-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UzDlUsCKkiD9x2a3SoY1cGzMV+wxUKgvdoVhYowScMvmuBSznExA69KyBkZjAajG Z3nRlRUTKC+tAvUmaWZOOw== 0000912057-97-017688.txt : 19970515 0000912057-97-017688.hdr.sgml : 19970515 ACCESSION NUMBER: 0000912057-97-017688 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO CENTRAL INDEX KEY: 0000105598 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132553920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06214 FILM NUMBER: 97605573 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 4154771000 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 Commission file number 1-6214 ------------------------------------------ WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 415-477-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding April 30, 1997 ------------------ Common stock, $5 par value 89,420,878 FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements ---- Consolidated Statement of Income. . . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity . . . . 4 Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . 5 Note to Financial Statements. . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data. . . . . . . . . . . . . . . . . . . . . . 8 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Line of Business Results. . . . . . . . . . . . . . . . . . . . . 11 Earnings Performance. . . . . . . . . . . . . . . . . . . . . . . 15 Net Interest Income. . . . . . . . . . . . . . . . . . . . . . 15 Noninterest Income . . . . . . . . . . . . . . . . . . . . . . 18 Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . 20 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 21 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . . 22 Balance Sheet Analysis. . . . . . . . . . . . . . . . . . . . . . 23 Investment Securities. . . . . . . . . . . . . . . . . . . . . 23 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . 25 Commercial real estate . . . . . . . . . . . . . . . . . . . 25 Nonaccrual and Restructured Loans and Other Assets . . . . . . 26 Changes in total nonaccrual loans. . . . . . . . . . . . . . 26 Changes in foreclosed assets . . . . . . . . . . . . . . . . 29 Loans 90 days past due and still accruing. . . . . . . . . . 29 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . 30 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 32 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . 33 Asset/Liability Management . . . . . . . . . . . . . . . . . . 35 Derivative Financial Instruments . . . . . . . . . . . . . . . 36 Liquidity Management . . . . . . . . . . . . . . . . . . . . . 37 PART II- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 38 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 38 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 - -------------------------------------------------------------------------------- The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. In addition, this Form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. The Company cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the progress of integrating First Interstate Bancorp and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. The interim financial information should be read in conjunction with the Company's 1996 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - -------------------------------------------------------------------------------- Quarter ended March 31, -------------------- (in millions) 1997 1996 - -------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 5 $ 2 Investment securities 208 128 Loans 1,549 875 Other 11 1 ------ ------ Total interest income 1,773 1,006 ------ ------ INTEREST EXPENSE Deposits 422 241 Federal funds purchased and securities sold under repurchase agreements 31 36 Commercial paper and other short-term borrowings 2 5 Senior and subordinated debt 81 48 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 -- ------ ------ Total interest expense 561 330 ------ ------ NET INTEREST INCOME 1,212 676 Provision for loan losses 105 -- ------ ------ Net interest income after provision for loan losses 1,107 676 ------ ------ NONINTEREST INCOME Service charges on deposit accounts 221 122 Fees and commissions 214 118 Trust and investment services income 109 59 Investment securities gains 4 -- Other 92 55 ------ ------ Total noninterest income 640 354 ------ ------ NONINTEREST EXPENSE Salaries 341 181 Incentive compensation 41 32 Employee benefits 95 54 Equipment 94 55 Net occupancy 102 53 Goodwill 83 9 Core deposit intangible 62 10 Other 299 173 ------ ------ Total noninterest expense 1,117 567 ------ ------ INCOME BEFORE INCOME TAX EXPENSE 630 463 Income tax expense 291 199 ------ ------ NET INCOME $ 339 $ 264 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 329 $ 254 ------ ------ ------ ------ PER COMMON SHARE Net income $ 3.62 $ 5.39 ------ ------ ------ ------ Dividends declared $ 1.30 $ 1.30 ------ ------ ------ ------ Average common shares outstanding 90.8 47.0 ------ ------ ------ ------ - -------------------------------------------------------------------------------- 2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1997 1996 1996 - ----------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 8,530 $ 11,736 $ 2,721 Federal funds sold and securities purchased under resale agreements 209 187 49 Investment securities at fair value 12,634 13,505 8,435 Loans 65,436 67,389 35,167 Allowance for loan losses 1,922 2,018 1,681 -------- -------- ------- Net loans 63,514 65,371 33,486 -------- -------- ------- Due from customers on acceptances 96 197 79 Accrued interest receivable 611 665 316 Premises and equipment, net 2,310 2,406 859 Core deposit intangible 1,901 2,038 156 Goodwill 7,312 7,322 373 Other assets 4,746 5,461 2,504 -------- -------- ------- Total assets $101,863 $108,888 $48,978 -------- -------- ------- -------- -------- ------- LIABILITIES Noninterest-bearing deposits $ 25,337 $ 29,073 $ 9,740 Interest-bearing deposits 51,090 52,748 28,066 -------- -------- ------- Total deposits 76,427 81,821 37,806 Federal funds purchased and securities sold under repurchase agreements 1,685 2,029 2,243 Commercial paper and other short-term borrowings 241 401 225 Acceptances outstanding 96 197 79 Accrued interest payable 242 171 110 Other liabilities 3,400 3,947 1,166 Senior debt 1,940 2,120 1,881 Subordinated debt 2,938 2,940 1,266 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,150 -- STOCKHOLDERS' EQUITY Preferred stock 425 600 489 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 89,977,610 shares, 91,474,425 shares and 46,999,455 shares 450 457 235 Additional paid-in capital 9,801 10,287 1,136 Retained earnings 2,959 2,749 2,366 Cumulative foreign currency translation adjustments -- (4) (4) Investment securities valuation allowance (40) 23 (20) -------- -------- ------- Total stockholders' equity 13,595 14,112 4,202 -------- -------- ------- Total liabilities and stockholders' equity $101,863 $108,888 $48,978 -------- -------- ------- -------- -------- ------- - -----------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------ Quarter ended March 31, ---------------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------ PREFERRED STOCK Balance, beginning of quarter $ 600 $ 489 Preferred stock redeemed (175) -- ------- ------ Balance, end of quarter 425 489 ------- ------ COMMON STOCK Balance, beginning of quarter 457 235 Common stock issued under employee benefit and dividend reinvestment plans 1 -- Common stock repurchased (8) -- ------- ------ Balance, end of quarter 450 235 ------- ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of quarter 10,287 1,135 Common stock issued under employee benefit and dividend reinvestment plans 23 7 Common stock repurchased (509) (6) ------- ------ Balance, end of quarter 9,801 1,136 ------- ------ RETAINED EARNINGS Balance, beginning of quarter 2,749 2,174 Net income 339 264 Preferred stock dividends (10) (10) Common stock dividends (119) (62) ------- ------ Balance, end of quarter 2,959 2,366 ------- ------ CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning of quarter (4) (4) Translation adjustments 4 -- ------- ------ Balance, end of quarter -- (4) ------- ------ INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of quarter 23 26 Change in unrealized net gain, after applicable taxes (63) (46) ------- ------ Balance, end of quarter (40) (20) ------- ------ Total stockholders' equity $13,595 $4,202 ------- ------ ------- ------ - ------------------------------------------------------------------------------ 4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------- Quarter ended March 31, ----------------------- (in millions) 1997 1996 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 339 $ 264 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 105 -- Depreciation and amortization 223 71 Deferred income tax provision 3 -- Increase (decrease) in net deferred loan fees (3) 1 Net (increase) decrease in accrued interest receivable 54 (8) Net increase in accrued interest payable 71 25 Other, net 382 75 ------- ------- Net cash provided by operating activities 1,174 428 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities at fair value Proceeds from sales 150 -- Proceeds from prepayments and maturities 1,100 419 Purchases (478) (14) Net decrease in loans resulting from originations and collections 1,833 258 Proceeds from sales (including participations) of loans 81 51 Purchases (including participations) of loans (39) (37) Proceeds from sales of foreclosed assets 48 21 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (22) 128 Other, net 272 (245) ------- ------- Net cash provided by investing activities 2,945 581 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (5,394) (1,176) Net decrease in short-term borrowings (504) (508) Proceeds from issuance of senior debt -- 100 Repayment of senior debt (175) -- Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 149 -- Proceeds from issuance of common stock 24 7 Redemption of preferred stock (175) -- Repurchase of common stock (517) (6) Payment of cash dividends on preferred stock (10) (10) Payment of cash dividends on common stock (119) (62) Other, net (604) (8) ------- ------- Net cash used by financing activities (7,325) (1,663) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,206) (654) Cash and cash equivalents at beginning of quarter 11,736 3,375 ------- ------- CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 8,530 $ 2,721 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the quarter for: Interest $ 490 $ 305 Income taxes $ 73 $ 75 Noncash investing activities: Transfers from loans to foreclosed assets $ 26 $ 35 - ---------------------------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTE TO FINANCIAL STATEMENTS MERGER WITH FIRST INTERSTATE BANCORP (MERGER) On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp (First Interstate). The Merger was accounted for as a purchase transaction. Accordingly, the results of operations of First Interstate are included with those of the Company for periods subsequent to the date of the Merger. The major components of management's plan for the combined company include the realignment of First Interstate's businesses to reflect Wells Fargo's structure, consolidation of retail branches and administrative facilities and reduction in staffing levels. As a result of this plan, the adjustments to goodwill since April 1, 1996 included accruals totaling approximately $324 million ($191 million after tax) related to the disposition of premises, including an accrual of $127 million ($75 million after tax) associated with the dispositions of traditional former First Interstate branches in California and out of state. The California dispositions included 176 branch closures during 1996 and five branch closures in the first quarter of 1997. In addition, 31 branch dispositions have been or are scheduled to be completed in the second quarter of 1997. The Company also entered into definitive agreements with several institutions to sell 20 former First Interstate branches, including deposits, located in California. The sales of 17 of these branches were closed in the first quarter of 1997. The sales of the remaining three branches are expected to be completed in the third quarter of 1997. The out-of-state dispositions include 17 branch closures that were completed in the first quarter of 1997, as well as 23 branch closures which have been or are scheduled to be completed in the second quarter of 1997. The Company also entered into definitive agreements with several institutions to sell 88 former First Interstate out-of-state branches, including deposits. The remaining 24 California and 108 out-of-state dispositions associated with the goodwill adjustment are expected to be completed in 1997. (See Noninterest Income section for information on other, Wells Fargo branch dispositions.) Additionally, the adjustments to goodwill included accruals of approximately $481 million ($284 million after tax) related to severance of former First Interstate employees throughout the Company who will be displaced. Severance payments totaling $214 million were paid since the second quarter of 1996, including $63 million in the first quarter of 1997. In the first quarter of 1997, the Company completed the sale of the Corporate and Municipal Bond Administration (Corporate Trust) business to the Bank of New York. The $7,267 million excess purchase price over fair value of First Interstate's net assets acquired (goodwill) is amortized using the straight-line method over 25 years. 6 [THIS PAGE INTENTIONALLY LEFT BLANK] 7 FINANCIAL REVIEW
SUMMARY FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------------------- % Change Quarter ended Mar. 31, 1997 from -------------------------------------- ------------------ MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------------------------- FOR THE QUARTER Net income $ 339 $ 123 $ 264 176% 28% Net income applicable to common stock 329 103 254 219 30 Per common share Net income $ 3.62 $ 1.12 $ 5.39 223 (33) Dividends declared 1.30 1.30 1.30 -- -- Average common shares outstanding 90.8 92.2 47.0 (2) 93 Profitability ratios (annualized) Net income to average total assets (ROA) 1.31% 0.45% 2.16% 191 (39) Net income applicable to common stock to average common stockholders' equity (ROE) 10.02 2.99 28.34 235 (65) Efficiency ratio (1) 60.3% 82.0% 55.1% (26) 9 Average loans $ 65,493 $ 67,097 $35,025 (2) 87 Average assets 105,430 107,308 49,134 (2) 115 Average core deposits 77,622 80,776 36,819 (4) 111 Net interest margin 6.14% 6.14% 6.18% -- (1) NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (2) Net income applicable to common stock $ 443 $ 222 $ 262 100 69 Net income per common share 4.88 2.41 5.58 102 (13) ROA 1.90% 0.97% 2.25% 96 (16) ROE 36.67 16.99 32.74 116 12 Efficiency ratio 52.9 74.0 54.3 (29) (3) AT QUARTER END Investment securities $ 12,634 $ 13,505 $ 8,435 (6) 50 Loans 65,436 67,389 35,167 (3) 86 Allowance for loan losses 1,922 2,018 1,681 (5) 14 Goodwill 7,312 7,322 373 -- -- Assets 101,863 108,888 48,978 (6) 108 Core deposits 76,156 81,581 37,414 (7) 104 Common stockholders' equity 13,170 13,512 3,713 (3) 255 Stockholders' equity 13,595 14,112 4,202 (4) 224 Tier 1 capital (3) 6,407 6,565 3,856 (2) 66 Total capital (Tiers 1 and 2) (3) 9,891 10,000 5,353 (1) 85 Capital ratios Common stockholders' equity to assets 12.93% 12.41% 7.58% 4 71 Stockholders' equity to assets 13.35 12.96 8.58 3 56 Risk-based capital (3) Tier 1 capital 7.80 7.68 9.40 2 (17) Total capital 12.05 11.70 13.04 3 (18) Leverage (3) 6.61 6.65 7.91 (1) (16) Book value per common share $ 146.37 $ 147.72 $ 79.01 (1) 85 Staff (active, full-time equivalent) 34,486 36,902 18,748 (7) 84 COMMON STOCK PRICE High $ 319.25 $ 289.88 $261.25 10 22 Low 271.00 250.25 203.13 8 33 Quarter end 284.13 269.75 261.25 5 9 - -------------------------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) Nonqualifying core deposit intangible (CDI) amortization and average balance excluded from these calculations are, with the exception of the efficiency ratio, net of applicable taxes. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $31 million and $1,095 million, respectively, for the quarter ended March 31, 1997. Goodwill amortization and average balance (which are not tax effected) were $83 million and $7,306 million, respectively, for the quarter ended March 31, 1997. (3) See the Capital Adequacy/Ratios section for additional information. 8 OVERVIEW Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, Wells Fargo & Company and its subsidiaries are referred to as the Company. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate). As a result, the financial information presented in this Form 10-Q for the first quarter of 1996 does not reflect the effects of the acquisition. Since the Company's results of operations for the periods subsequent to the Merger's consummation reflect amounts recognized from the combined operations, they cannot be divided between or attributed directly to either of the two former entities. In most of the Company's income and expense categories and net income, the increases in the amounts reported for the first quarter of 1997 compared to the amounts reported for the same quarter of 1996 resulted from the Merger. The increases in substantially all of the categories of the Company's balance sheet between amounts reported at March 31, 1997 and those reported at March 31, 1996 also resulted from the Merger. Other significant factors affecting the Company's results of operations and financial position are described in the applicable sections below. Net income for the first quarter of 1997 was $339 million, compared with $123 million for the fourth quarter of 1996 and $264 million for the first quarter of 1996. Net income per share for the first quarter of 1997 was $3.62, compared with $1.12 in the fourth quarter of 1996 and $5.39 in the first quarter of 1996. Return on average assets (ROA) was 1.31% and return on average common equity (ROE) was 10.02% for the first quarter of 1997, compared with .45% and 2.99%, respectively, for the fourth quarter of 1996, and 2.16% and 28.34%, respectively, for the first quarter of 1996. Earnings before the amortization of goodwill and nonqualifying CDI ("cash" or "tangible" earnings) for the first quarter of 1997 were $4.88 per share, compared with $2.41 per share in the fourth quarter of 1996 and $5.58 per share for the first quarter of 1996. On the same basis, ROA was 1.90% and ROE was 36.67% in the first quarter of 1997, compared with .97% and 16.99%, respectively, in the fourth quarter of 1996 and 2.25% and 32.74%, respectively, in the first quarter of 1996. Following the Merger, "cash" earnings, as well as "cash" ROA and ROE, are the measures of performance which will be most comparable with prior quarters. They are also the most relevant measures of financial performance for shareholders because they measure the Company's ability to support growth, pay dividends and repurchase stock. (See page 22 for additional information.) The increase in reported EPS and "cash" EPS from the fourth quarter of 1996 is substantially due to the fourth quarter 1996 estimated expenses related to the First Interstate integration of about $300 million and the $96 million accrual related to the disposition of operations associated with scheduled branch closures, partially offset by an increase of $35 million in the loan loss provision in the first quarter of 1997. 9 Net interest income on a taxable-equivalent basis was $1,216 million, $1,253 million and $676 million in the first quarter of 1997, fourth quarter and first quarter of 1996, respectively. The increase in net interest income in the first quarter of 1997 compared with the same period of 1996 was predominantly due to an increase in average earning assets as a result of the Merger. The Company's net interest margin was 6.14% for the first quarter of 1997, compared with 6.18% in the same quarter of 1996 and 6.14% in the fourth quarter of 1996. Noninterest income was $640 million in the first quarter of 1997, compared with $354 million in the same period of 1996. Noninterest expense in the first quarter of 1997 was $1,117 million, compared with $567 million for the same period of 1996. In addition to the effect of combining operations of First Interstate with the Company, the increase reflected goodwill and nonqualifying CDI amortization, severance for Wells Fargo employees and other integration expenditures. The Company expects to meet its pre-merger objective of realizing annual cost savings of $800 million not later than 18 months after the date of the Merger. About 50% ($100 million, or $400 million annualized) of the cost savings were realized in the first quarter of 1997. The Company believes that substantially all of the impact of revenue losses due to the Merger was recognized by the first quarter of 1997, with revenue growth expected to resume in the second half of 1997. For additional discussion of the Company's plan for branch closures and consolidations, see Note to Financial Statements. The provision for loan losses in the first quarter of 1997 was $105 million, compared with no provision for the same period in 1996. During the first quarter of 1997, net charge-offs totaled $201 million, or 1.23% of average loans (annualized). This compared with $178 million, or 1.04%, during the fourth quarter of 1996 and $113 million, or 1.30%, during the first quarter of 1996. The allowance for loan losses was 2.94% of total loans at March 31, 1997, compared with 3.00% at December 31, 1996 and 4.78% at March 31, 1996. Total nonaccrual and restructured loans were $655 million, or 1.0% of total loans, at March 31, 1997, compared with $724 million, or 1.1%, at December 31, 1996 and $537 million, or 1.5%, at March 31, 1996. Foreclosed assets amounted to $207 million at March 31, 1997, compared with $219 million at December 31, 1996 and $198 million at March 31, 1996. Common stockholders' equity to total assets was 12.93% at March 31, 1997, compared with 12.41% and 7.58% at December 31, 1996 and March 31, 1996, respectively. The Company's total risk-based capital (RBC) ratio at March 31, 1997 was 12.05% and its Tier 1 RBC ratio was 7.80%, exceeding minimum guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. At December 31, 1996, the Company's ratios were 11.70% and 7.68%, respectively; at March 31, 1996, these ratios were 13.04% and 9.40%, respectively. The Company's leverage ratios were 6.61%, 6.65% and 7.91% at March 31, 1997, December 31, 1996 and March 31, 1996, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline for banks of 5%. 10 The Company has bought in the past, and will continue to buy, shares to offset common stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in April 1996 the repurchase of up to 9.6 million shares of the Company's outstanding common stock. Under these programs, the Company has repurchased a total of 6.3 million shares (net of shares issued) since April 1996, including 1.5 million shares (net of shares issued) in the first quarter of 1997. The Company currently expects to repurchase approximately 1.5 million shares (net of shares issued) per quarter in 1997. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. This Statement establishes standards for computing and presenting earnings per share (EPS). It replaces the presentation of primary EPS (net income applicable to common stock divided by average common shares outstanding and, if dilution is 3% or more, common stock equivalents) with a presentation of basic EPS (net income applicable to common stock divided by average common shares outstanding), which the Company currently presents. It also requires dual presentation of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of both EPS computations. This Statement is effective with the year-end 1997 financial statements. Earlier application is not permitted; however, the Statement requires restatement of all prior period EPS data presented, including interim periods. The basic and diluted EPS under FAS 128 for the Company's first quarter 1997 would not differ materially from the existing primary and fully diluted EPS under APB 15. LINE OF BUSINESS RESULTS The line of business results show the financial performance of the Company's major business units. The table on pages 12 and 13 presents the line of business results for the quarters ended March 31, 1997 and 1996. First Interstate results prior to April 1, 1996 are not included and, therefore, the 1997 quarter is not comparable to 1996. The results incorporate estimates of cost allocations, transfers and assignments reflecting management's current understanding of the First Interstate businesses. The cost allocations are based on estimates of the steady state level of expenses. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated to allow comparability from one period to the next. The Company believes that cash earnings is the most relevant measure of financial performance for shareholders. For this reason, goodwill and nonqualifying core deposit intangible have not been allocated to the business units in this presentation and are reported in "Other." 11 The following table provides the line of business results (estimated) for the Company's six major business units. - -------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Banking Investment Group Group Group ------------------------------------------- QUARTER ENDED MARCH 31, 1997 1996 1997 1996 1997 1996 Net interest income (1) $ 267 $113 $ 187 $ 97 $ 202 $ 99 Provision for loan losses (2) -- -- 30 16 1 -- Noninterest income (3) 298 160 66 44 134 65 Noninterest expense (3) 493 265 119 70 153 85 ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 72 8 104 55 182 79 Income tax expense (benefit) (4) 29 3 43 23 74 33 ----- ----- ----- ----- ----- ----- Net income $ 43 $ 5 $ 61 $ 32 $ 108 $ 46 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Average loans $ -- $ -- $ 5.2 $3.0 $ 1.9 $ 0.5 Average assets 2.0 1.0 7.3 4.1 3.1 0.8 Average core deposits 19.4 9.3 12.3 6.3 35.4 18.2 Return on equity (5) 16% 4% 32% 31% 62% 47% Risk-adjusted efficiency ratio (6) 96% 106% 70% 72% 55% 63% - -------------------------------------------------------------------------------- (1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups in 1997 and 1996 is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (3) The Retail Distribution Group's charges to the product groups are shown as noninterest income to the branches and noninterest expense to the product groups. They amounted to $97 million and $50 million for the quarters ended March 31, 1997 and 1996, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. The following describes the major business units. The Retail Distribution Group sells and services a complete line of retail financial products for consumers and small businesses. In addition to the 24-hour Telephone Banking Centers and Wells Fargo's Online Financial Services (the Company's personal computer banking services), the Group encompasses Physical Distribution's network of traditional branches, in-store branches, banking centers and ATMs. Retail Distribution also includes the consumer checking business, which primarily uses the network as a source of new customers. At March 31, 1997, there were 1,216 traditional branches and 723 in-store branches and banking centers with 2,723 ATM locations throughout the Western United States. Average consumer checking core deposits for the first quarter 1997 were $18.7 billion, compared with $8.8 billion in 1996. The Business Banking Group provides a full range of credit products and financial services to small businesses and their owners. These include lines of credit, receivables and inventory financing, equipment loans and leases, real estate financing, SBA financing, cash management, deposit and investment accounts, payroll services, retirement plans and credit and debit card processing. Business Banking customers are small businesses with annual sales up to $10 million in which the owner of the business is also the principal financial decision maker. 12 - -------------------------------------------------------------------------------- Wholesale Real Estate Products Consumer Consolidated Group Group Lending Other Company - ------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 $ 111 $ 66 $ 195 $ 104 $ 278 $ 184 $ (28) $ 13 $1,212 $ 676 10 8 19 10 133 73 (88) (107) 105 -- 18 24 82 38 93 58 (51) (35) 640 354 21 22 105 50 114 75 112 -- 1,117 567 ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- 98 60 153 82 124 94 (103) 85 630 463 40 25 63 35 51 40 (9) 40 291 199 ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- $ 58 $ 35 $ 90 $ 47 $ 73 $ 54 $ (94) $ 45 $ 339 $ 264 ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- $ 9.4 $7.0 $17.0 $ 8.9 $24.3 $11.8 $ 7.7 $ 3.8 $ 65.5 $35.0 10.1 7.5 22.4 10.0 25.4 12.2 35.1 13.5 105.4 49.1 0.3 0.1 9.6 2.6 0.4 0.2 0.2 0.1 77.6 36.8 24% 20% 24% 25% 19% 28% --% --% 10% 28% 56% 68% 68% 64% 79% 66% --% --% --% --% - -------------------------------------------------------------------------------- (4) Businesses are taxed at the Company's marginal (statutory) tax rate, adjusted for any nondeductible expenses. Any differences between the marginal and effective tax rates are in Other. (5) Equity is allocated to the lines of business based on an assessment of the inherent risk associated with each business so that the returns on allocated equity are on a risk-adjusted basis and comparable across business lines. (6) The risk-adjusted efficiency ratio is defined as noninterest expense plus the cost of capital divided by revenues (net interest income and noninterest income) less normalized loan losses. Core deposits for the first quarter 1997 averaged $12.3 billion, compared with $6.3 billion in 1996. Loans averaged $5.2 billion, compared with $3.0 billion in 1996. The Investment Group is responsible for the sales and management of savings and investment products, investment management and fiduciary and brokerage services to institutions, retail customers and high net worth individuals. This includes the Stagecoach and Overland Express families of mutual funds as well as personal trust, employee benefit trust and agency assets. It also includes product management for market rate accounts, savings deposits, Individual Retirement Accounts (IRAs) and time deposits. Within this Group, Private Client Services operates as a fully integrated financial services organization focusing on banking/credit, trust services, investment management and full service and discount brokerage. During the first quarter, the Group established Wells Capital Management, a registered investment advisor and wholly owned subsidiary of Wells Fargo Bank, N.A. Wells Capital Management will focus on the management of institutional accounts, mutual funds and collective investment funds. In addition, the Bank closed the sale of the Corporate and Municipal Bond Administration (Corporate Trust) business to The Bank of New York in March 1997. Assets under management at March 31, 1997 were $57.6 billion, compared with $36.1 billion at March 31, 1996. For the first quarter ending 1997, average loans were $1.9 billion and average core deposits were $35.4 billion, compared with average loans of $0.5 billion and average core deposits of $18.2 billion for the same period in 1996. 13 The Real Estate Group provides a complete line of services supporting the commercial real estate market. Products and services include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Real Estate Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield bonds, origination of permanent loans for securitization, loan syndications and commercial real estate loan servicing. The Real Estate Group's loans averaged $9.4 billion in first quarter 1997, compared with $7.0 billion in the same period of 1996. The Wholesale Products Group serves businesses with annual sales in excess of $5 million and maintains relationships with major corporations throughout the United States. The Group is responsible for soliciting and maintaining credit and noncredit relationships with businesses by offering a variety of products and services, including traditional commercial loans and lines, letters of credit, international trade facilities, foreign exchange services, cash management and electronic products. The Group includes the majority ownership interest in the Wells Fargo HSBC Trade Bank that provides trade financing, letters of credit and collection services. The Wholesale Products Group's loans averaged $17.0 billion in first quarter 1997, compared with $8.9 billion in 1996, and average core deposits were $9.6 billion, compared with $2.6 billion in 1996. Consumer Lending offers a full array of consumer loan products, including credit cards, transportation (auto, recreational vehicle, marine) financing, home equity lines and loans, lines of credit and installment loans. The loan portfolio for first quarter 1997 averaged $24.3 billion, consisting of $5.3 billion in credit cards, $11.9 billion in equity/unsecured loans and $7.1 billion in transportation financing. This compares with $3.9 billion in credit cards, $5.5 billion in equity/unsecured loans and $2.4 billion in transportation financing in 1996. The Other category includes the Company's 1-4 family first mortgage portfolio, the investment securities portfolio, goodwill and the nonqualifying core deposit intangible, the difference between the normalized provision for the line groups and the Company provision for loan losses, the net impact of transfer pricing loan and deposit balances, the cost of external debt, the elimination of intergroup noninterest income and expense, and any residual effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage the sensitivity of net interest spreads. 14 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1,216 million in the first quarter of 1997, compared with $676 million in the first quarter of 1996. The Company's net interest margin was 6.14% in the first quarter of 1997, compared with 6.18% in the first quarter of 1996. Interest income included hedging income of $25 million in the first quarter of 1997, compared with $10 million in the first quarter of 1996. Interest expense included hedging income of $2 million in the first quarter of 1997, compared with $1 million in the same quarter of 1996. Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 16 and 17. Loans averaged $65.5 billion in the first quarter of 1997, compared with $67.1 billion and $35.0 billion in the fourth quarter and first quarter of 1996, respectively. A major portion of the decrease in average loan balance from the fourth quarter of 1996 was due to intentional runoff in the corporate banking side of commercial loans acquired in the Merger, as well as payments and payoffs of other real estate mortgages, including those acquired in the Merger. The decrease is also partially due to normal and service-related attrition, seasonality and a de-emphasis of direct auto lending in revolving credit and monthly payments, as well as the expected runoff in the real estate 1-4 family mortgage portfolio. Investment securities averaged $13.1 billion during the first quarter of 1997, compared with $13.2 billion and $8.7 billion in the fourth quarter and first quarter of 1996, respectively. Average core deposits were $77.6 billion, $80.8 billion and $36.8 billion and funded 74%, 75% and 75% of the Company's average total assets in the first quarter of 1997, fourth quarter and first quarter of 1996, respectively. The decrease in average core deposits from the fourth quarter of 1996 was primarily due to customer attrition due to service-related issues and a decline in interest-bearing checking deposits related to moving customer deposits to off- balance sheet sweep products. 15 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS)(1)(2)
- --------------------------------------------------------------------------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------------------------- MARCH 31, December 31, 1997 1996 -------------------------------------- ------------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - --------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 374 5.43% $ 5 $ 570 5.88% $ 8 Investment securities at fair value (3): U.S. Treasury securities 2,916 6.04 43 2,624 6.06 40 Securities of U.S. government agencies and corporations 6,703 6.41 107 7,017 6.41 112 Private collateralized mortgage obligations 3,134 6.57 52 3,105 6.67 52 Other securities 368 6.35 6 440 6.83 7 -------- ------ --------- -------- Total investment securities at fair value 13,121 6.36 208 13,186 6.42 211 Loans: Commercial 18,406 8.98 409 18,897 8.93 424 Real estate 1-4 family first mortgage 10,236 7.41 189 10,535 7.42 196 Other real estate mortgage 11,550 10.89 310 12,039 9.54 288 Real estate construction 2,299 9.75 55 2,311 10.52 61 Consumer: Real estate 1-4 family junior lien mortgage 6,170 9.30 142 6,348 9.45 151 Credit card 5,330 14.07 188 5,335 14.65 195 Other revolving credit and monthly payment 8,271 9.27 189 8,522 9.47 203 -------- ------ --------- -------- Total consumer 19,771 10.57 519 20,205 10.83 549 Lease financing 3,079 8.84 68 2,936 8.71 64 Foreign 152 7.34 3 174 7.80 3 -------- ------ --------- -------- Total loans 65,493 9.57 1,553 67,097 9.42 1,585 Other 706 6.25 11 709 6.15 11 -------- ------ --------- -------- Total earning assets $ 79,694 8.99 1,777 $ 81,562 8.88 1,815 -------- ------ --------- -------- -------- --------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,913 1.14 5 $ 3,000 1.28 10 Market rate and other savings 34,103 2.55 214 34,012 2.66 227 Savings certificates 15,518 5.05 193 15,785 5.07 201 Other time deposits 180 3.94 2 331 6.79 5 Deposits in foreign offices 559 5.13 7 227 4.85 3 -------- ------ --------- -------- Total interest-bearing deposits 52,273 3.27 421 53,355 3.33 446 Federal funds purchased and securities sold under repurchase agreements 2,425 5.18 31 1,493 5.29 20 Commercial paper and other short-term borrowings 230 5.07 2 416 3.66 4 Senior debt 2,001 6.19 31 2,240 6.19 35 Subordinated debt 2,939 6.92 51 2,941 6.90 51 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,251 7.85 25 326 7.86 6 -------- ------ --------- -------- Total interest-bearing liabilities 61,119 3.72 561 60,771 3.68 562 Portion of noninterest-bearing funding sources 18,575 -- -- 20,791 -- -- -------- ------ --------- -------- Total funding sources $ 79,694 2.85 561 $ 81,562 2.74 562 -------- ------ --------- -------- -------- --------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 6.14% $1,216 6.14% $ 1,253 --------- ------ --------- -------- --------- ------ --------- -------- NONINTEREST-EARNING ASSETS Cash and due from banks $ 9,956 $ 10,539 Goodwill 7,306 7,362 Other 8,474 7,845 -------- --------- Total noninterest-earning assets $ 25,736 $ 25,746 -------- --------- -------- --------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 26,088 $ 27,979 Other liabilities 4,370 3,917 Preferred stockholders' equity 548 934 Common stockholders' equity 13,305 13,707 Noninterest-bearing funding sources used to fund earning assets (18,575) (20,791) -------- --------- Net noninterest-bearing funding sources $ 25,736 $ 25,746 -------- --------- -------- --------- TOTAL ASSETS $105,430 $107,308 -------- --------- -------- --------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.27%, 8.25% and 8.33% for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.57%, 5.53% and 5.40% for the same quarters, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. The average amortized cost balances for investment securities at fair value totaled $13,116 million, $13,145 million and $8,614 million for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (4) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all quarters presented. 16 -------------------------------------- Quarter ended -------------------------------------- March 31, 1996 -------------------------------------- Interest Average Yields/ income/ (in millions) balance rates expense - ------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 125 5.68% $ 2 Investment securities at fair value (3): U.S. Treasury securities 1,356 5.52 18 Securities of U.S. government agencies and corporations 4,991 5.95 75 Private collateralized mortgage obligations 2,078 6.05 31 Other securities 225 7.70 4 ------- ------ Total investment securities at fair value 8,650 5.95 128 Loans: Commercial 9,308 9.96 231 Real estate 1-4 family first mortgage 4,400 7.56 83 Other real estate mortgage 8,197 9.23 188 Real estate construction 1,327 9.98 33 Consumer: Real estate 1-4 family junior lien mortgage 3,334 8.50 71 Credit card 3,933 15.56 153 Other revolving credit and monthly payment 2,598 11.19 71 ------- ------ Total consumer 9,865 12.02 295 Lease financing 1,897 9.20 44 Foreign 31 6.96 1 ------- ------ Total loans 35,025 10.03 875 Other 69 6.34 1 ------- ------ Total earning assets $43,869 9.21 $1,006 ------- ------ ------- ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 856 .99 2 Market rate and other savings 17,991 2.52 113 Savings certificates 8,636 5.24 113 Other time deposits 341 7.26 6 Deposits in foreign offices 524 5.42 7 ------- ------ Total interest-bearing deposits 28,348 3.41 241 Federal funds purchased and securities sold under repurchase agreements 2,706 5.36 36 Commercial paper and other short-term borrowings 405 5.27 5 Senior debt 1,710 6.26 26 Subordinated debt 1,266 6.85 22 Guaranteed preferred beneficial interests in Company's subordinated debentures -- -- -- ------- ------ Total interest-bearing liabilities 34,435 3.86 330 Portion of noninterest-bearing funding sources 9,434 -- -- ------- ------ Total funding sources $43,869 3.03 330 ------- ------ ------- NET INTEREST MARGIN AND NET INTEREST 6.18% $ 676 INCOME ON A TAXABLE-EQUIVALENT --------- ------ BASIS (4) --------- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,873 Goodwill 377 Other 2,015 ------- Total noninterest-earning assets $ 5,265 ------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 9,336 Other liabilities 1,277 Preferred stockholders' equity 489 Common stockholders' equity 3,597 Noninterest-bearing funding sources used to fund earning assets (9,434) Net noninterest-bearing ------- funding sources $ 5,265 ------- ------- TOTAL ASSETS $49,134 ------- ------- - --------------------------------------------------- 17 NONINTEREST INCOME
- ----------------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------------ % (in millions) 1997 1996 Change - ----------------------------------------------------------------------------------------------------- Service charges on deposit accounts $221 $122 81% Fees and commissions: Credit card membership and other credit card fees 45 26 73 Shared ATM network fees 39 13 200 Charges and fees on loans 31 17 82 Debit and credit card merchant fees 22 15 47 Mutual fund and annuity sales fees 16 8 100 All other 61 39 56 ---- ---- Total fees and commissions 214 118 81 Trust and investment services income: Asset management and custody fees 61 35 74 Mutual fund management fees 40 21 90 All other 8 3 167 ---- ---- Total trust and investment services income 109 59 85 Investment securities gains 4 -- -- Income from equity investments accounted for by the: Cost method 51 35 46 Equity method 16 2 700 Check printing charges 17 9 89 Gains from dispositions of operations 7 5 40 Gains on sales of loans 6 4 50 Losses on dispositions of premises and equipment (30) (11) 173 All other 25 11 127 ---- ---- Total $640 $354 81% ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------------------------
The overall increase in noninterest income reflected the impact of the Merger. "All other" fees and commissions include mortgage loan servicing fees and the related amortization expense for purchased mortgage servicing rights. Mortgage loan servicing fees totaled $24 million and $16 million for the first quarter of 1997 and 1996, respectively. The related amortization expense was $18 million and $11 million for the first quarter of 1997 and 1996, respectively. The balance of purchased mortgage servicing rights was $287 million and $170 million at March 31, 1997 and 1996, respectively. The purchased mortgage loan servicing portfolio totaled $27 billion at March 31, 1997, compared with $16 billion at March 31, 1996. A major portion of the increase in trust and investment services income for the first quarter ended March 31, 1997 was due to greater mutual fund management fees, reflecting the overall growth in the fund families' net assets, including the Pacifica funds previously managed by First Interstate. The Company managed 28 of the Stagecoach family of mutual funds consisting of $14.4 billion of assets at March 31, 1997, compared with 16 funds consisting of $7.5 billion of assets at March 31, 1996. The Company also manages the Overland Express family of 14 mutual funds, which had $5.2 billion of assets under management at March 31, 1997, compared with $3.9 billion at March 31, 1996, and is sold through brokers around the country. In addition 18 to managing Stagecoach and Overland Express Funds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $191 billion (including $136 billion from First Interstate) and $52 billion at March 31, 1997 and 1996, respectively. At December 31, 1996, the Company had a liability of $111 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with branch closures. Of this amount, $15 million represented the balance of the 1995 accrual for the sale of 12 traditional branches, including deposits, that closed in February 1997 and for the disposition of 11 branches, 10 of which were closed in the first quarter of 1997, and one which is expected to be sold in the third quarter of 1997. At December 31, 1996 and March 31, 1997, the remaining balance associated with branch dispositions not acquired as a result of the Merger consisted of a fourth quarter 1996 accrual of $96 million for the disposition of 137 traditional branches in California in 1997, of which 44 branches have been or are scheduled to be closed in the second quarter of 1997. The remaining 93 branch dispositions are expected to be completed by the fourth quarter of 1997. At March 31, 1997, the Company had 1,939 retail outlets, comprised of 1,216 traditional branches, 342 supermarket branches and 381 banking centers, in 10 Western states. 19 NONINTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------------ % (in millions) 1997 1996 Change - ----------------------------------------------------------------------------------------------------- Salaries $ 341 $181 88% Incentive compensation 41 32 28 Employee benefits 95 54 76 Equipment 94 55 71 Net occupancy 102 53 92 Goodwill 83 9 822 Core deposit intangible: Nonqualifying (1) 54 -- -- Qualifying 8 10 (20) Contract services 56 42 33 Operating losses 42 14 200 Telecommunications 38 16 138 Postage 23 15 53 Security 22 6 267 Stationery and supplies 21 10 110 Check printing 15 7 114 Outside professional services 15 13 15 Travel and entertainment 14 9 56 Outside data processing 13 3 333 Advertising and promotion 13 13 -- Foreclosed assets (9) 2 -- All other 36 23 57 --------- --------- Total $1,117 $567 97% --------- --------- --------- --------- --------- --------- - -----------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangibles acquired after February 1992 that are subtracted from stockholders' equity in computing regulatory capital for bank holding companies. In addition to the effect of combining operations of First Interstate with the Company, the overall increase in noninterest expense primarily reflected integration expenses, including intangible amortization, severance and higher expenses for contract services. Salaries, incentive compensation and employee benefits expense increased $210 million in the first quarter of 1997 due to higher staff levels after the consummation of the Merger. Salaries and employee benefits expense for the first quarter of 1997 included integration-related severance expense of $10 million. Additional severance expense may be incurred in future quarters as the Company continues the integration process. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 34,486 at March 31, 1997, compared with 18,748 at March 31, 1996. The Company currently expects to have about 32,000 active FTE by the fourth quarter of 1997. Goodwill and CDI amortization resulting from the Merger were $74 million and $54 million, respectively, for the quarter ended March 31, 1997. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be $199 million, $178 million and $162 million, respectively. 20 The related impact on income tax expense is expected to be a benefit of $82 million, $73 million and $66 million in 1998, 1999 and 2000, respectively. INCOME TAXES The Company's effective tax rate was 46% for the first quarter of 1997, compared with 43% for the same period of 1996. The increase in the effective tax rate for the first quarter of 1997 was due to goodwill amortization related to the Merger, which is not tax deductible, partially offset by a decline in state income taxes. 21 EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI The following table reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for the quarter ended March 31, 1997:
- --------------------------------------------------------------------------------------------------- Quarter ended (in millions) March 31, 1997 - --------------------------------------------------------------------------------------------------- Amortization ----------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ---------------------------------------------------------------------------------------------------- Income before income tax expense $ 630 $ 83 $ 54 $ 767 Income tax expense 291 -- 23 314 ----- ---- ---- ----- Net income 339 83 31 453 Preferred stock dividends 10 -- -- 10 ----- ---- ---- ----- Net income applicable to common stock $ 329 $ 83 $ 31 $ 443 ----- ---- ---- ----- ----- ---- ---- ----- Per common share $3.62 $.91 $.35 $4.88 ----- ---- ---- ----- ----- ---- ---- ----- - ---------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended March 31, 1997 were calculated as follows:
- ---------------------------------------------------------------------------------------------------- Quarter ended (in millions) March 31, 1997 - ---------------------------------------------------------------------------------------------------- ROA: A*/ (C-E) = 1.90% ROE: B*/ (D-E) = 36.67% Efficiency: (F-G) / H = 52.9% Net income $ 453(A) Net income applicable to common stock 443(B) Average total assets 105,430(C) Average common stockholders' equity 13,305(D) Average goodwill ($7,306) and after-tax nonqualifying core deposit intangible ($1,095) 8,401(E) Noninterest expense 1,117(F) Amortization expense for goodwill and nonqualifying core deposit intangible 137(G) Net interest income plus noninterest income 1,852(H) - ----------------------------------------------------------------------------------------------------
*Annualized These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" or "tangible" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows on page 5 for other information regarding funds available for use by management. 22 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, 1997 1996 1996 ------------------- ------------------- ------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ---------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE: U.S. Treasury securities $ 2,847 $ 2,830 $ 2,824 $ 2,837 $1,347 $1,350 Securities of U.S. government agencies and corporations (1) 6,423 6,388 7,043 7,050 4,866 4,823 Private collateralized mortgage obligations (2) 3,102 3,065 3,237 3,230 2,056 2,032 Other 310 309 342 343 170 180 ------- ------- ------- ------- ------ ------- Total debt securities 12,682 12,592 13,446 13,460 8,439 8,385 Marketable equity securities 18 42 18 45 29 50 ------- ------- ------- ------- ------ ------- Total $12,700 $12,634 $13,464 $13,505 $8,468 $8,435 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- ------ ------- - ----------------------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage- backed securities. (2) Substantially all private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages. The available-for-sale portfolio includes both debt and marketable equity securities. At March 31, 1997, the available-for-sale securities portfolio had an unrealized net loss of $66 million, or less than 1% of the cost of the portfolio, comprised of unrealized gross losses of $120 million and unrealized gross gains of $54 million. At December 31, 1996, the available-for-sale securities portfolio had an unrealized net gain of $41 million, comprised of unrealized gross gains of $107 million and unrealized gross losses of $66 million. At March 31, 1996, the available-for-sale securities portfolio had an unrealized net loss of $33 million, comprised of unrealized gross losses of $95 million and unrealized gross gains of $62 million. The unrealized net gain or loss on available-for-sale securities is reported on an after-tax basis as a separate component of stockholders' equity. At March 31, 1997, the valuation allowance amounted to an unrealized net loss of $40 million, compared with an unrealized net gain of $23 million at December 31, 1996 and an unrealized net loss of $20 million at March 31, 1996. The unrealized net loss in the available-for-sale portfolio at March 31, 1997 was predominantly due to investments in mortgage-backed securities. This unrealized net loss reflected current interest rates that were higher than those at the time the investments were purchased. The decline in the fair value of the investment securities portfolio is not considered to be an other-than-temporary impairment. The Company may decide to sell certain of the available-for-sale securities to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities). During the first three months of 1997, realized gross gains resulting from the sale of available-for-sale securities were $4 million (realized gross losses were zero). During the first three months of 1996, there were no sales of available-for-sale securities. 23 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ---------------------------------------------------------------------------------------------------------------------------- March 31, 1997 ------------------------------------------------------------------------------------- Expected remaining principal maturity ------------------------------------------------------------------------------------- Weighted average expected Weighted remaining One year or less Total average maturity --------------------- (in millions) amount yield (in yrs.-mos.) Amount Yield - ------------------------------------------------------------------------------------------------------------ AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $ 2,847 6.02% 1-11 $ 730 5.85% Securities of U.S. government agencies and corporations 6,423 6.60 2-5 2,405 6.72 Private collateralized mortgage obligations 3,102 6.71 2-2 933 6.58 Other 310 6.56 2-1 93 6.49 ------- ------- TOTAL COST OF DEBT SECURITIES $12,682 6.50% 2-3 $4,161 6.53% ------- ---- ---- ------- ---- ------- ---- ---- ------- ---- ESTIMATED FAIR VALUE $12,592 $4,132 ------- ------- ------- ------- After one year After five years through five years through ten years After ten years --------------------- --------------------- --------------------- (in millions) Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES (1): U.S. Treasury securities $2,111 6.08% $ 6 6.30% $-- 6.88% Securities of U.S. government agencies and corporations 3,107 6.54 808 6.70 103 5.21 Private collateralized mortgage obligations 1,956 6.78 211 6.69 2 6.98 Other 195 6.59 22 6.66 -- 6.98 ------ ------ ---- TOTAL COST OF DEBT SECURITIES $7,369 6.47% $1,047 6.69% $105 5.24% ------ ---- ------ ---- ---- ---- ------ ---- ------ ---- ---- ---- ESTIMATED FAIR VALUE $7,317 $1,039 $104 ------ ------ ---- ------ ------ ---- - -----------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale investment securities carried at fair value. The weighted average expected remaining maturity of the debt securities portfolio was 2 years and 3 months at March 31, 1997, compared with 2 years and 2 months at December 31, 1996 and 2 years and 1 month at March 31, 1996. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At March 31, 1997, mortgage-backed securities included in securities of U.S. government agencies and corporations primarily consisted of pass- through securities and collateralized mortgage obligations (CMOs) and substantially all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $9,453 million, or 75%, of the Company's investment securities portfolio at March 31, 1997. The CMO securities held by the Company (including the private issues) are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. As an indication of interest rate risk, the Company has estimated the impact of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on this rate scenario, mortgage-backed securities would decrease in fair value from $9,453 million to $9,072 million and the expected remaining maturity of these securities would increase from 2 years and 3 months to 2 years and 7 months. 24 LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------- % Change Mar. 31, 1997 from ------------------ MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------- Commercial (1)(2) $19,025 $19,515 $ 9,393 (3) % 103 % Real estate 1-4 family first mortgage 10,032 10,425 4,346 (4) 131 Other real estate mortgage (3) 11,497 11,860 8,274 (3) 39 Real estate construction 2,243 2,303 1,312 (3) 71 Consumer: Real estate 1-4 family junior lien mortgage 6,112 6,278 3,303 (3) 85 Credit card 5,232 5,462 3,928 (4) 33 Other revolving credit and monthly payment 7,984 8,374 2,590 (5) 208 ------- ------- ------- Total consumer 19,328 20,114 9,821 (4) 97 Lease financing 3,152 3,003 1,991 5 58 Foreign 159 169 30 (6) 430 ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $598, $654 and $504) $65,436 $67,389 $35,167 (3) % 86 % ------- ------- ------- --- --- ------- ------- ------- --- --- - --------------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $968 million, $1,070 million and $576 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,282 million, $1,409 million and $927 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (3) Includes agricultural loans that are secured by real estate of $332 million, $325 million and $252 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------ % Change Mar. 31, 1997 from --------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------ Commercial loans to real estate developers and REITs (1) $ 968 $ 1,070 $ 576 (10)% 68 % Other real estate mortgage 11,497 11,860 8,274 (3) 39 Real estate construction 2,243 2,303 1,312 (3) 71 ------- ------- ------- Total $14,708 $15,233 $10,162 (3)% 45 % ------- ------- ------- ---- --- ------- ------- ------- ---- --- Nonaccrual loans $ 330 $ 376 $ 349 (12)% (5)% ------- ------- ------- ---- --- ------- ------- ------- ---- --- Nonaccrual loans as a % of total 2.2% 2.5% 3.4% ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 25 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- -------------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 - -------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2)(3) $199 $223 $120 Real estate 1-4 family first mortgage 97 99 61 Other real estate mortgage (4) 306 349 289 Real estate construction 24 25 44 Consumer: Real estate 1-4 family junior lien mortgage 16 15 11 Other revolving credit and monthly payment 1 1 -- Lease financing 2 2 -- ---- ---- ---- Total nonaccrual loans (5) 645 714 525 Restructured loans (6) 10 10 12 ---- ---- ---- Nonaccrual and restructured loans 655 724 537 As a percentage of total loans 1.0% 1.1% 1.5% Foreclosed assets 207 219 198 Real estate investments (7) 5 4 7 ---- ---- ---- Total nonaccrual and restructured loans and other assets $867 $947 $742 ---- ---- ---- ---- ---- ---- - --------------------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes loans (primarily unsecured) to real estate developers and REITs of none, $2 million and $16 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (3) Includes agricultural loans of $18 million, $13 million and $6 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (4) Includes agricultural loans secured by real estate of $10 million, $10 million and $1 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. (5) Of the total nonaccrual loans, $419 million, $493 million and $392 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (6) In addition to originated loans that were subsequently restructured, there were loans of $50 million at March 31, 1997, December 31, 1996 and March 31, 1996 that were purchased at a steep discount whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. Of the total restructured loans and loans purchased at a steep discount, $50 million were considered impaired under FAS 114 at March 31, 1997, December 31, 1996 and March 31, 1996. (7) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $158 million, $154 million and $115 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. The table below summarizes the changes in total nonaccrual loans. - ------------------------------------------------------------------- MARCH 31, March 31, (in millions) 1997 1996 - ------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $714 $538 New loans placed on nonaccrual 107 113 Charge-offs (52) (9) Payments (120) (54) Transfers to foreclosed assets (1) (30) Loans returned to accrual (3) (33) ---- ---- BALANCE, END OF QUARTER $645 $525 ---- ---- ---- ---- - ------------------------------------------------------------------- 26 The Company generally identifies loans to be evaluated for impairment under FAS 114 (Accounting by Creditors for Impairment of a Loan) when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 150 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. Not all impaired loans are necessarily placed on nonaccrual status. That is, restructured loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. The average recorded investment in impaired loans was $480 million during the first quarter of 1997 and $439 million during the first quarter of 1996. Total interest income recognized on impaired loans was $5 million during the first quarter of 1997 and $4 million during the first quarter of 1996. The interest income for all periods was recorded using the cash method. 27 The table below shows the recorded investment in impaired loans by loan category at March 31, 1997, December 31, 1996 and March 31, 1996:
- ---------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 - ---------------------------------------------------------------------------------------- Commercial $122 $155 $ 81 Real estate 1-4 family first mortgage 2 1 3 Other real estate mortgage (1) 320 362 314 Real estate construction 23 24 44 Other 2 1 -- ---- ---- ---- Total (2) $469 $543 $442 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $362 $416 $355 Discounted cash flow method 79 101 70 Historical loss factors 28 26 17 ---- ---- ---- $469 $543 $442 ---- ---- ---- ---- ---- ---- - ----------------------------------------------------------------------------------------
(1) Includes accruing loans of $50 million purchased at a steep discount at March 31, 1997, December 31, 1996 and March 31, 1996 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 $28 million, $27 million and $21 million of impaired loans with a related FAS 114 allowance of $2 million, $2 million and $2 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates normal influxes of nonaccrual loans as it further increases its lending activity as well as resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be impacted by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on its policies. 28 The table below summarizes the changes in foreclosed assets. - -------------------------------------------------------------------------- MARCH 31, March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $219 $186 Additions 25 35 Sales (34) (18) Charge-offs (3) (3) Write-downs (1) (1) Other 1 (1) ---- ---- BALANCE, END OF QUARTER $207 $198 ---- ---- ---- ---- - -------------------------------------------------------------------------- LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual because they are automatically charged off after being past due for a prescribed period (generally, 180 days). Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 150 days of becoming past due and such nonaccrual loans are excluded from the following table.
- ------------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------------------------- Commercial $ 29 $ 65 $ 10 Real estate 1-4 family first mortgage 45 42 8 Other real estate mortgage 28 59 3 Real estate construction 3 4 -- Consumer: Real estate 1-4 family junior lien mortgage 32 23 3 Credit card 139 120 97 Other revolving credit and monthly payment 20 20 1 ---- ---- --- Total consumer 191 163 101 ---- ---- --- Total $296 $333 $122 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------------------------
29 ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------- Quarter ended ------------------------------ MARCH 31, March 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $2,018 $1,794 Provision for loan losses 105 -- Loan charge-offs: Commercial (1) (69) (13) Real estate 1-4 family first mortgage (5) (4) Other real estate mortgage (8) (3) Real estate construction (1) (1) Consumer: Real estate 1-4 family junior lien mortgage (6) (4) Credit card (115) (86) Other revolving credit and monthly payment (56) (20) ------- --------- Total consumer (177) (110) Lease financing (10) (6) ------- --------- Total loan charge-offs (270) (137) ------- --------- Loan recoveries: Commercial (2) 13 5 Real estate 1-4 family first mortgage 1 3 Other real estate mortgage 22 4 Real estate construction 1 1 Consumer: Real estate 1-4 family junior lien mortgage 2 1 Credit card 11 5 Other revolving credit and monthly payment 16 3 ------- --------- Total consumer 29 9 Lease financing 3 2 ------- --------- Total loan recoveries 69 24 ------- --------- Total net loan charge-offs (201) (113) ------- --------- BALANCE, END OF QUARTER $1,922 $1,681 ------- --------- ------- --------- Total net loan charge-offs as a percentage of average loans (annualized) 1.23% 1.30% ------- --------- ------- --------- Allowance as a percentage of total loans 2.94% 4.78% ------- --------- ------- --------- - --------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate developers and REITs for either quarter presented. (2) Includes recoveries from loans (primarily unsecured) to real estate developers and REITs of $1 million for both quarters presented. 30 The table below presents net charge-offs by loan category.
- -------------------------------------------------------------------------------------------------------------- Quarter Ended ------------------------------------------------ MARCH 31, March 31, 1997 1996 -------------------- ------------------ % OF % of AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) - --------------------------------------------------------------------------------------------------------------- Commercial $ 56 1.17 % $ 8 .34 % Real estate 1-4 family first mortgage 4 .16 1 .10 Other real estate mortgage (14) (.47) (1) (.05) Real estate construction -- -- -- -- Consumer: Real estate 1-4 family junior lien mortgage 4 .26 3 .41 Credit card 104 7.92 81 8.25 Other revolving credit and monthly payment 40 1.94 17 2.64 ---- ---- Total consumer 148 3.05 101 4.12 Lease financing 7 .86 4 .93 ---- ---- Total net loan charge-offs $201 1.23 % $113 1.30 % ---- ---- ---- ---- ---- ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. Included in the Commercial loan category in the first quarter of 1997 were small business commercial loan net charge-offs of $19 million (or 2.18% of average small business loans), compared with $15 million (or 1.89%) in the fourth quarter of 1996 and $9 million (or 1.90%) in the first quarter of 1996. The target market for small business loans is expected to experience higher loss rates on a recurring basis than is the case with loans to middle market and corporate borrowers, and such loans are priced at appropriately higher spreads. The largest category of net charge-offs in the first quarter of 1997 and 1996 was credit card loans, comprising more than 50% of total net charge-offs in each period. During the first quarter of 1997, credit card gross charge-offs due to bankruptcies were $45 million, or 39%, of total credit card gross charge-offs, compared with $46 million, or 41%, in the fourth quarter of 1996 and $29 million, or 34%, in the first quarter of 1996. In addition, credit card loans 30 to 89 days past due and still accruing totaled $189 million at March 31, 1997, compared with $199 million at December 31, 1996 and $135 million at March 31, 1996. The total amount of credit card charge-offs and the percentage of net charge-offs to average credit card loans are expected to continue for the remainder of 1997 at a level consistent with that experienced over the past year. The Company considers the allowance for loan losses of $1,922 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at March 31, 1997. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company made a $105 million provision in the first quarter 1997. The Company anticipates that it will continue making incremental increases to the provision of approximately $35 million through the fourth quarter of 1997, when it is expected that the provision will approximate net charge-offs. 31 OTHER ASSETS
- --------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1997 1996 1996 - --------------------------------------------------------------------------------- Nonmarketable equity investments $ 932 $ 937 $ 424 Net deferred tax asset (1) 540 437 879 Certain identifiable intangible assets 493 471 236 Foreclosed assets 208 219 198 Other 2,573 3,397 767 ------ ------ ------- Total other assets $4,746 $5,461 $2,504 ------ ------ ------- ------ ------ ------- - ---------------------------------------------------------------------------------
(1) Net of a valuation allowance of none at March 31, 1997, December 31, 1996 and March 31, 1996. The Company estimates that approximately $490 million of the $540 million net deferred tax asset at March 31, 1997 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $50 million primarily relates to approximately $684 million of net deductions that are expected to reduce future California taxable income (California tax law does not permit recovery of previously paid taxes). The Company's California taxable income has averaged approximately $1.5 billion for each of the last three years. The Company believes that it is more likely than not that it will have sufficient future California taxable income to fully utilize these deductions. Mortgage servicing rights purchased during first quarter 1997, fourth quarter 1996 and first quarter 1996 were $48 million, $28 million and $25 million, respectively. There were no retained servicing rights recognized during the same periods. Purchased mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Amortization expense, recorded in noninterest income, totaled $18 million, $17 million and $11 million for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996, respectively. Purchased mortgage servicing rights included in certain identifiable intangible assets were $287 million, $257 million and $170 million at March 31, 1997, December 31, 1996 and March 31, 1996, respectively. Other identifiable intangible assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $26 million, $25 million and $24 million for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996, respectively. In January 1997, the Company adopted Statement of Financial Accounting Standards No. 125 (FAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for those provisions that became effective at that date. The adoption did not have a material effect on the Company's first quarter 1997 financial statements. Also, in December 1996, the FASB issued FAS 127, Deferral of the Effective Date of Certain Provisions of FASB Statement 125, which deferred to January 1, 1998 those provisions of FAS 125 related to 32 repurchase agreements, dollar-rolls, securities lending and similar transactions. The adoption of FAS 127 is not expected to have a material effect on the Company's financial statements. DEPOSITS
- --------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1997 1996 1996 - --------------------------------------------------------------------------------------- Noninterest-bearing $25,337 $29,073 $ 9,740 Interest-bearing checking 2,350 2,792 745 Market rate and other savings 33,055 33,947 18,260 Savings certificates 15,414 15,769 8,669 ------- ------- ------- Core deposits 76,156 81,581 37,414 Other time deposits 173 186 245 Deposits in foreign offices 98 54 147 ------- ------- ------- Total deposits $76,427 $81,821 $37,806 ------- ------- ------- ------- ------- ------- - ---------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's RBC and leverage ratios at March 31, 1997 compared with March 31, 1996 resulted primarily from an overall increase in risk-weighted assets due to the Merger. The increase in the Company's RBC ratios at March 31, 1997 compared with December 31, 1996 resulted primarily from a decrease in total risk-weighted assets. However, the decrease in the average (nonrisk-weighted) assets used in the leverage ratio did not decrease as significantly as risk-weighted assets. Substantially due to the repurchase of common stock and redemption of preferred stock, the leverage ratio decreased slightly. In April 1997, the Company announced that it will redeem all outstanding depositary shares representing its Series G preferred stock, totaling $150 million, on May 29, 1997. This stock was included in the risk-based capital and leverage ratios as of March 31, 1997. 33 The table below presents the Company's risk-based capital and leverage ratios.
- ----------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in billions) 1997 1996 1996 - ----------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $13.2 $ 13.5 $ 3.7 Preferred stock (1) .4 .4 .5 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.2 1.2 -- Goodwill and other deductions (2) (8.4) (8.5) (.3) ----- ------ ------ Total Tier 1 capital 6.4 6.6 3.9 ----- ------ ------ Tier 2: Preferred securities in excess of Tier 1 limitation .1 -- -- Mandatory convertible debt .2 .2 -- Subordinated debt and unsecured senior debt 2.2 2.1 1.0 Allowance for loan losses allowable in Tier 2 1.0 1.1 .5 ----- ------ ------ Total Tier 2 capital 3.5 3.4 1.5 ----- ------ ------ Total risk-based capital $ 9.9 $ 10.0 $ 5.4 ----- ------ ------ ----- ------ ------ Risk-weighted balance sheet assets $79.0 $ 82.2 $ 38.9 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 10.1 10.1 2.8 Standby letters of credit 1.7 2.1 .6 Other .6 .5 .3 ----- ------ ------ Total risk-weighted off-balance sheet items 12.4 12.7 3.7 ----- ------ ------ Goodwill and other deductions (2) (8.4) (8.5) (.4) Allowance for loan losses not included in Tier 2 (.9) (.9) (1.2) ----- ------ ------ Total risk-weighted assets $82.1 $ 85.5 $ 41.0 ----- ------ ------ ----- ------ ------ Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.80% 7.68% 9.40% Total capital (8% minimum requirement) 12.05 11.70 13.04 Leverage ratio (3% minimum requirement) (3) 6.61% 6.65% 7.91% - -----------------------------------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at March 31, 1997 and December 31, 1996 due to the Company's December 1996 announcement to redeem this series in March 1997. (2) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on available-for-sale investment securities carried at fair value. (3) Tier 1 capital divided by quarterly average total assets (excluding goodwill, nonqualifying CDI and other items which were deducted to arrive at Tier 1 capital). Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At March 31, 1997, the Bank had a Tier 1 RBC ratio of 8.64%, a combined Tier 1 and Tier 2 ratio of 11.26% and a leverage ratio of 6.85%. 34 ASSET/LIABILITY MANAGEMENT As is typical in the banking industry, most of the Company's assets and liabilities are sensitive to fluctuation in interest rates. Accordingly, an essential objective of asset/liability management is to control interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between the two will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." Another source of interest rate risk, "basis risk," results from changing spreads between loan and deposit rates. More difficult to quantify and manage, this type of risk is not highly correlated to changes in the level of interest rates, and is driven by other market conditions. The Company employs various asset/liability strategies, including the use of interest rate derivative products, to ensure that exposure to interest rate fluctuations is limited within Company guidelines of acceptable levels of risk-taking. The Company uses interest rate derivatives as an asset/liability management tool to hedge mismatches in interest rate maturities. For example, receive-fixed rate swaps are used to convert fixed-rate debt to a floating-rate liability. One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitive gap indicates that there would be a negative impact on the net interest margin from an increasing rate environment. At March 31, 1997, the under-one-year cumulative gap was a $1,851 million (1.8% of total assets) net liability position, compared with a net liability position of $1,402 million (1.3% of total assets) at December 31, 1996. The increase in the net liability position was due to decreases in securities, real estate 1-4 family first mortgage and consumer loans, most of which was offset by decreases in interest-bearing deposits and short-term borrowings. Two adjustments to the cumulative gap provide comparability with those bank holding companies that present interest rate sensitivity in an alternative manner. However, management does not believe that these adjustments depict its interest rate risk. The first adjustment excludes noninterest-earning assets, noninterest-bearing liabilities and stockholders' equity from the reported cumulative gap. The second adjustment moves interest-bearing checking, savings deposits and Wells Extra Savings (included in market rate savings) from the nonmarket category to the shortest possible maturity category. The second adjustment reflects the availability of the deposits for immediate withdrawal. The resulting adjusted under-one-year cumulative gap (net liability position) was $11.9 billion and $12.5 billion at March 31, 1997 and December 31, 1996, respectively. The gap analysis provides a useful framework to measure the term structure risk. To more fully explore the complex relationships within the gap over time and interest rate environments, the Company performs simulation modeling to estimate the potential effects of changing interest rates. 35 DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value of the Company's derivative financial instruments at March 31, 1997 and December 31, 1996.
- ----------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, 1997 1996 --------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT (3) VALUE amount amount (3) value - ------------------------------------------------------------------------------------------------------------------------ ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Futures contracts $ 5,331 $ -- $ -- $ 5,188 $ -- $ -- Floors purchased (1) 21,639 37 37 20,640 101 101 Caps purchased (1) 425 4 4 435 3 3 Futures options purchased 9 -- -- -- -- -- Swap contracts (1) 16,528 78 (191) 16,661 217 117 Foreign exchange contracts: Forward contracts (1) 64 2 2 64 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 7 -- -- 10 -- -- Floors written 409 -- (5) 405 -- (10) Caps written 1,796 -- (6) 2,174 -- (4) Floors purchased (1) 410 5 5 404 9 9 Caps purchased (1) 1,684 6 6 2,088 4 4 Swap contracts (1) 2,217 17 2 2,325 12 2 Foreign exchange contracts (2): Forward and spot contracts (1) 1,391 19 2 1,313 14 1 Option contracts purchased (1) 91 1 1 65 1 1 Option contracts written 91 -- (2) 59 -- (1) - ------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these financial instruments. (2) The Company has immaterial trading positions in these contracts. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps and interest rate swap agreements. The contract or notional amounts of derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contract or notional amounts do not represent exposure to liquidity risk. The Company is not a dealer but an end-user of these instruments and does not use them speculatively. The Company also offers contracts to its customers, but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The Company also enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivative financial instruments. 36 The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts (except futures contracts and floor, cap and option contracts written for which credit risk is DE MINIMUS) through credit approvals, limits and monitoring procedures. Credit risk related to derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. As the Company generally enters into transactions only with high quality counterparties, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. LIQUIDITY MANAGEMENT Liquidity for the Parent Company and its subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, and through dividends from subsidiaries and lines of credit. In 1996, the Company filed a shelf registration that allows for the issuance of $3.5 billion of senior or subordinated debt or preferred stock. The proceeds from the sale of any securities will be used for general corporate purposes. As of March 31, 1997, the Company had issued $.2 billion of preferred stock under this shelf registration and $3.3 billion of securities remained unissued. No additional securities have been issued under this shelf registration. In 1996, the Company also filed a universal shelf registration statement of $750 million with the SEC which includes senior and subordinated debt, preferred stock and common stock of the Company and preferred securities of special purpose subsidiary trusts. The registration allows each special purpose subsidiary to issue trust preferred securities which qualify as Tier 1 capital of the Company for regulatory purposes. The special purpose subsidiary will hold junior subordinated deferrable interest debentures (debentures) of the Company. Interest paid on these debentures will be distributed to the holders of the trust preferred securities. As a result, distributions to the holders of the trust preferred securities will be tax deductible and treated as interest expense in the consolidated statement of income. This provides the Company with a more cost-effective means of obtaining Tier 1 capital than if the Company itself were to issue additional preferred stock. In December 1996, the Company issued $400 million in trust preferred securities through one trust, Wells Fargo Capital I. In January 1997, the Company issued an additional $150 million in trust preferred securities through a new trust, Wells Fargo Capital II. At March 31, 1997, $200 million remained unissued under this shelf registration. In addition to the publicly registered trust preferred securities, the Company established in 1996 three special purpose trusts, which collectively issued $750 million of trust preferred securities in private placements. Similar to the registered trust preferred securities, these preferred securities qualify as Tier 1 capital for regulatory purposes and the interest on the debentures is paid as tax deductible distributions to the trust preferred security holders. The proceeds from the publicly registered and private placement issuances were invested in debentures of the Company. The proceeds from the sale of these debentures were used by the Company for general corporate purposes. 37 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on April 15, 1997. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected; and the selection of KPMG Peat Marwick LLP as the Company's independent auditors for 1997 was ratified. The following are the voting results on each of the matters:
Against For or Withheld Abstentions ----------- ----------- ----------- (1) Election of Directors --------------------- H. Jesse Arnelle 77,877,060 338,642 -- Michael R. Bowlin 77,446,178 769,524 -- Edward M. Carson 77,884,889 330,813 -- William S. Davila 77,882,728 332,974 -- Rayburn S. Dezember 77,888,360 327,342 -- Paul Hazen 77,878,034 337,668 -- Robert K. Jaedicke 77,882,393 333,309 -- Thomas L. Lee 77,891,691 324,011 -- Ellen M. Newman 77,889,597 326,105 -- Philip J. Quigley 77,888,380 327,322 -- Carl E. Reichardt 77,886,294 329,408 -- Donald B. Rice 77,892,079 323,623 -- Richard J. Stegemeier 77,881,278 334,424 -- Susan G. Swenson 77,860,343 355,359 -- Daniel M. Tellep 77,887,102 328,600 -- Chang-Lin Tien 77,884,596 331,106 -- John A. Young 77,886,961 328,741 -- William F. Zuendt 77,886,417 329,285 -- (2) Ratification of KPMG Peat Marwick LLP as independent auditors for 1997. 77,912,638 112,319 190,745
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(ii) By-Laws 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 38 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.06 and 2.33 for the quarters ended March 31, 1997 and 1996, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.66 and 5.33 for the quarters ended March 31, 1997 and 1996, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.00 and 2.22 for the quarters ended March 31, 1997 and 1996, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.20 and 4.56 for the quarters ended March 31, 1997 and 1996, respectively. (b) The Company filed the following reports on Form 8-K during the first quarter of 1997 and through the date hereof: (1) January 21, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter and year ended December 31, 1996 (2) April 15, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended March 31, 1997 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 1997. WELLS FARGO & COMPANY By: /s/ Frank A. Moeslein ------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 39 EX-3.(II) 2 EX-3(II) BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED APRIL 15, 1997 --------------- ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders of Wells Fargo & Company (the "corporation") shall be held on the third Tuesday of April in each year at such time of day as may be fixed by the Board of Directors, at the principal office of the corporation, if not a bank holiday, and if a bank holiday then on the next succeeding business day at the same hour and place, or at such other time, date or place, within or without the State of Delaware, as may be determined by the Board of Directors. At such meeting, Directors shall be elected, reports of the affairs of the corporation may be considered, and any other proper business may be transacted. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders, unless otherwise regulated by statute, for any purpose or purposes whatsoever, may be called at any time by the Board of Directors, the Chairman of the Board, the President, the Chief Executive Officer (if other than the Chairman of the Board or the President), or one or more stockholders holding not less than 10 percent of the voting power of the corporation. Such meetings may be held at any place within or without the State of Delaware designated by the Board of Directors of the corporation. SECTION 3. NOTICE OF MEETINGS. Notice of all meetings of the stockholders, both annual and special, shall be given by the Secretary in writing to stockholders entitled to vote. A notice may be given either personally or by mail or other means of written communication, charges prepaid, addressed to any stockholder at his address appearing on the books of the corporation or at the address given by such stockholder to the corporation for the purpose of notice. Notice of any meeting of stockholders shall be sent to each stockholder entitled thereto not less than 10 nor more than 60 days prior to such meeting. Such notice shall state the place, date and hour of the meeting and shall also state (i) in the case of a special meeting, the general nature of the business to be transacted and that no other business may be transacted, (ii) in the case of an annual meeting, those matters which the Board of Directors intends at the time of the mailing of the notice to present for stockholder action and that any other proper matter may be presented for stockholder action to the meeting, and (iii) in the case of any meeting at which Directors are to be elected, the names of the nominees which the management intends at the time of the mailing of the notice to present for election. SECTION 4. QUORUM. Except as otherwise provided by law, the presence of the holders of a majority of the stock issued and outstanding present in person or represented by proxy and entitled to vote is requisite and shall constitute a quorum for the transaction of business at all meetings of the stockholders, and the vote of a majority of such stock present and voting at a duly held meeting at which there is a quorum present shall decide any question brought before such meeting. SECTION 5. VOTING. Unless otherwise provided in the Certificate of Incorporation, every stockholder shall be entitled to one vote for every share of stock standing in his name on the books of the corporation, and may vote either in person or by proxy. ARTICLE II DIRECTORS SECTION 1. NUMBER, TERM. The property, business and affairs of the corporation shall be managed and all corporate power shall be exercised by or under the direction of the Board of Directors as from time to time constituted. The number of Directors of this corporation shall be not less than 10 nor more than l8, the exact number within the limits so specified to be fixed from time to time by a By-Law adopted by the stockholders or by the Board of Directors. Until some other number is so fixed, the number of Directors shall be 18. The term of office of each Director shall be from the time of his election until the annual meeting next succeeding his election and until his successor shall have been duly elected, or until his death, resignation or lawful removal pursuant to the provisions of the General Corporation Law of Delaware. SECTION 2. POWERS. In addition to the powers expressly conferred by these By-Laws, the Board of Directors may exercise all corporate powers and do such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or approved by the stockholders. SECTION 3. COMPENSATION. Directors and Advisory Directors (as provided in Section 12 of this Article) as such may receive such compensation, if any, as the Board of Directors by 2 resolution may direct, including salary or a fixed sum plus expenses, if any, for attendance at meetings of the Board of Directors or of its committees. SECTION 4. ORGANIZATIONAL MEETING. An organizational meeting of the Board of Directors shall be held each year on the day of the annual meeting of stockholders of the corporation for the purpose of electing officers, the members of the Formal Committees provided in Section 11 of this Article and the Advisory Directors provided in Section 12 of this Article, and for the transaction of any other business. Said organizational meeting shall be held without any notice other than this By-Law. SECTION 5. PLACE OF MEETINGS. The Board of Directors shall hold its meetings at the main office of the corporation or at such other place as may from time to time be designated by the Board of Directors or by the chief executive officer. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors will be held on the third Tuesday of each month (except for the months of August and December) at the later of the following times: (i) 10:30 a.m. or (ii) immediately following the adjournment of any regular meeting of the Board of Directors of Wells Fargo Bank, National Association, held on the same day. If the day of any regular meeting shall fall upon a bank holiday, the meeting shall be held at the same hour on the first day following which is not a bank holiday. No call or notice of a regular meeting need be given unless the meeting is to be held at a place other than the main office of the corporation. SECTION 7. SPECIAL MEETINGS. Special meetings shall be held when called by the chief executive officer or at the written request of four Directors. SECTION 8. QUORUM; ADJOURNED MEETINGS. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. A majority of the Directors present, whether or not a quorum, may adjourn any meeting to another time and place, provided that, if the meeting is adjourned for more than 30 days, notice of the adjournment shall be given in accordance with these By-Laws. SECTION 9. NOTICE, WAIVERS OF NOTICE. Notice of special meetings and notice of regular meetings held at a place other than the head office of the corporation shall be given to each Director, and notice of the adjournment of a meeting adjourned for more than 30 days shall be given prior to the adjourned meeting to all Directors not present at the time of the adjournment. No such notice need specify the purpose of the meeting. Such notice shall be given four days prior to the meeting if given by mail or on the day preceding the day of the 3 meeting if delivered personally or by telephone, facsimile, telex or telegram. Such notice shall be addressed or delivered to each Director at such Director's address as shown upon the records of the corporation or as may have been given to the corporation by the Director for the purposes of notice. Notice need not be given to any Director who signs a waiver of notice (whether before or after the meeting) or who attends the meeting without protesting the lack of notice prior to its commencement. All such waivers shall be filed with and made a part of the minutes of the meeting. SECTION 10. TELEPHONIC MEETINGS. A meeting of the Board of Directors or of any Committee thereof may be held through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in such a meeting shall constitute presence at such meeting. SECTION 11. WRITTEN CONSENTS. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as the unanimous vote of the Directors. SECTION 12. RESIGNATIONS. Any Director may resign his position as such at any time by giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. Such resignation shall take effect as of the time such notice is given or as of any later time specified therein and the acceptance thereof shall not be necessary to make it effective. SECTION 13. VACANCIES. Vacancies in the membership of the Board of Directors shall be deemed to exist (i) in case of the death, resignation or removal of any Director, (ii) if the authorized number of Directors is increased, or (iii) if the stockholders fail, at a meeting of stockholders at which Directors are elected, to elect the full authorized number of Directors to be elected at that meeting. Vacancies in the membership of the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The stockholders may elect a Director at any time to fill any vacancy not filled by the Directors. SECTION 14. COMMITTEES OF THE BOARD OF DIRECTORS. By resolution adopted by a majority of the authorized number of 4 Directors, the Board of Directors may designate one or more Committees to act as or on behalf of the Board of Directors. Each such Committee shall consist of one or more Directors designated by the Board of Directors to serve on such Committee at the pleasure of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any Committee, which alternate members may replace any absent member at any meeting of such Committee. In the absence or disqualification of a member of a Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any Committee, to the extent provided in the resolution of the Board of Directors, these By-Laws or the Certificate of Incorporation, may have all the authority of the Board of Directors, except with respect to: (i) amending the Certificate of Incorporation (except that a Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amending these By-Laws. Included among the Committees shall be the following: (a) EXECUTIVE COMMITTEE. There shall be an Executive Committee consisting of the Chairman of the Board, presiding, and not less than seven additional Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. Subject to such limitations as may from time to time be imposed by the Board of Directors or as are imposed by these By-Laws, the Executive Committee shall have the fullest authority to act for and on behalf of the corporation, and it shall have all of the powers of the Board of Directors which, under the law, it is possible for a Board of Directors to delegate to such a committee, including the supervision of the general management, direction and superintendence of the business and affairs of the corporation and the power to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and 5 merger pursuant to Section 253 of the General Corporation Law of Delaware. (b) COMMITTEE ON EXAMINATIONS AND AUDITS. There shall be a Committee on Examinations and Audits consisting of not less than three Directors who are not officers of the corporation and who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of this Committee (i) to make, or cause to be made, in accordance with the procedures from time to time approved by the Board of Directors, internal examinations and audits of the affairs of the corporation and the affairs of any subsidiary which by resolution of its board of directors has authorized the Committee on Examinations and Audits to act hereunder, (ii) to make recommendations to the Board of Directors of the corporation and of each such subsidiary with respect to the selection of and scope of work for the independent auditors for the corporation and for each subsidiary, (iii) to review, or cause to be reviewed in accordance with procedures from time to time approved by the Board of Directors, all reports of internal examinations and audits, all audit-related reports made by the independent auditors for the corporation and each such subsidiary and all reports of examination of the corporation and of any subsidiary made by regulatory authorities, (iv) from time to time, to review and discuss with the management, and independently with the General Auditor, the Risk Control Officer and the independent auditors, the accounting and reporting principles, policies and practices employed by the corporation and its subsidiaries and the adequacy of their accounting, financial, operating and administrative controls, including the review and approval of any policy statements relating thereto, and (v) to perform such other duties as the Board of Directors may from time to time assign to it. The Committee on Examinations and Audits shall submit reports of its findings, conclusions and recommendations, if any, to the Board of Directors. (c) MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE. There shall be a Management Development and Compensation Committee consisting of not less than six directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise and none of whom shall be eligible to participate in either the Wells Fargo & Company Stock Appreciation Rights Plan, the Wells Fargo & Company Stock Option Plan the Wells Fargo & Company Employee Stock Purchase Plan or any similar employee stock plan (or shall have been so eligible within the year next preceding the date of becoming a member of the Management Development and Compensation Committee). It shall be the duty of the Management Development and Compensation Committee, and it shall have authority, (i) to advise the Chief Executive Officer concerning the corporation's salary policies, (ii) to administer such compensation programs as from time to time are delegated to it by the Board of Directors, (iii) to accept or reject the 6 recommendations of the Chief Executive Officer with respect to all salaries in excess of such dollar amount or of officers of such grade or grades as the Board of Directors may from time to time by resolution determine to be appropriate and (iv) upon the request of any subsidiary which by resolution of its board of directors has authorized the Management Development and Compensation Committee to act hereunder, to advise its chief executive officer concerning such subsidiary's salary policies and compensation programs. (d) NOMINATING COMMITTEE. There shall be a Nominating Committee consisting of not less than three Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of the Nominating Committee, annually and in the event of vacancies on the Board of Directors, to nominate candidates for election to the Board of Directors. Each Committee member shall serve until the organizational meeting of the Board of Directors held on the day of the annual meeting of stockholders in the year next following his or her election and until his or her successor shall have been elected, but any such member may be removed at any time by the Board of Directors. Vacancies in any of said committees, however created, shall be filled by the Board of Directors. A majority of the members of any such committee shall be necessary to constitute a quorum and sufficient for the transaction of business, and any act of a majority present at a meeting of any such committee at which there is a quorum present shall be the act of such committee. Subject to these By-Laws and the authority of the Board of Directors, each committee shall have the power to determine the form of its organization. The provisions of these By-Laws governing the calling, notice and place of special meetings of the Board of Directors shall apply to all meetings of any Committee unless such committee fixes a time and place for regular meetings, in which case notice for such meeting shall be unnecessary. The provisions of these By-Laws regarding actions taken by the Board of Directors, however called or noticed, shall apply to all meetings of any Committee. Each committee shall cause to be kept a full and complete record of its proceedings, which shall be available for inspection by any Director. There shall be presented at each meeting of the Board of Directors a summary of the minutes of all proceedings of each committee since the preceding meeting of the Board of Directors. ARTICLE III OFFICERS SECTION 1. ELECTION OF EXECUTIVE OFFICERS. The corporation shall have (i) a Chairman of the Board, (ii) a President, (iii) a 7 Secretary and (iv) a Chief Financial Officer. The Corporation also may have a Vice Chairman of the Board, one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Controller, a Treasurer, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant Secretaries, a General Auditor, a Risk Control Officer, and such other officers as the Board of Directors, or the Chief Executive Officer or any officer or committee whom he may authorize to perform this duty, may from time to time deem necessary or expedient for the proper conduct of business by the corporation. The Chairman of the Board, the Vice Chairman of the Board, if any, and the President shall be elected from among the members of the Board of Directors. The following offices shall be filled only pursuant to election by the Board of Directors: Chairman of the Board, Vice Chairman of the Board, President, Vice Chairman, Executive Vice President, Senior Vice President, Secretary, Controller, Treasurer, General Auditor and Risk Control Officer. Other officers may be appointed by the Chief Executive Officer or by any officer or committee whom he may authorize to perform this duty. All officers shall hold office at will, at the pleasure of the Board of Directors, the Chief Executive Officer, the officer or committee having the authority to appoint such officers, and the officer or committee authorized by the Chief Executive Officer to remove such officers, and may be removed at any time, with or without notice and with or without cause. No authorization by the Chief Executive Officer to perform such duty of appointment or removal shall be effective unless done in writing and signed by the Chief Executive Officer. Two or more offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the corporation. As Chief Executive Officer, he shall (i) exercise, and be responsible to the Board of Directors for, the general supervision of the property, affairs and business of the corporation, (ii) report at each meeting of the Board of Directors upon all matters within his knowledge which the interests of the corporation may require to be brought to its notice, (iii) prescribe, or to the extent he may deem appropriate designate an officer or committee to prescribe, the duties, authority and signing power of all other officers and employees of the corporation and (iv) exercise, subject to these By-Laws, such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, subject to these By-Laws, exercise such powers and perform such duties as may from time to time be prescribed by the Board of Directors. In the absence of the 8 Chairman of the Board and the President, the Vice Chairman of the Board shall preside over the meetings of the stockholders and the Board of Directors. SECTION 4. PRESIDENT. The President shall, subject to these By-Laws, be the chief operating officer of the corporation and shall exercise such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board, the President shall preside over the meetings of the stockholders and the Board of Directors. SECTION 5. ABSENCE OR DISABILITY OF CHIEF EXECUTIVE OFFICER. In the absence or disability of the Chairman of the Board, the President shall act as Chief Executive Officer. In the absence or the disability of both the Chairman of the Board and the President, the Vice Chairman of the Board shall act as Chief Executive Officer. In the absence of the Chairman of the Board, the President and the Vice Chairman of the Board, the officer designated by the Board of Directors, or if there be no such designation the officer designated by the Chairman of the Board, shall act as Chief Executive Officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as Chief Executive Officer in his absence or disability and in the absence or disability of the President and the Vice Chairman of the Board. SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, 9 trust companies, or other depositories as shall from time to time be selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of the financial condition of the corporation. In general, he shall perform all duties ordinarily incident to the office of a chief financial officer of a corporation, and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries by public accounting firms and, in connection therewith, he shall determine whether the internal auditing functions being performed within the subsidiaries are adequate. He shall also perform such other duties as the Chief Executive Officer may prescribe, and shall report to the Chief Executive Officer on all matters concerning the safety of the operations of the corporation and of any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. 10 ARTICLE IV INDEMNIFICATION SECTION 1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an Agent (as hereinafter defined) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding, or any appeal therein, if the Agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the Agent did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that his or her conduct was unlawful. For purposes of this Article, an "Agent" shall be: (i) any director, officer or employee of the corporation; (ii) any person who, being or having been such a director, officer or employee, is or was serving on behalf of the corporation at the request of an authorized officer of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise; or (iii) any person who is or was serving on behalf of the corporation at the request of the Chairman of the Board or the President of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in 11 or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. DETERMINATION OF RIGHT OF INDEMNIFICATION OR CONTRIBUTION. Unless otherwise ordered by a court, any indemnification under Section 1 or 2, and any contribution under Section 6, of this Article shall be made by the corporation to an Agent unless a determination is reasonably and promptly made, either (i) by the Board of Directors acting by a majority vote of a quorum consisting of Directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or if obtainable and such quorum so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such Agent acted in bad faith and in a manner that such Agent did not believe to be in or not opposed to the best interests of the corporation or, with respect to any criminal proceeding, that such Agent believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 4. ADVANCES OF EXPENSES. Except as limited by Section 5 of this Article, costs, charges and expenses (including attorneys' fees) incurred by an Agent in defense of any action, suit, proceeding or investigation of the nature referred to in Section 1 or 2 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter; provided, however, that if the General Corporation Law of Delaware then so requires, such payment shall be made only if the Agent shall undertake to reimburse the corporation for such payment in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. SECTION 5. RIGHT OF AGENT TO INDEMNIFICATION OR ADVANCE UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Section 1 or 2, or advance under Section 4, of this Article shall be made promptly and in any event within 90 days, upon the written request of the Agent, unless with respect to an application under said Sections 1 or 2 an adverse determination is reasonably and promptly made pursuant to Section 3 of this Article or unless with respect to an application under said Section 4 an adverse determination is made pursuant to said Section 4. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction if the Board of Directors or independent 12 legal counsel improperly denies the claim, in whole or in part, or if no disposition of such claim is made within 90 days. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any action, suit or proceeding in advance of its final disposition where any required undertaking has been tendered to the corporation) that the Agent has not met the standards of conduct which would require the corporation to indemnify or advance the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including the Board of Directors, independent legal counsel and the stockholders) to have made a determination prior to the commencement of such action that indemnification of the Agent is proper in the circumstances because he or she has met the applicable standard of conduct, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel and the stockholders) that the Agent had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Agent had not met the applicable standard of conduct. The Agent's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation. SECTION 6. CONTRIBUTION. In the event that the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an Agent in whole or in part, then in respect of any threatened, pending or completed action, suit or proceeding in which the corporation is jointly liable with the Agent (or would be if joined in such action, suit or proceeding), to the extent permitted by the General Corporation Law of Delaware the corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the corporation on the one hand and the Agent on the other from the transaction from which such action, suit or proceeding arose and (ii) the relative fault of the corporation on the one hand and of the Agent on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the corporation on the one hand and of the Agent on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. SECTION 7. OTHER RIGHTS AND REMEDIES. Indemnification under this Article shall be provided regardless of when the events alleged to underlie any action, suit or proceeding may 13 have occurred, shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification and advancement of expenses under this Article shall be deemed to be provided by a contract between the corporation and the Agent who serves as such at any time while these By-Laws and other relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. SECTION 8. INSURANCE. Upon resolution passed by the Board of Directors, the corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would have the power to indemnify such person against such liability under the provisions of this Article. The corporation may create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 9. CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the corporation" include all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer or employee of such a constituent corporation or who, being or having been such a director, officer or employee, is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity. SECTION 10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprise" in Sections 1 and 9 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service by an Agent as director, officer, employee, trustee or agent of the corporation which imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall 14 be deemed to have acted in a manner "not opposed to the best interest of the corporation" for purposes of this Article. SECTION 11. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees, judgments, fines and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by the applicable portion of this Article that shall not have been invalidated, or by any other applicable law. SECTION 12. ACTIONS INITIATED BY AGENT. Anything to the contrary in this Article notwithstanding, the corporation shall indemnify any Agent in connection with an action, suit or proceeding initiated by such Agent (other than actions, suits, or proceedings commenced pursuant to Section 5 of this Article) only if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INDEMNIFICATION. Notwithstanding any other provision of this Article, the corporation shall indemnify any Agent and advance expenses incurred by such Agent in any action, suit or proceeding of the nature referred to in Section 1 or 2 of this Article to the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, except that no amount shall be paid pursuant to this Article: (i) in the event of an adverse determination pursuant to Section 3 of this Article; (ii) in respect of remuneration to the extent that it shall be determined to have been paid in violation of law; (iii) in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934; or (iv) in contravention of any federal law or applicable regulation of any federal bank regulatory agency. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may also provide indemnification and advancement of expenses to other persons or entities to the extent deemed appropriate. 15 ARTICLE V MISCELLANEOUS SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year. SECTION 2. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate representing the number of shares of the stock of the corporation owned by such stockholder and the class or series of such shares. Each certificate shall be signed in the name of the corporation by (i) the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and (ii) the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. Any of the signatures on the certificate may be facsimile. Prior to due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner for any share of stock of the corporation shall be treated as the person exclusively entitled to vote, to receive notice, and to exercise all other rights and receive all other entitlements of a stockholder with respect to such share, except as may be provided otherwise by law. SECTION 3. EXECUTION OF WRITTEN INSTRUMENTS. All written instruments shall be binding upon the corporation if signed on its behalf by (i) any two of the following officers: the Chairman of the Board, the President, the Vice Chairman of the Board, the Vice Chairmen or the Executive Vice Presidents; or (ii) any one of the foregoing officers signing jointly with any Senior Vice President. Whenever any other officer or person shall be authorized to execute any agreement, document or instrument by resolution of the Board of Directors, or by the Chief Executive Officer, or by any two of the officers identified in the immediately preceding sentence, such execution by such other officer or person shall be equally binding upon the corporation. SECTION 4. SUBSIDIARY. As used in these By-Laws the term "subsidiary" or "subsidiaries" means any corporation 25 percent or more of whose voting shares is directly or indirectly owned or controlled by the corporation, or any other affiliate of the corporation designated in writing as a subsidiary of the corporation by the Chief Executive Officer of the corporation. All such written designations shall be filed with the Secretary of the corporation. SECTION 5. AMENDMENTS. These By-Laws may be altered, amended or repealed by a vote of the stockholders entitled to exercise a majority of the voting power of the corporation, by written consent of such stockholders or by the Board of Directors. 16 SECTION 6. ANNUAL REPORT. The Board of Directors shall cause an annual report to be sent to the stockholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of stockholders to be held during the ensuing fiscal year. SECTION 7. CONSTRUCTION. Unless the context clearly requires it, nothing in these By-Laws shall be construed as a limitation on any powers or rights of the corporation, its Directors or its officers provided by the General Corporation Law of Delaware. Unless the context otherwise requires, the General Corporation Law of Delaware shall govern the construction of these By-Laws. SECTION 8. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors or any committee thereof, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors or such committee shall approve, including, without limitation, a pledge of shares of stock of the corporation. This Section shall not be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. SECTION 9. NOTICES; WAIVERS. Whenever, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such provision shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile, telex or telegram. A waiver in writing of any such required notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 17 EX-11 3 EX-11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE Quarter ended March 31, ---------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------ PRIMARY EARNINGS PER COMMON SHARE Net income $ 339 $ 264 Less preferred dividends 10 10 ------ ------ Net income for calculating primary earnings per common share $ 329 $ 254 ------ ------ ------ ------ Average common shares outstanding 90.8 47.0 ------ ------ ------ ------ PRIMARY EARNINGS PER COMMON SHARE $ 3.62 $ 5.39 ------ ------ ------ ------ FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 339 $ 264 Less preferred dividends 10 10 ------ ------ Net income for calculating fully diluted earnings per common share $ 329 $ 254 ------ ------ ------ ------ Average common shares outstanding 90.8 47.0 Add exercise of options, warrants and share rights, reduced by the number of shares that could have been purchased with the proceeds from such exercise 1.1 1.3 ------ ------ Average common shares outstanding as adjusted 91.9 48.3 ------ ------ ------ ------ FULLY DILUTED EARNINGS PER COMMON SHARE $ 3.58 $ 5.24 ------ ------ ------ ------ - ------------------------------------------------------------------------------- (1) This presentation is submitted in accordance with Item 601(b)(11) of Regulation S-K. This presentation is not required by APB Opinion No. 15, because it results in dilution of less than 3%. EX-27 4 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10Q DATED MAY 14, 1997 FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8,530 0 209 0 12,634 0 0 65,436 1,922 101,863 76,427 1,926 3,642 6,177 0 425 450 12,720 101,863 1,549 208 16 1,773 422 561 1,212 105 4 1,117 630 339 0 0 339 3.62 3.58 6.14 645 296 10 0 2,018 270 69 1,922 0 0 0
EX-99.A 5 EX-99A EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - ------------------------------------------------------------------------------ Quarter ended March 31, --------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------ EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 630 $463 Fixed charges 594 348 ------ ---- $1,224 $811 ------ ---- ------ ---- Fixed charges (1): Interest expense $ 561 $330 Estimated interest component of net rental expense 33 18 ------ ---- $ 594 $348 ------ ---- ------ ---- Ratio of earnings to fixed charges (2) 2.06 2.33 ------ ---- ------ ---- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 630 $463 Fixed charges 172 107 ------ ---- $ 802 $570 ------ ---- ------ ---- Fixed charges: Interest expense $ 561 $330 Estimated interest component of net rental expense 33 18 Less interest on deposits 422 241 ------ ---- $ 172 $107 ------ ---- ------ ---- Ratio of earnings to fixed charges (2) 4.66 5.33 ------ ---- ------ ---- - ------------------------------------------------------------------------------ (1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.B 6 EX-99B EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS - ------------------------------------------------------------------------------ Quarter ended March 31, --------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------ EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 630 $ 463 Fixed charges 594 348 ------ ----- $1,224 $ 811 ------ ----- ------ ----- Preferred dividend requirement $ 10 $ 10 Ratio of income before income tax expense to net income 1.86 1.75 ------ ----- Preferred dividends (2) $ 19 $ 18 ------ ----- Fixed charges (1): Interest expense 561 330 Estimated interest component of net rental expense 33 18 ------ ----- 594 348 ------ ----- Fixed charges and preferred dividends $ 613 $ 366 ------ ----- ------ ----- Ratio of earnings to fixed charges and preferred dividends (3) 2.00 2.22 ------ ----- ------ ----- EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 630 $ 463 Fixed charges 172 107 ------ ----- $ 802 $ 570 ------ ----- ------ ----- Preferred dividends (2) $ 19 $ 18 ------ ----- Fixed charges: Interest expense 561 330 Estimated interest component of net rental expense 33 18 Less interest on deposits 422 241 ------ ----- 172 107 ------ ----- Fixed charges and preferred dividends $ 191 $ 125 ------ ----- ------ ----- Ratio of earnings to fixed charges and preferred dividends (3) 4.20 4.56 ------ ----- ------ ----- - ------------------------------------------------------------------------------ (1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. -----END PRIVACY-ENHANCED MESSAGE-----