
-------- -------- --------
Total deposits $132,340 $136,788 $130,148
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
CAPITAL ADEQUACY/RATIOS
The Company and each of the subsidiary banks are subject to various
regulatory capital adequacy requirements administered by the Federal Reserve
Board and the Office of the Comptroller of the Currency. Risk-based capital
(RBC) guidelines establish a risk-adjusted ratio relating capital to
different categories of assets and off-balance sheet exposures.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
To be well
capitalized under
the FDICIA
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ------------------ ---------------------
(in billions) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------- ------ ----- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total capital (to risk-weighted assets)
Wells Fargo & Company $17.0 10.97% >$12.4 >8.00%
- -
Norwest Bank Minnesota, N.A. 2.2 12.06 > 1.5 >8.00 >$1.8 >10.00%
- - - -
Wells Fargo Bank, N.A. 8.2 12.01 > 5.4 >8.00 > 6.8 >10.00
- - - -
Tier 1 capital (to risk-weighted assets)
Wells Fargo & Company $12.8 8.23% >$6.2 >4.00%
- -
Norwest Bank Minnesota, N.A. 1.9 10.33 > .7 >4.00 >$1.1 > 6.00%
- - - -
Wells Fargo Bank, N.A. 5.4 8.03 > 2.7 >4.00 > 4.1 > 6.00
- - - -
Tier 1 capital (to average assets)
(Leverage ratio)
Wells Fargo & Company $12.8 6.74% >$7.6 >4.00%(1)
- -
Norwest Bank Minnesota, N.A. 1.9 6.16 > 1.2 >4.00 (1) >$1.5 >5.00%
- - - -
Wells Fargo Bank, N.A. 5.4 6.94 > 3.1 >4.00 (1) > 3.9 >5.00
- - - -
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average
total assets, excluding goodwill and certain other items. The minimum
leverage ratio guideline is 3% for banking organizations that have
implemented the risk-based capital measure for market risk, and for
banking organizations that do not anticipate significant growth and that
have well-diversified risk, excellent asset quality, high liquidity, good
earnings, effective management and monitoring of market risk and, in
general, are considered top-rated, strong banking organizations.
36
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the aggregate notional or contractual amounts,
credit risk amount and net fair value of the Company's derivative financial
instruments at March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 December 31, 1998
------------------------------------------ ------------------------------------------
NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated
CONTRACTUAL RISK FAIR contractual risk fair
(in millions) AMOUNT AMOUNT (3) VALUE amount amount (3) value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET/LIABILITY MANAGEMENT
HEDGES
Interest rate contracts:
Swaps (1) $28,048 $506 $499 $24,429 $735 $686
Futures 93,295 -- -- 62,348 -- --
Floors and caps (1) 39,531 335 335 33,598 504 504
Options (2) 27,368 26 45 25,822 112 101
Forwards (1) 42,403 51 (31) 41,283 11 (58)
Foreign exchange contracts:
Forward contracts (1) 163 1 1 168 -- (1)
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Swaps (1) 10,569 62 -- 7,795 81 10
Futures 14,768 -- -- 8,440 -- --
Floors and caps purchased (1) 4,892 26 26 5,619 42 42
Floors and caps written 5,062 -- (31) 5,717 -- (42)
Forwards (1) 484 6 1 850 24 4
Commodity contracts:
Swaps (1) 108 2 -- 78 4 --
Floors and caps purchased (1) 15 1 1 4 -- --
Floors and caps written 15 -- (1) 4 -- --
Foreign exchange contracts:
Forwards and spots (1) 3,617 40 5 3,524 37 2
Options purchased (1) 65 1 1 44 2 2
Options written 55 -- -- 43 -- (2)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company anticipates performance by substantially all of the
counterparties for these or the underlying financial instruments.
(2) At March 31, 1999, a significant portion of purchased option contracts
were options on futures contracts which are exchange traded for which
the exchange assumes counterparty risk.
(3) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
The Company enters into a variety of financial contracts, which include
interest rate futures and forward contracts, interest rate floors and caps,
options and interest rate swap agreements. The contract or notional amount of
a derivative is used to determine, along with the other terms of the
derivative, the amounts to be exchanged between the counterparties. It does
not in itself represent amounts exchanged by the parties and therefore is not
a measure of exposure through the use of derivatives nor of exposure to
liquidity risk. The Company is primarily an end-user of these instruments.
The Company also offers contracts to its customers but offsets such contracts
by purchasing other financial contracts or uses the contracts for
asset/liability management. To a lesser extent, the Company takes positions
based on market expectations or to benefit from price differentials between
financial instruments and markets.
37
<PAGE>
The Company is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. The Company controls the credit risk
of its financial contracts except for contracts for which credit risk is DE
MINIMUS through credit approvals, limits and monitoring procedures. Credit
risk related to derivative financial instruments is considered and, if
material, provided for separately from the allowance for loan losses. As the
Company generally enters into transactions only with high quality
counterparties, losses associated with counterparty nonperformance on
derivative financial instruments have been immaterial. Further, the Company
obtains collateral where appropriate and uses master netting arrangements in
accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to
Certain Contracts, as amended by FASB Interpretation No. 41, Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase Agreements.
LIQUIDITY AND CAPITAL MANAGEMENT
The Company manages its liquidity and capital at both the parent and
subsidiary levels.
In addition to the immediately liquid resources of cash and due from banks
and federal funds sold and securities purchased under resale agreements,
asset liquidity is provided by the Company's securities available for sale
portfolio.
Liquidity for the Parent is provided by dividend and interest income from its
subsidiaries, potential disposition of readily marketable assets and through
its ability to raise funds in a variety of domestic and international money
and capital markets. In 1996, the Company filed a universal registration
statement with the Securities and Exchange Commission that allows for
the issuance of $5 billion of domestic debt and equity securities, excluding
common stock. In 1996, the Parent established a $2 billion Euro Medium-Term
Note program (Euro MTN). The proceeds from the sale of any securities are
expected to be used for general corporate purposes. As of March 31, 1999, the
Company had issued $4.4 billion of domestic securities under the universal
registration statement and $300 million under the Euro MTN program.
Since 1986, the Company has repurchased common stock in the open market in a
systematic pattern to meet the common stock issuance requirements of the
Company's benefit plans and other common stock issuance requirements,
including acquisitions accounted for as purchases. In January of 1999, the
Board of Directors authorized the repurchase of up to 8 million
additional shares of the Company's outstanding common stock. As of March 31,
1999, the total remaining common stock purchase authority was approximately
5.2 million shares. In April of 1999, the Board of Directors authorized the
repurchase of up to 9 million additional shares of the Company's
outstanding common stock.
In April 1999, the Board of Directors approved an increase in the Company's
quarterly common stock dividend to 20 cents per share from 18.5 cents,
representing an 8% increase in the quarterly dividend rate.
38
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
The majority of the Company's interest rate risk arises from the instruments,
positions and transactions entered into for purposes other than trading. They
include loans, securities available for sale, deposit liabilities, short-term
borrowings, long-term debt and derivative financial instruments used for
asset/liability management. Interest rate risk occurs when assets and
liabilities reprice at different times as interest rates change. For example,
if fixed-rate assets are funded with floating-rate debt, the spread between
asset and liability rates will decline or turn negative if rates increase.
The Company refers to this type of risk as "term structure risk." There is,
however, another source of interest rate risk which results from changing
spreads between asset and liability rates. The Company calls this type of
risk "basis risk;" it is a significant source of interest rate risk for the
Company and is more difficult to quantify and manage than term structure
risk. Two primary components of basis risk for the Company are the spread
between prime-based loans and market rate account (MRA) savings deposits and
the rate paid on savings and interest-bearing checking accounts as compared
to LIBOR-based loans.
Interest rate risk is managed within an overall asset/liability framework for
the Company. The principal objectives of asset/liability management are to
manage the sensitivity of net interest spreads and net income to potential
changes in interest rates and to enhance profitability in ways that promise
sufficient reward for understood and controlled risk. Funding positions are
kept within predetermined limits designed to ensure that risk-taking is not
excessive and that liquidity is properly managed. The Company employs a
sensitivity analysis in the form of a net interest income simulation to help
characterize the market risk arising from changes in interest rates in the
other-than-trading portfolio.
The Company's net interest income simulation includes all other-than-trading
financial assets, financial liabilities, derivative financial instruments and
leases where the Company is the lessor. It captures the dynamic nature of the
balance sheet by anticipating probable balance sheet and off-balance sheet
strategies and volumes under different interest rate scenarios over the
course of a one-year period. This simulation measures both the term structure
risk and the basis risk in the Company's positions. The simulation also
captures the option characteristics of products, such as caps and floors on
floating rate loans, the right to prepay mortgage loans without penalty and
the ability of customers to withdraw deposits on demand. These options are
modeled directly in the simulation either through the use of option pricing
models, in the case of caps and floors on loans, or through statistical
analysis of historical customer behavior, in the case of mortgage loan
prepayments or non-maturity deposits.
The simulation model is used to measure the impact on after-tax net income,
relative to a base case scenario, of rates increasing or decreasing 100 basis
points over the next 12 months. At March 31, 1999, the simulation showing
the largest drop in net income relative to the base case scenario over the
next twelve months is a 100 basis point increase in rates which would result
in a decrease in net income of $61 million. In the simulation which was run
at December 31, 1998, the largest
39
<PAGE>
drop in net income relative to the base case scenario over the next twelve
months was a 100 basis point increase in rates which would result in a
decrease in net income of $26 million.
The Company uses interest rate derivative financial instruments as
asset/liability management tools to hedge mismatches in interest rate
exposures indicated by the net interest income simulation described above.
They are used to reduce the Company's exposure to interest rate fluctuations
and provide more stable spreads between loan yields and the rates on their
funding sources. For example, the Company uses interest rate futures to
shorten the rate maturity of MRA savings deposits to better match the
maturity of prime-based loans. The Company also purchases interest rate
floors to protect against the loss in interest income on LIBOR-based loans
during a declining interest rate environment. Additionally, receive-fixed
rate swaps are used to convert floating-rate loans into fixed rates to better
match the liabilities that fund the loans. The Company also uses derivatives
including floors, futures contracts and options on futures contracts to hedge
the Company's mortgage servicing rights.
The Company considers the fair values and the potential near term losses to
future earnings related to its customer accommodation derivative financial
instruments to be immaterial.
40
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3(b) to the Company's Current Report
on Form 8-K dated June 28, 1993. Certificates of Amendment
of Certificate of Incorporation, incorporated by reference
to Exhibit 3 to the Company's Current Report on Form 8-K
dated July 3, 1995 (authorizing preference stock), and
Exhibits 3(b) and 3(c) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998
(changing the Company's name and increasing authorized
common and preferred stock, respectively)
(b) Certificate of Designations for the Company's ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994
(c) Certificate of Designations for the Company's Cumulative
Tracking Preferred Stock, incorporated by reference to
Exhibit 3 to the Company's Current Report on Form 8-K
dated January 9, 1995
(d) Certificate of Designations for the Company's 1995 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995
(e) Certificate Eliminating the Certificate of Designations
for the Company's Cumulative Convertible Preferred Stock,
Series B, incorporated by reference to Exhibit 3(a) to the
Company's Current Report on Form 8-K dated November 1,
1995
(f) Certificate Eliminating the Certificate of Designations
for the Company's 10.24% Cumulative Preferred Stock,
incorporated by reference to Exhibit 3 to the Company's
Current Report on Form 8-K dated February 20, 1996
(g) Certificate of Designations for the Company's 1996 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated February 26, 1996
(h) Certificate of Designations for the Company's 1997 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated April 14, 1997
41
<PAGE>
3(i) Certificate of Designations for the Company's 1998 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated April 20, 1998
(j) Certificate of Designations for the Company's Adjustable
Cumulative Preferred Stock, Series B, incorporated by
reference to Exhibit 3(j) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998
(k) Certificate of Designations for the Company's
Fixed/Adjustable Rate Noncumulative Preferred Stock,
Series H, incorporated by reference to Exhibit 3(k) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998
(l) Certificate of Designations for the Company's Series C
Junior Participating Preferred Stock, incorporated by
reference to Exhibit 3(l) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998
(m) Certificate Eliminating the Certificate of Designations
for the Company's Series A Junior Participating Preferred
Stock, incorporated by reference to Exhibit 3(a) to the
Company's Current Report on Form 8-K dated April 21, 1999
(n) Certificate of Designations for the Company's 1999 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3(b) to the Company's Current Report
on Form 8-K dated April 21, 1999
(o) By-Laws, incorporated by reference to Exhibit 3(m) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998
4(a) See Exhibits 3(a) through 3(o)
(b) Rights Agreement, dated as of October 21, 1998, between
the Company and ChaseMellon Shareholder Services, L.L.C.,
as Rights Agent, incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form 8-A dated
October 21, 1998
(c) The Company agrees to furnish upon request to the
Commission a copy of each instrument defining the rights
of holders of senior and subordinated debt of the Company.
27 Financial Data Schedule
42
<PAGE>
99(a) Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.10 and 1.88 for the quarters ended March
31, 1999 and 1998, respectively. The ratios of earnings to
fixed charges, excluding interest on deposits, were 3.58
and 3.22 for the quarters ended March 31, 1999 and 1998,
respectively.
(b) Computation of Ratios of Earnings to Fixed Charges and
Preferred Dividends -- the ratios of earnings to fixed
charges and preferred dividends, including interest on
deposits, were 2.08 and 1.85 for the quarters ended March
31, 1999 and 1998, respectively. The ratios of earnings to
fixed charges and preferred dividends, excluding interest
on deposits, were 3.49 and 3.12 for the quarters ended
March 31, 1999 and 1998, respectively.
(b) The Company filed the following reports on Form 8-K during the
first quarter of 1999:
(1) January 19, 1999 under Item 5, containing the Supplemental
Annual Report for 1997; Supplemental Quarterly Report for
the quarter ended September 30, 1998; and the Company's
financial results for the quarter and year ended December
31, 1998
(2) January 29, 1999 under Item 5, describing the Board
action taken with respect to the Company's systematic
stock repurchase program
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 17, 1999.
WELLS FARGO & COMPANY
By: /s/ LES L. QUOCK
------------------------------------
Les L. Quock
Senior Vice President and Controller
(Principal Accounting Officer)
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR
THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,364
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 869
<TRADING-ASSETS> 1,839
<INVESTMENTS-HELD-FOR-SALE> 35,801
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 108,108
<ALLOWANCE> 3,161
<TOTAL-ASSETS> 201,430
<DEPOSITS> 132,340
<SHORT-TERM> 17,270
<LIABILITIES-OTHER> 9,396
<LONG-TERM> 21,148
0
459
<COMMON> 2,777
<OTHER-SE> 18,040
<TOTAL-LIABILITIES-AND-EQUITY> 201,430
<INTEREST-LOAN> 2,579
<INTEREST-INVEST> 510
<INTEREST-OTHER> 399
<INTEREST-TOTAL> 3,488
<INTEREST-DEPOSIT> 717
<INTEREST-EXPENSE> 1,222
<INTEREST-INCOME-NET> 2,266
<LOAN-LOSSES> 270
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 2,342
<INCOME-PRETAX> 1,381
<INCOME-PRE-EXTRAORDINARY> 884
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 884
<EPS-PRIMARY> 0.53<F1>
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 5.58
<LOANS-NON> 703
<LOANS-PAST> 300
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,134
<CHARGE-OFFS> 362
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 3,161
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Amount represents basic earnings per common share pursuant to FAS 128.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99(A)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Quarter
ended March 31,
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS, INCLUDING INTEREST ON DEPOSITS (1):
Income before income tax expense $1,381 $1,126
Fixed charges 1,253 1,285
------ ------
$2,634 $2,411
------ ------
------ ------
Fixed charges (1):
Interest expense $1,222 $1,245
Estimated interest component of net rental expense 31 40
------ ------
$1,253 $1,285
------ ------
------ ------
Ratio of earnings to fixed charges (2) 2.10 1.88
------ ------
------ ------
EARNINGS, EXCLUDING INTEREST ON DEPOSITS:
Income before income tax expense $1,381 $1,126
Fixed charges 536 508
------ ------
$1,917 $1,634
------ ------
------ ------
Fixed charges:
Interest expense $1,222 $1,245
Less interest on deposits 717 777
Estimated interest component of net rental expense 31 40
------ ------
$ 536 $ 508
------ ------
------ ------
Ratio of earnings to fixed charges (2) 3.58 3.22
------ ------
------ ------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) As defined in Item 503(d) of Regulation S-K.
(2) These computations are included herein in compliance with Securities and
Exchange Commission regulations. However, management believes that fixed
charge ratios are not meaningful measures for the business of the Company
because of two factors. First, even if there was no change in net income,
the ratios would decline with an increase in the proportion of income which
is tax-exempt or, conversely, they would increase with a decrease in the
proportion of income which is tax-exempt. Second, even if there was no
change in net income, the ratios would decline if interest income and
interest expense increase by the same amount due to an increase in the
level of interest rates or, conversely, they would increase if interest
income and interest expense decrease by the same amount due to a decrease
in the level of interest rates.
<PAGE>
EXHIBIT 99(B)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Quarter
ended March 31,
---------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS, INCLUDING INTEREST ON DEPOSITS (1):
Income before income tax expense $1,381 $1,126
Fixed charges 1,253 1,285
------ ------
$2,634 $2,411
------ ------
------ ------
Preferred dividend requirement $ 9 $ 9
Ratio of income before income tax expense to net income 1.56 1.65
------ ------
Preferred dividends (2) $ 14 $ 15
------ ------
Fixed charges (1):
Interest expense 1,222 1,245
Estimated interest component of net rental expense 31 40
------ ------
1,253 1,285
------ ------
Fixed charges and preferred dividends $1,267 $1,300
------ ------
------ ------
Ratio of earnings to fixed charges and preferred dividends (3) 2.08 1.85
------ ------
------ ------
EARNINGS, EXCLUDING INTEREST ON DEPOSITS:
Income before income tax expense $1,381 $1,126
Fixed charges 536 508
------ ------
$1,917 $1,634
------ ------
------ ------
Preferred dividends (2) $ 14 $ 15
------ ------
Fixed charges:
Interest expense 1,222 1,245
Less interest on deposits 717 777
Estimated interest component of net rental expense 31 40
------ ------
536 508
------ ------
Fixed charges and preferred dividends $ 550 $ 523
------ ------
------ ------
Ratio of earnings to fixed charges and preferred dividends (3) 3.49 3.12
====== ======
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) As defined in Item 503(d) of Regulation S-K.
(2) The preferred dividends were increased to amounts representing the pretax
earnings that would be required to cover such dividend requirements.
(3) These computations are included herein in compliance with Securities and
Exchange Commission regulations. However, management believes that fixed
charge ratios are not meaningful measures for the business of the Company
because of two factors. First, even if there was no change in net income,
the ratios would decline with an increase in the proportion of income which
is tax-exempt or, conversely, they would increase with a decrease in the
proportion of income which is tax-exempt. Second, even if there was no
change in net income, the ratios would decline if interest income and
interest expense increase by the same amount due to an increase in the
level of interest rates or, conversely, they would increase if interest
income and interest expense decrease by the same amount due to a decrease
in the level of interest rates.
