-----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, WpRBk7MuzbK3jX59qegWUajXaO/Qk0/9iYBvOtLpU+efJrv/j62YPTXjAqjo8hIV 9tF2qD00DxKWdctfcFZCLw== 0000912057-97-027650.txt : 19970814 0000912057-97-027650.hdr.sgml : 19970814 ACCESSION NUMBER: 0000912057-97-027650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 97659524 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 June 30, 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: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding July 31, 1997 ------------------- Common stock, $5 par value 87,912,628 FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Statement of Income. . . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity. . . . . 4 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . 10 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Line of Business Results . . . . . . . . . . . . . . . . . . . . . 14 Earnings Performance . . . . . . . . . . . . . . . . . . . . . . . 19 Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . 19 Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . 22 Noninterest Expense. . . . . . . . . . . . . . . . . . . . . . . 24 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . . . 26 Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . 27 Investment Securities. . . . . . . . . . . . . . . . . . . . . . 27 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 29 Commercial real estate . . . . . . . . . . . . . . . . . . . . 29 Nonaccrual and Restructured Loans and Other Assets . . . . . . . 30 Changes in total nonaccrual loans. . . . . . . . . . . . . . . 30 Changes in foreclosed assets . . . . . . . . . . . . . . . . . 33 Loans 90 days past due and still accruing. . . . . . . . . . . 33 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . 34 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . . 37 Asset/Liability Management . . . . . . . . . . . . . . . . . . . 39 Derivative Financial Instruments . . . . . . . . . . . . . . . . 40 Liquidity Management . . . . . . . . . . . . . . . . . . . . . . 41 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 43 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 - -------------------------------------------------------------------------------- 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 Six months ended June 30, ended June 30, --------------------- -------------------- (in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 6 $ 8 $ 11 $ 10 Investment securities 190 225 398 353 Loans 1,507 1,618 3,057 2,494 Other 13 7 24 7 ------ ------ ------ ------ Total interest income 1,716 1,858 3,490 2,864 ------ ------ ------ ------ INTEREST EXPENSE Deposits 429 454 851 695 Federal funds purchased and securities sold under repurchase agreements 34 21 65 57 Commercial paper and other short-term borrowings 3 3 6 8 Senior and subordinated debt 78 80 159 128 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 -- 50 -- ------ ------ ------ ------ Total interest expense 569 558 1,131 888 ------ ------ ------ ------ NET INTEREST INCOME 1,147 1,300 2,359 1,976 Provision for loan losses 140 -- 245 -- ------ ------ ------ ------ Net interest income after provision for loan losses 1,007 1,300 2,114 1,976 ------ ------ ------ ------ NONINTEREST INCOME Service charges on deposit accounts 214 258 434 380 Fees and commissions 234 211 448 329 Trust and investment services income 112 104 221 164 Investment securities gains 3 3 7 2 Other 116 63 209 118 ------ ------ ------ ------ Total noninterest income 679 639 1,319 993 ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 316 400 656 581 Incentive compensation 49 61 89 93 Employee benefits 81 102 176 157 Equipment 98 111 192 167 Net occupancy 95 108 196 161 Goodwill 81 81 164 89 Core deposit intangible 67 82 129 91 Operating losses 180 27 222 42 Other 279 305 539 463 ------ ------ ------ ------ Total noninterest expense 1,246 1,277 2,363 1,844 ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 440 662 1,070 1,125 Income tax expense 212 299 502 498 ------ ------ ------ ------ NET INCOME $ 228 $ 363 $ 568 $ 627 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 222 $ 344 $ 551 $ 598 ------ ------ ------ ------ ------ ------ ------ ------ PER COMMON SHARE Net income $ 2.49 $ 3.61 $ 6.12 $ 8.39 ------ ------ ------ ------ ------ ------ ------ ------ Dividends declared $ 1.30 $ 1.30 $ 2.60 $ 2.60 ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 89.0 95.6 89.9 71.3 ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 8,037 $ 11,736 $ 8,882 Federal funds sold and securities purchased under resale agreements 224 187 1,344 Investment securities at fair value 11,530 13,505 13,692 Loans 65,689 67,389 70,541 Allowance for loan losses 1,850 2,018 2,273 -------- -------- -------- Net loans 63,839 65,371 68,268 -------- -------- -------- Due from customers on acceptances 97 197 210 Accrued interest receivable 519 665 591 Premises and equipment, net 2,262 2,406 2,400 Core deposit intangible 1,835 2,038 2,208 Goodwill 7,231 7,322 7,479 Other assets 4,606 5,461 3,512 -------- -------- -------- Total assets $100,180 $108,888 $108,586 -------- -------- -------- -------- -------- -------- LIABILITIES Noninterest-bearing deposits $ 24,284 $ 29,073 $ 27,535 Interest-bearing deposits 49,464 52,748 56,333 -------- -------- -------- Total deposits 73,748 81,821 83,868 Federal funds purchased and securities sold under repurchase agreements 4,237 2,029 944 Commercial paper and other short-term borrowings 208 401 262 Acceptances outstanding 97 197 210 Accrued interest payable 196 171 177 Other liabilities 2,869 3,947 2,865 Senior debt 1,734 2,120 2,586 Subordinated debt 2,686 2,940 2,644 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,150 -- STOCKHOLDERS' EQUITY Preferred stock 275 600 839 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 88,078,690 shares, 91,474,425 shares and 94,912,532 shares 440 457 475 Additional paid-in capital 9,305 10,287 11,207 Retained earnings 3,064 2,749 2,586 Cumulative foreign currency translation adjustments -- (4) (4) Investment securities valuation allowance 22 23 (73) -------- -------- -------- Total stockholders' equity 13,106 14,112 15,030 -------- -------- -------- Total liabilities and stockholders' equity $100,180 $108,888 $108,586 -------- -------- -------- -------- -------- -------- - ----------------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------ Six months ended June 30, ------------------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------------------ PREFERRED STOCK Balance, beginning of period $ 600 $ 489 Preferred stock issued to First Interstate stockholders -- 350 Preferred stock redeemed (325) -- ------- ------- Balance, end of period 275 839 ------- ------- COMMON STOCK Balance, beginning of period 457 235 Common stock issued to First Interstate stockholders -- 260 Common stock issued under employee benefit and dividend reinvestment plans 1 2 Common stock repurchased (18) (22) ------- ------- Balance, end of period 440 475 ------- ------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 10,287 1,135 Preferred stock issued to First Interstate stockholders -- 10 Common stock issued to First Interstate stockholders -- 11,039 Common stock issued under employee benefit and dividend reinvestment plans 44 53 Common stock repurchased (1,026) (1,141) Fair value adjustment related to First Interstate stock option -- 111 ------- ------- Balance, end of period 9,305 11,207 ------- ------- RETAINED EARNINGS Balance, beginning of period 2,749 2,174 Net income 568 627 Preferred stock dividends (17) (29) Common stock dividends (236) (186) ------- ------- Balance, end of period 3,064 2,586 ------- ------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance, beginning of period (4) (4) Translation adjustments 4 -- ------- ------- Balance, end of period -- (4) ------- ------- INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period 23 26 Change in unrealized net gain, after applicable taxes (1) (99) ------- ------- Balance, end of period 22 (73) ------- ------- Total stockholders' equity $13,106 $15,030 ------- ------- ------- ------- - ------------------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------ Six months ended June 30, ------------------------ (in millions) 1997 1996 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 568 $ 627 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 245 -- Depreciation and amortization 414 323 Deferred income tax provision 52 146 Increase (decrease) in net deferred loan fees 1 (21) Net decrease in accrued interest receivable 146 25 Net increase in accrued interest payable 25 5 Other, net 228 38 ------- ------- Net cash provided by operating activities 1,679 1,143 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities at fair value Proceeds from sales 255 763 Proceeds from prepayments and maturities 2,224 2,435 Purchases (505) (469) Cash acquired from First Interstate -- 6,030 Net decrease in loans resulting from originations and collections 1,553 49 Proceeds from sales (including participations) of loans 108 184 Purchases (including participations) of loans (128) (43) Proceeds from sales of foreclosed assets 85 61 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (37) 907 Other, net 246 (93) ------- ------- Net cash provided by investing activities 3,801 9,824 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (8,073) (2,566) Net increase (decrease) in short-term borrowings 2,015 (2,116) Proceeds from issuance of senior debt -- 760 Repayment of senior debt (375) (300) Proceeds from issuance of subordinated debt -- 500 Repayment of subordinated debt (251) -- Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 149 -- Proceeds from issuance of common stock 45 55 Redemption of preferred stock (325) -- Repurchase of common stock (1,044) (1,163) Payment of cash dividends on preferred stock (17) (21) Payment of cash dividends on common stock (236) (186) Other, net (1,067) (423) ------- ------- Net cash used by financing activities (9,179) (5,460) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,699) 5,507 Cash and cash equivalents at beginning of period 11,736 3,375 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,037 $ 8,882 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,106 $ 796 Income taxes $ 450 $ 185 Noncash investing and financing activities: Transfers from loans to foreclosed assets $ 53 $ 72 Acquisition of First Interstate: Common stock issued $ -- $11,299 Fair value of preferred stock issued -- 360 Fair value of stock options -- 111 Fair value of assets acquired -- 55,797 Fair value of liabilities assumed -- 51,214 - ------------------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. DERIVATIVE FINANCIAL INSTRUMENTS In response to recent rule amendments of the Securities and Exchange Commission (see page 41), the following is an enhanced description of the derivative financial instruments accounting policy contained in the Company's 1996 Form 10-K. Interest Rate Derivatives: The Company uses interest rate derivative financial instruments (futures, caps, floors and swaps) primarily to hedge mismatches in the rate maturity of loans and their funding sources. These instruments serve to reduce rather than increase the Company's exposure to movements in interest rates. At the inception of the hedge, the Company identifies an individual asset or liability, or an identifiable group of essentially similar assets or liabilities that expose the Company to interest rate risk at the consolidated or enterprise level. Interest rate derivatives are accounted for by the deferral or accrual method only if they are designated as a hedge and are expected to be and are effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Futures contracts must meet specific correlation tests (i.e., the change in their fair values must be within 80 to 120 percent of the opposite change in the fair values of the hedged assets or liabilities). For caps, floors and swaps, their notional amount, interest rate index and life must closely match the related terms of the hedged assets or liabilities. Further, for futures, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives are closed out or settled; previously unrecognized hedge results and the net settlement upon close-out or termination that offset changes in value of the hedged asset or liability are deferred and amortized over the life of the asset or liability with excess amounts recognized in noninterest income. Gains and losses on futures contracts result from the daily settlement of their open positions and are deferred and classified on the balance sheet with the hedged asset or liability. They are recognized in income when the effects of the related fair value changes of the hedged asset or liability are recognized (e.g., amortized as a component of the interest income or expense reported on the hedged asset or liability). Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in the interest income or expense reported on the hedged asset or liability. Fees associated with these financial contracts are included on the balance sheet at the time that the fee is paid and are classified with the hedged asset or liability. These fees are amortized over their contractual life as a component of the interest reported on the hedged asset or liability. If a hedged asset or liability settles before maturity of the hedging interest rate derivatives, the derivatives are closed out or settled, and previously unrecognized hedge results and the net settlement upon close-out or termination are accounted for as part of the gains and losses on the hedged asset 6 or liability. If interest rate derivatives used in an effective hedge are closed out or terminated before the hedged item settles, previously unrecognized hedge results and the net settlement upon close-out or termination are deferred and amortized over the life of the hedged asset or liability. Cash flows resulting from interest rate derivatives (including any related fees) that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows from the items being hedged and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Interest rate derivatives entered into as an accommodation to customers and interest rate derivatives used to offset the interest rate risk of those contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from interest rate derivative financial instruments carried at fair value are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Credit risk related to interest rate derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. Foreign Exchange Derivatives: The Company 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 derivatives. All contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from foreign exchange derivatives are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the foreign exchange derivatives are collected, paid or settled. Credit risk related to foreign exchange derivatives is considered and, if material, provided for separately from the allowance for loan losses. 7 2. 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 175 branch closures during 1996, five branch closures in the first quarter of 1997 and 31 branch closures in the second quarter of 1997. In addition, 10 branch dispositions have been completed or are scheduled to be completed by year-end 1997, with another 14 branches to be closed in 1998. 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 completed in the first quarter of 1997. The sales of the remaining three branches are expected to be completed in 1998. The out-of-state dispositions included 17 branch closures that were completed in the first quarter of 1997 and 23 branch closures that were completed in the second quarter of 1997. In addition, 51 branch closures have been completed or are scheduled to be completed by year-end 1997, with another 58 closures to be completed in 1998. The Company also entered into definitive agreements with several institutions to sell 87 former First Interstate out-of-state branches, including deposits. The sales of five of these branches were completed in the second quarter of 1997 and the sales of the remaining 82 have been completed or will be completed in the third quarter of 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 $253 million were paid since the second quarter of 1996, including $39 million in the second 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. During the second quarter, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. Transfer of the accounts will occur in several stages beginning in the third quarter of 1997. The sales price will be settled subsequent to these transfers, starting in the fourth quarter of 1997. Substantially all of the businesses were acquired as part of the acquisition of First Interstate; therefore, the excess of proceeds over the cost of the net assets sold on that portion of the sale will be deducted from goodwill. The net income for the first half of 1997 generated by the Institutional Custody businesses was approximately $6 million. 8 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. 9 FINANCIAL REVIEW
SUMMARY FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------------------------ % Change Quarter ended June 30, 1997 from Six months ended ----------------------------- ------------------ ---------------- JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, % (in millions) 1997 1997 1996 1997 1996 1997 1996 Change - --------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 228 $ 339 $ 363 (33)% (37)% $ 568 $ 627 (9)% Net income applicable to common stock 222 329 344 (33) (35) 551 598 (8) Per common share Net income $ 2.49 $ 3.62 $ 3.61 (31) (31) $ 6.12 $ 8.39 (27) Dividends declared 1.30 1.30 1.30 -- -- 2.60 2.60 -- Average common shares outstanding 89.0 90.8 95.6 (2) (7) 89.9 71.3 26 Profitability ratios (annualized) Net income to average total assets (ROA) .92% 1.31% 1.35% (30) (32) 1.12% 1.60% (30) Net income applicable to common stock to average common stockholders' equity (ROE) 6.88 10.02 9.77 (31) (30) 8.46 13.52 (37) Efficiency ratio (1) 68.2% 60.3% 65.8% 13 4 64.2% 62.1% 3 Average loans $ 64,618 $ 65,493 $ 70,734 (1) (9) $ 65,053 $ 52,880 23 Average assets 99,739 105,430 108,430 (5) (8) 102,569 78,782 30 Average core deposits 73,524 77,622 83,356 (5) (12) 75,562 60,087 26 Net interest margin 5.93% 6.14% 6.03% (3) (2) 6.03% 6.08% (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 $ 338 $ 443 $ 468 (24) (28) $ 781 $ 730 7 Net income per common share 3.79 4.88 4.89 (22) (22) 8.69 10.24 (15) ROA 1.51% 1.90% 1.96% (21) (23) 1.71% 2.05% (17) ROE 29.27 36.67 33.43 (20) (12) 33.06 33.18 -- Efficiency ratio 60.6 52.9 58.0 15 4 56.7 56.7 -- AT PERIOD END Investment securities $ 11,530 $ 12,634 $ 13,692 (9) (16) $ 11,530 $ 13,692 (16) Loans 65,689 65,436 70,541 -- (7) 65,689 70,541 (7) Allowance for loan losses 1,850 1,922 2,273 (4) (19) 1,850 2,273 (19) Goodwill 7,231 7,312 7,479 (1) (3) 7,231 7,479 (3) Assets 100,180 101,863 108,586 (2) (8) 100,180 108,586 (8) Core deposits 73,545 76,156 83,331 (3) (12) 73,545 83,331 (12) Common stockholders' equity 12,831 13,170 14,191 (3) (10) 12,831 14,191 (10) Stockholders' equity 13,106 13,595 15,030 (4) (13) 13,106 15,030 (13) Tier 1 capital (3) 6,101 6,407 6,346 (5) (4) 6,101 6,346 (4) Total capital (Tiers 1 and 2) (3) 9,329 9,891 9,591 (6) (3) 9,329 9,591 (3) Capital ratios Common stockholders' equity to assets 12.81% 12.93% 13.07% (1) (2) 12.81% 13.07% (2) Stockholders' equity to assets 13.08 13.35 13.84 (2) (5) 13.08 13.84 (5) Risk-based capital (3) Tier 1 capital 7.49 7.80 7.40 (4) 1 7.49 7.40 1 Total capital 11.45 12.05 11.18 (5) 2 11.45 11.18 2 Leverage (3) 6.67 6.61 6.37 1 5 6.67 6.37 5 Book value per common share $ 145.68 $ 146.37 $ 149.52 -- (3) $ 145.68 $ 149.52 (3) Staff (active, full-time equivalent) 33,216 34,486 41,548 (4) (20) 33,216 41,548 (20) COMMON STOCK PRICE High $ 287.88 $ 319.25 $ 264.50 (10) 9 $ 319.25 $ 264.50 21 Low 246.00 271.00 232.13 (9) 6 246.00 203.13 21 Period end 269.50 284.13 239.13 (5) 13 269.50 239.13 13 - ------------------------------------------------------------------------------------------------------------------------------------
(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 $35 million and $1,034 million, respectively, for the quarter ended June 30, 1997 and $66 million and $1,064 million, respectively, for the six months ended June 30, 1997. Goodwill amortization and average balance (which are not tax effected) were $81 million and $7,271 million, respectively, for the quarter ended June 30, 1997 and $164 million and $7,288 million, respectively, for the six months ended June 30, 1997. (3) See the Capital Adequacy/Ratios section for additional information. 10 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 all periods reflects the effects of the acquisition subsequent to the Merger's consummation. Since the Company's results of operations subsequent to the Merger's consummation reflect amounts recognized from 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, the increases in the amounts reported for the first six months of 1997 compared to the amounts reported for the same period in 1996 resulted from the Merger. Other significant factors affecting the Company's results of operations are described in the applicable sections below. Net income for the second quarter of 1997 was $228 million, compared with $363 million for the second quarter of 1996, a decrease of 37%. Per share earnings for the second quarter of 1997 were $2.49, compared with $3.61 in the second quarter of 1996, a decrease of 31%. Net income for the first six months of 1997 was $568 million, or $6.12 per share, compared with $627 million, or $8.39 per share, for the first six months of 1996. Return on average assets (ROA) was .92% and 1.12% in the second quarter and first half of 1997, respectively, compared with 1.35% and 1.60% in the same periods of 1996. Return on average common equity (ROE) was 6.88% and 8.46% in the second quarter and first half of 1997, respectively, compared with 9.77% and 13.52%, respectively, in the same periods of 1996. Earnings before the amortization of goodwill and nonqualifying core deposit intangible ("cash" or "tangible" earnings) in the second quarter and first half of 1997 were $3.79 and $8.69 per share, respectively, compared with $4.89 and $10.24 per share in the same periods of 1996. On the same basis, ROA was 1.51% and 1.71% in the second quarter and first half of 1997, respectively, compared with 1.96% and 2.05% in the same periods of 1996; ROE was 29.27% and 33.06% in the second quarter and first half of 1997, respectively, compared with 33.43% and 33.18% in the same periods of 1996. Net interest income on a taxable-equivalent basis was $1,150 million and $2,366 million in the second quarter and first half of 1997, respectively, compared with $1,304 million and $1,980 million in the same periods of 1996. The decrease in net interest income for the second quarter of 1997 compared with the same period of 1996 was predominantly due to a decline in average earning assets. The Company's net interest margin was 5.93% for the second quarter of 1997, compared with 6.03% in the same quarter of 1996 and 6.14% in the first quarter of 1997. 11 Noninterest income was $679 million and $1,319 million in the second quarter and first half of 1997, respectively, compared with $639 million and $993 million in the same periods of 1996. Noninterest expense in the second quarter and first half of 1997 was $1,246 million and $2,363 million, respectively, compared with $1,277 million and $1,844 million for the same periods of 1996. The decrease in noninterest expense in the second quarter of 1997 resulted from cost savings achieved subsequent to the Merger, substantially offset by an increase in operating losses (see page 24 for additional information). The Company expects to meet its pre-merger objective of realizing annual cost savings of $800 million by the fourth quarter of 1997. The Company also expects revenue growth to resume in the fourth quarter of 1997. For additional discussion of the Company's plan for branch closures and consolidations, see Note 2 to Financial Statements. The provision for loan losses in the second quarter and first half of 1997 was $140 million and $245 million, respectively, compared with no provision for the same periods in 1996. During the second quarter of 1997, net charge-offs totaled $212 million, or 1.32% of average loans (annualized). This compared with $201 million, or 1.23%, during the first quarter of 1997 and $178 million, or 1.01%, during the second quarter of 1996. The allowance for loan losses of $1,850 million was 2.82% of total loans at June 30, 1997, compared with 2.94% at March 31, 1997 and 3.22% at June 30, 1996. Total nonaccrual and restructured loans were $612 million at June 30, 1997, compared with $724 million at December 31, 1996 and $742 million at June 30, 1996. Foreclosed assets amounted to $194 million at June 30, 1997, $219 million at December 31, 1996 and $238 million at June 30, 1996. Common stockholders' equity to total assets was 12.81% at June 30, 1997, compared with 12.93% and 13.07% at March 31, 1997 and June 30, 1996, respectively. The Company's total risk-based capital ratio at June 30, 1997 was 11.45% and its Tier 1 risk-based capital ratio was 7.49%, 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 March 31, 1997, the risk-based capital ratios were 12.05% and 7.80%, respectively; at June 30, 1996, these ratios were 11.18% and 7.40%, respectively. The Company's leverage ratios were 6.67%, 6.61% and 6.37% at June 30, 1997, March 31, 1997 and June 30, 1996, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline of 5% for banks. 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 two programs, the Company has repurchased a total of 8.2 million shares (net of shares issued) since April 1996, including 1.9 million shares (net of shares issued) in the second quarter of 1997. The Company currently expects to continue repurchasing shares in each of the last two quarters of 1997, although not at the same level as the second quarter. 12 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 quarter and six-month period ended June 30, 1997 would not differ materially from the existing primary and fully diluted EPS under APB 15. In June 1997, the FASB issued FAS 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires that a company classify items of other comprehensive income, as defined by accounting standards, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The Company is in the process of determining its preferred format. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This Statement is effective with the year-end 1998 financial statements; however, a total for comprehensive income is required in the financial statements of interim periods beginning with the first quarter of 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. 13 LINE OF BUSINESS RESULTS (ESTIMATED)
- ---------------------------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Banking Investment Group Group Group -------------------------------------------------------- 1997 1996 1997 1996 1997 1996 QUARTER ENDED JUNE 30, Net interest income (1) $ 265 $ 242 $ 198 $ 176 $ 199 $ 228 Provision for loan losses (2) -- -- 33 20 1 1 Noninterest income (3) 301 325 66 66 138 142 Noninterest expense (3) 469 498 124 124 165 181 ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 97 69 107 98 171 188 Income tax expense (benefit) (4) 40 28 44 40 70 77 ----- ----- ----- ----- ----- ----- Net income (loss) $ 57 $ 41 $ 63 $ 58 $ 101 $ 111 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Average loans $ 0.0 $ 0.0 $ 5.5 $ 4.6 $ 2.0 $ 2.0 Average assets 1.8 2.3 7.3 6.5 2.7 2.7 Average core deposits 18.7 18.8 12.1 13.1 34.0 37.8 Return on equity (5) 22% 15% 32% 36% 58% 59% Risk-adjusted efficiency ratio (6) 91% 97% 70% 70% 59% 59% SIX MONTHS ENDED JUNE 30, Net interest income (1) $ 534 $ 360 $ 387 $ 274 $ 396 $ 325 Provision for loan losses (2) -- -- 64 36 2 2 Noninterest income (3) 596 485 134 111 272 207 Noninterest expense (3) 951 758 241 198 329 272 ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 179 87 216 151 337 258 Income tax expense (benefit) (4) 73 36 88 63 138 107 ----- ----- ----- ----- ----- ----- Net income (loss) $ 106 $ 51 $ 128 $ 88 $ 199 $ 151 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Average loans $ 0.0 $ 0.0 $ 5.4 $ 3.8 $ 1.9 $ 1.3 Average assets 1.9 1.5 7.3 5.3 2.9 1.7 Average core deposits 19.2 14.1 12.3 9.7 34.6 28.0 Return on equity (5) 20% 13% 34% 33% 57% 53% Risk-adjusted efficiency ratio (6) 93% 99% 68% 71% 59% 61% - ----------------------------------------------------------------------------------------------------
(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 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 $90 million and $112 million for the quarters ended June 30, 1997 and 1996, respectively, and $180 million and $161 million for the six months ended June 30, 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 line of business results show the financial performance of the Company's major business units. The table presents the second quarter and six months ended June 30, 1997 and the same periods of 1996. First Interstate results prior to April 1, 1996 are not included and, therefore, the results for the six months ended June 30, 1997 are not comparable to the same period of 1996. 14
- ---------------------------------------------------------------------------------------------------------------------------------- Wholesale (income/expense in millions, Real Estate Products Consumer Consolidated average balances in billions) Group Group Lending Other Company ----------------------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 QUARTER ENDED JUNE 30, Net interest income (1) $ 85 $ 106 $ 180 $ 212 $ 283 $ 285 $ (63) $ 51 $1,147 $1,300 Provision for loan losses (2) 11 12 19 21 112 111 (36) (165) 140 -- Noninterest income (3) 30 14 81 83 106 75 (43) (66) 679 639 Noninterest expense (3) 33 29 113 126 119 130 223 189 1,246 1,277 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Income before income tax expense (benefit) 71 79 129 148 158 119 (293) (39) 440 662 Income tax expense (benefit) (4) 29 33 53 61 65 49 (89) 11 212 299 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Net income (loss) $ 42 $ 46 $ 76 $ 87 $ 93 $ 70 $(204) $ (50) $ 228 $ 363 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Average loans $ 9.4 $10.5 $16.6 $18.8 $23.7 $24.4 $ 7.4 $10.4 $ 64.6 $ 70.7 Average assets 10.2 11.1 20.0 23.1 24.5 25.1 33.2 37.6 99.7 108.4 Average core deposits 0.3 0.3 8.0 10.0 0.4 0.4 -- 3.0 73.5 83.4 Return on equity (5) 17% 18% 19% 19% 25% 19% --% --% 7% 10% Risk-adjusted efficiency ratio (6) 76% 72% 79% 77% 68% 81% --% --% --% --% SIX MONTHS ENDED JUNE 30, Net interest income (1) $ 196 $ 172 $ 375 $ 315 $ 561 $ 469 $ (90) $ 61 $2,359 $1,976 Provision for loan losses (2) 21 20 37 31 227 184 (106) (273) 245 -- Noninterest income (3) 48 38 164 122 198 134 (93) (104) 1,319 993 Noninterest expense (3) 54 51 219 176 232 205 337 184 2,363 1,844 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Income before income tax expense (benefit) 169 139 283 230 300 214 (414) 46 1,070 1,125 Income tax expense (benefit) (4) 69 58 116 95 123 89 (105) 50 502 498 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Net income (loss) $ 100 $ 81 $ 167 $ 135 $ 177 $ 125 $(309) $ (4) $ 568 $ 627 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Average loans $ 9.4 $ 8.8 $16.8 $13.8 $24.0 $18.1 $ 7.6 $ 7.1 $ 65.1 $ 52.9 Average assets 10.2 9.3 21.1 16.6 25.0 18.7 34.2 25.7 102.6 78.8 Average core deposits 0.3 0.2 8.6 6.3 0.4 0.3 0.2 1.5 75.6 60.1 Return on equity (5) 21% 19% 20% 21% 24% 22% --% --% 8% 14% Risk-adjusted efficiency ratio (6) 65% 70% 76% 73% 70% 75% --% --% --% --% - ----------------------------------------------------------------------------------------------------------------------------------
(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. 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. 15 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 June 30, 1997, there were 1,126 traditional branches and 772 in-store branches and banking centers with 2,759 ATM locations throughout the Western United States. Retail Distribution Group's net income for the second quarter of 1997 increased $16 million, or 39%, over second quarter 1996. Net interest income increased due to wider spreads on core deposits. Noninterest income for the quarter reflected lower sales and service charges to the product groups and higher losses on the disposition of premises due to branch closures, which was partly offset by higher external fees and commissions. Noninterest expense decreased in the quarter due to branch closures and merger-related cost savings, significantly offset by higher operating losses during the period. 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. Business Banking's net income for the second quarter of 1997 increased $5 million, or 9%. The increase in net interest income was due to higher volume and spreads on commercial loans and higher spreads on core deposits. This was partially offset by lower deposit balances. The provision was higher due to the volume of loans acquired through direct market mailings. 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 second quarter, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. In July 1997, the Bank announced a partnership with Morgan Stanley, Dean Witter, Discover & Co., whereby Dean Witter would provide technology, investment products, services and 16 sales and marketing support to Wells Fargo Securities and its clients. The full range of Dean Witter's services is expected to be available to Wells Fargo customers by the first quarter of 1998. The Investment Group's net income for the second quarter of 1997 decreased by $10 million, or 9%. Net interest income decreased by $29 million primarily due to a decline in core deposits which was partially offset by wider deposit spreads. Noninterest expense decreased as a result of cost savings from the sale of Corporate Trust, lower personnel expense (including incentive compensation) and lower distribution costs from lower deposit sales. Assets under management at June 30, 1997 were $59.2 billion, compared with $56.3 billion at June 30, 1996. 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 debt, origination of permanent loans for securitization, loan syndications and commercial real estate loan servicing. The Real Estate Group's net income for the second quarter of 1997 decreased by $4 million, or 9%, from 1996. Net interest income decreased by $21 million due to lower loan balances, lower interest recoveries and narrower spreads. Noninterest income increased by $16 million due to sales of loans and commercial mortgage-backed securities, trading of high yield debt and higher income from real estate investments. Noninterest expense increased by $4 million due to higher operating losses and lower gains on the sale of foreclosed assets. 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 net income for the second quarter of 1997 decreased by $11 million, or 13%, from 1996. Net interest income decreased by $32 million due to lower loan and deposit balances. Lower service charges on deposit accounts in second quarter 1997 were offset partially by higher foreign exchange income. Noninterest expense decreased by $13 million due to merger-related cost savings. 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 17 credit and installment loans. The loan portfolio for second quarter 1997 averaged $23.7 billion, consisting of $5.2 billion in credit cards, $11.6 billion in equity/unsecured loans and $6.9 billion in transportation financing. This compares with $5.2 billion in credit cards, $12.2 billion in equity/unsecured loans and $7.0 billion in transportation financing in 1996. Consumer Lending's net income for the second quarter of 1997 increased $23 million, or 33%. Net interest income was lower due to higher interest losses related to an increase in loans charged off in the consumer portfolio, which was partially offset by a 29% increase in auto lease balances. The increase in noninterest income was due to higher fee income on credit cards and mortgage servicing. The decrease in noninterest expense was due to lower distribution expense. 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. The net loss for the Other category for the quarter ended June 30, 1997 increased by $154 million from 1996. Net interest income during the second quarter of 1997 reflects the impact of lower investment securities and higher short-term borrowing. Noninterest income in second quarter 1997 benefited from unusual gains on equity investments. Noninterest expense includes substantially all of the operating losses for second quarter 1997 related to resolving various merger-related operations and back office issues (see page 24 for additional information). The operating losses are partially offset by merger-related cost savings in the systems and other support groups. In June 1997, the FASB issued FAS 131, Disclosures about Segments of an Enterprise and Related Information. The Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement is effective for the year-end 1998 audited financial statements. 18 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1,150 million in the second quarter of 1997, compared with $1,304 million in the second quarter of 1996. The decrease in net interest income was predominantly due to a decline in average earning assets. The Company's net interest margin was 5.93% in the second quarter of 1997, compared with 6.03% in the second quarter of 1996 and 6.14% in the first quarter of 1997. Net interest income on a taxable-equivalent basis was $2,366 million in the first six months of 1997, compared with $1,980 million in the first six months of 1996. The Company's net interest margin was 6.03% in the first six months of 1997, compared with 6.08% in the first six months of 1996. The Company expects the net interest margin to be essentially flat in the second half of 1997. Interest income included hedging income of $21 million in the second quarter of 1997, compared with $24 million in the second quarter of 1996. Interest expense included hedging expense of $3 million in the second quarter of 1997 and 1996. Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 20 and 21. Loans averaged $64.6 billion in the second quarter of 1997, compared with $70.7 billion in the second quarter of 1996, and $65.1 billion in the first six months of 1997, compared with $52.9 billion in the first six months of 1996. The decrease in average loans from the second quarter of 1996 was largely due to runoff. In addition, a significant portion of the decrease was due to the divestitures and sales of former First Interstate branches and banks in 1996, which included $1.5 billion of loans. The Company expects growth in the commercial loan portfolio in the second half of 1997. Investment securities averaged $11.9 billion during the second quarter of 1997, compared with $14.9 billion in the second quarter of 1996, and $12.5 billion in the first six months of 1997, compared with $11.8 billion in the first six months of 1996. Average core deposits were $73.5 billion and $83.4 billion in the second quarter of 1997 and 1996, respectively, and funded 74% and 77% of the Company's average total assets in the same quarter of 1997 and 1996, respectively. For the first six months of 1997 and 1996, average core deposits were $75.6 billion and $60.1 billion, respectively, and funded 74% and 76% of the Company's average total assets in the same period of 1997 and 1996, respectively. The decrease in average core deposits from the second quarter of 1996 was largely due to net runoff. In addition, a significant portion of the decrease was due to the divestitures and sales of former First Interstate branches and banks in 1996, including $2.3 billion of core deposits. The Company expects core deposits to decrease in the second half of 1997 as a result of additional branch sales (see Note 2 to Financial Statements). 19 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- ---------------------------------------------------------------------------------------------------------------------------- Quarter ended June 30, -------------------------------------------------------------------- 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 $ 451 5.67% $ 6 $ 588 5.36% $ 8 Investment securities at fair value (3): U.S. Treasury securities 2,688 6.06 41 3,177 5.52 44 Securities of U.S. government agencies and corporations 5,926 6.44 96 8,434 6.07 129 Private collateralized mortgage obligations 2,939 6.64 49 2,653 6.23 42 Other securities 322 6.50 4 668 6.83 10 -------- ------ -------- ------ Total investment securities at fair value 11,875 6.40 190 14,932 6.01 225 Loans: Commercial 18,432 9.10 418 19,460 8.75 424 Real estate 1-4 family first mortgage 9,927 7.53 187 11,924 7.50 224 Other real estate mortgage 11,573 9.23 266 13,006 9.32 300 Real estate construction 2,262 10.03 57 2,385 10.07 60 Consumer: Real estate 1-4 family junior lien mortgage 6,035 9.37 141 6,790 8.96 152 Credit card 5,164 14.44 186 5,183 14.61 189 Other revolving credit and monthly payment 7,835 9.35 183 9,151 9.35 213 -------- ------ -------- ------ Total consumer 19,034 10.74 510 21,124 10.51 554 Lease financing 3,264 8.65 71 2,599 8.76 57 Foreign 126 6.43 2 236 4.72 3 -------- ------ -------- ------ Total loans 64,618 9.37 1,511 70,734 9.20 1,622 Other 721 6.84 13 396 6.62 7 -------- ------ -------- ------ Total earning assets $77,665 8.87 1,720 $ 86,650 8.62 1,862 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,895 1.33 6 $ 7,060 1.24 22 Market rate and other savings 32,519 2.60 211 32,921 2.68 220 Savings certificates 15,669 5.09 199 16,779 4.84 201 Other time deposits 165 4.51 2 483 5.89 7 Deposits in foreign offices 833 5.45 11 303 5.17 4 -------- ------ -------- ------ Total interest-bearing deposits 51,081 3.37 429 57,546 3.17 454 Federal funds purchased and securities sold under repurchase agreements 2,492 5.42 34 1,667 5.08 21 Commercial paper and other short-term borrowings 216 7.11 4 296 4.19 3 Senior debt 1,751 6.36 28 2,289 6.07 35 Subordinated debt 2,884 6.94 50 2,580 7.03 45 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 7.81 25 -- -- -- -------- ------ -------- ------ Total interest-bearing liabilities 59,723 3.83 570 64,378 3.49 558 Portion of noninterest-bearing funding sources 17,942 -- -- 22,272 -- -- -------- ------ -------- ------ Total funding sources $77,665 2.94 570 $ 86,650 2.59 558 -------- ------ -------- ------ -------- ------ -------- ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 5.93% $1,150 6.03% $1,304 ---- ------ ---- ------ ---- ------ ---- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 7,654 $ 8,569 Goodwill 7,271 7,238 Other 7,149 5,973 ------- -------- Total noninterest-earning assets $22,074 $ 21,780 ------- -------- ------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $23,441 $ 26,596 Other liabilities 3,273 2,414 Preferred stockholders' equity 371 839 Common stockholders' equity 12,931 14,203 Noninterest-bearing funding sources used to fund earning assets (17,942) (22,272) ------- -------- Net noninterest-bearing funding sources $22,074 $ 21,780 ------- -------- ------- -------- TOTAL ASSETS $99,739 $108,430 ------- -------- ------- -------- - ----------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50% and 8.25% for the quarters ended June 30, 1997 and 1996, respectively, and 8.38% and 8.29% for the six months ended June 30, 1997 and 1996, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.81% and 5.52% for the quarters ended June 30, 1997 and 1996, respectively, and 5.69% and 5.46% for the six months ended June 30, 1997 and 1996, 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 $11,897 million and $15,012 million for the quarters ended June 30, 1997 and 1996, respectively, and $12,503 million and $11,814 million for the six months ended June 30, 1997 and 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 periods presented. 20
- ---------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, ------------------------------------------------------------------- 1997 1996 ------------------------------- ------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 413 5.56% $ 11 $ 357 5.42% $ 10 Investment securities at fair value (3): U.S. Treasury securities 2,801 6.05 84 2,266 5.52 62 Securities of U.S. government agencies and corporations 6,313 6.42 203 6,712 6.02 203 Private collateralized mortgage obligations 3,036 6.61 101 2,366 6.15 73 Other securities 345 6.42 10 447 7.03 15 -------- ------ ------- ------ Total investment securities at fair value 12,495 6.38 398 11,791 5.99 353 Loans: Commercial 18,419 9.04 827 14,384 9.15 655 Real estate 1-4 family first mortgage 10,080 7.47 376 8,162 7.52 307 Other real estate mortgage 11,562 10.06 576 10,602 9.28 489 Real estate construction 2,280 9.89 112 1,856 10.04 93 Consumer: Real estate 1-4 family junior lien mortgage 6,102 9.34 283 5,062 8.81 222 Credit card 5,247 14.25 374 4,558 15.02 343 Other revolving credit and monthly payment 8,052 9.30 372 5,875 9.76 285 -------- ------ ------- ------ Total consumer 19,401 10.65 1,029 15,495 10.99 850 Lease financing 3,172 8.74 139 2,248 8.95 101 Foreign 139 6.93 5 133 4.98 3 -------- ------ ------- ------ Total loans 65,053 9.47 3,064 52,880 9.48 2,498 Other 713 6.55 24 231 6.57 7 -------- ------ ------- ------ Total earning assets $ 78,674 8.93 3,497 $65,259 8.82 2,868 -------- ------ ------- ------ -------- ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,904 1.24 12 $ 3,958 1.21 24 Market rate and other savings 33,307 2.57 425 25,456 2.62 332 Savings certificates 15,594 5.07 392 12,707 4.98 315 Other time deposits 171 4.21 4 412 6.46 13 Deposits in foreign offices 697 5.32 18 414 5.33 11 -------- ------ ------- ------ Total interest-bearing deposits 51,673 3.32 851 42,947 3.25 695 Federal funds purchased and securities sold under repurchase agreements 2,459 5.30 65 2,186 5.25 57 Commercial paper and other short-term borrowings 223 6.06 6 350 4.81 8 Senior debt 1,876 6.27 58 2,000 6.15 61 Subordinated debt 2,911 6.93 101 1,923 6.97 67 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,275 7.83 50 -- -- -- -------- ------ ------- ------ Total interest-bearing liabilities 60,417 3.77 1,131 49,406 3.61 888 Portion of noninterest-bearing funding sources 18,257 -- -- 15,853 -- -- -------- ------ ------- ------ Total funding sources $ 78,674 2.90 1,131 $65,259 2.74 888 -------- ------ ------- ------ -------- ------ ------- ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 6.03% $2,366 6.08% $1,980 ---- ------ ---- ------ ---- ------ ---- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 8,799 $ 5,721 Goodwill 7,288 3,808 Other 7,808 3,994 -------- ------- Total noninterest-earning assets $ 23,895 $13,523 -------- ------- -------- ------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 24,757 $17,966 Other liabilities 3,819 1,846 Preferred stockholders' equity 459 664 Common stockholders' equity 13,117 8,900 Noninterest-bearing funding sources used to fund earning assets (18,257) (15,853) -------- ------- Net noninterest-bearing funding sources $ 23,895 $13,523 -------- ------- -------- ------- TOTAL ASSETS $102,569 $78,782 -------- ------- -------- ------- - ----------------------------------------------------------------------------------------------------------------------------
21 NONINTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------- % -------------- % (in millions) 1997 1996 Change 1997 1996 Change - -------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $214 $258 (17)% $ 434 $380 14% Fees and commissions: Credit card membership and other credit card fees 55 26 112 100 53 89 Debit and credit card merchant fees 24 37 (35) 46 52 (12) Charges and fees on loans 33 32 3 64 50 28 Shared ATM network fees 43 27 59 82 39 110 Mutual fund and annuity sales fees 16 18 (11) 32 27 19 All other 63 71 (11) 124 108 15 ---- ---- ------ ---- Total fees and commissions 234 211 11 448 329 36 Trust and investment services income: Asset management and custody fees 61 60 2 122 95 28 Mutual fund management fees 45 34 32 84 55 53 All other 6 10 (40) 15 14 7 ---- ---- ------ ---- Total trust and investment services income 112 104 8 221 164 35 Investment securities gains 3 3 -- 7 2 250 Income from equity investments accounted for by the: Cost method 40 20 100 91 55 65 Equity method 15 8 88 30 10 200 Check printing charges 18 15 20 36 24 50 Gains on sales of loans 7 1 600 13 5 160 Gains from dispositions of operations 1 1 -- 8 5 60 Losses on dispositions of premises and equipment (6) (5) 20 (36) (17) 112 All other 41 23 78 67 36 86 ---- ---- ------ ---- Total $679 $639 6% $1,319 $993 33% ---- ---- --- ------ ---- --- ---- ---- --- ------ ---- --- - --------------------------------------------------------------------------------------------------------------------
"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 $25 million and $21 million for the second quarter of 1997 and 1996, respectively, and $49 million and $37 million for the first half of 1997 and 1996, respectively. The related amortization expense was $18 million and $16 million for the second quarter of 1997 and 1996, respectively, and $35 million and $27 million for the first half of 1997 and 1996, respectively. The balance of purchased mortgage servicing rights was $280 million and $230 million at June 30, 1997 and 1996, respectively. The purchased mortgage loan servicing portfolio totaled $24 billion at June 30, 1997, compared with $20 billion at June 30, 1996. A major portion of the increase in trust and investment services income for the first half of 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. In the second quarter of 1997, this increase was substantially offset by a reduction in income due to the sale of the Corporate Trust business to The Bank of New York in the first quarter of 1997. The Company managed 28 of the Stagecoach family of funds consisting of $15.0 billion of assets at June 30, 1997, compared with 17 Stagecoach funds and 18 Pacifica funds that together consisted of $13.2 billion of assets at June 30, 1996. The Company also manages the Overland Express family of 14 funds, which had $5.3 billion of assets under management at June 30, 1997, 22 compared with $4.4 billion at June 30, 1996, and is sold through brokers around the country. In addition to managing Stagecoach and Overland Express Funds, the Company managed or maintained personal trust, employee benefit trust and agency assets of approximately $208 billion and $285 billion (including $235 billion from First Interstate) at June 30, 1997 and 1996, respectively, including $84 billion of assets managed by the Institutional Custody businesses, which will be sold to The Bank of New York in several stages beginning in the third quarter of 1997. The decrease in assets under management is due to the sale of the Corporate Trust business in the first quarter of 1997. 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 branches not acquired as a result of the Merger (see Note 2 to Financial Statements for other, former First Interstate branch dispositions). 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 10 branches, 9 of which were closed in the first quarter of 1997 and one that is expected to be sold in the third quarter of 1997. At December 31, 1996, the remaining balance consisted of a fourth quarter 1996 accrual of $96 million for the disposition of 137 traditional branches in California. Of the $96 million, $31 million was associated with 41 branches that were closed in the second quarter of 1997. The remaining $65 million liability at June 30, 1997 was related to 28 branches which have been closed or are scheduled to be closed by year-end 1997 and 68 branches that are expected to be closed in 1998. At June 30, 1997, the Company had 1,898 retail outlets, comprised of 1,126 traditional branches, 394 supermarket branches and 378 banking centers, in 10 Western states. 23 NONINTEREST EXPENSE
- -------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------- % -------------- % (in millions) 1997 1996 Change 1997 1996 Change - ------------------------------------------------------------------------------------------------------------------- Salaries $ 316 $ 400 (21)% $ 656 $ 581 13% Incentive compensation 49 61 (20) 89 93 (4) Employee benefits 81 102 (21) 176 157 12 Equipment 98 111 (12) 192 167 15 Net occupancy 95 108 (12) 196 161 22 Goodwill 81 81 -- 164 89 84 Core deposit intangible: Nonqualifying (1) 59 72 (18) 113 72 57 Qualifying 8 10 (20) 16 19 (16) Operating losses 180 27 567 222 42 429 Contract services 59 66 (11) 115 108 6 Telecommunications 36 28 29 73 44 66 Postage 22 26 (15) 45 41 10 Security 22 17 29 44 23 91 Outside professional services 21 31 (32) 36 44 (18) Stationery and supplies 16 21 (24) 36 31 16 Advertising and promotion 21 21 -- 34 34 -- Check printing 14 10 40 30 16 88 Travel and entertainment 15 16 (6) 29 26 12 Outside data processing 13 15 (13) 26 18 44 Foreclosed assets 5 1 400 (4) 3 -- All other 35 53 (34) 75 75 -- ------ ------ ------ ------ Total $1,246 $1,277 (2)% $2,363 $1,844 28% ------ ------ --- ------ ------ --- ------ ------ --- ------ ------ --- - --------------------------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The decrease in noninterest expense in the second quarter of 1997 resulted from cost savings achieved subsequent to the Merger, substantially offset by an increase in operating losses. The operating losses for the second quarter were predominantly a result of back-office problems which arose subsequent to certain systems conversions and other changes to operating processes that were part of the First Interstate integration. These problems were related to clearing accounts with other banks, misposting of deposits and loan payments to customer accounts and processing of returned items. Since the inception of these problems, management dedicated resources to resolve the increasing volume of ensuing suspense items. In the second quarter of 1997, based on the age and volume of suspense items as well as additional research and better insight, management determined that many of the items would not be cleared or collected. Consequently, it was determined that there was a need to record an operating loss related to the outstanding items. Most of these items are expected to be written off in the third quarter. Salaries, incentive compensation and employee benefits expense decreased $117 million from the second quarter of 1996 due to staff reductions after the Merger. Salaries and employee benefits expense for the second and first quarters of 1997 included merger-related severance expense of $12 million and $10 million, respectively. 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 33,216 at June 30, 24 1997, compared with 41,548 at June 30, 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 $73 million and $59 million, respectively, for the second quarter of 1997, compared with $72 million and $72 million, respectively, for the second quarter of 1996. 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. 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 48% and 47% for the second quarter and first half of 1997, respectively, compared with 45% and 44% for the same periods of 1996, respectively. The increase in the effective tax rate for the second quarter was mostly due to the impact of a constant amount of goodwill amortization related to the Merger, which is not tax deductible, relative to lower pretax income. The increase in the effective rate in the first half of 1997 was substantially due to increased goodwill amortization related to the Merger, which started in the second quarter of 1996. 25 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 June 30, 1997: - ------------------------------------------------------------------------------ Quarter ended (in millions) June 30, 1997 - ------------------------------------------------------------------------------ Amortization --------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ------------------------------------------------------------------------------ Income before income tax expense $ 440 $ 81 $ 59 $ 580 Income tax expense 212 -- 24 236 ----- ---- ---- ----- Net income 228 81 35 344 Preferred dividends 6 -- -- 6 ----- ---- ---- ----- Net income applicable to common stock $ 222 $ 81 $ 35 $ 338 ----- ---- ---- ----- ----- ---- ---- ----- Per common share $2.49 $.91 $.39 $3.79 ----- ---- ---- ----- ----- ---- ---- ----- - ------------------------------------------------------------------------------ The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended June 30, 1997 were calculated as follows:
- ---------------------------------------------------------------------------------------------------- Quarter ended (in millions) June 30, 1997 - ---------------------------------------------------------------------------------------------------- ROA: A*/ (C-E) = 1.51% ROE: B*/ (D-E) = 29.27% Efficiency: (F-G) / H = 60.57% Net income $ 344 (A) Net income applicable to common stock 338 (B) Average total assets 99,739 (C) Average common stockholders' equity 12,931 (D) Average goodwill ($7,271) and after-tax nonqualifying core deposit intangible ($1,034) 8,305 (E) Noninterest expense 1,246 (F) Amortization expense for goodwill and nonqualifying core deposit intangible 140 (G) Net interest income plus noninterest income 1,826 (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. 26 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------ JUNE 30, December 31, June 30, 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 $ 2,613 $ 2,618 $ 2,824 $ 2,837 $ 2,626 $ 2,624 Securities of U.S. government agencies and corporations (1) 5,696 5,711 7,043 7,050 7,928 7,847 Private collateralized mortgage obligations (2) 2,897 2,884 3,237 3,230 2,790 2,716 Other 261 262 342 343 439 443 ------- ------- ------- ------- ------- ------- Total debt securities 11,467 11,475 13,446 13,460 13,783 13,630 Marketable equity securities 26 55 18 45 31 62 ------- ------- ------- ------- ------- ------- Total $11,493 $11,530 $13,464 $13,505 $13,814 $13,692 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------
(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 June 30, 1997, the available-for-sale securities portfolio had an unrealized net gain of $37 million, or less than 1% of the cost of the portfolio, comprised of unrealized gross gains of $84 million and unrealized gross losses of $47 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 June 30, 1996, the available-for-sale securities portfolio had an unrealized net loss of $122 million, comprised of unrealized gross losses of $185 million and unrealized gross gains of $63 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 June 30, 1997, the valuation allowance amounted to an unrealized net gain of $22 million, compared with an unrealized net gain of $23 million at December 31, 1996 and an unrealized net loss of $73 million at June 30, 1996. During the first half of 1997, realized gross gains and losses resulting from the sale of available-for-sale securities were $8 million and $1 million, respectively. During the first half of 1996, realized gross gains and losses resulting from the sale of available-for-sale securities were $4 million and $2 million, respectively. 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). 27 The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ----------------------------------------------------------------------------------------------------- June 30, 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 $ 2,613 6.05% 1-8 $ 807 5.88% Securities of U.S. government agencies and corporations 5,696 6.61 2-4 2,380 6.80 Private collateralized mortgage obligations 2,897 6.66 2-1 927 6.96 Other 261 6.65 2-3 81 7.11 ------- ------ TOTAL COST OF DEBT SECURITIES $11,467 6.49% 2-2 $4,195 6.67% ------- ---- --- ------ ---- ------- ---- --- ------ ---- ESTIMATED FAIR VALUE $11,475 $4,197 ------- ------ ------- ------ - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- June 30, 1997 ------------------------------------------------------------------- Expected remaining principal maturity ------------------------------------------------------------------- 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 $1,800 6.12% $ 6 6.30% $-- 6.90% Securities of U.S. government agencies and corporations 2,559 6.49 663 6.58 94 5.13 Private collateralized mortgage obligations 1,836 6.51 133 6.76 1 8.30 Other 171 6.42 7 6.70 2 6.98 ------ ---- --- TOTAL COST OF DEBT SECURITIES $6,366 6.39% $809 6.61% $97 5.20% ------ ---- ---- ---- --- ---- ------ ---- ---- ---- --- ---- ESTIMATED FAIR VALUE $6,370 $810 $98 ------ ---- --- ------ ---- --- - -----------------------------------------------------------------------------------------------------------------
(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 2 months at June 30, 1997, compared with 2 years and 3 months at March 31, 1997 and 2 years and 2 months at December 31, 1996. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At June 30, 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 $8,595 million, or 75%, of the Company's investment securities portfolio at June 30, 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 $8,595 million to $8,285 million and the expected remaining maturity of these securities would increase from 2 years and 3 months to 2 years and 7 months. 28 LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------- % Change June 30, 1997 from -------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------- Commercial (1)(2) $19,464 $19,515 $19,575 --% (1)% Real estate 1-4 family first mortgage 9,757 10,425 11,811 (6) (17) Other real estate mortgage (3) 11,747 11,860 12,920 (1) (9) Real estate construction 2,378 2,303 2,401 3 (1) Consumer: Real estate 1-4 family junior lien mortgage 6,008 6,278 6,736 (4) (11) Credit card 5,090 5,462 5,276 (7) (4) Other revolving credit and monthly payment 7,749 8,374 9,075 (7) (15) ------- ------- ------- Total consumer 18,847 20,114 21,087 (6) (11) Lease financing 3,373 3,003 2,689 12 25 Foreign 123 169 58 (27) 112 ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $712, $654 and $528) $65,689 $67,389 $70,541 (3)% (7)% ------- ------- ------- --- --- ------- ------- ------- --- --- - --------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $1,129 million, $1,070 million and $905 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,393 million, $1,409 million and $1,493 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (3) Includes agricultural loans that are secured by real estate of $325 million, $325 million and $370 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------- % Change June 30, 1997 from -------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers and REITs (1) $ 1,129 $ 1,070 $ 905 6% 25% Other real estate mortgage 11,747 11,860 12,920 (1) (9) Real estate construction 2,378 2,303 2,401 3 (1) ------- ------- ------- Total $15,254 $15,233 $16,226 --% (6)% ------- ------- ------- ---- ---- ------- ------- ------- ---- ---- Nonaccrual loans $ 303 $ 376 $ 425 (19)% (29)% ------- ------- ------- ---- ---- ------- ------- ------- ---- ---- Nonaccrual loans as a % of total 2.0% 2.5% 2.6% ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 29 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1) - ------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 1997 1996 1996 - ------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2)(3) $179 $223 $208 Real estate 1-4 family first mortgage 102 99 87 Other real estate mortgage (4) 283 349 363 Real estate construction 19 25 47 Consumer: Real estate 1-4 family junior lien mortgage 17 15 22 Other revolving credit and monthly payment 2 1 1 Lease financing -- 2 3 ---- ---- ---- Total nonaccrual loans (5) 602 714 731 Restructured loans (6) 10 10 11 ---- ---- ---- Nonaccrual and restructured loans 612 724 742 As a percentage of total loans .9% 1.1% 1.1% Foreclosed assets 194 219 238 Real estate investments (7) 5 4 7 ---- ---- ---- Total nonaccrual and restructured loans and other assets $811 $947 $987 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------- (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 $1 million, $2 million and $15 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (3) Includes agricultural loans of $17 million, $13 million and $30 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (4) Includes agricultural loans secured by real estate of $17 million, $10 million and $6 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (5) Of the total nonaccrual loans, $376 million, $493 million and $553 million at June 30, 1997, December 31, 1996 and June 30, 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 $49 million, $50 million and $50 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively, 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, $49 million, $50 million and $50 million were considered impaired under FAS 114 at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. (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 $124 million at June 30, 1997, December 31, 1996 and June 30, 1996, respectively. The table below summarizes the changes in total nonaccrual loans. - -------------------------------------------------------------------------------- JUNE 30, June 30, (in millions) 1997 1996 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $ 645 $ 525 Nonaccrual loans of First Interstate -- 201 New loans placed on nonaccrual 112 173 Charge-offs (39) (48) Payments (109) (87) Transfers to foreclosed assets (2) (19) Loans returned to accrual (5) (14) ------ ----- BALANCE, END OF QUARTER $ 602 $ 731 ------ ----- ------ ----- - -------------------------------------------------------------------------------- 30 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 $432 million and $456 million during the second quarter and first half of 1997, respectively, and $613 million and $523 million during the second quarter and first half of 1996, respectively. Total interest income recognized on impaired loans was $4 million and $9 million during the second quarter and first half of 1997, respectively, and $5 million and $9 million during the second quarter and first half of 1996, respectively, substantially all of which was recorded using the cash method. 31 The table below shows the recorded investment in impaired loans by loan category at June 30, 1997, December 31, 1996 and June 30, 1996: - -------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1997 1996 1996 - -------------------------------------------------------------------------------- Commercial $106 $155 $166 Real estate 1-4 family first mortgage 1 1 2 Other real estate mortgage (1) 298 362 386 Real estate construction 18 24 47 Other 2 1 2 ---- ---- ---- Total (2) $425 $543 $603 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $321 $416 $433 Discounted cash flow method 80 101 135 Historical loss factors 24 26 35 ---- ---- ---- $425 $543 $603 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------- (1) Includes accruing loans of $49 million, $50 million and $50 million purchased at a steep discount at June 30, 1997, December 31, 1996 and June 30, 1996, respectively, whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $24 million, $27 million and $39 million of impaired loans with a related FAS 114 allowance of $2 million, $2 million and $4 million at June 30, 1997, December 31, 1996 and June 30, 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 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. 32 The table below summarizes the changes in foreclosed assets. - -------------------------------------------------------------------------------- JUNE 30, June 30, (in millions) 1997 1996 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $207 $198 Foreclosed assets of First Interstate -- 51 Additions 27 37 Sales (31) (33) Charge-offs (3) (12) Write-downs (2) (1) Other deductions (4) (2) ---- ---- BALANCE, END OF QUARTER $194 $238 ---- ---- ---- ---- - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 1997 1996 1996 - -------------------------------------------------------------------------------- Commercial $ 36 $ 65 $ 83 Real estate 1-4 family first mortgage 33 42 31 Other real estate mortgage 10 59 31 Real estate construction 2 4 15 Consumer: Real estate 1-4 family junior lien mortgage 34 23 11 Credit card 127 120 105 Other revolving credit and monthly payment 16 20 7 ---- ---- ---- Total consumer 177 163 123 Lease financing 1 -- 1 ---- ---- ---- Total $259 $333 $284 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------- 33 ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------- Quarter ended Six months ended ------------------ ------------------ JUNE 30, June 30, JUNE 30, June 30, (in millions) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,922 $1,681 $2,018 $1,794 Allowance of First Interstate -- 770 -- 770 Provision for loan losses 140 -- 245 -- Loan charge-offs: Commercial (1) (60) (48) (129) (61) Real estate 1-4 family first mortgage (5) (5) (10) (9) Other real estate mortgage (2) (13) (10) (16) Real estate construction (2) (4) (3) (5) Consumer: Real estate 1-4 family junior lien mortgage (6) (13) (12) (17) Credit card (133) (101) (248) (187) Other revolving credit and monthly payment (57) (51) (113) (71) ------ ------ ------ ------ Total consumer (196) (165) (373) (275) Lease financing (10) (8) (20) (14) ------ ------ ------ ------ Total loan charge-offs (275) (243) (545) (380) ------ ------ ------ ------ Loan recoveries: Commercial (2) 20 8 33 13 Real estate 1-4 family first mortgage 1 2 2 5 Other real estate mortgage 8 19 30 23 Real estate construction -- 4 1 5 Consumer: Real estate 1-4 family junior lien mortgage 1 4 3 5 Credit card 11 11 22 16 Other revolving credit and monthly payment 19 15 35 18 ------ ------ ------ ------ Total consumer 31 30 60 39 Lease financing 3 2 6 4 ------ ------ ------ ------ Total loan recoveries 63 65 132 89 ------ ------ ------ ------ Total net loan charge-offs (212) (178) (413) (291) ------ ------ ------ ------ BALANCE, END OF PERIOD $1,850 $2,273 $1,850 $2,273 ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) 1.32% 1.01% 1.28% 1.10% ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 2.82% 3.22% 2.82% 3.22% ------ ------ ------ ------ ------ ------ ------ ------ - -----------------------------------------------------------------------------------------------
(1) Charge-offs of loans to real estate developers were none and $1 million for the quarters ended June 30, 1997 and 1996, respectively, and none and $1 million for the six months ended June 30, 1997 and 1996, respectively. (2) Includes recoveries from loans to real estate developers of none and $1 million for the quarters ended June 30, 1997 and 1996, respectively, and $1 million and $1 million for the six months ended June 30, 1997 and 1996, respectively. 34 The table below presents net charge-offs by loan category.
- ----------------------------------------------------------------------------------------------------------------------- Quarter ended Six Months Ended ----------------------------------- ------------------------------------ JUNE 30, 1997 June 30, 1996 JUNE 30, 1997 June 30, 1996 --------------- ---------------- ---------------- ---------------- % OF % of % OF % of AVERAGE average AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1) - ----------------------------------------------------------------------------------------------------------------------- Commercial $ 40 .89% $ 40 .80% $ 96 1.05% $ 48 .65% Real estate 1-4 family first mortgage 4 .15 3 .10 8 .15 4 .10 Other real estate mortgage (6) (.19) (6) (.20) (20) (.33) (7) (.14) Real estate construction 2 .36 -- -- 2 .15 -- -- Consumer: Real estate 1-4 family junior lien mortgage 5 .30 9 .54 9 .28 12 .50 Credit card 122 9.47 90 7.03 226 8.68 171 7.56 Other revolving credit and monthly payment 38 1.96 36 1.59 78 1.95 53 1.82 ---- ---- ---- ---- Total consumer 165 3.47 135 2.58 313 3.26 236 3.07 Lease financing 7 .81 6 .84 14 .84 10 .88 ---- ---- ---- ---- Total net loan charge-offs $212 1.32% $178 1.01% $413 1.28% $291 1.10% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. Included in the Commercial loan category in the second quarter of 1997 were small business commercial loan net charge-offs of $23 million (or 2.43% of average small business loans), compared with $19 million (or 2.18%) in the first quarter of 1997 and $12 million (or 1.85%) in the second 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 all periods presented was credit card loans, comprising more than 50% of total net charge-offs in each period. During the second quarter of 1997, credit card gross charge-offs due to bankruptcies were $59 million, or 45%, of total credit card gross charge-offs, compared with $45 million, or 39%, in the first quarter of 1997 and $41 million, or 40%, in the second quarter of 1996. In addition, credit card loans 30 to 89 days past due and still accruing totaled $172 million at June 30, 1997, compared with $189 million at March 31, 1997 and $160 million at June 30, 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 $1,850 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at June 30, 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 $140 million provision in the second quarter 1997. The Company anticipates that it will continue making incremental increases to the provision of approximately $30 to $40 million through the fourth quarter of 1997, when it is expected that the provision will approximate net charge-offs. 35 OTHER ASSETS - ----------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1997 1996 1996 - ----------------------------------------------------------------------------- Nonmarketable equity investments $ 952 $ 937 $ 691 Net deferred tax asset 465 437 551 Certain identifiable intangible assets 478 471 462 Foreclosed assets 194 219 238 Other 2,517 3,397 1,570 ------ ------ ------ Total other assets $4,606 $5,461 $3,512 ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------- The Company estimates that approximately $421 million of the $465 million net deferred tax asset at June 30, 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 $44 million primarily relates to approximately $581 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 second quarter 1997 and second quarter 1996 were $11 million and $76 million (including $72 million from First Interstate), 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 and $16 million for the quarters ended June 30, 1997 and 1996, respectively. Purchased mortgage servicing rights included in certain identifiable intangible assets were $280 million, $257 million and $230 million at June 30, 1997, December 31, 1996 and June 30, 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 and $25 million for the quarters ended June 30, 1997 and 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 second or 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 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. 36 DEPOSITS - ----------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1997 1996 1996 - ----------------------------------------------------------------------------- Noninterest-bearing $24,284 $29,073 $27,535 Interest-bearing checking 2,271 2,792 6,984 Market rate and other savings 31,088 33,947 32,302 Savings certificates 15,902 15,769 16,510 ------- ------- ------- Core deposits 73,545 81,581 83,331 Other time deposits 162 186 472 Deposits in foreign offices 41 54 65 ------- ------- ------- Total deposits $73,748 $81,821 $83,868 ------- ------- ------- ------- ------- ------- - ----------------------------------------------------------------------------- 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 ratios at June 30, 1997 compared with December 31, 1996 resulted substantially from the repurchase of common stock. 37 The table below presents the Company's risk-based capital and leverage ratios.
- ------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in billions) 1997 1996 1996 - ------------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $12.8 $13.5 $14.2 Preferred stock (1) .3 .4 .8 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.2 -- Goodwill and other deductions (2) (8.3) (8.5) (8.7) ----- ----- ----- Total Tier 1 capital 6.1 6.6 6.3 ----- ----- ----- Tier 2: Mandatory convertible debt .2 .2 .2 Subordinated debt and unsecured senior debt 2.0 2.1 2.0 Allowance for loan losses allowable in Tier 2 1.0 1.1 1.1 ----- ----- ----- Total Tier 2 capital 3.2 3.4 3.3 ----- ----- ----- Total risk-based capital $ 9.3 $10.0 $ 9.6 ----- ----- ----- ----- ----- ----- Risk-weighted balance sheet assets $78.7 $82.2 $83.3 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.7 10.1 9.5 Standby letters of credit 1.7 2.1 2.4 Other .6 .5 .4 ----- ----- ----- Total risk-weighted off-balance sheet items 12.0 12.7 12.3 ----- ----- ----- Goodwill and other deductions (2) (8.3) (8.5) (8.7) Allowance for loan losses not included in Tier 2 (.9) (.9) (1.2) ----- ----- ----- Total risk-weighted assets $81.5 $85.5 $85.7 ----- ----- ----- ----- ----- ----- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.49% 7.68% 7.40% Total capital (8% minimum requirement) 11.45 11.70 11.18 Leverage ratio (3% minimum requirement) (3) 6.67% 6.65% 6.37% - ----------------------------------------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at 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 June 30, 1997, the Bank had a Tier 1 RBC ratio of 8.46%, a combined Tier 1 and Tier 2 ratio of 11.11% and a leverage ratio of 7.12%. 38 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 June 30, 1997, the under-one-year cumulative gap was a $338 million (0.3% of total assets) net liability position, compared with net liability positions of $1,851 million (1.8% of total assets) at March 31, 1997 and $1,402 million (1.3% of total assets) at December 31, 1996. The decrease in the net liability position from March 31, 1997 was primarily due to an increase in consumer loans repricing within one year and a decrease in market rate savings repricing within one year. 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 $9.4 billion, $11.9 billion and $12.5 billion at June 30, 1997, March 31, 1997 and December 31, 1996, respectively. 39 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. DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at June 30, 1997 and December 31, 1996.
- ------------------------------------------------------------------------------------------------------------- JUNE 30, 1997 December 31, 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 $ 5,249 $ -- $-- $ 5,188 $ -- $ -- Floors purchased (1) 22,439 47 47 20,640 101 101 Caps purchased (1) 422 3 3 435 3 3 Swap contracts (1) 16,391 121 4 16,661 217 117 Foreign exchange contracts: Forward contracts (1) 47 -- -- 64 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Futures contracts 3 -- -- 10 -- -- Floors written 692 -- (8) 405 -- (10) Caps written 1,828 -- (4) 2,174 -- (4) Floors purchased (1) 697 8 8 404 9 9 Caps purchased (1) 1,796 4 4 2,088 4 4 Swap contracts (1) 2,246 12 2 2,325 12 2 Foreign exchange contracts (2): Forward and spot contracts (1) 1,485 19 2 1,313 14 1 Option contracts purchased (1) 89 1 1 65 1 1 Option contracts written 88 -- (1) 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. 40 The Company also enters into foreign exchange derivative positions (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. 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. In February 1997, the Securities and Exchange Commission (SEC) published rule amendments to clarify and expand existing disclosure requirements for derivative financial instruments. The amendments require enhanced disclosure of accounting policies for derivative financial instruments in the notes to the financial statements. In addition, the amendments expand existing disclosure requirements to include quantitative and qualitative information about market risk inherent in market risk sensitive instruments. The required quantitative and qualitative information should be disclosed outside the financial statements and related notes thereto. The enhanced accounting policy disclosure requirements are effective for the quarterly period ended June 30, 1997; accordingly, see Note 1 to Financial Statements in this Form 10-Q. The rule amendments that require expanded disclosure of quantitative and qualitative information about market risk are effective with the 1997 Form 10-K. 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 with the SEC 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 June 30, 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 41 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 separate trust, Wells Fargo Capital II. At June 30, 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. 42 PART II - OTHER INFORMATION 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. 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 1.73 and 2.11 for the quarters ended June 30, 1997 and 1996, respectively, and 1.90 and 2.19 for the six months ended June 30, 1997 and 1996, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 3.57 and 5.73 for the quarters ended June 30, 1997 and 1996, respectively, and 4.11 and 5.55 for the six months ended June 30, 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 1.70 and 2.00 for the quarters ended June 30, 1997 and 1996, respectively, and 1.85 and 2.08 for the six months ended June 30, 1997 and 1996, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.34 and 4.58 for the quarters ended June 30, 1997 and 1996, respectively, and 3.76 and 4.59 for the six months ended June 30, 1997 and 1996, respectively. (b) The Company filed the following reports on Form 8-K during the second quarter of 1997 and through the date hereof: (1) May 21, 1997 under Item 5, containing the Press Release that announced the retirement of William F. Zuendt as President and Chief Operating Officer of Wells Fargo & Company in 1997 (2) July 9, 1997 under Item 5, containing the Press Release that announced that Wells Fargo & Company's second quarter 1997 earnings would not meet analysts' expectations (3) July 15, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended June 30, 1997 43 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 August 13, 1997. WELLS FARGO & COMPANY By: /s/ Frank A. Moeslein -------------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 44 EX-3.(II) 2 EXHIBIT 3.(II) BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED JULY 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 l7, 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 17. 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, 2 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 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. 3 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 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. 4 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 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 5 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 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 6 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 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. 7 (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 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 8 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. 9 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 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 10 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, 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 11 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. 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) 12 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 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 13 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 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 14 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 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 15 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 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, 16 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. ARTICLE V 17 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 18 exercise a majority of the voting power of the corporation, by written consent of such stockholders or by the Board of Directors. 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 19 notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 20 EX-11 3 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ----------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, --------------- --------------- (in millions) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Net income $ 228 $ 363 $ 568 $ 627 Less preferred dividends 6 19 17 29 ----- ----- ----- ----- Net income for calculating primary earnings per common share $ 222 $ 344 $ 551 $ 598 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 89.0 95.6 89.9 71.3 ----- ----- ----- ----- ----- ----- ----- ----- PRIMARY EARNINGS PER COMMON SHARE $2.49 $3.61 $6.12 $8.39 ----- ----- ----- ----- ----- ----- ----- ----- FULLY DILUTED EARNINGS PER COMMON SHARE (1) Net income $ 228 $ 363 $ 568 $ 627 Less preferred dividends 6 19 17 29 ----- ----- ----- ----- Net income for calculating fully diluted earnings per common share $ 222 $ 344 $ 551 $ 598 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 89.0 95.6 89.9 71.3 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 1.0 1.8 1.0 1.8 ----- ----- ----- ----- Average common shares outstanding as adjusted 90.0 97.4 90.9 73.1 ----- ----- ----- ----- ----- ----- ----- ----- FULLY DILUTED EARNINGS PER COMMON SHARE $2.47 $3.54 $6.06 $8.19 ----- ----- ----- ----- ----- ----- ----- ----- - -----------------------------------------------------------------------------------------------
(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 AUGUST 13, 1997 FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 8,037 0 224 0 11,530 0 0 65,689 1,850 100,180 73,748 4,445 3,065 5,719 0 275 440 12,391 100,180 3,057 398 24 3,490 851 1,131 2,359 245 7 2,363 1,070 568 0 0 568 6.12 2.47 6.03 602 259 10 0 2,018 545 132 1,850 0 0 0
EX-99.(A) 5 EXHIBIT 99.(A) EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ---------------------- ---------------------- (in millions) 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 440 $ 662 $1,070 $1,125 Fixed charges 600 594 1,195 942 ------ ------ ------ ------ $1,040 $1,256 $2,265 $2,067 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges (1): Interest expense $ 569 $ 558 $1,131 $ 888 Estimated interest component of net rental expense 31 36 64 54 ------ ------ ------ ------ $ 600 $ 594 $1,195 $ 942 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 1.73 2.11 1.90 2.19 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 440 $ 662 $1,070 $1,125 Fixed charges 171 140 344 247 ------ ------ ------ ------ $ 611 $ 802 $1,414 $1,372 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense $ 569 $ 558 $1,131 $ 888 Estimated interest component of net rental expense 31 36 64 54 Less interest on deposits 429 454 851 695 ------ ------ ------ ------ $ 171 $ 140 $ 344 $ 247 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 3.57 5.73 4.11 5.55 ------ ------ ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------------------------
(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 EXHIBIT 99.(B) EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ---------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ---------------- ---------------- (in millions) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 440 $ 662 $1,070 $1,125 Fixed charges 600 594 1,195 942 ------ ------ ------ ------ $1,040 $1,256 $2,265 $2,067 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividend requirement $ 6 $ 19 $ 17 $ 29 Ratio of income before income tax expense to net income 1.92 1.82 1.88 1.79 ------ ------ ------ ------ Preferred dividends (2) $ 12 $ 35 $ 32 $ 52 ------ ------ ------ ------ Fixed charges (1): Interest expense 569 558 1,131 888 Estimated interest component of net rental expense 31 36 64 54 ------ ------ ------ ------ 600 594 1,195 942 ------ ------ ------ ------ Fixed charges and preferred dividends $ 612 $ 629 $1,227 $ 994 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 1.70 2.00 1.85 2.08 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 440 $ 662 $1,070 $1,125 Fixed charges 171 140 344 247 ------ ------ ------ ------ $ 611 $ 802 $1,414 $1,372 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends (2) $ 12 $ 35 $ 32 $ 52 ------ ------ ------ ------ Fixed charges: Interest expense 569 558 1,131 888 Estimated interest component of net rental expense 31 36 64 54 Less interest on deposits 429 454 851 695 ------ ------ ------ ------ 171 140 344 247 ------ ------ ------ ------ Fixed charges and preferred dividends $ 183 $ 175 $ 376 $ 299 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 3.34 4.58 3.76 4.59 ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------------------
(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-----