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 September 30, 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 October 29, 1999 ------------------ Common stock, $1-2/3 par value 1,642,295,001
FORM 10-Q TABLE OF CONTENTS <TABLE> <CAPTION> PART I FINANCIAL INFORMATION Item 1. Financial Statements Page ---- <S> <C> <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 (MD&A) Summary Financial Data............................................ 15 Overview.......................................................... 16 Operating Segment Results......................................... 21 Earnings Performance.............................................. 23 Net Interest Income.............................................. 23 Noninterest Income............................................... 26 Noninterest Expense.............................................. 27 Income Taxes..................................................... 31 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI......... 32 Balance Sheet Analysis............................................ 33 Securities Available for Sale.................................... 33 Loan Portfolio................................................... 34 Nonaccrual and Restructured Loans and Other Assets............... 35 Loans 90 Days Past Due and Still Accruing..................... 37 Allowance for Loan Losses........................................ 38 Interest Receivable and Other Assets............................. 39 Deposits......................................................... 40 Capital Adequacy/Ratios.......................................... 41 Derivative Financial Instruments................................. 42 Liquidity and Capital Management................................. 43 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 44 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................................. 45 SIGNATURE................................................................. 48 </TABLE> 1
PART I--FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, --------------------- --------------------- (in millions, except per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Securities available for sale $ 586 $ 424 $ 1,612 $ 1,330 Mortgages held for sale 198 230 671 609 Loans held for sale 80 93 280 274 Loans 2,725 2,702 7,912 8,046 Other interest income 52 79 150 199 -------- -------- -------- -------- Total interest income 3,641 3,528 10,625 10,458 -------- -------- -------- -------- INTEREST EXPENSE Deposits 679 788 2,075 2,340 Short-term borrowings 226 195 635 558 Long-term debt 338 266 911 804 Guaranteed preferred beneficial interests in Company's subordinated debentures 16 16 45 67 -------- -------- -------- -------- Total interest expense 1,259 1,265 3,666 3,769 -------- -------- -------- -------- NET INTEREST INCOME 2,382 2,263 6,959 6,689 Provision for loan losses 240 307 770 921 -------- -------- -------- -------- Net interest income after provision for loan losses 2,142 1,956 6,189 5,768 -------- -------- -------- -------- NONINTEREST INCOME Service charges on deposit accounts 385 356 1,096 993 Trust and investment fees and commissions 317 267 932 794 Credit card fee revenue 138 136 395 384 Other fees and commissions 258 241 763 695 Mortgage banking 318 275 969 854 Insurance 95 73 299 278 Net venture capital gains 162 4 287 116 Net (losses) gains on securities available for sale (2) 76 19 161 Other 138 193 590 595 -------- -------- -------- -------- Total noninterest income 1,809 1,621 5,350 4,870 -------- -------- -------- -------- NONINTEREST EXPENSE Salaries 776 730 2,251 2,132 Incentive compensation 124 164 393 449 Employee benefits 208 167 624 543 Equipment 193 192 566 572 Net occupancy 205 188 576 564 Goodwill 106 108 314 317 Core deposit intangible 49 58 151 183 Net losses (gains) on dispositions of premises and equipment 6 7 (5) 55 Other 751 733 2,254 2,282 -------- -------- -------- -------- Total noninterest expense 2,418 2,347 7,124 7,097 -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 1,533 1,230 4,415 3,541 Income tax expense 571 488 1,638 1,397 -------- -------- -------- -------- NET INCOME $ 962 $ 742 $ 2,777 $ 2,144 -------- -------- -------- -------- -------- -------- -------- -------- NET INCOME APPLICABLE TO COMMON STOCK $ 953 $ 733 $ 2,751 $ 2,118 -------- -------- -------- -------- -------- -------- -------- -------- EARNINGS PER COMMON SHARE $ .58 $ .45 $ 1.67 $ 1.31 -------- -------- -------- -------- -------- -------- -------- -------- DILUTED EARNINGS PER COMMON SHARE $ .57 $ .45 $ 1.65 $ 1.29 -------- -------- -------- -------- -------- -------- -------- -------- DIVIDENDS DECLARED PER COMMON SHARE $ .20 $ .185 $ .585 $ .515 -------- -------- -------- -------- -------- -------- -------- -------- Average common shares outstanding 1,648.6 1,617.3 1,649.0 1,614.4 -------- -------- -------- -------- -------- -------- -------- -------- Diluted average common shares outstanding 1,667.1 1,640.7 1,667.9 1,637.3 -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> 2
WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions, except shares) 1999 1998 1998 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 12,011 $ 12,731 $ 10,985 Federal funds sold and securities purchased under resale agreements 1,556 1,517 1,950 Securities available for sale 36,906 31,997 32,210 Mortgages held for sale 9,850 19,770 15,469 Loans held for sale 4,661 5,322 5,058 Loans 114,709 107,994 107,692 Allowance for loan losses 3,167 3,134 3,170 -------- -------- -------- Net loans 111,542 104,860 104,522 -------- -------- -------- Mortgage servicing rights 4,341 3,080 2,725 Premises and equipment, net 3,124 3,130 3,279 Core deposit intangible 1,334 1,510 1,555 Goodwill 7,620 7,664 7,758 Interest receivable and other assets 14,115 10,894 10,352 -------- -------- -------- Total assets $207,060 $202,475 $195,863 -------- -------- -------- -------- -------- -------- LIABILITIES Noninterest-bearing deposits $ 41,872 $ 46,732 $ 40,951 Interest-bearing deposits 89,685 90,056 89,000 -------- -------- -------- Total deposits 131,557 136,788 129,951 Short-term borrowings 19,248 15,897 17,570 Accrued expenses and other liabilities 8,377 8,537 8,616 Long-term debt 24,911 19,709 18,486 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 785 682 STOCKHOLDERS' EQUITY Preferred stock 560 547 552 Unearned ESOP shares (100) (84) (90) -------- -------- -------- Total preferred stock 460 463 462 Common stock - $1-2/3 par value, authorized 4,000,000,000 shares; issued 1,666,095,265 shares, 1,661,392,590 shares and 1,635,821,810 shares 2,777 2,769 2,726 Additional paid-in capital 8,769 8,673 7,921 Retained earnings 10,625 9,045 9,552 Cumulative other comprehensive income 242 463 462 Notes receivable from ESOP (1) (3) (4) Treasury stock - 16,331,628 shares, 17,334,787 shares and 15,309,106 shares (690) (651) (561) -------- -------- -------- Total stockholders' equity 22,182 20,759 20,558 -------- -------- -------- Total liabilities and stockholders' equity $207,060 $202,475 $195,863 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------ </TABLE> 3
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 (in millions, except shares) shares stock shares stock capital - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCE DECEMBER 31, 1997 $543 $(80) $2,718 $8,126 ---- ---- ------ ------ Comprehensive income Net income 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 10,585,434 7 142 Common stock issued for acquisitions 16,002,900 25 53 Common stock repurchased 27,730,007 (24) (406) Preferred stock issued to ESOP 35,000 35 (37) 2 Preferred stock released to ESOP 27 (1) Preferred stock (25,573) converted to common shares 661,993 (26) 3 Preferred stock dividends Common stock dividends Cash payments received on notes receivable from ESOP 2 Increase in Rabbi trust assets (classified as treasury stock) ---- ---- ------ ------ Net change 9 (10) 8 (205) ---- ---- ------ ------ BALANCE SEPTEMBER 30, 1998 $552 $(90) $2,726 $7,921 ---- ---- ------ ------ ---- ---- ------ ------ BALANCE DECEMBER 31, 1998 $547 $(84) $2,769 $8,673 ---- ---- ------ ------ Comprehensive income Net income 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 17,258,229 82 Common stock issued for acquisitions 6,185,330 8 11 Common stock repurchased 19,288,479 Preferred stock issued to ESOP 75,000 75 (80) 5 Preferred stock released to ESOP 64 (4) Preferred stock (60,165) converted to common shares 1,550,754 (62) 2 Preferred stock dividends Common stock dividends Cash payments received on notes receivable from ESOP Increase in Rabbi trust assets (classified as treasury stock) ---- ---- ------ ------ Net change 13 (16) 8 96 ---- ---- ------ ------ BALANCE SEPTEMBER 30, 1999 $560 $(100) $2,777 $8,769 ---- ---- ------ ------ ---- ---- ------ ------ - -------------------------------------------------------------------------------------------------------------- <CAPTION> - -------------------------------------------------------------------------------------------------------------- Notes Cumulative receivable other Total Retained from Treasury comprehensive stockholders' (in millions, except shares) earnings ESOP stock income equity - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCE DECEMBER 31, 1997 $8,292 $(10) $(275) $ 464 $19,778 ------ ---- ----- ----- ------- Comprehensive income Net income 2,144 2,144 Other comprehensive income, net of tax: Translation adjustments (2) (2) Unrealized gains (losses) on securities available for sale arising during the year 100 100 Reclassification adjustment for (gains) losses on securities available for sale included in net income (100) (100) Total comprehensive income 2,142 Common stock issued (145) 59 63 Common stock issued for acquisitions 12 210 300 Common stock repurchased (514) (944) Preferred stock issued to ESOP -- Preferred stock released to ESOP 26 Preferred stock (25,573) converted to common shares 23 -- Preferred stock dividends (26) (26) Common stock dividends (725) (725) Cash payments received on notes receivable from ESOP 6 8 Increase in Rabbi trust assets (classified as treasury stock) (64) (64) ------ ---- ----- ----- ------- Net change 1,260 6 (286) (2) 780 ------ ---- ----- ----- ------- BALANCE SEPTEMBER 30, 1998 $9,552 $(4) $(561) $ 462 $20,558 ------ ---- ----- ----- ------- ------ ---- ----- ----- ------- BALANCE DECEMBER 31, 1998 $9,045 $(3) $(651) $ 463 $20,759 ------ ---- ----- ----- ------- Comprehensive income Net income 2,777 2,777 Other comprehensive income, net of tax: Translation adjustments 3 3 Unrealized gains (losses) on securities available for sale arising during the year (212) (212) Reclassification adjustment for (gains) losses on securities available for sale included in net income (12) (12) ------ Total comprehensive income 2,556 Common stock issued (201) 640 521 Common stock issued for acquisitions (6) 54 67 Common stock repurchased (777) (777) Preferred stock issued to ESOP -- Preferred stock released to ESOP 60 Preferred stock (61,867) converted to common shares 60 -- Preferred stock dividends (26) (26) Common stock dividends (964) (964) Cash payments received on notes receivable from ESOP 2 2 Increase in Rabbi trust asset (classified as treasury stock (16) (16) ------ ---- ----- ----- ------- Net change 1,580 2 (39) (221) 1,423 ------ ---- ----- ----- ------- BALANCE SEPTEMBER 30, 1999 $10,625 $(1) $(690) $242 $22,182 ------ ---- ----- ----- ------- ------ ---- ----- ----- ------- - -------------------------------------------------------------------------------------------------------------- </TABLE> 4
WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Nine months ended Sept. 30, ---------------------------------- (in millions) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,777 $ 2,144 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 770 921 Depreciation and amortization 1,492 1,646 Securities available for sale gains (19) (161) Gains on sales of mortgages held for sale (228) (306) Gains on sales of loans (32) (48) Gains on dispositions of operations (102) (89) Release of preferred shares to ESOP 60 26 Net (increase) decrease in trading assets (518) 59 Net increase in accrued interest receivable (141) (86) Net increase in accrued interest payable 5 97 Originations of mortgages held for sale (69,316) (75,374) Proceeds from sales of mortgages held for sale 78,748 69,674 Net increase in loans held for sale (560) (564) Other assets, net 151 (98) Other accrued expenses and liabilities, net (66) 1,242 ------- -------- Net cash provided (used) by operating activities 13,021 (917) ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 6,979 8,105 Proceeds from prepayments and maturities 6,485 7,266 Purchases (19,208) (18,286) Net (cash paid for) acquired from acquisitions (161) 36 Net increase in banking subsidiaries' loans resulting from originations and collections (3,461) (874) Proceeds from sales (including participations) of banking subsidiaries' loans 1,691 1,237 Purchases (including participations) of banking subsidiaries' loans (1,211) (97) Principal collected on nonbank subsidiaries' loans 4,221 5,592 Nonbank subsidiaries' loans originated (6,590) (6,441) (Cash paid for) proceeds on dispositions of operations (721) 473 Proceeds from sales of foreclosed assets 145 246 Net increase in federal funds sold and securities purchased under resale agreements (39) (901) Other, net (3,140) (633) ------- -------- Net cash used by investing activities (15,010) (4,277) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (5,949) 35 Net increase in short-term borrowings 3,205 3,911 Proceeds from issuance of long-term debt 11,958 3,688 Repayment of long-term debt (6,727) (2,638) Repayment of guaranteed preferred beneficial interests in Company's subordinated debentures -- (617) Proceeds from issuance of common stock 588 187 Repurchase of common stock (777) (944) Net decrease in notes receivable from ESOP 2 8 Payment of cash dividends on preferred and common stock (990) (751) Other, net (41) 219 ------- -------- Net cash provided by financing activities 1,269 3,098 ------- -------- NET CHANGE IN CASH AND DUE FROM BANKS (720) (2,096) Cash and due from banks at beginning of period 12,731 13,081 ------- -------- CASH AND DUE FROM BANKS AT END OF PERIOD $12,011 $ 10,985 ------- -------- ------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,637 $ 3,672 Income taxes $ 666 $ 946 Noncash investing and financing activities: Transfers from loans to foreclosed assets $ 175 $ 178 Transfers from securities available for sale to trading assets $ 1,132 $ -- Transfers from loans held for sale to loans $ 1,221 $ -- - ----------------------------------------------------------------------------------------------------------------- </TABLE> 5
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. Wells Fargo & Company together with its subsidiaries are referred to as the Company. 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. As a result of these sales, which were completed in April 1999, $104 million of pretax gains were included in noninterest income as gains on dispositions of operations. In connection with the Merger, the Company recorded approximately $600 million of restructuring charges in the fourth quarter of 1998. The restructuring plans are evaluated on a regular basis during the integration process. A severance-related reserve of $280 million was included in the restructuring charges. This reserve was based on the Company's existing severance plans for involuntary terminations. As of September 30, 1999, approximately 1,575 employees, totaling approximately $80 million in severance-related benefits, had entered the severance process. The restructuring charges also included approximately $250 million related to dispositions of owned and leased premises held for sale or remarketing, which is expected to be used by mid-2000. The remaining balance of this reserve was approximately $160 million at September 30, 1999, which was comprised of approximately $50 million for owned premises and approximately $110 million for leased premises. The remaining balance of other restructuring charges, which totaled $70 million when originally recorded, was $15 million at September 30, 1999. The suspension of depreciation on these assets held for disposition reduced net occupancy expense and equipment expense by a total of $13 million for the nine months ended September 30, 1999. 6
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 eight pending transactions as of September 30, 1999 with total assets of $3.3 billion, and anticipates that approximately $146 million of cash and approximately 22.3 million common shares will be issued upon consummation of these transactions. The pending transactions, subject to approval by regulatory agencies, are expected to be completed by the first quarter of 2000, and are not significant to the financial statements of the Company, either individually or in the aggregate. During the nine months ended September 30, 1999, the Company completed nine transactions involving the acquisition of $2.0 billion in assets. In connection with these acquisitions, the Company paid $395 million in cash and issued 6.2 million shares of its common stock. These transactions were not significant to the financial statements of the Company, either individually or in the aggregate. 7
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 September 30, 1999, December 31, 1998 and September 30, 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 SEPT. 30, Dec. 31, Sept. 30, SEPT. 30, Dec. 31, Sept. 30, ----------------- 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) 22,653 -- -- 23 -- -- 10.30 11.30 1998 ESOP Cumulative Convertible (Liquidation preference $1,000) 8,472 8,740 13,604 8 9 14 10.75 11.75 1997 ESOP Cumulative Convertible (Liquidation preference $1,000) 13,639 19,698 19,846 13 20 20 9.50 10.50 1996 ESOP Cumulative Convertible (Liquidation preference $1,000) 21,111 22,068 22,274 21 22 22 8.50 9.50 1995 ESOP Cumulative Convertible (Liquidation preference $1,000) 19,790 20,130 20,283 20 20 20 10.00 10.00 ESOP Cumulative Convertible (Liquidation preference $1,000) 9,532 9,726 9,825 9 10 10 9.0 9.0 Unearned ESOP shares(1) -- -- -- (100) (84) (90) -- -- Less Cumulative Tracking held by subsidiary (Liquidation preference $200) 25,000 25,000 25,000 5 5 5 9.30 9.30 --------- --------- --------- ---- ---- ---- Total 6,550,197 6,535,362 6,540,832 $460 $463 $462 --------- --------- --------- ---- ---- ---- --------- --------- --------- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------------------------------- </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
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 Nine months ended Sept. 30, ended Sept. 30, -------------- --------------- (in millions, except per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income $ 962 $ 742 $ 2,777 $ 2,144 Less: Preferred stock dividends 9 9 26 26 --------- --------- -------- --------- Net income applicable to common stock $ 953 $ 733 $ 2,751 $ 2,118 --------- --------- -------- --------- --------- --------- -------- --------- EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 953 $ 733 $ 2,751 $ 2,118 --------- --------- -------- --------- --------- --------- -------- --------- Average common shares outstanding (denominator) 1,648.6 1,617.3 1,649.0 1,614.4 --------- --------- -------- --------- --------- --------- -------- --------- Per share $ .58 $ .45 $ 1.67 $ 1.31 --------- --------- -------- --------- --------- --------- -------- --------- DILUTED EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 953 $ 733 $ 2,751 $ 2,118 --------- --------- -------- --------- --------- --------- -------- --------- Average common shares outstanding 1,648.6 1,617.3 1,649.0 1,614.4 Add: Stock options 17.2 21.4 17.3 20.8 Restricted share rights 1.3 2.0 1.6 2.1 --------- --------- -------- --------- Diluted average common shares outstanding (denominator) 1,667.1 1,640.7 1,667.9 1,637.3 --------- --------- -------- --------- --------- --------- -------- --------- Per share $ .57 $ .45 $ 1.65 $ 1.29 --------- --------- -------- --------- --------- --------- -------- --------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> 9
4. OPERATING SEGMENTS The Company has identified four 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 (and have been) restated to allow comparability. 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 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 the Wells Fargo Internet Services Group, 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 $10 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 of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, foreign exchange services, cash management, investment management and electronic products. The Group includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade 10
financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support programs for American-made products). 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 RECONCILIATION COLUMN includes goodwill and the nonqualifying core deposit intangible (CDI), the net impact of transfer pricing loan and deposit balances, the cost of external debt 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
The following table provides the results for the Company's four major operating segments. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- (income/expense in millions, Community Wholesale Norwest average balances in billions) Banking Banking Mortgage ----------------- ---------------- -------------- 1999 1998 1999 1998 1999 1998 <S> <C> <C> <C> <C> <C> <C> QUARTER ENDED SEPTEMBER 30, Net interest income (1) $1,688 $1,549 $ 357 $ 340 $ 33 $ 63 Provision for loan losses 147 194 19 13 2 1 Noninterest income 1,070 999 305 215 315 302 Noninterest expense 1,510 1,453 286 254 236 276 ------ ------ ------ ------ ---- ---- Income (loss) before income tax expense (benefit) 1,101 901 357 288 110 88 Income tax expense (benefit) (2) 354 339 134 115 40 32 ------ ------ ------ ------ ---- ---- Net income (loss) $ 747 $ 562 $ 223 $ 173 $ 70 $ 56 ------ ------ ------ ------ ---- ---- ------ ------ ------ ------ ---- ---- Average loans $ 67 $ 64 $ 34 $ 33 $ 1 $ 1 Average assets 120 105 42 39 22 24 Average core deposits 113 110 9 9 5 5 Return on equity (3) 20% 16% 25% 20% 22% 16% NINE MONTHS ENDED SEPTEMBER 30, Net interest income (1) $4,846 $4,598 $1,054 $1,010 $139 $156 Provision for loan losses 465 626 84 (1) 8 3 Noninterest income 3,203 2,893 869 774 957 852 Noninterest expense 4,396 4,489 818 756 760 750 ------ ------ ------ ------ ---- ---- Income (loss) before income tax expense (benefit) 3,188 2,376 1,021 1,029 328 255 Income tax expense (benefit) (2) 1,078 876 380 413 120 93 ------ ------ ------ ------ ---- ---- Net income (loss) $2,110 $1,500 $ 641 $ 616 $208 $162 ------ ------ ------ ------ ---- ---- ------ ------ ------ ------ ---- ---- Average loans $ 66 $ 64 $ 34 $ 32 $ 1 $ 1 Average assets 117 106 41 38 24 21 Average core deposits 113 109 9 8 5 5 Return on equity (3) 19% 15% 24% 25% 21% 17% - ------------------------------------------------------------------------------------------------------- </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. Community Banking and Wholesale Banking 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 was composed of interest revenue of $202 million and $270 million for the third quarter of 1999 and 1998, respectively, and $677 million and $705 million for the first nine months of 1999 and 1998, respectively, and interest expense of $169 million and $207 million for the third quarter of 1999 and 1998, respectively, and $538 million and $549 million for the first nine months of 1999 and 1998, respectively.) (2) 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. (3) 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. 12
<TABLE> <CAPTION> - ------------------------------------------------------------------- Recon- Consoli- Norwest ciliation dated Financial column (4) Company - ------------------------------------------------------------------ 1999 1998 1999 1998 1999 1998 <S><C> <C> <C> <C> <C> <C> $ 324 $ 326 $ (20) $ (15) $2,382 $2,263 72 99 -- -- 240 307 92 75 27 30 1,809 1,621 240 216 146 148 2,418 2,347 ----- ----- ------ ----- ------ ------ 104 86 (139) (133) 1,533 1,230 38 31 5 (29) 571 488 ----- ----- ------ ----- ------ ------ $ 66 $ 55 $ (144) $(104) $ 962 $ 742 ----- ----- ------ ----- ------ ------ ----- ----- ------ ----- ------ ------ $ 10 $ 9 $ -- $ -- $ 112 $ 107 11 11 8 8 203 187 -- -- -- -- 127 124 16% 15% --% --% 18% 15% $ 977 $ 972 $ (57) $(47) $6,959 $6,689 213 293 -- -- 770 921 239 225 82 126 5,350 4,870 708 652 442 450 7,124 7,097 ----- ----- ------ ---- ------ ------ 295 252 (417) (371) 4,415 3,541 109 91 (49) (76) 1,638 1,397 ----- ----- ------ ---- ------ ------ $ 186 $ 161 $ (368) $(295) $2,777 $2,144 ----- ----- ------ ----- ------ ------ ----- ----- ------ ----- ------ ------ $ 9 $ 9 $ -- $ -- $ 110 $ 106 11 11 8 9 201 185 -- -- -- -- 127 122 16% 16% --% --% 18% 15% - ------------------------------------------------------------------- </TABLE> (4) The material items in the reconciliation column related to revenue (i.e., net interest income plus noninterest income) and net income consist of Treasury activities and unallocated items. Revenue includes Treasury activities of $22 million and $24 million; and unallocated items of $(15) million and $(9) million for the third quarter of 1999 and 1998, respectively. Revenue includes Treasury activities of $63 million and $101 million; and unallocated items of $(38) million and $(22) million for the first nine months of 1999 and 1998, respectively. Net income includes Treasury activities of $13 million and $14 million; and unallocated items of $(157) million and $(118) million for the third quarter of 1999 and 1998, respectively. Net income includes Treasury activities of $38 million and $58 million; and unallocated items of $(406) million and $(353) million for the first nine months of 1999 and 1998, respectively. The material items in the reconciliation column related to noninterest expense include goodwill and nonqualifying CDI amortization of $124 million and $129 million for the third quarter of 1999 and 1998, respectively, and $376 million and $394 million for the first nine months of 1999 and 1998, respectively. The material items in the reconcilation column related to average assets include goodwill and nonqualifying CDI of $8 billion for all periods presented. 13
5. MORTGAGE BANKING ACTIVITIES Mortgage banking activities include Norwest Mortgage and mortgage banking activities in other operating segments. The outstanding balance of mortgage loans serviced for others, which are not included in the accompanying balance sheet, was $283 billion, $250 billion and $238 billion at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. The following table summarizes the changes in capitalized mortgage loan servicing rights: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------------- -------------------- (in millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $4,144 $2,968 $3,144 $3,112 Originations 181 181 654 492 Purchases 150 183 522 521 Sales -- -- -- (346) Amortization (139) (242) (599) (602) Other (principally hedge activity) 5 (301) 620 (388) ------ ------ ------ ------ 4,341 2,789 4,341 2,789 Less valuation allowance -- 64 -- 64 ------ ------ ------ ------ Balance, end of period $4,341 $2,725 $4,341 $2,725 ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------- </TABLE> During the quarter ended September 30, 1999, the Company reduced its valuation allowance for capitalized mortgage servicing rights by $64 million. The fair value of capitalized mortgage servicing rights included in the consolidated balance sheet at September 30, 1999 was approximately $4.6 billion, calculated using discount rates ranging from 500 to 700 basis points over the ten-year U.S. Treasury rate. 14
FINANCIAL REVIEW SUMMARY FINANCIAL DATA <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- % Change Quarter ended Sept. 30, 1999 from Nine months ended ----------------------------- ------------------- -------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions) 1999 1999 1998 1999 1998 1999 1998 Change - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> FOR THE PERIOD Net income $ 962 $ 931 $ 742 3% 30% $ 2,777 $ 2,144 30% Net income applicable to common stock 953 922 733 3 30 2,751 2,118 30 Earnings per common share $ .58 $ .56 $ .45 4 29 $ 1.67 $ 1.31 27 Diluted earnings per common share .57 .55 .45 4 27 1.65 1.29 28 Dividends declared per common share .20 .20 .185 -- 8 .585 .515 14 Average common shares outstanding 1,648.6 1,651.4 1,617.3 -- 2 1,649.0 1,614.4 2 Diluted average common shares outstanding 1,667.1 1,672.3 1,640.7 -- 2 1,667.9 1,637.3 2 Profitability ratios (annualized) Net income to average total assets (ROA) 1.88% 1.86% 1.58% 1 19 1.85% 1.55% 19 Net income applicable to common stock to average common stockholders' equity (ROE) 17.97 17.50 14.72 3 22 17.60 14.55 21 Total revenue $ 4,191 $ 4,125 $ 3,884 2 8 $ 12,309 $ 11,559 6 Efficiency ratio (1) 57.7% 57.3% 60.4% 1 (4) 57.9% 61.4% (6) Average loans $ 112,262 $108,996 $106,553 3 5 $109,714 $105,830 4 Average assets 202,972 200,342 186,634 1 9 200,694 185,187 8 Average core deposits 126,759 127,563 123,720 (1) 2 127,481 122,449 4 Net interest margin 5.73% 5.68% 5.88% 1 (3) 5.67% 5.86% (3) NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (2) Net income applicable to common stock $ 1,087 $ 1,054 $ 872 3 25 $ 3,149 $ 2,534 24 Earnings per common share .66 .64 .54 3 22 1.91 1.57 22 Diluted earnings per common share .65 .63 .53 3 23 1.89 1.55 22 ROA 2.24% 2.23% 1.97% -- 14 2.22% 1.95% 14 ROE 34.33 33.43 31.47 3 9 34.04 32.02 6 Efficiency ratio 54.1 53.7 56.3 1 (4) 54.2 57.2 (5) AT PERIOD END Securities available for sale $ 36,906 $ 35,710 $ 32,210 3 15 $ 36,906 $ 32,210 15 Loans 114,709 111,646 107,692 3 7 114,709 107,692 7 Allowance for loan losses 3,167 3,165 3,170 -- -- 3,167 3,170 -- Goodwill 7,620 7,598 7,758 -- (2) 7,620 7,758 (2) Assets 207,060 205,421 195,863 1 6 207,060 195,863 6 Core deposits 125,160 127,302 123,792 (2) 1 125,160 123,792 1 Common stockholders' equity 21,722 20,915 20,096 4 8 21,722 20,096 8 Stockholders' equity 22,182 21,375 20,558 4 8 22,182 20,558 8 Tier 1 capital (3) 14,005 13,454 12,437 4 13 14,005 12,437 13 Total capital (Tiers 1 and 2) (3) 18,166 17,612 16,800 3 8 18,166 16,800 8 Capital ratios Common stockholders' equity to assets 10.49% 10.18% 10.26% 3 2 10.49% 10.26% 2 Stockholders' equity to assets 10.71 10.41 10.50 3 2 10.71 10.50 2 Risk-based capital (3) Tier 1 capital 8.71 8.45 8.20 3 6 8.71 8.20 6 Total capital 11.30 11.07 11.07 2 2 11.30 11.07 2 Leverage (3) 7.22 7.05 7.00 2 3 7.22 7.00 3 Book value per common share $ 13.17 $ 12.67 $ 12.40 4 6 $ 13.17 $ 12.40 6 Staff (active, full-time equivalent) 89,528 90,410 89,719 (1) -- 89,528 89,719 -- COMMON STOCK PRICE High $ 45.31 $ 44.88 $ 39.75 1 14 $ 45.31 $ 43.88 3 Low 36.44 34.38 27.50 6 33 32.13 27.50 17 Period end 39.63 42.75 36.00 (7) 10 39.63 36.00 10 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The efficiency ratio is defined as noninterest expense divided by total revenue (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 and ROA ratios, net of applicable taxes. The pretax amount for the average balance of nonqualifying CDI was $1,301 million for the quarter ended September 30, 1999 and $1,345 million for the nine months ended September 30, 1999. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $27 million and $807 million, respectively, for the quarter ended September 30, 1999 and $84 million and $834 million, respectively, for the nine months ended September 30, 1999. Goodwill amortization and average balance (which are not tax effected) were $106 million and $7,674 million, respectively, for the quarter ended September 30, 1999 and $314 million and $7,688 million, respectively, for the nine months ended September 30, 1999. (3) See the Capital Adequacy/Ratios section for additional information. 15
OVERVIEW Wells Fargo & Company is a $207 billion diversified financial services company providing banking, mortgage and consumer finance through about 6,000 stores, the Internet and other distribution channels throughout North America, including all 50 states, and elsewhere internationally. It ranked seventh in assets at September 30, 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. 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. Net income for the third quarter of 1999 was $962 million, compared with $742 million for the third quarter of 1998. Diluted earnings per common share for the third quarter of 1999 were $.57, compared with $.45 for the third quarter of 1998. Net income for the first nine months of 1999 was $2,777 million, or $1.65 per share, compared with $2,144 million, or $1.29 per share, for the first nine months of 1998. Return on average assets (ROA) was 1.88% and 1.85% in the third quarter and first nine months of 1999, respectively, compared with 1.58% and 1.55% in the same periods of 1998. Return on average common equity (ROE) was 17.97% and 17.60% in the third quarter and first nine months of 1999, respectively, compared with 14.72% and 14.55% in the same periods of 1998. Diluted earnings before the amortization of goodwill and nonqualifying core deposit intangible ("cash" or "tangible" earnings) in the third quarter and first nine months of 1999 were $.65 and $1.89 per share, respectively, compared with $.53 and $1.55 per share in the same periods of 1998. On the same basis, ROA was 2.24% and 2.22% in the third quarter and first nine months of 1999, respectively, compared with 1.97% and 1.95% in the same periods of 1998; ROE was 34.33% and 34.04% in the third quarter and first nine months of 1999, respectively, compared with 31.47% and 32.02% in the same periods of 1998. Net interest income on a taxable-equivalent basis was $2,399 million and $7,007 million for the third quarter and first nine months of 1999, respectively, compared with $2,278 million and $6,734 million for the same periods of 1998. The Company's net interest margin was 5.73% and 5.67% for the third quarter and first nine months of 1999, respectively, compared with 5.88% and 5.86% for the same periods of 1998. Noninterest income was $1,809 million and $5,350 million for the third quarter and first nine months of 1999, respectively, compared with $1,621 million and $4,870 million for the same 16
periods of 1998. The increase for the third quarter of 1999 was mostly due to higher net mortgage servicing fees and higher venture capital gains partially offset by gains on sales of mortgages in the third quarter of 1998. The increase for the first nine months of 1999 was primarily due to higher net mortgage servicing fees, venture capital gains and trust and investment fees and commissions. Noninterest expense totaled $2,418 million and $7,124 million for the third quarter and first nine months of 1999, respectively, compared with $2,347 million and $7,097 million for the same periods of 1998. The efficiency ratio improved to 57.7% for the third quarter of 1999, and 57.9% for the first nine months of 1999, compared with 60.4% and 61.4% for the same periods a year ago. The Company expects to meet its pre-Merger target of approximately $650 million in annual pretax 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 $240 million and $770 million in the third quarter and first nine months of 1999, respectively, compared with $307 million and $921 million in the same periods of 1998. During the third quarter of 1999, net charge-offs were $241 million, or .85% of average total loans (annualized), compared with $318 million, or 1.18%, during the third quarter of 1998. The allowance for loan losses was $3,167 million, or 2.76% of total loans, at September 30, 1999, compared with $3,134 million, or 2.90%, at December 31, 1998 and $3,170 million, or 2.94%, at September 30, 1998. At September 30, 1999, total nonaccrual and restructured loans were $698 million, or .6% of total loans, compared with $710 million, or .7%, at December 31, 1998 and $722 million, or .7%, at September 30, 1998. Foreclosed assets amounted to $213 million at September 30, 1999, $167 million at December 31, 1998 and $176 million at September 30, 1998. At September 30, 1999, the ratio of common stockholders' equity to total assets was 10.49%, compared with 10.26% at September 30, 1998. The Company's total risk-based capital (RBC) ratio at September 30, 1999 was 11.30% and its Tier 1 RBC ratio was 8.71%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's ratios at September 30, 1998 were 11.07% and 8.20%, respectively. The Company's leverage ratio was 7.22% at September 30, 1999 and 7.00% at September 30, 1998, exceeding the minimum regulatory guideline of 3% for bank holding companies. RECENT DEVELOPMENTS - FINANCIAL MODERNIZATION On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the Act) which will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company (FHC) if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, well managed, and has at least a satisfactory rating under the Community Reinvestment Act (CRA) by filing a declaration that the bank holding company wishes to become a FHC. No regulatory approval will be required for a FHC to acquire a 17
company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Board of Governors of the Federal Reserve System (the Board). The Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating. Subsidiary banks of a FHC or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a FHC or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the FHC or the bank has at least a satisfactory CRA rating. FACTORS THAT MAY AFFECT FUTURE RESULTS This document and other documents filed by the Company with the Securities and Exchange Commission (SEC) have forward-looking statements. In addition, the Company's senior management may make forward-looking statements orally to analysts, investors, the media and others. These forward-looking statements may include one or more of the following: - -- Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; - -- Descriptions of plans or objectives of management for future operations, products or services; - -- Forecasts of future economic performance; - -- "Year 2000 Readiness Disclosures" under the Year 2000 Information and Readiness Disclosure Act; and - -- Descriptions of assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements give the Company's expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, 18
forward-looking statements are subject to risks and uncertainties. There are a number of factors--many of which are beyond the Company's control--that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate, Year 2000 and other risks, are described elsewhere in this report and in the MD&A section of the 1998 Annual Report on Form 10-K filed by the Company with the SEC. Factors relating to the regulation and supervision of the Company and its subsidiaries are also described or incorporated in the Form 10-K. There are other factors besides those described or incorporated in this report or in the other reports filed by the Company with the SEC that could cause actual conditions, events or results to differ from those in the forward-looking statements. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. BUSINESS AND ECONOMIC CONDITIONS. The Company's business and earnings are sensitive to general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy generally and the local economies in which the Company conducts business. Should any of these conditions worsen in the United States or abroad, the Company's business and earnings could be adversely affected. For example, an economic downturn or higher interest rates could decrease the demand for loans and other products and services offered by the Company and/or increase the number of customers and counterparties who become delinquent or who default on their loans or other obligations to the Company. An increase in the number of delinquencies or defaults would result in a higher level of charge-offs and a higher level of loan loss provision, which could adversely affect the Company's earnings. Higher interest rates would also increase the Company's cost to borrow funds and may increase the rate paid on deposits, which could more than offset, in the net interest margin, the increase in rates earned by the Company on new or floating rate loans or short-term investments. See "Quantitative and Qualitative Disclosures About Market Risk" for more information on interest rate risk. COMPETITION. The Company operates in a highly competitive environment both in terms of the products and services the Company offers and the geographic markets in which the Company conducts business. The Company expects this environment to become even more competitive in the future as a result of legislative, regulatory and technological changes and the continued trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in an increasing number of traditional banking businesses such as syndicated lending and consumer banking. Many of the Company's competitors enjoy the benefits of advanced technology, fewer regulatory constraints and lower cost structures. 19
The financial services industry is likely to become even more competitive as further technological advances enable more companies to provide financial services. The Company expects that the consolidation of the financial services industry will result in larger, better capitalized companies offering a wide array of financial services and products. The Company believes that recent legislative changes (see "Legislation" below), will further increase the competitive pressures in the financial services industry. FISCAL AND MONETARY POLICIES. The Company's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies directly and indirectly influence the rate of interest that commercial banks pay on their interest-bearing deposits and may also affect the value of financial instruments held by the Company. These policies also determine to a significant extent the cost to the Company of funds for lending and investing. Changes in these policies are beyond the Company's control and hard to predict. Federal Reserve Board policies can also affect the Company's customers and counterparties, potentially increasing the risk that such customers and counterparties may become delinquent or default on their obligations to the Company. DISINTERMEDIATION. "Disintermediation" is the process of eliminating the role of the mediator (or middleman) in completing a transaction. For the financial services industry, this means eliminating or significantly reducing the role of banks and other depository institutions in completing transactions that have traditionally involved banks at one end or both ends of the transaction. For example, technological advances now allow parties to pay bills and transfer funds directly without the involvement of banks. Important consequences of this disintermediation include the loss of customer deposits (and the income generated from these deposits) and decreases in transactions that generate fee income. LEGISLATION. The Gramm-Leach-Bliley Act permits affiliation among banks, securities firms and insurance companies by creating a new type of financial services company called a "financial holding company." Financial holding companies may offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company may acquire banks and other financial institutions. The Act significantly changes the competitive environment in which the Company and its subsidiaries conduct business. MERGER OF FORMER NORWEST AND FORMER WELLS FARGO. One or more factors relating to the Merger could adversely impact the Company's business and earnings generally and in particular the expected benefits of the Merger to the Company. These factors include the following: - -- expected cost savings and/or potential revenue enhancements from the Merger may not be fully realized or realized within the expected time frame; 20
- -- deposit attrition (run-off), customer loss and/or revenue loss following the Merger may be greater than expected; - -- costs or difficulties related to the integration of the businesses of the two companies may be greater than expected. OTHER MERGERS AND ACQUISITIONS. The Company expands its business in part by acquiring banks and other companies engaged in activities closely related to banking. The Company continues to explore opportunities to acquire banking institutions and other companies permitted by the Bank Holding Company Act of 1956. Discussions are continually being carried on related to such acquisitions. Generally, management of the Company does not comment on such discussions or possible acquisitions until a definitive agreement has been signed. A number of factors related to past and future acquisitions could adversely affect the Company's business and earnings, including those described above for the Norwest/Wells Fargo merger. In addition, the Company's acquisitions generally are subject to approval by federal and, in some cases, state regulatory agencies. The failure to receive required regulatory approvals within the time frame or on the conditions expected by management could also adversely affect the Company's business and earnings. 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. In July 1999, the FASB issued FAS 137, Deferring Statement 133's Effective Date, which defers the effective date for implementation of FAS 133 by one year, making FAS 133 effective no later than January 1, 2001 for the Company's financial statements. FAS 133 requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives would be reported in earnings or other comprehensive income 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 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 $747 million in the third quarter of 1999 from $562 million in the third quarter of 1998, an increase of 33%. Net income increased to $2,110 million for the first nine months of 1999 from $1,500 million for the first nine months of 1998, an increase of 41%. Net interest income increased to $1,688 million in the third quarter of 1999 from $1,549 million in the third quarter of 1998. Net interest income increased to $4,846 million for the first nine months of 1999 from $4,598 million in the first nine months of 1998. The provision for loan losses decreased by $47 million and $161 million for the third quarter and first nine months of 1999, respectively, reflecting lower charge-offs. 21
Noninterest income for the third quarter of 1999 increased by $71 million over the same period in 1998. The increase in noninterest income for the third quarter of 1999 was mostly due to higher venture capital gains, commissions and trust and investment fees. WHOLESALE BANKING'S net income was $223 million in the third quarter of 1999, compared with $173 million in the third quarter of 1998, an increase of 29%. Net income was $641 million for the first nine months of 1999, compared with $616 million in the first nine months of 1998, an increase of 4%. Net interest income was $357 million in the third quarter of 1999 and $340 million in the third quarter of 1998. The increase in net interest income was due to higher average loans within asset-based lending and Real Estate Capital Markets. Net interest income increased to $1,054 million for the first nine months of 1999 from $1,010 million in the first nine months of 1998. Average outstanding loan balances grew to $34 billion in the third quarter of 1999 from $33 billion in the third quarter of 1998. Noninterest income increased to $305 million and $869 million in the third quarter and first nine months of 1999, respectively, from $215 million and $774 million in the same periods of 1998. The increase for both periods was primarily due to higher gains from investment securities and trading activities as well as increased income from service charges, fees and commissions, and foreign exchange gains. Noninterest expense increased to $286 million in the third quarter of 1999 and $818 million for the first nine months of 1999 from $254 million and $756 million for the same periods in the prior year. The increase for the first nine months of 1999 was primarily due to increased expenses in the investment management area and the addition of Century Business Credit Corporation, which was acquired in the first quarter of 1999. The provision for loan losses increased by $6 million and $85 million for the third quarter and first nine months of 1999, respectively, due to increased charge-offs. NORWEST MORTGAGE'S net income in the third quarter of 1999 increased to $70 million from $56 million in the third quarter of 1998, an increase of 25%. Net income increased to $208 million for the first nine months of 1999 from $162 million in the first nine months of 1998, an increase of 28%. The increase for the third quarter of 1999 was principally due to growth in the servicing portfolio and decreased amortization of mortgage servicing rights, offset by a decrease in loan origination and closing fees. The servicing portfolio increased to $274 billion at September 30, 1999 from $233 billion at September 30, 1998. The weighted average coupon on loans in the servicing portfolio was 7.30% at September 30, 1999 compared with 7.54% a year earlier. Total capitalized mortgage servicing rights amounted to $4.3 billion, or 1.58%, of the servicing portfolio at September 30, 1999 compared with $2.7 billion, or 1.17%, at September 30, 1998. Amortization of capitalized mortgage servicing rights was $139 million and $599 million for the third quarter and first nine months of 1999, respectively, compared with $242 million and $570 million for the same periods of 1998. The decrease in amortization for the third quarter of 1999 was largely due to rising interest rates, which decreased the prepayment speeds in the servicing portfolio. Combined (losses)/gains on sales of mortgages and servicing rights were $(29) million for the third quarter of 1999 and $194 million for the first nine months of 1999, compared with $152 million and $288 million for the same periods of the prior year. The decrease for the third quarter of 1999 was largely due to less favorable market conditions and decreased loan sales. Fundings for the third quarter and first nine months of 1999 were $19 billion and $69 billion, respectively, compared with $28 billion and $75 billion for the same 22
periods of the prior year. The decrease in third quarter funding volume was primarily due to a decrease in refinance activity. The percentage of fundings attributed to mortgage loan refinancing was approximately 20% for the third quarter of 1999, compared with 43% for the same period in 1998. NORWEST FINANCIAL'S net income increased to $66 million in the third quarter of 1999 from $55 million for the same period in 1998, an increase of 20%. Net income increased to $186 million for the first nine months of 1999 from $161 million for the same period in 1998, an increase of 16%. The provision for loan losses decreased 27% in the third quarter and first nine months of 1999 compared to the same periods in the prior year due to a reduction in the provision for loan losses at Island Finance. Norwest Financial's noninterest expense increased by $24 million, or 11%, and $56 million, or 9%, for the quarter and nine months ended September 30, 1999, respectively, from the same periods in 1998. The increase for both periods was due to higher salaries, incentive compensation and employee benefits. EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $2,399 million in the third quarter of 1999, compared with $2,278 million in the third quarter of 1998. The Company's net interest margin was 5.73% in the third quarter of 1999, compared with 5.88% in the third quarter of 1998. Net interest income on a taxable-equivalent basis was $7,007 million in the first nine months of 1999, compared with $6,734 million in the first nine months of 1998. The Company's net interest margin was 5.67% in the first nine months of 1999, compared with 5.86% in the first nine months of 1998. The decrease in the net interest margin for both the third quarter and the first nine months was primarily due to higher balances of lower yielding investment securities and lower yields on consumer loans and commercial real estate mortgages partially offset by decreased rates on consumer deposits. Interest income included hedging income of $51 million in the third quarter of 1999, compared with $21 million in the third quarter of 1998. Interest expense included hedging income of $24 million in the third quarter of 1999, compared with $19 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. Average core deposits were $127 billion and $124 billion and funded 62% and 66% of the Company's average total assets in the third quarter of 1999 and 1998, respectively. For the first nine months of 1999 and 1998, average core deposits were $127 billion and $122 billion, respectively, and funded 64% and 66% of the Company's average total assets, respectively. 23
<TABLE> <CAPTION> AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2) - ---------------------------------------------------------------------------------------------------------------------------- Quarter ended Sept. 30, ------------------------------------------------------------- 1999 1998 --------------------------- -------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (IN MILLIONS) BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,327 5.13% $ 17 $ 2,120 5.86% $ 31 Securities available for sale (3): Securities of U.S. Treasury and federal agencies 5,915 5.47 85 4,494 6.03 68 Securities of U.S. states and political subdivisions 1,848 8.31 38 1,547 8.57 31 Mortgage-backed securities: Federal agencies 20,840 7.11 374 15,286 7.09 265 Private collateralized mortgage obligations 3,003 6.89 53 3,078 6.70 51 -------- ------ -------- ------ Total mortgage-backed securities 23,843 7.08 427 18,364 7.03 316 Other securities 3,612 6.93 50 1,533 6.29 21 -------- ------ -------- ------ Total securities available for sale 35,218 6.85 600 25,938 6.90 436 Loans held for sale (3) 4,381 7.24 80 4,757 7.84 93 Mortgages held for sale (3) 10,711 7.33 198 13,142 7.01 230 Loans: Commercial 36,011 8.88 806 33,762 8.92 758 Real estate 1-4 family first mortgage 12,236 8.58 263 12,558 8.47 266 Other real estate mortgage 17,243 8.73 379 16,230 9.53 390 Real estate construction 4,189 9.38 99 3,764 9.43 90 Consumer: Real estate 1-4 family junior lien mortgage 11,817 9.01 267 10,837 9.58 261 Credit card 5,323 13.95 187 5,877 15.07 221 Other revolving credit and monthly payment 16,848 12.06 509 16,345 12.87 527 -------- ------ -------- ------ Total consumer 33,988 11.29 963 33,059 12.18 1,009 Lease financing 7,070 7.76 137 5,766 8.20 118 Foreign 1,525 20.88 80 1,414 21.03 74 -------- ------ -------- ------ Total loans (4) 112,262 9.67 2,727 106,553 10.11 2,705 Other 3,067 4.68 36 2,794 6.71 48 -------- ------ -------- ------ Total earning assets $166,966 8.73 3,658 $155,304 9.13 3,543 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 2,723 .92 6 $ 2,774 1.03 7 Market rate and other savings 56,339 2.23 317 52,331 2.68 354 Savings certificates 25,262 4.66 297 27,750 5.21 364 Other time deposits 3,276 4.86 40 3,955 5.50 55 Deposits in foreign offices 1,552 4.86 19 663 4.77 8 -------- ------ -------- ------ Total interest-bearing deposits 89,152 3.02 679 87,473 3.58 788 Short-term borrowings 17,649 5.09 226 13,819 5.59 195 Long-term debt 23,112 5.85 339 16,713 6.37 266 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 7.56 15 744 8.59 16 -------- ------ -------- ------ Total interest-bearing liabilities 130,698 3.83 1,259 118,749 4.23 1,265 Portion of noninterest-bearing funding sources 36,268 -- -- 36,555 -- -- -------- ------ -------- ------ Total funding sources $166,966 3.00 1,259 $155,304 3.25 1,265 -------- ------ -------- ------ -------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 5.73% $2,399 5.88% $2,278 ---- ------ ----- ------ ---- ------ ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 11,196 $ 10,381 Goodwill 7,674 7,811 Other 17,136 13,138 -------- -------- Total noninterest-earning assets $ 36,006 $ 31,330 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 42,435 $ 40,865 Other liabilities 8,337 6,803 Preferred stockholders' equity 460 462 Common stockholders' equity 21,042 19,755 Noninterest-bearing funding sources used to fund earning assets (36,268) (36,555) -------- -------- Net noninterest-bearing funding sources $ 36,006 $ 31,330 -------- -------- -------- -------- TOTAL ASSETS $202,972 $186,634 -------- -------- -------- -------- - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The average prime rate of the Company was 8.10% and 8.50% for the quarters ended September 30, 1999 and 1998, respectively, and 7.87% and 8.50% for the nine months ended September 30, 1999 and 1998, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.44% and 5.62% for the quarters ended September 30, 1999 and 1998, respectively, and 5.17% and 5.65% for the nine months ended September 30, 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 all periods presented. 24
<TABLE> <CAPTION> - -------------------------------------------------------------- Nine months ended Sept. 30, - -------------------------------------------------------------- 1999 1998 - ---------------------------- ---------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - -------------------------------------------------------------- <C> <C> <C> <C> <C> <C> $ 1,311 4.95% $ 49 $ 1,531 5.73% $ 66 5,608 5.43 233 5,254 5.97 233 1,797 8.36 108 1,524 8.53 93 19,923 6.81 1,014 16,153 7.14 846 3,156 6.82 162 2,641 6.78 134 ------- ------ -------- ------ 23,079 6.81 1,176 18,794 7.09 980 3,202 6.81 136 1,460 4.55 60 ------- ------ -------- ------ 33,686 6.65 1,653 27,032 6.84 1,366 5,182 7.23 280 4,705 7.75 273 12,774 6.97 671 11,624 6.98 609 35,512 8.66 2,302 32,813 9.04 2,219 12,134 8.44 767 13,227 8.29 823 16,985 8.82 1,121 16,241 9.53 1,158 4,044 9.34 283 3,542 9.48 251 11,336 9.07 770 10,600 9.86 782 5,402 13.77 558 6,136 15.05 693 15,983 12.38 1,482 16,569 12.81 1,591 ------- ------ -------- ------ 32,721 11.46 2,810 33,305 12.29 3,066 6,813 7.81 399 5,417 8.30 337 1,505 20.99 237 1,285 20.88 201 ------- ------ -------- ------ 109,714 9.64 7,919 105,830 10.16 8,055 2,636 5.17 101 3,021 5.97 134 ------- ------ -------- ------ $ 165,303 8.65 10,673 $153,743 9.14 10,503 - --------- ------ -------- ------ - --------- -------- $ 2,764 .89 18 $ 2,713 1.40 28 55,996 2.28 956 51,842 2.65 1,026 26,077 4.76 929 27,774 5.25 1,091 3,528 4.97 131 4,085 5.52 170 1,212 4.51 41 690 4.89 25 ------- ------ -------- ------ 89,577 3.10 2,075 87,104 3.59 2,340 17,567 4.83 635 13,570 5.49 557 20,903 5.81 912 16,828 6.38 805 785 7.54 44 1,089 8.15 67 ------- ------ -------- ------ 128,832 3.80 3,666 118,591 4.25 3,769 36,471 -- -- 35,152 -- -- ------- ------ -------- ------ $ 165,303 2.97 3,666 $153,743 3.28 3,769 ------- ------ -------- ------ ------- -------- 5.67% $7,007 5.86% $6,734 ----- ------ ----- ------ ----- ------ ----- ------ $ 11,184 $ 10,529 7,688 7,918 16,519 12,997 ------- -------- $ 35,391 $ 31,444 ------- -------- ------- -------- $ 42,644 $ 40,120 7,866 6,552 460 461 20,892 19,463 (36,471) (35,152) ------- -------- $ 35,391 $ 31,444 ------- -------- ------- -------- $ 200,694 $185,187 ------- -------- ------- -------- - ------------------------------------------- </TABLE> 25
NONINTEREST INCOME <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ----------------- % ---------------- % (in millions) 1999 1998 Change 1999 1998 Change - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Service charges on deposit accounts $ 385 $ 356 8% $1,096 $ 993 10% Trust and investment fees and commissions: Asset management and custody fees 195 167 17 569 495 15 Mutual fund and annuity sales fees 99 76 30 288 227 27 All other 23 24 (4) 75 72 4 ------ ------ ------ ------ Total trust and investment fees and commissions 317 267 19 932 794 17 Credit card fee revenue 138 136 1 395 384 3 Other fees and commissions: Cash network fees 73 60 22 201 167 20 Charges and fees on loans 78 73 7 241 215 12 All other 107 108 (1) 321 313 3 ------ ------ ------ ------ Total other fees and commissions 258 241 7 763 695 10 Mortgage banking: (1) Origination and other closing fees 101 128 (21) 330 366 (10) Servicing fees, net of amortization 176 (47) -- 231 (6) -- Net gains on sales of mortgage servicing rights -- -- -- -- 16 (100) Net (losses) gains on sales of mortgages (16) 142 -- 228 306 (25) All other 57 52 10 180 172 5 ------ ------ ------ ------ Total mortgage banking 318 275 16 969 854 13 Insurance 95 73 30 299 278 8 Net venture capital gains 162 4 -- 287 116 147 Net (losses) gains on securities available for sale (2) 76 -- 19 161 (88) Income from equity investments accounted for by the Cost method 35 32 9 99 116 (15) Equity method 18 12 50 59 43 37 Net gains on sales of loans 6 25 (76) 32 48 (33) Net gains on dispositions of operations -- 18 (100) 102 89 15 All other 79 106 (25) 298 299 -- ------ ------ ------ ------ Total $1,809 $1,621 12% $5,350 $4,870 10% ------ ------ ---- ------ ------ ---- ------ ------ ---- ------ ------ ---- - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) See page 22 for discussion of Norwest Mortgage noninterest income. The increase in trust and investment fees and commissions for the third quarter of 1999 was due to an overall increase in mutual fund management fees, reflecting the overall growth in the fund families' net assets, an increase in brokerage commissions and an increase in trust and agency assets under management and administration. The Company managed 82 mutual funds consisting of $55.0 billion of assets at September 30, 1999 that included 42 Stagecoach Funds ($30.3 billion) and 40 Norwest Advantage Funds ($24.7 billion), compared with 81 mutual funds consisting of $46.8 billion of assets at September 30, 1998 that included 38 Stagecoach Funds ($25.6 billion) and 43 Norwest Advantage Funds ($21.2 billion). The Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $402 billion and $383 billion at September 30, 1999 and 1998, respectively. Net venture capital gains were $162 million for the third quarter and $287 million for the first nine months of 1999, compared with $4 million and $116 million for the same periods of 1998. Sales of venture capital securities generally relate to the timing of holdings becoming publicly 26
traded and subsequent market conditions, causing venture capital gains to be unpredictable in nature. At September 30, 1999, the Company held a venture capital investment in Cerent Corp., which was acquired by Cisco Systems, Inc. (Cisco) through a tax-free exchange of common stock on November 1, 1999. Based on the closing price of Cisco's common stock and the exchange ratio set forth in the definitive agreement, the Company will recognize a non-cash venture capital gain of about $550 million in the fourth quarter of 1999. NONINTEREST EXPENSE <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, % ended Sept. 30, ---------------- ---------------- % (in millions) 1999 1998 Change 1999 1998 Change - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Salaries $ 776 $ 730 6% $2,251 $2,132 6 % Incentive compensation 124 164 (24) 393 449 (12) Employee benefits 208 167 25 624 543 15 Equipment 193 192 1 566 572 (1) Net occupancy 205 188 9 576 564 2 Goodwill 106 108 (2) 314 317 (1) Core deposit intangible: Nonqualifying (1) 44 52 (15) 135 162 (17) Qualifying 5 6 (17) 16 21 (24) Net losses (gains) on dispositions of premises and equipment 6 7 (14) (5) 55 -- Operating losses 25 35 (29) 91 106 (14) Outside professional services 83 74 12 243 213 14 Contract services 119 89 34 320 243 32 Telecommunications 66 66 -- 191 187 2 Outside data processing 69 66 5 207 174 19 Advertising and promotion 54 62 (13) 160 181 (12) Postage 54 56 (4) 169 168 1 Travel and entertainment 58 53 9 173 153 13 Stationery and supplies 44 41 7 122 123 (1) Insurance 41 29 41 127 111 14 Security 22 22 -- 64 63 2 All other 116 140 (17) 387 560 (31) ------ ------ ------ ------ Total $2,418 $2,347 3% $7,124 $7,097 -- % ------ ------ --- ------ ------ ---- ------ ------ --- ------ ------ ---- - ------------------------------------------------------------------------------------------------------------------- </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 decrease in incentive compensation was due to decreased commissions on mortgage originations. The increase in contract services was largely due to expenses associated with various Merger-related projects. During the third quarter of 1999, the Company continued with its enterprise-wide project to prepare and maintain the Company's systems for Year 2000 compliance. The Year 2000 compliance 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. In addition, the year 2000 is a leap year but some programs may not recognize it 27
as a leap year and may not properly provide for February 29, 2000. "Systems" includes hardware, networks, in-house 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 identified by management as vital to the successful continuation of a core business activity. 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 intended to determine Year 2000 vulnerability and risk; Phase II - date detection on systems intended 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 intended to validate that interfaces are Year 2000 compliant and contingency planning. The former Wells Fargo also uses a four-phase plan for achieving Year 2000 readiness: the Assessment Phase (Phase I) - intended to determine which computers, operating systems, applications and facilities require remediation and prioritization of those remediation efforts; the Renovation Phase (Phase II) - - correction or replacement of any non-compliant hardware, software or facilities; the Validation Phase (Phase III) - testing of in-house systems, vendor software and service providers; and the Implementation Phase (Phase IV) - testing of remediated and validated code in interfaces with customers, vendors, government institutions and others. All renovated software, both in-house applications and vendor software, is placed back into production before the Validation Phase. The Company has completed all of the phases discussed in the preceding two paragraphs. During the remainder of 1999, the Company will be performing the ongoing task of maintaining Year 2000 readiness for already certified mission critical systems and of monitoring the limited systems changes which are permitted under the Company's Year 2000 policies. The Company's Year 2000 Program Office oversees the Year 2000 efforts of the Company and all of its subsidiaries, including both the former Norwest businesses and the former Wells Fargo businesses. 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. 28
The Company may be affected by the Year 2000 compliance efforts of governmental agencies, businesses and other entities who provide data to, or receive data from, the Company, and by entities, such as borrowers, vendors, counterparties and customers, 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, counterparties and governmental entities and the testing of major external interfaces with third parties that 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. The Company has developed business continuity plans for its core business systems which include plans to mitigate the effects of internal operational problems or problems caused by counterparties whose failure to properly address Year 2000 issues may adversely affect the Company's ability to perform certain functions. The Company developed these plans by augmenting existing business continuity plans with Year 2000 plans. The Company's Corporate Business Continuity Planning group conducted a validation and review of these plans, using staff who were not involved directly in developing the plans. As part of its business continuity planning, the Company is also working on Year 2000 event plans to address issues that may arise during the period from December 27, 1999 through January 10, 2000 and February 27 through March 1, 2000. The Company has an on-going awareness program to communicate Year 2000 matters to employees and customers and has also developed liquidity preparedness and cash availability plans to address any potential increased funding needs that may arise as the millennium approaches. The Company currently estimates that its total cost for the Year 2000 project will approximate $325 million. Through September 30, 1999, the Company has incurred charges of $293 million related to its Year 2000 project, including $24 million in the third 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 29
execution of the phases, ineffective remediation of computer code, the unpredictability of consumer behavior, and whether the Company's customers, vendors, competitors and other third parties effectively address the Year 2000 issue. Year 2000 issues expose the Company to a number of risks, any one of which, if realized, could have a material adverse effect on the Company's business, results of operations or financial condition. These risks include the possibility that, to the extent certain vendors fail to adequately address Year 2000 issues, the Company may suffer disruptions in important services on which the Company depends, such as telecommunications, electrical power and data processing. Year 2000 issues could affect the Company's liquidity if customer withdrawals in anticipation of the Year 2000 are greater than expected or if the Company's lenders are unable to provide the Company with funds when and as needed by the Company. Year 2000 issues also create additional credit risk to the Company insofar as the failure of the Company's customers and counterparties to adequately address Year 2000 issues could increase the likelihood that these customers and counterparties become delinquent or default on their obligations to the Company. Year 2000 issues also create additional fiduciary risk to the Company to the extent that the values of assets held in fiduciary accounts are negatively impacted by Year 2000 issues. In addition to increasing the Company's risk exposure to problem loans, credit losses, losses in fiduciary business and liquidity problems, Year 2000 issues expose the Company to increased risk of litigation losses and expenses relating to the foregoing. There are other Year 2000 risks besides those described above that may impact the Company's business, results of operations or financial condition. There can be no assurances that the Company, its significant third party vendors or its significant customers and counterparties will adequately address their respective Year 2000 issues. Although the Company continues to assess the Year 2000 readiness of its significant third party vendors and its significant customers and counterparties, it is not possible at this time to determine the effect on the Company's business, results of operations or financial condition from the failure of any of these parties to be Year 2000 compliant. 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. 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 forward-looking statements in the foregoing Year 2000 discussion should be read with the cautionary statements included in the "Factors That May Affect Future Results" portion of the MD&A section of this report. 30
INCOME TAXES The Company's effective income tax rate was 37% for the third quarter and first nine months of 1999, compared with 40% for the third quarter of 1998 and 39% for the first nine months of 1998. The lower effective rate for both the third quarter and the first nine months of 1999 compared to the same periods last year resulted from a reduction of state income tax and an increase in charitable donations of appreciated securities. 31
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 September 30, 1999. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions, except per share amounts) Sept. 30, 1999 - ------------------------------------------------------------------------------------------------------------------- Amortization -------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Income before income tax expense $1,533 $106 $ 44 $1,683 Income tax expense 571 -- 16 587 ------ ---- ---- ------ Net income 962 106 28 1,096 Preferred stock dividends 9 -- -- 9 ------ ---- ---- ------ Net income applicable to common stock $ 953 $106 $ 28 $1,087 ------ ---- ---- ------ ------ ---- ---- ------ Earnings per common share $ .58 $.06 $.02 $ .66 ------ ---- ---- ------ ------ ---- ---- ------ Diluted earnings per common share $ .57 $.06 $.02 $ .65 ------ ---- ---- ------ ------ ---- ---- ------ - ------------------------------------------------------------------------------------------------------------------- </TABLE> The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and related balances for the quarter ended September 30, 1999 were calculated as follows: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- Quarter ended (in millions) Sept. 30, 1999 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> ROA: A / (C-E-F) = 2.24 % ROE: B / (D-E-G) = 34.33 % Efficiency: (H-I) / J = 54.1 % Net income $ 1,096 (A) Net income applicable to common stock 1,087 (B) Average total assets 202,972 (C) Average common stockholders' equity 21,042 (D) Average goodwill 7,674 (E) Average pretax nonqualifying core deposit intangible 1,301 (F) Average after-tax nonqualifying core deposit intangible 807 (G) Noninterest expense 2,418 (H) Amortization expense for goodwill and nonqualifying core deposit intangible 150 (I) Net interest income plus noninterest income 4,191 (J) - ----------------------------------------------------------------------------------------------------------- </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. 32
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> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, 1999 Dec. 31, 1998 Sept. 30, 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 $ 6,540 $ 6,276 $ 3,260 $ 3,287 $ 3,325 $ 3,385 Securities of U.S. states and political subdivisions 2,054 2,048 1,683 1,794 1,689 1,797 Mortgage-backed securities: Federal agencies 21,947 21,737 20,539 20,804 21,404 21,813 Private collateralized mortgage obligations (1) 3,063 2,977 3,420 3,440 3,355 3,394 ------- ------- ------- -------- ------- ------- Total mortgage-backed securities 25,010 24,714 23,959 24,244 24,759 25,207 Other 2,396 2,312 1,879 1,899 1,280 1,297 ------- ------- ------- -------- ------- ------- Total debt securities 36,000 35,350 30,781 31,224 31,053 31,686 Marketable equity securities 500 1,556 386 773 390 524 ------- ------- ------- -------- ------- ------- Total $36,500 $36,906 $31,167 $31,997 $31,443 $32,210 ------- ------- ------- -------- ------- ------- ------- ------- ------- -------- ------- ------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Substantially all private collateralized mortgage obligations are AAA rated bonds collateralized by 1-4 family residential first mortgages. The following table provides the components of the unrealized net gain on securities available for sale. The unrealized net gain on securities available for sale is reported on an after-tax basis as a part of cumulative other comprehensive income in stockholders' equity. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- (in millions) SEPT. 30, 1999 Dec. 31, 1998 Sept. 30, 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Unrealized gross gains $1,341 $919 $815 Unrealized gross losses (935) (89) (48) ------ ---- ---- Unrealized net gain $ 406 $830 $767 ------ ---- ---- ------ ---- ---- - ------------------------------------------------------------------------------------------------------------------- </TABLE> The following table provides the components of the realized net gain on the sales of securities in the securities available for sale portfolio. 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). <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------------- -------------------- (in millions) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Realized gross gains $ 7 $ 77 $ 52 $ 171 Realized gross losses (9) (1) (33) (10) --- ---- ---- ----- Realized net (loss) gain $(2) $ 76 $ 19 $ 161 --- ---- ---- ----- --- ---- ---- ----- - ------------------------------------------------------------------------------------------------------------------- </TABLE> 33
The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 7 years and 2 months at September 30, 1999. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At September 30, 1999, mortgage-backed securities, including collateralized mortgage obligations (CMOs) of $3.0 billion, were $24.7 billion, or 67%, 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 $24.7 billion to $22.6 billion and the expected remaining maturity of these securities would increase from 6 years and 2 months to 7 years and 2 months. LOAN PORTFOLIO <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- % Change Sept. 30, 1999 from ---------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 1998 1998 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Commercial (1) $37,222 $ 35,450 $ 35,012 5% 6% Real estate 1-4 family first mortgage 12,375 11,496 12,333 8 -- Other real estate mortgage (2) 17,653 16,668 16,240 6 9 Real estate construction 4,381 3,790 3,748 16 17 Consumer: Real estate 1-4 family junior lien mortgage 12,171 11,128 11,057 9 10 Credit card 5,347 5,795 5,686 (8) (6) Other revolving credit and monthly payment 16,709 15,809 16,215 6 3 ------- -------- -------- Total consumer 34,227 32,732 32,958 5 4 Lease financing 7,292 6,380 5,994 14 22 Foreign 1,559 1,478 1,407 5 11 ------- -------- -------- Total loans (net of unearned income, including net deferred loan fees, of $3,003, $2,967 and $2,910) $14,709 $107,994 $107,692 6% 7% ------- -------- -------- -- -- ------- -------- -------- -- -- - ----------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $2,863 million, $2,979 million and $2,900 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. (2) Includes agricultural loans that are secured by real estate of $1,008 million, $923 million and $930 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. 34
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonaccrual loans (1)(2)(3) $697 $709 $721 Restructured loans (4) 1 1 1 ---- ---- ---- Nonaccrual and restructured loans 698 710 722 As a percentage of total loans .6% .7% .7% Foreclosed assets 213 167 176 Real estate investments (5) 34 1 2 ---- ---- ---- Total nonaccrual and restructured loans and other assets $945 $878 $900 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- </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) Includes commercial agricultural loans of $36 million, $32 million and $29 million and agricultural loans secured by real estate of $14 million, $12 million and $13 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. (3) Of the total nonaccrual loans, $365 million, $388 million and $448 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (4) In addition to originated loans that were subsequently restructured, there were loans of none, $23 million and $23 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively, 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, none, $23 million and $23 million were considered impaired under FAS 114 at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. (5) 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 $108 million, $128 million and $134 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. 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 35
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 results in a value that 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. 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> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Impairment measurement based on: Collateral value method $306 $329 $356 Discounted cash flow method 52 67 97 Historical loss factors 7 15 18 ---- ---- ---- Total (1)(2) $365 $411 $471 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Includes accruing loans of none, $23 million and $23 million purchased at a steep discount at September 30, 1999, December 31, 1998 and September 30, 1998, respectively, whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $216 million, $155 million, and $126 million of impaired loans with a related FAS 114 allowance of $38 million, $37 million and $35 million at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. The average recorded investment in impaired loans was $366 million and $480 million during the third quarter of 1999 and 1998, respectively, and $373 million and $469 million during the first nine months of 1999 and 1998, respectively. Total interest income recognized on impaired loans was $2 million and $4 million during the third quarter of 1999 and 1998, respectively, and $6 million and $11 million during the first nine 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. 36
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. 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. 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> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Commercial $ 43 $ 9 $ 20 Real estate 1-4 family first mortgage 29 17 21 Other real estate mortgage 46 41 52 Real estate construction 6 6 9 Consumer: Real estate 1-4 family junior lien mortgage 34 63 68 Credit card 102 140 136 Other revolving credit and monthly payment 206 180 247 ---- ---- ---- Total consumer (1) 342 383 451 ---- ---- ---- Total $466 $456 $553 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Consumer loans at December 31, 1998 and September 30, 1998 have been revised to include Norwest Financial loans of $114 million and $175 million, respectively, that were contractually past due 90 days or more as to interest or principal. 37
ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ---------------------- ---------------------- (in millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BALANCE, BEGINNING OF PERIOD $3,165 $3,098 $ 3,134 $ 3,062 Allowances related to business combinations, net 3 83 38 118 Provision for loan losses 240 307 770 921 Loan charge-offs: Commercial (93) (67) (285) (189) Real estate 1-4 family first mortgage (3) (6) (22) (18) Other real estate mortgage (8) (23) (20) (42) Real estate construction -- -- (1) (2) Consumer: Real estate 1-4 family junior lien mortgage (7) (5) (22) (18) Credit card (93) (127) (299) (409) Other revolving credit and monthly payment (122) (158) (358) (493) ------ ------ ------- ------- Total consumer (222) (290) (679) (920) Lease financing (9) (11) (30) (35) Foreign (18) (25) (57) (47) ------ ------ ------- ------- Total loan charge-offs (353) (422) (1,094) (1,253) ------ ------ ------- ------- Loan recoveries: Commercial 25 18 61 60 Real estate 1-4 family first mortgage 3 4 6 9 Other real estate mortgage 4 27 33 68 Real estate construction -- 1 4 3 Consumer: Real estate 1-4 family junior lien mortgage 3 1 10 5 Credit card 10 14 36 44 Other revolving credit and monthly payment 60 31 149 112 ------ ------ ------- ------- Total consumer 73 46 195 161 Lease financing 3 4 9 10 Foreign 4 4 11 11 ------ ------ ------- ------- Total loan recoveries 112 104 319 322 ------ ------ ------- ------- Total net loan charge-offs (241) (318) (775) (931) ------ ------ ------- ------- BALANCE, END OF PERIOD $3,167 $3,170 $ 3,167 $ 3,170 ------ ------ ------- ------- ------ ------ ------- ------- Total net loan charge-offs as a percentage of average loans (annualized) .85% 1.18% .94% 1.18% ------ ------ ------- ------- ------ ------ ------- ------- Allowance as a percentage of total loans 2.76% 2.94% 2.76% 2.94% ------ ------ ------- ------- ------ ------ ------- ------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> 38
The Company considers the allowance for loan losses of $3,167 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at September 30, 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 ongoing examination process by the Company and its regulators. INTEREST RECEIVABLE AND OTHER ASSETS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonmarketable equity investments $ 2,687 $ 2,392 $ 2,199 Government National Mortgage Association (GNMA) pool buy outs 1,983 1,624 911 Trading assets 2,326 760 1,243 Interest receivable 1,203 1,062 1,140 Foreclosed assets 213 167 176 Certain identifiable intangible assets 235 212 254 Due from customers on acceptances 99 128 163 Interest earning deposits 87 113 88 Other 5,282 4,436 4,178 ------- ------- ------- Total interest receivable and other assets $14,115 $10,894 $10,352 ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> Income from nonmarketable equity investments accounted for using the cost method was $35 million and $32 million in the third quarter of 1999 and 1998, respectively, and $99 million and $116 million in the first nine months of 1999 and 1998, respectively. The increase in GNMA pool buy outs 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. Trading assets consist predominantly of securities, including corporate debt and U.S. government agency obligations. The increase at September 30, 1999 compared with December 31, 1998 was primarily due to an increase in U.S. Treasury securities. Noninterest income from trading assets was $6 million and $36 million in the third quarter of 1999 and 1998, respectively, and $71 million and $140 million in the first nine months of 1999 and 1998, respectively. 39
Amortization expense for certain identifiable intangible assets included in other assets was $11 million and $15 million in the third quarter of 1999 and 1998, respectively, and $34 million and $60 million in the first nine months of 1999 and 1998, respectively. DEPOSITS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Noninterest-bearing $ 41,872 $ 46,732 $ 40,951 Interest-bearing checking 2,736 2,908 2,931 Market rate and other savings 55,641 55,152 52,030 Savings certificates 24,911 27,497 27,880 -------- -------- -------- Core deposits 125,160 132,289 123,792 Other time deposits 3,213 3,753 3,880 Deposits in foreign offices 3,184 746 2,279 -------- -------- -------- Total deposits $131,557 $136,788 $129,951 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------- </TABLE> 40
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 September 30, 1999: Total capital (to risk-weighted assets) > > Wells Fargo & Company $18.2 11.30 % - $12.9 - 8.00% > > > > Norwest Bank Minnesota, N.A. 2.4 12.34 - 1.5 - 8.00 - $1.9 - 10.00% > > > > Wells Fargo Bank, N.A. 8.5 12.02 - 5.6 - 8.00 - 7.0 - 10.00 Tier 1 capital (to risk-weighted assets) > > Wells Fargo & Company $14.0 8.71 % - $6.4 - 4.00% > > > > Norwest Bank Minnesota, N.A. 2.1 10.69 - .8 - 4.00 - $ 1.2 - 6.00% > > > > Wells Fargo Bank, N.A. 5.7 8.15 - 2.8 - 4.00 - 4.2 - 6.00 Tier 1 capital (to average assets) (Leverage ratio) > > Wells Fargo & Company $14.0 7.22 % - $7.8 - 4.00% (1) > > > > Norwest Bank Minnesota, N.A. 2.1 6.14 - 1.3 - 4.00 (1) - $ 1.7 - 5.00% > > > > Wells Fargo Bank, N.A. 5.7 7.12 - 3.2 - 4.00 (1) - 4.0 - 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. 41
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 September 30, 1999 and December 31, 1998. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 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) $32,636 $ 170 $(43) $24,429 $735 $686 Futures 55,860 -- -- 62,348 -- -- Floors and caps (1) 41,877 210 210 33,598 504 504 Options (1)(2) 19,255 35 53 25,822 112 101 Forwards (1) 34,096 92 (29) 41,283 11 (58) Foreign exchange contracts: Forward contracts (1) 91 -- (1) 168 -- (1) CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 15,605 99 (5) 7,795 81 10 Futures 25,502 -- -- 8,440 -- -- Floors and caps purchased (1) 6,254 57 57 5,619 42 42 Floors and caps written 5,736 -- (59) 5,717 -- (42) Options purchased 650 -- -- -- -- -- Options written 950 -- -- -- -- -- Forwards (1) 171 4 1 850 24 4 Commodity contracts: Swaps (1) 114 11 -- 78 4 -- Floors and caps purchased (1) 38 3 3 4 -- -- Floors and caps written 38 -- (3) 4 -- -- Foreign exchange contracts: Forwards and spots (1) 4,287 67 13 3,524 37 2 Options purchased (1) 46 -- -- 44 2 2 Options written 40 -- -- 43 -- (2) - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The Company anticipates performance by substantially all of the counterparties for these contracts or the underlying financial instruments. (2) At September 30, 1999, a significant portion of purchase 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. Because the contract or notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. The Company is primarily an end-user of these instruments. The Company also offers such contracts to its customers but offsets these contracts by purchasing other financial contracts or uses the contracts for asset/liability management. To a lesser extent, the Company 42
takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. 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 the second quarter of 1999, the Company issued the $.6 billion remaining on its registration statement filed with the SEC in 1996 in the form of Medium-Term Notes. The Company subsequently filed a new shelf registration statement with the SEC that allows for the issuance of $10 billion in debt and equity securities, excluding common stock, other than common stock issuable upon the exercise or conversion of debt and equity securities. This registration statement became effective June 16, 1999, and together with the $150 million issuance authority remaining on the Company's registration statements filed in 1993 and 1995, permits the Company to issue an aggregate of $10.15 billion in such debt and equity securities. As of September 30, 1999, the Company had issued $3.0 billion of securities and had established a program to issue, from time to time, Medium-Term Notes, Series A and Subordinated Medium-Term Notes, Series B in the aggregate principal amount of up to $7.15 billion from the $10.15 billion available for issuance under the registration statements described above. In 1996, the Parent also established a $2 billion Euro Medium-Term Note program (Euro MTN) and as of September 30, 1999 had issued $300 million under that program. The proceeds from the sales of any securities are expected to be used for general corporate purposes. In September of 1999, the Board of Directors authorized the repurchase of up to 82 million additional shares of the Company's outstanding common stock. These shares, to be purchased at market price, are part of the Company's ongoing systematic pattern of common stock repurchases to meet the common stock issuance requirements of the Company's benefit plans and conversion of convertible securities, and for other Company purposes, including 43
acquisitions accounted for as purchases and for managing the Company's capital position. As of September 30, 1999, the total remaining common stock purchase authority was approximately 83 million shares. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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. 44
The simulation model is used to measure the impact on net income, relative to a base case scenario, of interest rates increasing or decreasing 100 basis points over the next 12 months. At September 30, 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 that would result in a decrease in net income of $65 million. In the simulation that was run at December 31, 1998, the largest drop in net income relative to the base case scenario over the next twelve months was a 100 basis point increase in rates that 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. 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 Change of Location of Registered Office and Change of Registered Agent, incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 45
3(c) 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 (d) 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 (e) 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 (f) 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 (g) 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 (h) 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 (i) 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 (j) 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 (k) 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 (l) 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 (m) 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 46
3(n) 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 (o) 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 (p) 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(p) (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. 10(a) Supplemental 401(k) Plan, as amended and restated effective July 1, 1999 (b) Supplemental Cash Balance Plan, as amended and restated effective July 1, 1999 (c) Deferred Compensation Plan for Non-Employee Directors of the former Norwest, as amended and restated effective September 28, 1999 (d) Directors' Stock Deferral Plan for directors of the former Norwest, as amended and restated effective September 28, 1999 (e) Directors' Formula Stock Award Plan for directors of the former Norwest, as amended and restated effective September 28, 1999 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.18 and 1.94 for the quarters ended September 30, 1999 and 1998, respectively, and 2.17 and 1.91 for the nine months ended September 30, 1999 and 1998, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 3.48 and 3.38 for the quarters ended September 30, 1999 and 1998, respectively, and 3.61 and 3.29 for the nine months ended September 30, 1999 and 1998, respectively. 47
99(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 2.16 and 1.92 for the quarters ended September 30, 1999 and 1998, respectively, and 2.15 and 1.89 for the nine months ended September 30, 1999 and 1998, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.40 and 3.29 for the quarters ended September 30, 1999 and 1998, respectively, and 3.53 and 3.20 for the nine months ended September 30, 1999 and 1998, respectively. (b) The Company filed the following reports on Form 8-K during the third quarter of 1999: 1 July 20, 1999 under Item 5, containing the Company's financial results for the quarter ended June 30, 1999 2 July 28, 1999 under Item 7, Underwriting Agreement and Indenture dated as of July 21, 1999 relating to the Company's offering of 6 5/8% Notes due 2004 in the aggregate principal amount of $1.5 billion 3 September 8, 1999 under Item 7, Indenture dated as of August 30, 1999 and Distribution Agreement dated as of September 2, 1999 relating to the establishment of a Medium-Term Note Program, Series A and a Subordinated Medium-Term Note Program, Series B 4 September 29, 1999 under Item 5, containing the Press Release announcing the Company's additional share repurchase authorization SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 15, 1999. WELLS FARGO & COMPANY By: LES L. QUOCK ------------------------------------- Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) 48