-----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, E1NwNeF/VPbiNd+k1bIlsV9CQnnqessi03Uri3WPAUvvB6y4ou//Wo0T4cdTRGmA Q2PEKvLhBpCcB6LOEsuu7w== 0001047469-98-031159.txt : 19980814 0001047469-98-031159.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-031159 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE SROS: PCX 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: SEC FILE NUMBER: 001-06214 FILM NUMBER: 98686600 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 8004114932 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 FORM 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, 1998 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, 1998 ------------------ Common stock, $5 par value 85,136,765
FORM 10-Q TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Statement of Income . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity. . . 4 Consolidated Statement of Cash Flows . . . . . . . . . . . . . 5 Note to Financial Statements . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data . . . . . . . . . . . . . . . . . . . . 7 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Proposed Merger with Norwest Corporation . . . . . . . . . . . 10 Line of Business Results . . . . . . . . . . . . . . . . . . . 11 Earnings Performance . . . . . . . . . . . . . . . . . . . . . 17 Net Interest Income. . . . . . . . . . . . . . . . . . . . . 17 Noninterest Income . . . . . . . . . . . . . . . . . . . . . 21 Noninterest Expense. . . . . . . . . . . . . . . . . . . . . 23 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . 25 Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . 26 Investment Securities. . . . . . . . . . . . . . . . . . . . 26 Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . 28 Commercial real estate . . . . . . . . . . . . . . . . . . 28 Nonaccrual and Restructured Loans and Other Assets . . . . . 29 Changes in total nonaccrual loans. . . . . . . . . . . . . 29 Changes in foreclosed assets . . . . . . . . . . . . . . . 32 Loans 90 days past due and still accruing. . . . . . . . . 32 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . 33 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 35 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . 36 Derivative Financial Instruments . . . . . . . . . . . . . . 38 Liquidity Management . . . . . . . . . . . . . . . . . . . . 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 40 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 41 SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
- ----------------------------------------------------------------------------- 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. Wells Fargo & Company (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, customer disintermediation, technology changes (including the Year 2000 issue) 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 1997 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) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 10 $ 6 $ 16 $ 11 Investment securities 130 190 275 398 Loans 1,515 1,507 3,027 3,057 Other 21 13 43 24 ------ ------ ------ ------ Total interest income 1,676 1,716 3,361 3,490 ------ ------ ------ ------ INTEREST EXPENSE Deposits 403 429 811 851 Federal funds purchased and securities sold under repurchase agreements 20 34 61 65 Commercial paper and other short-term borrowings 4 3 11 6 Senior and subordinated debt 73 78 148 159 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 25 51 50 ------ ------ ------ ------ Total interest expense 525 569 1,082 1,131 ------ ------ ------ ------ NET INTEREST INCOME 1,151 1,147 2,279 2,359 Provision for loan losses 170 140 350 245 ------ ------ ------ ------ Net interest income after provision for loan losses 981 1,007 1,929 2,114 ------ ------ ------ ------ NONINTEREST INCOME Fees and commissions 272 234 527 448 Service charges on deposit accounts 222 214 430 434 Trust and investment services income 114 112 228 221 Investment securities gains 18 3 23 7 Other 109 116 252 209 ------ ------ ------ ------ Total noninterest income 735 679 1,460 1,319 ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 303 316 608 656 Incentive compensation 61 49 114 89 Employee benefits 80 81 171 176 Equipment 100 98 197 192 Net occupancy 98 95 199 196 Goodwill 81 81 162 164 Core deposit intangible 57 67 117 129 Operating losses 25 180 56 222 Other 292 279 565 539 ------ ------ ------ ------ Total noninterest expense 1,097 1,246 2,189 2,363 ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 619 440 1,200 1,070 Income tax expense 282 212 548 502 ------ ------ ------ ------ NET INCOME $ 337 $ 228 $ 652 $ 568 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 333 $ 222 $ 643 $ 551 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE $ 3.91 $ 2.49 $ 7.52 $ 6.12 ------ ------ ------ ------ ------ ------ ------ ------ DILUTED EARNINGS PER COMMON SHARE $ 3.87 $ 2.47 $ 7.45 $ 6.06 ------ ------ ------ ------ ------ ------ ------ ------ DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.30 $ 2.60 $ 2.60 ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 85.2 89.0 85.5 89.9 ------ ------ ------ ------ ------ ------ ------ ------ Diluted average common shares outstanding 86.1 89.9 86.4 90.9 ------ ------ ------ ------ ------ ------ ------ ------ - --------------------------------------------------------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1998 1997 1997 - ----------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 7,130 $ 8,169 $ 8,037 Federal funds sold and securities purchased under resale agreements 590 82 224 Securities available for sale 8,449 9,888 11,530 Loans 64,320 65,734 65,689 Allowance for loan losses 1,835 1,828 1,850 ------- ------- -------- Net loans 62,485 63,906 63,839 ------- ------- -------- Due from customers on acceptances 88 98 97 Accrued interest receivable 466 507 519 Premises and equipment, net 2,017 2,117 2,262 Core deposit intangible 1,592 1,709 1,835 Goodwill 6,837 7,031 7,231 Other assets 3,546 3,949 4,606 ------- ------- -------- Total assets $93,200 $97,456 $100,180 ------- ------- -------- ------- ------- -------- LIABILITIES Noninterest-bearing deposits $23,411 $23,953 $ 24,284 Interest-bearing deposits 47,039 48,246 49,464 ------- ------- -------- Total deposits 70,450 72,199 73,748 Federal funds purchased and securities sold under repurchase agreements 1,262 3,576 4,237 Commercial paper and other short-term borrowings 287 249 208 Acceptances outstanding 88 98 97 Accrued interest payable 193 175 196 Other liabilities 2,256 2,403 2,869 Senior debt 1,684 1,983 1,734 Subordinated debt 2,731 2,585 2,686 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,299 1,299 STOCKHOLDERS' EQUITY Preferred stock 275 275 275 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 85,091,451 shares, 86,152,779 shares and 88,078,690 shares 425 431 440 Additional paid-in capital 8,347 8,712 9,305 Retained earnings 3,837 3,416 3,064 Cumulative other comprehensive income 66 55 22 ------- ------- -------- Total stockholders' equity 12,950 12,889 13,106 ------- ------- -------- Total liabilities and stockholders' equity $93,200 $97,456 $100,180 ------- ------- -------- ------- ------- -------- - -----------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------- Six months ended June 30, ------------------------------------------- 1998 1997 ------------------ -------------------- STOCK- COMPRE- Stock- Compre- HOLDERS' HENSIVE holders' hensive (in millions) EQUITY INCOME Equity Income - ------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of period $ 275 $ 600 Preferred stock redeemed -- (325) ------- ------- Balance, end of period 275 275 ------- ------- COMMON STOCK Balance, beginning of period 431 457 Common stock issued under employee benefit and dividend reinvestment plans 1 1 Common stock repurchased (7) (18) ------- ------- Balance, end of period 425 440 ------- ------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 8,712 10,287 Common stock issued under employee benefit and dividend reinvestment plans 52 44 Common stock repurchased (417) (1,026) ------- ------- Balance, end of period 8,347 9,305 ------- ------- RETAINED EARNINGS Balance, beginning of period 3,416 2,749 Net income 652 $652 568 $568 Preferred stock dividends (9) (17) Common stock dividends (222) (236) ------- ------- Balance, end of period 3,837 3,064 ------- ------- CUMULATIVE OTHER COMPREHENSIVE INCOME Balance, beginning of period 55 19 Unrealized gains on investment securities arising during the period, net of tax of $17 million and $2 million 25 25 3 3 Reclassification adjustment for investment securities gains included in net income, net of tax of $9 million and $3 million (14) (14) (4) (4) Foreign currency translation adjustments, net of tax of ($4) million -- -- 4 4 ------- ---- ------- ---- Balance, end of period 66 22 ------- ------- COMPREHENSIVE INCOME $663 $571 ---- ---- ---- ---- Total stockholders' equity $12,950 $13,106 ------- ------- ------- ------- - -------------------------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------- Six months ended June 30, ------------------------- (in millions) 1998 1997 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 652 $ 568 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 350 245 Depreciation and amortization 466 414 Investment securities gains (23) (7) Gains on sales of loans (53) (13) Gains from dispositions of operations (71) (8) Net decrease in accrued interest receivable 41 146 Net increase in accrued interest payable 18 25 Net decrease (increase) in loans originated for sale 569 (294) Other, net (51) 603 ------- ------- Net cash provided by operating activities 1,898 1,679 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale Proceeds from sales 54 255 Proceeds from prepayments and maturities 2,751 2,224 Purchases (1,324) (505) Net (increase) decrease in loans resulting from originations and collections 58 1,553 Proceeds from sales (including participations) of loans 548 108 Purchases (including participations) of loans (81) (128) Proceeds from dispositions of operations 473 8 Proceeds from sales of foreclosed assets 78 85 Net increase in federal funds sold and securities purchased under resale agreements (508) (37) Other, net (98) 238 ------- ------- Net cash provided by investing activities 1,951 3,801 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (1,749) (8,073) Net increase (decrease) in short-term borrowings (2,276) 2,015 Repayment of senior debt (293) (375) Proceeds from issuance of subordinated debt 250 -- Repayment of subordinated debt (100) (251) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures -- 149 Proceeds from issuance of common stock 53 45 Redemption of preferred stock -- (325) Repurchase of common stock (424) (1,044) Payment of cash dividends on preferred stock (9) (17) Payment of cash dividends on common stock (222) (236) Other, net (118) (1,067) ------- ------- Net cash used by financing activities (4,888) (9,179) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (1,039) (3,699) Cash and Cash Equivalents at Beginning of Period 8,169 11,736 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,130 $ 8,037 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,064 $ 1,106 Income taxes $ 339 $ 450 Noncash investing activities: Transfers from loans to foreclosed assets $ 33 $ 53 - -------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTE TO FINANCIAL STATEMENTS MERGER WITH FIRST INTERSTATE BANCORP (MERGER) On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp (First Interstate). The Merger was accounted for as a purchase transaction. The major components of management's plan for the combined company included 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 that were completed by June 30, 1998. The California dispositions included 175 branch closures during 1996, 47 branch closures during 1997 and one branch closure in the first quarter of 1998. The Company also sold 17 former First Interstate branches located in California, including deposits, in 1997. The out-of-state dispositions included 88 branch closures that were completed in 1997, 30 branch closures in the first quarter of 1998 and 38 branch closures in the second quarter of 1998. The Company also sold 87 former First Interstate out-of-state branches, including deposits, in 1997. (See Noninterest Income section for information on other branch dispositions.) Additionally, the adjustments to goodwill included accruals of approximately $452 million ($267 million after tax) related to severance of former First Interstate employees who were displaced by June 30, 1998. During 1997, 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 occurred in several stages, the last of which was during the second quarter of 1998. Substantially all of the businesses were acquired as part of the acquisition of First Interstate; therefore, the excess of the related proceeds over the attributable costs of the net assets sold on that portion of the sale was deducted from goodwill. Conversely, net proceeds of approximately $9 million attributable to business originated by the Company were recorded as a gain in the first half of 1998, including approximately $7 million in the second quarter of 1998. The $7,198 million excess purchase price over fair value of First Interstate's net assets acquired (goodwill) is amortized using the straight-line method over 25 years. 6 FINANCIAL REVIEW SUMMARY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------- % Change Quarter ended June 30, 1998 from Six months ended ---------------------------- -------------------- ------------------ JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, % (in millions) 1998 1998 1997 1998 1997 1998 1997 Change - --------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 337 $ 315 $ 228 7% 48% $ 652 $ 568 15% Net income applicable to common stock 333 311 222 7 50 643 551 17 Earnings per common share $ 3.91 $ 3.62 $ 2.49 8 57 $ 7.52 $ 6.12 23 Diluted earnings per comon share 3.87 3.58 2.47 8 57 7.45 6.06 23 Dividends declared per comon share 1.30 1.30 1.30 -- -- 2.60 2.60 -- Average common shares outstanding 85.2 85.8 89.0 (1) (4) 85.5 89.9 (5) Diluted average common shares outstanding 86.1 86.6 89.9 (1) (4) 86.4 90.9 (5) Profitability ratios (annualized) Net income to average total assets (ROA) 1.45% 1.34% .92% 8 58 1.40% 1.12% 25 Net income applicable to common stock to average common stockholders' equity (ROE) 10.66 10.07 6.88 6 55 10.37 8.46 23 Efficiency ratio (1) 58.2% 58.9% 68.2% (1) (15) 58.5% 64.2% (9) Average loans $64,397 $65,067 $ 64,618 (1) -- $64,730 $ 65,053 -- Average assets 93,148 95,258 99,739 (2) (7) 94,197 102,569 (8) Average core deposits 69,807 69,858 73,524 -- (5) 69,833 75,562 (8) Net interest margin 6.22% 6.01% 5.93% 3 5 6.12% 6.03% 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 $ 444 $ 423 $ 338 5 31 $ 866 $ 781 11 Earnings per common share 5.21 4.92 3.79 6 37 10.13 8.69 17 Diluted earnings per common share 5.15 4.88 3.75 6 37 10.03 8.59 17 ROA 2.11% 1.98% 1.51% 7 40 2.04% 1.71% 19 ROE 37.78 37.46 29.27 1 29 37.62 33.06 14 Efficiency ratio 51.2 51.7 60.6 (1) (16) 51.5 56.7 (9) AT PERIOD END Securities available for sale $ 8,449 $ 8,676 $ 11,530 (3) (27) $ 8,449 $ 11,530 (27) Loans 64,320 64,504 65,689 -- (2) 64,320 65,689 (2) Allowance for loan losses 1,835 1,830 1,850 -- (1) 1,835 1,850 (1) Goodwill 6,837 6,943 7,231 (2) (5) 6,837 7,231 (5) Assets 93,200 94,820 100,180 (2) (7) 93,200 100,180 (7) Core deposits 70,209 72,041 73,545 (3) (5) 70,209 73,545 (5) Common stockholders' equity 12,675 12,528 12,831 1 (1) 12,675 12,831 (1) Stockholders' equity 12,950 12,803 13,106 1 (1) 12,950 13,106 (1) Tier 1 capital (3) 6,425 6,141 6,101 5 5 6,425 6,101 5 Total capital (Tiers 1 and 2) (3) 9,491 9,161 9,329 4 2 9,491 9,329 2 Capital ratios Common stockholders' equity to assets 13.60% 13.21% 12.81% 3 6 13.60% 12.81% 6 Stockholders' equity to assets 13.90 13.50 13.08 3 6 13.90 13.08 6 Risk-based capital (3) Tier 1 capital 8.08 7.76 7.49 4 8 8.08 7.49 8 Total capital 11.94 11.58 11.45 3 4 11.94 11.45 4 Leverage (3) 7.53 7.04 6.67 7 13 7.53 6.67 13 Book value per common share $148.96 $146.90 $ 145.68 1 2 $148.96 $ 145.68 2 Staff (active, full-time equivalent) 31,620 32,414 33,216 (2) (5) 31,620 33,216 (5) COMMON STOCK PRICE High $387.25 $337.88 $ 287.88 15 35 $387.25 $ 319.25 21 Low 329.13 295.00 246.00 12 34 295.00 246.00 20 Period end 369.00 331.25 269.50 11 37 369.00 269.50 37 - ---------------------------------------------------------------------------------------------------------------------------------
(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 $30 million and $913 million, respectively, for the quarter ended June 30, 1998 and $61 million and $928 million, respectively, for the six months ended June 30, 1998. Goodwill amortization and average balance (which are not tax effected) were $81 million and $6,902 million, respectively, for the quarter ended June 30, 1998 and $162 million and $6,946 million, respectively, for the six months ended June 30, 1998. (3) See the Capital Adequacy/Ratios section for additional information. 7 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. Net income for the second quarter of 1998 was $337 million, compared with $228 million for the second quarter of 1997, an increase of 48%. Earnings per share for the second quarter of 1998 were $3.91, compared with $2.49 in the second quarter of 1997, an increase of 57%. Net income for the first six months of 1998 was $652 million, or $7.52 per share, compared with $568 million, or $6.12 per share, for the first six months of 1997. Return on average assets (ROA) was 1.45% and 1.40% in the second quarter and first half of 1998, respectively, compared with .92% and 1.12% in the same periods of 1997. Return on average common equity (ROE) was 10.66% and 10.37% in the second quarter and first half of 1998, respectively, compared with 6.88% and 8.46% in the same periods of 1997. Earnings before the amortization of goodwill and nonqualifying core deposit intangible ("cash" or "tangible" earnings) in the second quarter and first half of 1998 were $5.21 and $10.13 per share, respectively, compared with $3.79 and $8.69 per share in the same periods of 1997. On the same basis, ROA was 2.11% and 2.04% in the second quarter and first half of 1998, respectively, compared with 1.51% and 1.71% in the same periods of 1997; ROE was 37.78% and 37.62% in the second quarter and first half of 1998, respectively, compared with 29.27% and 33.06% in the same periods of 1997. Net interest income on a taxable-equivalent basis was $1,154 million and $2,285 million in the second quarter and first half of 1998, respectively, compared with $1,150 million and $2,366 million in the same periods of 1997. The Company's net interest margin was 6.22% for the second quarter of 1998, compared with 5.93% in the same quarter of 1997 and 6.01% in the first quarter of 1998. The increase in net interest margin for the second quarter of 1998 compared with the same period of 1997 was primarily due to interest received on previously charged off loans (including loans where interest had previously been applied to principal) and the improvement in the funding mix based on reductions in the levels of cash and float. Noninterest income was $735 million and $1,460 million in the second quarter and first half of 1998, respectively, compared with $679 million and $1,319 million in the same periods of 1997. The increase in noninterest income for the second quarter of 1998 compared with the same period of 1997 was primarily due to a $58 million gain on the sale of the mortgage servicing business and higher fee income, largely offset by increased losses on dispositions of premises and equipment and a $33 million write-down of auto lease residuals. Noninterest expense in the second quarter and first half of 1998 was $1,097 million and $2,189 million, respectively, compared with $1,246 million and $2,363 million for the same periods of 1997. The decrease in noninterest expense for the second quarter of 1998 compared with the same period of 1997 was mostly due to a decrease in operating losses. 8 The provision for loan losses in the second quarter and first half of 1998 was $170 million and $350 million, respectively, compared with $140 million and $245 million for the same periods in 1997. During the second quarter of 1998, net charge-offs totaled $165 million, or 1.02% of average loans (annualized). This compared with $178 million, or 1.11%, during the first quarter of 1998 and $212 million, or 1.32%, during the second quarter of 1997. The allowance for loan losses of $1,835 million was 2.85% of total loans at June 30, 1998, compared with 2.84% at March 31, 1998 and 2.82% at June 30, 1997. Total nonaccrual and restructured loans were $517 million, or .8% of total loans, at June 30, 1998, compared with $537 million, or .8% of total loans, at December 31, 1997 and $612 million, or .9% of total loans, at June 30, 1997. Foreclosed assets amounted to $127 million at June 30, 1998, $158 million at December 31, 1997 and $194 million at June 30, 1997. Common stockholders' equity to total assets was 13.60% at June 30, 1998, compared with 13.21% and 12.81% at March 31, 1998 and June 30, 1997, respectively. The Company's total risk-based capital ratio at June 30, 1998 was 11.94% and its Tier 1 risk-based capital ratio was 8.08%, 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, 1998, the risk-based capital ratios were 11.58% and 7.76%, respectively; at June 30, 1997, these ratios were 11.45% and 7.49%, respectively. The Company's leverage ratios were 7.53%, 7.04% and 6.67% at June 30, 1998, March 31, 1998 and June 30, 1997, 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 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 a repurchase program begun in 1994. In October 1997, the Board of Directors authorized the repurchase from time to time of up to an additional 8.6 million shares of the Company's outstanding stock under the same program. Under these programs, the Company has repurchased 7.7 million shares (net of shares issued) in 1996, 5.3 million shares (net of shares issued) in 1997 and 1.1 million shares (net of shares issued) in the first half of 1998, including .2 million shares (net of shares issued) in the second quarter of 1998. In connection with its proposed merger with Norwest Corporation, the Company rescinded all of its share repurchase programs effective June 7, 1998. In addition, the Company intends to issue approximately 2.5 million shares to cure a portion of previously repurchased "tainted" shares and, thus, allow the merger to be accounted for as a pooling of interests. 9 PROPOSED MERGER WITH NORWEST CORPORATION On June 8, 1998, the Company announced that it had entered into a definitive agreement with Norwest Corporation (Norwest) to merge the two companies. The name of the combined company will be Wells Fargo & Company and its corporate headquarters will be in San Francisco. Minneapolis will be the headquarters for the combined Midwest banking business. The merger is intended to be accounted for as a pooling of interests. The consummation of the merger is subject to various conditions, including required approvals of the Company's and Norwest's shareholders and receipt of all requisite regulatory approvals. There is no assurance as to when or whether the required approvals would be obtained, and if obtained, as to what conditions or restrictions would be imposed. Subject to these conditions, the merger is currently expected to close in the fourth quarter of 1998. The combined Board of Directors will consist of an equal number of representatives from each of the companies. Under the terms of the merger agreement, the Company's shareholders will receive a tax-free exchange of ten shares of Norwest common stock for each share of the Company's common stock. At June 30, 1998, Norwest had assets of $93 billion and was the twelfth largest bank holding company in the nation. Norwest had 3,935 financial services stores in all 50 states, Canada, the Caribbean, Latin America and elsewhere internationally. At June 30, 1998, the Company had 1,875 physical distribution offices in ten western states. The Company and Norwest anticipate that, in order to comply with Department of Justice merger guidelines, the companies will be requested to sell a modest level of deposits. In this connection, the companies expect to propose divestitures in various markets in Arizona and Nevada. The impact of such divestitures is not expected to be material. The combined companies expect to achieve approximately $650 million ($430 million after tax) in annual cost savings within three years of the merger date. The savings are expected to result from the conversion to one systems platform, the elimination of duplicate systems development and maintenance, the consolidation of operations and branches and the elimination of duplicate overhead functions. The combined companies expect to incur approximately $950 million ($625 million after tax) in transition-related expenses. The estimated transition-related expenses consist primarily of employee-related expense and costs associated with systems integration and operations. The following discussions included in Line of Business Results, Earnings Performance, and Balance Sheet Analysis sections of this report do not reflect the expected impact of the Company's merger with Norwest. 10 LINE OF BUSINESS RESULTS The line of business results show the financial performance of the Company's major business units. The table on pages 12 and 13 presents the line of business results for the second quarter and six months ended June 30, 1998 and 1997. 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. 11 The following table presents the line of business results (estimated) for the Company's six major business units.
- ----------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Banking Investment Group Group Group -------------------------------------------------------------------------------- 1998 1997 1998 1997 1998 1997 QUARTER ENDED JUNE 30, Net interest income (1) $ 233 $ 249 $ 195 $ 193 $ 178 $ 202 Provision for loan losses (2) -- -- 40 33 1 1 Noninterest income (3) 295 292 72 66 149 139 Noninterest expense (3) 435 467 101 104 168 164 ---- ---- ---- ---- ---- ---- Income before income tax expense (benefit) 93 74 126 122 158 176 Income tax expense (benefit) (4) 38 31 51 49 64 72 ---- ---- ---- ---- ---- ---- Net income (loss) $ 55 $ 43 $ 75 $ 73 $ 94 $ 104 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average loans $ -- $ -- $ 6.4 $ 5.5 $ 2.3 $ 2.1 Average assets 2.5 2.9 8.1 7.2 2.8 2.9 Average core deposits 18.5 18.5 10.7 11.5 32.0 34.3 Return on equity (5) 22% 17% 38% 39% 51% 59% Risk-adjusted efficiency ratio (6) 92% 95% 61% 62% 62% 58% SIX MONTHS ENDED JUNE 30, Net interest income (1) $ 463 $ 499 $ 386 $ 377 $ 362 $ 403 Provision for loan losses (2) -- -- 77 64 3 3 Noninterest income (3) 559 577 144 133 289 273 Noninterest expense (3) 887 944 199 205 337 326 ---- ---- ---- ---- ---- ---- Income before income tax expense (benefit) 135 132 254 241 311 347 Income tax expense (benefit) (4) 55 54 103 98 126 143 ---- ---- ---- ---- ---- ---- Net income (loss) $ 80 $ 78 $ 151 $ 143 $ 185 $ 204 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Average loans $ -- $ -- $ 6.3 $ 5.4 $ 2.2 $ 2.1 Average assets 2.5 3.1 7.9 7.3 2.7 3.0 Average core deposits 18.3 19.1 10.7 11.7 32.3 34.8 Return on equity (5) 16% 15% 38% 39% 51% 58% Risk-adjusted efficiency ratio (6) 96% 97% 60% 61% 63% 58% - -----------------------------------------------------------------------------------------------------------------------------
(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 retail distribution channels and noninterest expense to the product groups. They amounted to $85 million and $90 million for the quarters ended June 30, 12
- ---------------------------------------------------------------------------------------------------- Wholesale Real Estate Products Consumer Consolidated Group Group Lending Other Company - ---------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 $ 119 $ 87 $ 174 $ 182 $ 268 $ 277 $ (16) $ (43) $1,151 $1,147 12 11 20 19 98 108 (1) (32) 170 140 56 30 93 85 146 112 (76) (45) 735 679 25 32 115 120 121 128 132 231 1,097 1,246 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- 138 74 132 128 195 153 (223) (287) 619 440 56 31 54 52 79 63 (60) (86) 282 212 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- $ 82 $ 43 $ 78 $ 76 $ 116 $ 90 $(163) $(201) $ 337 $ 228 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- $10.4 $ 9.4 $17.7 $16.7 $22.2 $23.6 $ 5.4 $ 7.3 $ 64.4 $ 64.6 11.8 10.2 21.2 20.2 22.9 24.5 23.8 31.8 93.1 99.7 .5 .4 7.6 8.4 .5 .4 -- -- 69.8 73.5 28% 17% 18% 18% 34% 24% --% --% 11% 7% 49% 74% 79% 81% 59% 70% --% --% --% --% $ 217 $ 199 $ 346 $ 384 $ 541 $ 550 $ (36) $ (53) $2,279 $2,359 24 21 39 38 199 218 8 (99) 350 245 126 48 189 171 270 210 (117) (93) 1,460 1,319 57 51 235 231 238 248 236 358 2,189 2,363 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- 262 175 261 286 374 294 (397) (405) 1,200 1,070 107 72 106 117 151 121 (100) (103) 548 502 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- $ 155 $ 103 $ 155 $ 169 $ 223 $ 173 $(297) $(302) $ 652 $ 568 --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- --------- ------- ------- ------- ------- ------- -------- ------- ------- ------- $10.5 $ 9.4 $17.5 $16.9 $22.5 $23.8 $ 5.7 $ 7.5 $ 64.7 $ 65.1 11.9 10.2 21.0 21.2 23.3 24.9 24.9 32.9 94.2 102.6 .4 .4 7.6 9.0 .5 .4 -- .2 69.8 75.6 27% 21% 18% 19% 32% 23% --% --% 10% 8% 53% 63% 80% 77% 60% 72% --% --% --% --% - ----------------------------------------------------------------------------------------------------
1998 and 1997, respectively, and $168 million and $180 million for the six months ended June 30, 1998 and 1997, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. (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. 13 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, business centers and ATMs. Retail Distribution also includes the consumer checking business, which primarily uses the network as a source of new customers. As of June 30, 1998, the Company had 855 traditional branches, 570 in-store branches, 373 banking centers and 34 business centers. Motor banking facilities ("motorbanks") were available at 43 of the traditional branches. There were 4,632 ATMs as of June 30, 1998. Retail Distribution Group's net income for the quarter and six months ended June 30, 1998 increased $12 million, or 28%, and $2 million, or 3%, respectively. Net interest income for both periods declined largely due to lower spreads on core deposits, partially offset by lower nonearning asset (predominantly cash) balances. The increase in noninterest income for the second quarter reflected higher consumer checking fees and service charges and lower losses on the disposition of premises due to branch closures, partially offset by lower sales and service charges to the product groups. Noninterest income for the first six months of 1998 was lower primarily due to higher losses on the disposition of premises due to branch closures. Noninterest expense in both time periods improved due to branch closures and merger-related cost savings. 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, medical savings accounts 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 quarter and six months ended June 30, 1998 increased $2 million, or 3%, and $8 million, or 6%, respectively. The increase in net interest income in both periods was due to higher volume and spreads on commercial loans, partially offset by lower core deposit balances and spreads. Noninterest income in both periods increased due to higher fees on loans. Noninterest expense improved for the first six months due to lower costs in the direct market lending area. 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 family 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 14 financial services organization focusing on banking/credit, trust services, investment management and full-service and discount brokerage. The Group also includes Wells Capital Management, a registered investment adviser and wholly owned subsidiary of the Bank. Wells Capital Management provides investment management services to institutional clients as well as the Bank's proprietary trust funds. In 1997, 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 accounts occurred in several stages, the first of which was in the third quarter of 1997, and was completed in the second quarter of 1998. Also in 1997, the Bank entered into an alliance with Morgan Stanley Dean Witter & Co., whereby Dean Witter provides technology, investment products, services and sales and marketing support to Wells Fargo Securities and its full-service brokerage clients. All of these services are now available to Wells Fargo customers under private label. In addition, the Bank entered into an alliance in December 1997 with BHC Securities as its clearing broker which allows Wells Fargo Securities' on-line brokerage (Wells Trade) to offer a broad range of investment products to customers through the Internet and telephone channels. Assets under management at June 30, 1998 were $67.6 billion, compared with $59.2 billion at June 30, 1997. The Investment Group's net income for the quarter and six months ended June 30, 1998 declined by $10 million, or 10%, and $19 million, or 9%, respectively. Net interest income decreased in both periods due to lower core deposit balances and spreads, which were partially offset in the first six months by interest recoveries on loans previously charged off. The increase in noninterest income for both periods was largely due to higher fee income in the mutual funds, trust and brokerage areas and gains on the sale of the Institutional Custody businesses. This was primarily offset by the loss of ongoing fee income related to the businesses sold during 1997. The increase in noninterest expense in both periods reflects higher sales force growth and sales in the brokerage business which was partially offset by cost savings realized after the sale of the Corporate Trust and Institutional Custody businesses. 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. 15 The Real Estate Group's net income for the second quarter of 1998 increased $39 million, or 91%. Net income for the six months ended June 30, 1998 increased $52 million, or 50%. Net interest income for both periods increased primarily due to higher interest recoveries on loans where interest had previously been applied to principal and higher average loan and investment security balances. This was partially offset by narrower spreads on loans. Noninterest income was higher in both periods primarily due to gains from the securitization of loans as well as higher Acquisition, Development and Construction (ADC) investment income, gains from investment securities and income from equity investments. Noninterest expense for the second quarter decreased due to higher foreclosed asset gains in 1998. Noninterest expense for the first six months increased due to lower foreclosed asset gains and higher incentive compensation expense partially offset by lower operating losses. 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, which provides trade and Eximbank (a public corporation offering export finance support programs for American-made products) financing, letters of credit and collection services. Wholesale Products Group's net income in the second quarter of 1998 increased $2 million, or 3%. Net income for the six months ended June 30, 1998 decreased $14 million, or 8%. Net interest income for both periods declined due to lower core deposit balances and spreads. A significant portion of the increase in noninterest income for both periods was due to higher income from service charges on deposit accounts, foreign exchange and trust and investment services. Noninterest expense for the second quarter decreased primarily due to lower operating losses in 1998. A significant portion of the increase in noninterest expense for the six months ended June 30, 1998 was due to expense recoveries in 1997 which were partially offset by lower operating losses in 1998. Consumer Lending offers a full array of consumer loan products, including credit cards, transportation (auto, recreational vehicle, marine) financing, home equity lines and loans, lines of credit and installment loans. The loan portfolio for the second quarter averaged $22.2 billion, consisting of $4.6 billion in credit cards, $10.5 billion in equity/unsecured loans and $7.1 billion in transportation financing. This compares with $5.2 billion in credit cards, $11.4 billion in equity/unsecured loans and $7.0 billion in transportation financing in the second quarter of 1997. In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage Corporation. (See page 22 for additional information.) Consumer Lending's net income for the quarter and six months ended June 30, 1998 increased $26 million, or 29%, and $50 million, or 29%, respectively. Net interest income for both 16 periods decreased due to lower credit card and equity/unsecured loan balances and higher interest losses related to an increase in loans charged off in the consumer portfolio which were partially offset by higher spreads on credit cards and higher auto lease volume. The increase in noninterest income for both periods was predominantly due to the gain on the sale of the mortgage servicing business and higher fee income on credit cards which was partially offset by a write-down of auto lease residuals. 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 interest rate sensitivity. The net loss for the Other category for the quarter and six months ended June 30, 1998 decreased by $38 million from 1997, or 19%, and $5 million, or 2%, respectively. Net interest income for both periods reflects lower funding costs, partially offset by the impact of lower investment securities and lower first mortgage balances. Noninterest expense for both periods improved due to lower operating losses related to resolving various merger-related operations and back office issues and other merger-related cost savings in the systems and other support groups. In 1997, the Financial Accounting Standards Board (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. While that is the basis of the above line of business presentation, this Statement requires it to be part of the annual audited financial statements effective year-end 1998. EARNINGS PERFORMANCE NET INTEREST INCOME Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 18 and 19. 17 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- --------------------------------------------------------------------------------------------------------------------------------- Quarter ended June 30, ------------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------- 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 $ 689 5.63% $ 10 $ 451 5.67% $ 6 Securities available for sale (3): U.S. Treasury securities 2,086 6.12 32 2,688 6.06 41 Securities of U.S. government agencies and corporations 3,331 6.56 54 5,926 6.44 96 Private collateralized mortgage obligations 2,246 6.66 37 2,939 6.64 49 Other securities 494 7.07 8 322 6.50 4 -------- ------ -------- ------ Total securities available for sale 8,157 6.51 131 11,875 6.40 190 Loans: Commercial 20,657 8.96 462 18,432 9.10 418 Real estate 1-4 family first mortgage 8,123 7.45 151 9,927 7.53 187 Other real estate mortgage 11,788 9.98 293 11,573 9.23 266 Real estate construction 2,456 9.56 59 2,262 10.03 57 Consumer: Real estate 1-4 family junior lien mortgage 5,478 9.35 128 6,035 9.37 141 Credit card 4,555 15.28 174 5,164 14.44 186 Other revolving credit and monthly payment 6,844 9.02 154 7,835 9.35 183 -------- ------ -------- ------ Total consumer 16,877 10.82 456 19,034 10.74 510 Lease financing 4,368 8.63 94 3,264 8.65 71 Foreign 128 7.48 2 126 6.43 2 -------- ------ -------- ------ Total loans 64,397 9.44 1,517 64,618 9.37 1,511 Other 1,225 7.19 21 721 6.84 13 -------- ------ -------- ------ Total earning assets $ 74,468 9.05 1,679 $ 77,665 8.87 1,720 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,770 1.37 6 $ 1,895 1.33 6 Market rate and other savings 30,393 2.67 202 32,519 2.60 211 Savings certificates 14,966 5.10 190 15,669 5.09 199 Other time deposits 215 4.69 3 165 4.51 2 Deposits in foreign offices 136 4.95 2 833 5.45 11 -------- ------ -------- ------ Total interest-bearing deposits 47,480 3.40 403 51,081 3.37 429 Federal funds purchased and securities sold under repurchase agreements 1,536 5.35 20 2,492 5.42 34 Commercial paper and other short-term borrowings 248 6.27 4 216 7.11 4 Senior debt 1,733 6.27 27 1,751 6.36 28 Subordinated debt 2,686 6.80 46 2,884 6.94 50 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 7.81 25 1,299 7.81 25 -------- ------ -------- ------ Total interest-bearing liabilities 54,982 3.83 525 59,723 3.83 570 Portion of noninterest-bearing funding sources 19,486 -- -- 17,942 -- -- -------- ------ -------- ------ Total funding sources $ 74,468 2.83 525 $ 77,665 2.94 570 -------- ------ -------- ------ -------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 6.22% $1,154 5.93% $1,150 ----- ------ ----- ------ ----- ------ ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 6,453 $ 7,654 Goodwill 6,902 7,271 Other 5,325 7,149 -------- -------- Total noninterest-earning assets $ 18,680 $ 22,074 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 22,678 $ 23,441 Other liabilities 2,686 3,273 Preferred stockholders' equity 275 371 Common stockholders' equity 12,527 12,931 Noninterest-bearing funding sources used to fund earning assets (19,486) (17,942) -------- -------- Net noninterest-bearing funding sources $ 18,680 $ 22,074 -------- -------- -------- -------- TOTAL ASSETS $ 93,148 $ 99,739 -------- -------- -------- -------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50% for the quarters ended June 30, 1998 and 1997 and 8.50% and 8.38% for the six months ended June 30, 1998 and 1997, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.69% and 5.81% for the quarters ended June 30, 1998 and 1997, respectively, and 5.68% and 5.69% for the six months ended June 30, 1998 and 1997, 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 securities available for sale totaled $8,065 million and $11,897 million for the quarters ended June 30, 1998 and 1997, respectively, and $8,541 million and $12,503 million for the six months ended June 30, 1998 and 1997, 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. 18
- ---------------------------------------------------------------- Six months ended June 30, - ---------------------------------------------------------------- 1998 1997 - ------------------------------ ----------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------- $ 559 5.65% $ 16 $ 413 5.56% $ 11 2,275 6.10 68 2,801 6.05 84 3,659 6.59 119 6,313 6.42 203 2,213 6.68 74 3,036 6.61 101 491 7.21 17 345 6.42 10 - -------- ------ -------- ------ 8,638 6.52 278 12,495 6.38 398 20,340 9.04 913 18,419 9.04 827 8,394 7.47 313 10,080 7.47 376 11,961 9.58 569 11,562 10.06 576 2,398 9.61 114 2,280 9.89 112 5,598 9.44 262 6,102 9.34 283 4,694 15.13 355 5,247 14.25 374 6,961 9.08 314 8,052 9.30 372 - -------- ------ -------- ------ 17,253 10.84 931 19,401 10.65 1,029 4,267 8.67 185 3,172 8.74 139 117 7.86 5 139 6.93 5 - -------- ------ -------- ------ 64,730 9.41 3,030 65,053 9.47 3,064 1,187 7.32 43 713 6.55 24 - -------- ------ -------- ------ $ 75,114 9.02 3,367 $ 78,674 8.93 3,497 - -------- ------ -------- ------ - -------- -------- $ 1,748 1.42 12 $ 1,904 1.24 12 30,434 2.68 404 33,307 2.57 425 15,074 5.13 383 15,594 5.07 392 247 4.81 6 171 4.21 4 257 5.15 7 697 5.32 18 - -------- ------ -------- ------ 47,760 3.43 812 51,673 3.32 851 2,256 5.41 61 2,459 5.30 65 354 6.07 10 223 6.06 6 1,822 6.29 57 1,876 6.27 58 2,632 6.95 91 2,911 6.93 101 1,299 7.80 51 1,275 7.83 50 - -------- ------ -------- ------ 56,123 3.88 1,082 60,417 3.77 1,131 18,991 -- -- 18,257 -- -- - -------- ------ -------- ------ $ 75,114 2.91 1,082 $ 78,674 2.90 1,131 - -------- ------ -------- ------ - -------- -------- 6.12% $2,285 6.03% $2,366 ----- ------- ----- ------- ----- ------- ----- ------- $ 6,629 $ 8,799 6,946 7,288 5,508 7,808 - -------- -------- $ 19,083 $ 23,895 - -------- -------- - -------- -------- $ 22,577 $ 24,757 2,705 3,819 275 459 12,517 13,117 (18,991) (18,257) - -------- -------- $ 19,083 $ 23,895 - -------- -------- - -------- -------- $ 94,197 $102,569 - -------- -------- - -------- -------- - ----------------------------------------------------------------
19 Net interest income on a taxable-equivalent basis was $1,154 million in the second quarter of 1998, compared with $1,150 million in the second quarter of 1997. The Company's net interest margin was 6.22% in the second quarter of 1998, compared with 5.93% in the second quarter of 1997 and 6.01% in the first quarter of 1998. Net interest income on a taxable-equivalent basis was $2,285 million in the first six months of 1998, compared with $2,366 million in the first six months of 1997. The Company's net interest margin was 6.12% in the first six months of 1998, compared with 6.03% in the first six months of 1997. The Company expects the net interest margin to remain in the area of 6.15% for the third quarter of 1998. Interest income included hedging income of $20 million in the second quarter of 1998, compared with $21 million in the second quarter of 1997. Interest expense included hedging expense of $2 million in the second quarter of 1998, compared with $3 million in the same quarter of 1997. Loans averaged $64.4 billion in the second quarter of 1998, compared with $64.6 billion in the second quarter of 1997 and $64.7 billion in the first six months of 1998, compared with $65.1 billion in the first six months of 1997. The Company anticipates loan growth in the commercial portfolio in the third quarter of 1998. This growth is expected to be offset by declines due to decreased credit card marketing efforts and continuing run-off in the residential mortgage and direct auto loan portfolios, where the Company has withdrawn from the business of being an active originator. Securities available for sale averaged $8.2 billion during the second quarter of 1998, compared with $11.9 billion in the second quarter of 1997, and $8.6 billion in the first six months of 1998, compared with $12.5 billion in the first six months of 1997. The decrease was predominantly due to maturities. Average core deposits were $69.8 billion and $73.5 billion in the second quarter of 1998 and 1997, respectively, and funded 75% and 74% of the Company's average total assets in the second quarter of 1998 and 1997, respectively. For the first six months of 1998 and 1997, average core deposits were $69.8 billion and $75.6 billion, respectively, and funded 74% of the Company's average total assets in both periods. The decrease in average core deposits from the second quarter of 1997 was largely due to net run-off. In addition, a significant portion of the decrease was due to sales of branches in 1997, including $1.6 billion of core deposits. 20 NONINTEREST INCOME
- ----------------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------- % ------------------- % (in millions) 1998 1997 Change 1998 1997 Change - ----------------------------------------------------------------------------------------------------------------------------- Fees and commissions: Credit card membership and other credit card fees $ 62 $ 55 13 % $ 129 $ 100 29 % ATM network fees 50 43 16 94 82 15 Charges and fees on loans 43 33 30 83 64 30 Debit and credit card merchant fees 25 24 4 47 46 2 Mutual fund and annuity sales fees 23 16 44 43 32 34 All other (1) 69 63 10 131 124 6 ---- ---- ------ ------ Total fees and commissions 272 234 16 527 448 18 Service charges on deposit accounts 222 214 4 430 434 (1) Trust and investment services income: Asset management and custody fees 63 61 3 125 122 2 Mutual fund management fees 46 45 2 91 84 8 All other 5 6 (17) 12 15 (20) ---- ---- ------ ------ Total trust and investment services income 114 112 2 228 221 3 Investment securities gains 18 3 500 23 7 229 Income from equity investments accounted for by the: Cost method 34 40 (15) 83 91 (9) Equity method 16 15 7 31 30 3 Check printing charges 21 18 17 38 36 6 Gains on sales of loans 17 7 143 53 13 308 Gains from dispositions of operations 74 1 -- 71 8 788 Losses on dispositions of premises and equipment (42) (6) 600 (51) (36) 42 All other (11) 41 -- 27 67 (60) ---- ---- ------ ------ Total $735 $679 8 % $1,460 $1,319 11 % ---- ---- ---- ------ ------ ---- ---- ---- ---- ------ ------ ---- - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $16 million and $25 million for purchased mortgage servicing rights for the quarters ended June 30, 1998 and 1997, respectively, and $39 million and $49 million for the six months ended June 30, 1998 and 1997, respectively. Also includes the related amortization expense of $12 million and $18 million for the quarters ended June 30, 1998 and 1997, respectively, and $30 million and $35 million for the six months ended June 30, 1998 and 1997, respectively. Fees and commissions increased $38 million, or 16%, from the second quarter of 1997 reflecting increased fees in all major business units. The increase in trust and investment services income for the first half of 1998 reflected the growth in assets under management from $59.2 billion at June 30, 1997 to $67.6 billion at June 30, 1998. The majority of this increase was offset by a reduction in income due to the sale of the Corporate Trust and the Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. Trust and investment services income for the second quarter and first half of 1998 generated by the Corporate Trust and Institutional Custody businesses was approximately $.2 million and $.6 million, respectively, and $6.6 million and $16.4 million for the second quarter and first half of 1997, respectively. In the fourth quarter of 1997, the Overland Express Funds totaling $5.6 billion were merged into the Stagecoach family of mutual funds. The assets and fees generated are not expected to change significantly as a result of the merging of the two families of funds. The Company managed 38 mutual funds consisting of $24.7 billion of assets at June 30, 1998, compared with 42 mutual funds 21 consisting of $20.3 billion of assets (including 14 Overland Express Funds consisting of $5.3 billion of assets) at June 30, 1997. In addition to managing Stagecoach Funds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $126 billion and $208 billion at June 30, 1998 and 1997, respectively. The decrease in assets managed and maintained was due to the sale of the Institutional Custody businesses. The increase in gains on sales of loans was primarily due to gains from the securitization of commercial mortgage loans. In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage Corporation. Of the resulting pre-tax gain, $58 million was included in gains from dispositions of operations in the second quarter, while the remainder of approximately $5 million will be recorded in the third quarter when certain conditions are met. Pre-tax income from the mortgage servicing business was $3 million and $7 million in the second quarter and first half of 1998, respectively, compared with $4 million and $6 million in the same periods of 1997. At December 31, 1997, the Company had a liability of $48 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with 65 branches not acquired as a result of the acquisition of First Interstate Bancorp (First Interstate) or with First Interstate branches that were identified in the fourth quarter of 1997 for closure in 1998. Of this amount, $21 million represented the balance of the fourth-quarter 1996 accrual related to 32 traditional branches in California and $27 million represented the fourth-quarter 1997 accrual for the disposition of 33 traditional branches located mostly outside of California. Of the total 65 branches, 28 branches were closed in the first half of 1998, including 25 in the second quarter of 1998. In the second quarter of 1998, the Company evaluated the remaining 37 scheduled branch closures and decided to retain 25 branches, which resulted in reducing the liability by $14 million. The decision was made based on numerous factors, including the need to maintain customer service levels, particularly given the earlier unstable operating environment associated with integrating First Interstate, as well as the review of profitability analyses demonstrating increased customer usage and improved profitability for these 25 branches. These developments were not anticipated or foreseen at the time these accruals were originally recorded. The remaining balance of $19 million at June 30, 1998 is for the expected closure of 12 branches by year-end 1998. (See Note to Financial Statements for other, former First Interstate branch dispositions.) A major portion of the increase in losses on dispositions of premises and equipment was due to accrued losses on the expected sales of a warehouse and an office building, which closed or are scheduled to close in the third quarter. "All other" noninterest income in the second quarter of 1998 included a $33 million write-down of auto lease residuals for those leases expected to go to the end of their term over the next eighteen months. 22 At June 30, 1998, the Company had 855 traditional branches, 570 in-store branches, 373 banking centers and 34 business centers. Motor banking facilities ("motorbanks") were available at 43 of the traditional branches. NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------------------ Quarter Six months ended June 30, ended June 30, --------------------- % --------------------- % (in millions) 1998 1997 Change 1998 1997 Change - ------------------------------------------------------------------------------------------------------------------------------ Salaries $ 303 $ 316 (4)% $ 608 $ 656 (7)% Incentive compensation 61 49 24 114 89 28 Employee benefits 80 81 (1) 171 176 (3) Equipment 100 98 2 197 192 3 Net occupancy 98 95 3 199 196 2 Goodwill 81 81 -- 162 164 (1) Core deposit intangible: Nonqualifying (1) 51 59 (14) 103 113 (9) Qualifying 6 8 (25) 14 16 (13) Operating losses 25 180 (86) 56 222 (75) Contract services 68 59 15 133 115 16 Telecommunications 33 36 (8) 64 73 (12) Security 19 22 (14) 40 44 (9) Postage 18 22 (18) 37 45 (18) Outside professional services 29 21 38 48 36 33 Advertising and promotion 33 21 57 54 34 59 Stationery and supplies 12 16 (25) 26 36 (28) Travel and entertainment 17 15 13 33 29 14 Check printing 12 14 (14) 24 30 (20) Outside data processing 17 13 31 30 26 15 Foreclosed assets (5) 5 -- (1) (4) (75) All other 39 35 11 77 75 3 ------ ------ ------ ------ Total $1,097 $1,246 (12)% $2,189 $2,363 (7)% ------ ------ --- ------ ------ -- ------ ------ --- ------ ------ -- - ------------------------------------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. Salaries expense decreased $13 million and $48 million in the second quarter and first half of 1998, respectively, due to reduced staff levels. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 31,620 at June 30, 1998, compared with 33,216 at June 30, 1997. Goodwill and CDI amortization resulting from the acquisition of First Interstate on April 1, 1996 were $72 million and $51 million, respectively, for the quarter ended June 30, 1998, compared with $73 million and $59 million, respectively, for the quarter ended June 30, 1997. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be $199 million, $178 million and $162 million, respectively. The related impact on income tax expense is expected to be a benefit of $81 million, $72 million and $66 million in 1998, 1999 and 2000, respectively. 23 The Company has determined that a significant number of its computer software applications will need to be reprogrammed or, to a far lesser extent, replaced in order to maintain their functionality as the year 2000 approaches. A comprehensive plan has been developed, with system conversions and testing to be substantially completed by December 31, 1998. Additionally, the Company continues to communicate with significant customers and vendors to determine the extent of risk created by those third parties' failure to remediate their own Year 2000 issue. However, it is not possible, at present, to determine the financial effect if significant customer and vendor remediation efforts are not resolved in a timely manner. Cumulative charges to date to noninterest expense for incremental costs associated with the Year 2000 issue were approximately $53 million, including $23 million in the second quarter of 1998, $20 million in the first quarter of 1998 and $10 million in 1997. The Company currently estimates that it will incur (and expense) additional incremental, out-of-pocket costs in the area of $70 million. Other costs associated with the redeployment of internal systems technology resources to the Year 2000 issue are expected to be significantly less than the incremental costs. In February 1998, the FASB issued FAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which will be effective for the year-end 1998 financial statements. FAS 132 only addresses disclosure issues; it does not address measurement and recognition of pensions and other postretirement benefits. FAS 132 requires the reconciliation of changes in benefit obligation and plan assets for both pensions and other postretirement benefits, showing the effects of the major components separately for each reconciliation. FAS 132 will be adopted at year-end 1998 and is not expected to materially change the Company's current pension and other postretirement disclosures. 24 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, 1998:
- ----------------------------------------------------------------------------------------------- Quarter ended (in millions) June 30, 1998 - ----------------------------------------------------------------------------------------------- Amortization ----------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ----------------------------------------------------------------------------------------------- Income before income tax expense $ 619 $ 81 $ 51 $ 751 Income tax expense 282 -- 21 303 ----- ---- ---- ----- Net income 337 81 30 448 Preferred stock dividends 4 -- -- 4 ----- ---- ---- ----- Net income applicable to common stock $ 333 $ 81 $ 30 $ 444 ----- ---- ---- ----- ----- ---- ---- ----- Earnings per common share $3.91 $.95 $.35 $5.21 ----- ---- ---- ----- ----- ---- ---- ----- Diluted earnings per common share $3.87 $.94 $.34 $5.15 ----- ---- ---- ----- ----- ---- ---- ----- - -----------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended June 30, 1998 were calculated as follows:
- ------------------------------------------------------------------------------------------------ Quarter ended (in millions) June 30, 1998 - ------------------------------------------------------------------------------------------------ ROA: A*/ (C-E) = 2.11% ROE: B*/ (D-E) = 37.78% Efficiency: (F-G) / H = 51.20% Net income $ 448(A) Net income applicable to common stock 444(B) Average total assets 93,148(C) Average common stockholders' equity 12,527(D) Average goodwill ($6,902) and after-tax nonqualifying core deposit intangible ($913) 7,815(E) Noninterest expense 1,097(F) Amortization expense for goodwill and nonqualifying core deposit intangible 132(G) Net interest income plus noninterest income 1,886(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. 25 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES The following table provides the cost and fair value for the major components of securities available for sale (there were no securities held to maturity at the end of the periods presented):
- ----------------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 1998 1997 1997 --------------------- --------------------- ---------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ----------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $1,934 $1,948 $2,535 $2,549 $ 2,613 $ 2,618 Securities of U.S. government agencies and corporations (1) 3,105 3,139 4,390 4,425 5,696 5,711 Private collateralized mortgage obligations (2) 2,830 2,836 2,390 2,396 2,897 2,884 Other 412 429 441 453 261 262 ------ ------ ------ ------ ------- ------- Total debt securities 8,281 8,352 9,756 9,823 11,467 11,475 Marketable equity securities 57 97 40 65 26 55 ------ ------ ------ ------ ------- ------- Total $8,338 $8,449 $9,796 $9,888 $11,493 $11,530 ------ ------ ------ ------ ------- ------- ------ ------ ------ ------ ------- ------- - -----------------------------------------------------------------------------------------------------------------------------
(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 securities available for sale portfolio includes both debt and marketable equity securities. At June 30, 1998, the securities available for sale portfolio had an unrealized net gain of $111 million, or less than 2% of the cost of the portfolio, comprised of unrealized gross gains of $121 million and unrealized gross losses of $10 million. At December 31, 1997, the securities available for sale portfolio had an unrealized net gain of $92 million, comprised of unrealized gross gains of $112 million and unrealized gross losses of $20 million. At June 30, 1997, the securities available for sale portfolio had an unrealized net gain of $37 million, comprised of unrealized gross gains of $84 million and unrealized gross losses of $47 million. The unrealized net gain or loss on securities available for sale is included as a separate component of cumulative other comprehensive income in stockholders' equity. At June 30, 1998, the amount included in cumulative other comprehensive income on a net of tax basis was an unrealized net gain of $66 million, compared with $55 million at December 31, 1997 and $22 million at June 30, 1997. The major portion of the unrealized net gain in the securities available for sale portfolio at June 30, 1998 was due to investments in mortgage-backed securities. This unrealized net gain reflected current interest rates that were lower than those at the time the investments were purchased. The Company may decide to sell certain of the securities available for sale to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities). 26 Realized gross gains resulting from the sale of securities available for sale were $23 million and $8 million in the first half of 1998 and 1997, respectively. Realized gross losses were none and $1 million in the first half of 1998 and 1997, respectively. The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ---------------------------------------------------------------------------------------------------------------------------------- June 30, 1998 ------------------------------------------------------------------------------------------------------- Expected remaining principal maturity ------------------------------------------------------------------------------------------------------- Weighted average expected After one year After five years Weighted remaining Within one year through five years through ten years After ten years Total average maturity --------------- ------------------ ----------------- --------------- (in millions) amount yield (in yrs.-mos.) Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $1,934 6.10% 1-1 $1,152 6.07% $ 781 6.15% $ 1 6.70% $ -- --% Securities of U.S. government agencies and corporations 3,105 6.71 2-2 1,409 7.03 1,368 6.44 270 6.78 58 5.23 Private collateralized mortgage obligations 2,830 6.58 1-9 1,353 6.87 1,287 6.26 167 6.08 23 10.50 Other 412 7.81 4-9 47 6.48 209 7.54 114 8.49 42 8.79 ------ ------ ------ ---- ---- TOTAL COST OF DEBT SECURITIES(1) $8,281 6.58% 1-11 $3,961 6.69% $3,645 6.38% $552 6.92% $123 7.43% ------ ---- ---- ------ ---- ------ ---- ---- ---- ---- ---- ------ ---- ---- ------ ---- ------ ---- ---- ---- ---- ---- ESTIMATED FAIR VALUE $8,352 $3,982 $3,684 $557 $129 ------ ------ ------ ---- ---- ------ ------ ------ ---- ---- - ----------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of securities available for sale. The weighted average expected remaining maturity of the debt securities portfolio was 1 year and 11 months at June 30, 1998, compared with 1 year and 11 months at December 31, 1997 and 2 years and 2 months at June 30, 1997. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At June 30, 1998, 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 all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $5,975 million, or 71%, of the Company's securities available for sale portfolio at June 30, 1998. 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 $5,975 million to $5,778 million and the expected remaining maturity of these securities would increase from 1 year and 11 months to 2 years and 6 months. 27 LOAN PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------- % Change June 30, 1998 from ----------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1998 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------- Commercial (1)(2) $21,268 $20,144 $19,464 6 % 9 % Real estate 1-4 family first mortgage 7,863 8,869 9,757 (11) (19) Other real estate mortgage (3) 11,452 12,186 11,747 (6) (3) Real estate construction 2,499 2,320 2,378 8 5 Consumer: Real estate 1-4 family junior lien mortgage 5,413 5,865 6,008 (8) (10) Credit card (4) 4,472 5,039 5,090 (11) (12) Other revolving credit and monthly payment 6,757 7,185 7,749 (6) (13) ------- ------- ------- Total consumer 16,642 18,089 18,847 (8) (12) Lease financing 4,458 4,047 3,373 10 32 Foreign 138 79 123 75 12 ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $850, $832 and $712) $64,320 $65,734 $65,689 (2)% (2)% ------- ------- ------- --- --- ------- ------- ------- --- --- - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $1,961 million, $1,772 million and $1,129 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,549 million, $1,599 million and $1,393 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. (3) Includes agricultural loans that are secured by real estate of $356 million, $343 million and $325 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. (4) As a result of reevaluating its credit card lending strategies, the Company has decided to make available for sale certain accounts within the credit card portfolio. Accordingly, approximately $721 million of primarily out-of-franchise territory accounts are considered held for sale as of June 30, 1998. As a result of an accepted bid, $280 million of this portfolio is expected to be sold at a gain in the third quarter. The remaining portion continues to be available for sale. If sold, it is anticipated that a loss (charge-off) would result due to the credit quality of this portion, which has been provided for in the allocation of the allowance for loan losses. The Company intends to hold the remaining credit card portfolio for the foreseeable future. The table below presents comparative period-end commercial real estate loans.
- ----------------------------------------------------------------------------------------------------------------------------- % Change June 30, 1998 from ---------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 1998 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------- Commercial loans to real estate developers and REITs (1) $ 1,961 $ 1,772 $ 1,129 11 % 74 % Other real estate mortgage 11,452 12,186 11,747 (6) (3) Real estate construction 2,499 2,320 2,378 8 5 ------- ------- ------- Total $15,912 $16,278 $15,254 (2)% 4 % ------- ------- ------- -- -- ------- ------- ------- -- -- Nonaccrual loans $ 244 $ 252 $ 303 (3)% (19)% ------- ------- ------- -- -- ------- ------- ------- -- -- Nonaccrual loans as a % of total 1.5% 1.5% 2.0% ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 28 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ----------------------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 1998 1997 1997 - ----------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2)(3) $165 $155 $179 Real estate 1-4 family first mortgage 88 104 102 Other real estate mortgage (4) 213 228 283 Real estate construction 30 23 19 Consumer: Real estate 1-4 family junior lien mortgage 18 17 17 Other revolving credit and monthly payment 3 1 2 ---- ---- ---- Total nonaccrual loans (5) 517 528 602 Restructured loans (6) - 9 10 ---- ---- ---- Nonaccrual and restructured loans 517 537 612 As a percentage of total loans .8% .8% .9% Foreclosed assets 127 158 194 Real estate investments (7) 3 4 5 ---- ---- ---- Total nonaccrual and restructured loans and other assets $647 $699 $811 ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------------------
(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 at June 30, 1998, December 31, 1997 and June 30, 1997. (3) Includes agricultural loans of $10 million, $13 million and $17 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. (4) Includes agricultural loans secured by real estate of $12 million, $13 million and $17 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. (5) Of the total nonaccrual loans, $330 million, $321 million and $376 million at June 30, 1998, December 31, 1997 and June 30, 1997, 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 $23 million, $23 million and $49 million at June 30, 1998, December 31, 1997 and June 30, 1997, 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, $23 million, $23 million and $49 million were considered impaired under FAS 114 at June 30, 1998, December 31, 1997 and June 30, 1997, 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 $162 million, $172 million and $158 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. The table below summarizes the changes in total nonaccrual loans.
- ---------------------------------------------------------------------- JUNE 30, June 30, (in millions) 1998 1997 - ---------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $ 503 $ 645 New loans placed on nonaccrual 224 112 Charge-offs (19) (39) Payments (181) (109) Transfers to foreclosed assets -- (2) Loans returned to accrual (10) (5) ----- ----- BALANCE, END OF QUARTER $ 517 $ 602 ----- ----- ----- ----- - ----------------------------------------------------------------------
29 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 $361 million and $347 million during the second quarter and first half of 1998, respectively, and $432 million and $456 million during the second quarter and first half of 1997, respectively. Total interest income recognized on impaired loans was $2 million and $5 million during the second quarter and first half of 1998, respectively, and $4 million and $9 million during the second quarter and first half of 1997, respectively. The interest income for all periods was recorded using the cash method. 30 The table below shows the recorded investment in impaired loans by loan category.
- ----------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 1998 1997 1997 - ----------------------------------------------------------------------------- Commercial $114 $103 $106 Real estate 1-4 family first mortgage 5 2 1 Other real estate mortgage (1) 203 216 298 Real estate construction 28 22 18 Other 3 1 2 ---- ---- ---- Total (2) $353 $344 $425 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $234 $256 $321 Discounted cash flow method 97 61 80 Historical loss factors 22 27 24 ---- ---- ---- $353 $344 $425 ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------
(1) Includes accruing loans of $23 million, $23 million and $49 million purchased at a steep discount at June 30, 1998, December 31, 1997 and June 30, 1997, 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 $22 million, $27 million and $24 million of impaired loans (with a related FAS 114 allowance of $2 million) at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates normal influxes of nonaccrual loans as it further increases its lending activity as well as resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be impacted by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on its policies. 31 The table below summarizes the changes in foreclosed assets.
- ---------------------------------------------------------------------- JUNE 30, June 30, (in millions) 1998 1997 - ---------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $155 $207 Additions 13 27 Sales (40) (31) Charge-offs (1) (3) Write-downs (1) (2) Other 1 (4) ---- ---- BALANCE, END OF QUARTER $127 $194 ---- ---- ---- ---- - ----------------------------------------------------------------------
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) 1998 1997 1997 - ----------------------------------------------------------------------------- Commercial $ 15 $ 8 $ 36 Real estate 1-4 family first mortgage 17 35 33 Other real estate mortgage 9 5 10 Real estate construction 1 1 2 Consumer: Real estate 1-4 family junior lien mortgage 38 42 34 Credit card 116 133 127 Other revolving credit and monthly payment 7 19 16 ---- ---- ---- Total consumer 161 194 177 Lease financing -- -- 1 ---- ---- ---- Total $203 $243 $259 ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------
32 ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, --------------------- --------------------- (in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,830 $1,922 $1,828 $2,018 Provision for loan losses 170 140 350 245 Loan charge-offs: Commercial (1) (46) (60) (95) (129) Real estate 1-4 family first mortgage (4) (5) (8) (10) Other real estate mortgage (10) (2) (11) (10) Real estate construction (2) (2) (2) (3) Consumer: Real estate 1-4 family junior lien mortgage (2) (6) (6) (12) Credit card (117) (133) (235) (248) Other revolving credit and monthly payment (48) (57) (102) (113) ------ ------ ------ ------ Total consumer (167) (196) (343) (373) Lease financing (11) (10) (22) (20) ------ ------ ------ ------ Total loan charge-offs (240) (275) (481) (545) ------ ------ ------ ------ Loan recoveries: Commercial (2) 13 20 32 33 Real estate 1-4 family first mortgage 1 1 4 2 Other real estate mortgage 28 8 36 30 Real estate construction 1 -- 1 1 Consumer: Real estate 1-4 family junior lien mortgage 1 1 3 3 Credit card 12 11 23 22 Other revolving credit and monthly payment 17 19 33 35 ------ ------ ------ ------ Total consumer 30 31 59 60 Lease financing 2 3 6 6 ------ ------ ------ ------ Total loan recoveries 75 63 138 132 ------ ------ ------ ------ Total net loan charge-offs (165) (212) (343) (413) ------ ------ ------ ------ BALANCE, END OF PERIOD $1,835 $1,850 $1,835 $1,850 ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) 1.02 % 1.32 % 1.07 % 1.28 % ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 2.85 % 2.82 % 2.85 % 2.82 % ------ ------ ------ ------ ------ ------ ------ ------ - --------------------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate developers and REITs for the periods presented. (2) Includes recoveries from loans (primarily unsecured) to real estate developers and REITs of $1 million or less for all periods presented. 33 The table below presents net charge-offs by loan category.
- ----------------------------------------------------------------------------------------------------------------------------- Quarter ended June 30, Six months ended June 30, ------------------------------------ ----------------------------------------- 1998 1997 1998 1997 --------------- ---------------- ---------------- -------------------- % OF % of % OF % of AVERAGE average AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1) - ----------------------------------------------------------------------------------------------------------------------------- Commercial $ 33 .64 % $ 40 .89 % $ 63 .63 % $ 96 1.05 % Real estate 1-4 family first mortgage 3 .14 4 .15 4 .11 8 .15 Other real estate mortgage (18) (.60) (6) (.19) (25) (.44) (20) (.33) Real estate construction 1 .10 2 .36 1 .09 2 .15 Consumer: Real estate 1-4 family junior lien mortgage 1 .10 5 .30 3 .11 9 .28 Credit card 105 9.26 122 9.47 212 9.10 226 8.68 Other revolving credit and monthly payment 31 1.82 38 1.96 69 1.99 78 1.95 ---- ---- ---- ---- Total consumer 137 3.27 165 3.47 284 3.32 313 3.26 Lease financing 9 .71 7 .81 16 .77 14 .84 ---- ---- ---- ---- Total net loan charge-offs $165 1.02 % $212 1.32 % $343 1.07 % $413 1.28 % ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. The commercial loan category includes net charge-offs for the commercial loan component of small business loans of $26 million (or 2.45% of average small business loans in this category) in the second quarter of 1998, compared with $33 million (or 3.31%) in the first quarter of 1998 and $23 million (or 2.43%) in the second quarter of 1997. During the last half of 1997, the period of charging off past due loans for the Business Direct product within this portfolio was changed from 180 to 120 days. The target market for small business loans is expected to experience higher loss rates on a recurring basis than is the case with loans to middle market and corporate borrowers, and such loans are priced at appropriately higher spreads. The largest category of net charge-offs in the second quarter of 1998 and 1997 was credit card loans, comprising 64% and 58%, respectively, of total net charge-offs. During the second quarter of 1998, credit card gross charge-offs due to bankruptcies were $47 million, or 40%, of total credit card gross charge-offs, compared with $46 million, or 39%, in the first quarter of 1998 and $59 million, or 45%, in the second quarter of 1997. In addition, credit card loans 30 to 89 days past due and still accruing totaled $133 million at June 30, 1998, compared with $154 million at March 31, 1998 and $172 million at June 30, 1997. The total amount of credit card charge-offs is expected to decline over the remainder of 1998 compared to prior year levels. The percentage of net charge-offs to average credit card loans is expected to continue for the remainder of 1998 at a level consistent with or slightly lower than prior year levels. The Company considers the allowance for loan losses of $1,835 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at June 30, 1998. 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 $170 million provision in the second quarter of 1998. To maintain the allowance at its approximate current level, the Company anticipates that it will continue to make a 34 provision for loan losses of about $170 million (or less) for the third quarter of 1998, which is expected to approximate net charge-offs. OTHER ASSETS
- --------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1998 1997 1997 - --------------------------------------------------------------------------- Nonmarketable equity investments $1,164 $1,113 $1,093 Trading assets 1,018 815 467 Net deferred tax asset 56 209 465 Certain identifiable intangible assets 167 479 478 Foreclosed assets 127 158 194 Other 1,014 1,175 1,909 ------ ------ ------ Total other assets $3,546 $3,949 $4,606 ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------
Income from nonmarketable equity investments accounted for using the cost method was $34 million and $40 million in the second quarter of 1998 and 1997, respectively, and $83 million and $91 million in the six months ended June 30, 1998 and 1997, respectively. Trading assets consist predominantly of securities, including corporate debt and U.S. government agency obligations. Gains from trading assets were $18 million and $22 million in the second quarter of 1998 and 1997, respectively, and $38 million in both the six months ended June 30, 1998 and 1997. The Company estimates that approximately $51 million of the $56 million net deferred tax asset at June 30, 1998 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 $5 million primarily relates to net deductions that are expected to reduce future state taxable income. The Company believes that it is more likely than not that it will have sufficient future state taxable income to fully utilize these deductions. The amount of the total deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward periods are reduced. Included in certain identifiable intangible assets were purchased mortgage servicing rights of none, $292 million and $280 million at June 30, 1998, December 31, 1997 and June 30, 1997, respectively. In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage Corporation. (See page 22 for additional information.) 35 The other identifiable intangible assets included in other assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $6 million and $7 million for the quarters ended June 30, 1998 and 1997, respectively. DEPOSITS
- ----------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 1998 1997 1997 - ----------------------------------------------------------------------------- Noninterest-bearing $23,411 $23,953 $24,284 Interest-bearing checking 2,058 2,155 2,271 Market rate and other savings 29,743 29,940 31,088 Savings certificates 14,997 15,349 15,902 ------- ------- ------- Core deposits 70,209 71,397 73,545 Other time deposits 202 205 162 Deposits in foreign offices 39 597 41 ------- ------- ------- Total deposits $70,450 $72,199 $73,748 ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------
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 and market risk 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 increase in the Company's ratios at June 30, 1998 compared with December 31, 1997 was primarily due to an increase in Tier 1 capital, primarily retained earnings. 36 The table below presents the Company's risk-based capital and leverage ratios.
- ---------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in billions) 1998 1997 1997 - ---------------------------------------------------------------------------------- Tier 1: Common stockholders' equity $ 12.7 $12.6 $12.8 Preferred stock .3 .3 .3 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.3 1.3 Goodwill and other deductions (1) (7.9) (8.1) (8.3) ------ ----- ----- Total Tier 1 capital 6.4 6.1 6.1 ------ ----- ----- Tier 2: Mandatory convertible debt .1 .1 .2 Subordinated debt and unsecured senior debt 2.0 2.0 2.0 Allowance for loan losses allowable in Tier 2 1.0 1.0 1.0 ------ ----- ----- Total Tier 2 capital 3.1 3.1 3.2 ------ ----- ----- Total risk-based capital $ 9.5 $ 9.2 $ 9.3 ------ ----- ----- ------ ----- ----- Risk-weighted balance sheet assets $ 75.1 $77.6 $78.7 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.3 9.4 9.7 Standby letters of credit 1.5 1.6 1.7 Other 1.2 .7 .6 ------ ----- ----- Total risk-weighted off-balance sheet items 12.0 11.7 12.0 ------ ----- ----- Market risk equivalent assets (2) 1.0 -- -- Goodwill and other deductions (1) (7.9) (8.1) (8.3) Allowance for loan losses not included in Tier 2 (.8) (.8) (.9) ------ ----- ----- Total risk-weighted assets $ 79.4 $80.4 $81.5 ------ ----- ----- ------ ----- ----- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 8.08 % 7.61 % 7.49 % Total capital (8% minimum requirement) 11.94 11.49 11.45 Leverage ratio (3% minimum requirement) (3) 7.53 % 6.95 % 6.67 % - ----------------------------------------------------------------------------------
(1) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on securities available for sale. (2) As the Company met certain trading thresholds at June 30, 1998 as defined by the FRB, its risk-based capital ratios now include a regulatory measurement for market risk, which represents the risk of loss in trading activities that result from movements in market prices. (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, 1998, the Bank had a Tier 1 RBC ratio of 8.13%, a combined Tier 1 and Tier 2 ratio of 11.29% and a leverage ratio of 7.12%. 37 DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value of the Company's derivative financial instruments at June 30, 1998 and December 31, 1997.
- ----------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1998 December 31, 1997 ----------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT (2) VALUE amount amount (2) value - ----------------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $20,391 $259 $217 $16,301 $233 $174 Futures 5,307 -- -- 6,259 -- -- Floors purchased (1) 18,665 39 39 20,727 63 63 Caps purchased (1) 226 1 1 240 1 1 Options purchased 35 -- -- 42 -- -- Foreign exchange contracts: Forwards (1) 123 1 -- 57 1 1 CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 4,001 22 6 3,158 13 4 Futures 8,473 -- -- 2,387 -- -- Floors purchased (1) 1,124 13 13 1,141 13 13 Caps purchased (1) 2,954 3 3 2,836 8 8 Floors written 1,086 -- (14) 1,122 -- (13) Caps written 2,991 -- (4) 2,871 -- (9) Options purchased (1) -- -- -- 37 -- -- Options written (1) -- -- -- 27 -- -- Forwards (1) 377 6 3 59 2 2 Foreign exchange contracts: Forwards and spots (1) 2,523 31 2 1,853 29 3 Options purchased (1) 54 2 2 110 -- -- Options written 26 -- (2) 110 -- -- - -----------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these or the underlying financial instruments. (2) 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 contractual 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 contractual 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. 38 The Company also enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivative financial instruments. 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 June 1998, the FASB issued FAS 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for the Company's financial statements for periods beginning January 1, 2000. The new standard requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company has not yet determined when it will implement the Statement nor has it completed the complex analysis required to determine the impact on the financial statements. 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 Securities and Exchange Commission (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, 1998, the Company had issued $.2 billion of preferred stock and $.7 billion of medium-term notes under this shelf registration, with $2.6 billion of securities remaining unissued. 39 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk;" it is the Company's main source of interest rate risk and is significantly more difficult to quantify and manage than term structure risk. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of option pricing models, in the case of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The Company uses four standard scenarios - rates unchanged, expected rates, high rates and low rates - in analyzing interest rate sensitivity. The expected scenario is based on the Company's projected future interest rates, while the high-rate and low-rate scenarios cover 90% probable upward and downward rate movements based on the Company's own interest rate models. The current interest rate risk limit using the net interest income simulation allows up to 30 basis points (.30%) of sensitivity in the expected average net interest margin over the next 12 months. As of June 30, 1998, the simulation showed a decline in the net interest margin of 8 basis points (.08%, or $58 million decline in net interest income over the next 12 months) for the low-rate scenario case relative to the expected case. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures indicated by the net interest income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. 40 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2 Agreement and Plan of Merger by and between Wells Fargo & Company and Norwest Corporation dated as of June 7, 1998, incorporated by reference to Exhibit 2 to Form 8-K filed by the Company on June 18, 1998. The Company hereby agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. 3 (ii) By-Laws 4 The Company hereby agrees to furnish to the Commission upon request 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 2.11 and 1.73 for the quarters ended June 30, 1998 and 1997, respectively, and 2.05 and 1.90 for the six months ended June 30, 1998 and 1997, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.05 and 3.57 for the quarters ended June 30, 1998 and 1997, respectively, and 4.58 and 4.11 for the six months ended June 30, 1998 and 1997, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.09 and 1.70 for the quarters ended June 30, 1998 and 1997, respectively, and 2.02 and 1.85 for the six months ended June 30, 1998 and 1997, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.83 and 3.34 for the quarters ended June 30, 1998 and 1997, respectively, and 4.36 and 3.76 for the six months ended June 30, 1998 and 1997, respectively. 41 (b) The Company filed the following reports on Form 8-K during the second quarter of 1998 and through the date hereof: (1) April 3, 1998 under Item 5, announcing that on April 2, 1998 Wells Fargo Bank, N.A. and GMAC Mortgage Corporation entered into a letter of intent with respect to the acquisition by GMAC Mortgage of Wells Fargo's mortgage servicing business (2) April 21, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended March 31, 1998 (3) May 21, 1998 under Item 5, announcing that on May 15, 1998 a definitive agreement was signed by Wells Fargo Bank, N.A. and GMAC Mortgage regarding the sale of Wells Fargo's mortgage servicing business to GMAC Mortgage and announcing the election of Rod Jacobs as President and Director of Wells Fargo & Company and the election of Ross Kari as Chief Financial Officer (4) June 8, 1998 under Item 5, containing the Press Release announcing that on June 7, 1998 the Company and Norwest Corporation (Norwest) entered into an Agreement and Plan of Merger, pursuant to which the Company will merge with and into Norwest and containing the investor presentation materials dated June 8, 1998 regarding the proposed merger between the Company and Norwest (5) June 9, 1998 under Item 5, containing the final analyst presentation materials dated June 8, 1998 regarding the proposed merger between the Company and Norwest (6) June 11, 1998 under Item 5, containing the Press Release announcing the rescission of all of the Company's stock repurchase programs (7) June 18, 1998 under Item 5, containing the Agreement and Plan of Merger by and between the Company and Norwest, dated June 7, 1998, the Stock Option Agreement between the Company, as Issuer, and Norwest, as Grantee, dated June 7, 1998 and the Stock Option Agreement between Norwest, as Issuer, and the Company, as Grantee, dated June 7, 1998 (8) July 21, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended June 30, 1998 (9) July 24, 1998 under Item 5, containing the abridged analyst presentation materials dated June 8, 1998 regarding the proposed merger between the Company and Norwest 42 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, 1998. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN --------------------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 43 EX-3.(II) 2 EXHIBIT 3(II) BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED JUNE 7, 1998 ______________ ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETING. An annual meeting of stockholders of the corporation shall be held for the election of directors at such date, time and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. 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 or the Chief Executive Officer (if other than the Chairman of the Board or the President). Special meetings shall be held on the date and at the time and place as may be designated in a notice given by or at the direction of the Board of Directors. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting. 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. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. 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. SECTION 6. STOCKHOLDER PROPOSALS AND NOMINATIONS. (a) ANNUAL OR SPECIAL MEETINGS OF STOCKHOLDERS. At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and By-Laws of the corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a Director of the corporation at any meeting of stockholders shall be delivered to the Secretary of the corporation at its principal executive office (i) in the case of an annual meeting, not fewer than 90 nor more than 120 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced less than l00 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed; and (ii) in the case of a special meeting 2 at which Directors are to be elected, not later than the close of business on the tenth day following the earlier of the day on which notice of the date of the meeting was mailed or public announcement was made. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the corporation shall deliver with such notice (i) a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the corporation), (ii) such person's signed consent to serve as a Director of the corporation, if elected, and confirmation that, if elected as a director, such person agrees to abide by legal requirements and lawful contractual obligations of the corporation and not to cause or induce the corporation to violate or breach any such legal requirements and lawful contractual obligations, (iii) such stockholder's name and address, (iv) confirmation of the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder and (v) a confirmation that any governmental approvals required in connection with such person's nomination, election or taking office as a Director of the corporation have been obtained by such stockholder and/or nominee, as applicable, and are in full force and effect as of the date of submission of such notice of nomination. As used herein, shares "beneficially owned" shall mean all shares that such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares of which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if 3 such notice has not been given. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of stockholders notice as described above. (b) INCREASE IN NUMBER OF DIRECTORS. Notwithstanding anything in these By-Laws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the I0th day following the day on which such public announcement is first made by the corporation (c) ELIGIBILITY OF DIRECTORS. Persons proposed to be nominated for election (other than by or on behalf of the Board of Directors in accordance with applicable law, the Certificate of Incorporation and these By-Laws,) shall be eligible to serve as directors only if nominated in accordance with the procedures set forth in these By-Laws. Business proposed to be brought before a meeting (other than by or on behalf of the Board of Directors in accordance with applicable law, the Certificate of Incorporation and these By-Laws), shall be conducted at a meeting of stockholders only if brought before a meeting in accordance with the procedures set forth in these By-Laws. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the person presiding at the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such proposal or nomination shall be disregarded. (d) "PUBLIC ANNOUNCEMENT" DEFINED. For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (e) EXCHANGE ACT MATTERS. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with 4 all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall he deemed to affect any rights (i) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock of the corporation, if any, to elect directors under specified circumstances. SECTION 7. INSPECTORS OF ELECTIONS; OPENING AND CLOSING OF POLLS. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality, and according to the best of his or her ability. The inspectors shall have the duties prescribed by law. The person presiding at the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which stockholders will vote at the meeting. SECTION 8. RECORD DATE FOR ACTION BY WRITTEN CONSENT. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than l0 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten l0 days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the Board of Directors pursuant to the first sentence of this Section 8). If no record date has been fixed by the Board of Directors pursuant to the first sentence of this Section 8 or otherwise within l0 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when 5 no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal executive office, or to any officer or agent of the corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. SECTION 9. INSPECTORS OF WRITTEN CONSENTS. In the event of the delivery, in the manner provided by Section 8, to the corporation of the requisite written consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 8 represent at least the minimum number of votes that would be necessary to take the corporate action under applicable law, the Certificate of Incorporation and these By-Laws. Nothing contained in this Section 9 shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto and the seeking of injunctive relief in such litigation). SECTION l0. EFFECTIVENESS OF WRITTEN CONSENTS. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated written consent received in accordance with Section 8, a written consent or consents signed by a sufficient number of holders to take such action, under applicable law, the Certificate of Incorporation and these By-Laws, are delivered to the corporation in the manner prescribed in Section 8. 6 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 16. The term of office of each Director shall be from the time of his election until the annual meeting next succeeding his election and until his successor shall have been duly elected, or until his death, resignation or lawful removal pursuant to the provisions of the General Corporation Law of Delaware. SECTION 2. POWERS. In addition to the powers expressly conferred by these By-Laws, the Board of Directors may exercise all corporate powers and do such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or approved by the stockholders. SECTION 3. COMPENSATION. Directors and Advisory Directors (as provided in Section 12 of this Article) as such may receive such compensation, if any, as the Board of Directors by 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 7 following the adjournment of any regular meeting of the Board of Directors of Wells Fargo Bank, National Association, held on the same day. If the day of any regular meeting shall fall upon a bank holiday, the meeting shall be held at the same hour on the first day following which is not a bank holiday. No call or notice of a regular meeting need be given unless the meeting is to be held at a place other than the main office of the corporation. SECTION 7. SPECIAL MEETINGS. Special meetings shall be held when called by the chief executive officer or at the written request of four Directors. SECTION 8. QUORUM; ADJOURNED MEETINGS. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. A majority of the Directors present, whether or not a quorum, may adjourn any meeting to another time and place, provided that, if the meeting is adjourned for more than 30 days, notice of the adjournment shall be given in accordance with these By-Laws. SECTION 9. NOTICE, WAIVERS OF NOTICE. Notice of special meetings and notice of regular meetings held at a place other than the head office of the corporation shall be given to each Director, and notice of the adjournment of a meeting adjourned for more than 30 days shall be given prior to the adjourned meeting to all Directors not present at the time of the adjournment. No such notice need specify the purpose of the meeting. Such notice shall be given four days prior to the meeting if given by mail or on the day preceding the day of the 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 8 without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as the unanimous vote of the Directors. SECTION 12. RESIGNATIONS. Any Director may resign his position as such at any time by giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. Such resignation shall take effect as of the time such notice is given or as of any later time specified therein and the acceptance thereof shall not be necessary to make it effective. SECTION 13. VACANCIES. Vacancies in the membership of the Board of Directors shall be deemed to exist (i) in case of the death, resignation or removal of any Director, (ii) if the authorized number of Directors is increased, or (iii) if the stockholders fail, at a meeting of stockholders at which Directors are elected, to elect the full authorized number of Directors to be elected at that meeting. Vacancies in the membership of the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The stockholders may elect a Director at any time to fill any vacancy not filled by the Directors. SECTION 14. COMMITTEES OF THE BOARD OF DIRECTORS. By resolution adopted by a majority of the authorized number of 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 9 extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amending these By-Laws. Included among the Committees shall be the following: (a) EXECUTIVE COMMITTEE. There shall be an Executive Committee consisting of the Chairman of the Board, presiding, and not less than seven additional Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. Subject to such limitations as may from time to time be imposed by the Board of Directors or as are imposed by these By-Laws, the Executive Committee shall have the fullest authority to act for and on behalf of the corporation, and it shall have all of the powers of the Board of Directors which, under the law, it is possible for a Board of Directors to delegate to such a committee, including the supervision of the general management, direction and superintendence of the business and affairs of the corporation and the power to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. (b) COMMITTEE ON EXAMINATIONS AND AUDITS. There shall be a Committee on Examinations and Audits consisting of not less than three Directors who are not officers of the corporation and who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of this Committee (i) to make, or cause to be made, in accordance with the procedures from time to time approved by the Board of Directors, internal examinations and audits of the affairs of the corporation and the affairs of any subsidiary which by resolution of its board of directors has authorized the Committee on Examinations and Audits to act hereunder, (ii) to make recommendations to the Board of Directors of the corporation and of each such subsidiary with respect to the selection of and scope of work for the independent 10 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. (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 11 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 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 12 any, and the President shall be elected from among the members of the Board of Directors. The following offices shall be filled only pursuant to election by the Board of Directors: Chairman of the Board, Vice Chairman of the Board, President, Vice Chairman, Executive Vice President, Senior Vice President, Secretary, Controller, Treasurer, General Auditor and Risk Control Officer. Other officers may be appointed by the Chief Executive Officer or by any officer or committee whom he may authorize to perform this duty. All officers shall hold office at will, at the pleasure of the Board of Directors, the Chief Executive Officer, the officer or committee having the authority to appoint such officers, and the officer or committee authorized by the Chief Executive Officer to remove such officers, and may be removed at any time, with or without notice and with or without cause. No authorization by the Chief Executive Officer to perform such duty of appointment or removal shall be effective unless done in writing and signed by the Chief Executive Officer. Two or more offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the corporation. As Chief Executive Officer, he shall (i) exercise, and be responsible to the Board of Directors for, the general supervision of the property, affairs and business of the corporation, (ii) report at each meeting of the Board of Directors upon all matters within his knowledge which the interests of the corporation may require to be brought to its notice, (iii) prescribe, or to the extent he may deem appropriate designate an officer or committee to prescribe, the duties, authority and signing power of all other officers and employees of the corporation and (iv) exercise, subject to these By-Laws, such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, subject to these By-Laws, exercise such powers and perform such duties as may from time to time be prescribed by the Board of Directors. In the absence of the 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, 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, the President shall preside over the meetings of the stockholders and the Board of Directors. 13 SECTION 5. ABSENCE OR DISABILITY OF CHIEF EXECUTIVE OFFICER. In the absence or disability of the Chairman of the Board, the President shall act as Chief Executive Officer. In the absence or the disability of both the Chairman of the Board and the President, the Vice Chairman of the Board shall act as Chief Executive Officer. In the absence of the Chairman of the Board, the President and the Vice Chairman of the Board, the officer designated by the Board of Directors, or if there be no such designation the officer designated by the Chairman of the Board, shall act as Chief Executive Officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as Chief Executive Officer in his absence or disability and in the absence or disability of the President and the Vice Chairman of the Board. SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, 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. 14 SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries by public accounting firms and, in connection therewith, he shall determine whether the internal auditing functions being performed within the subsidiaries are adequate. He shall also perform such other duties as the Chief Executive Officer may prescribe, and shall report to the Chief Executive Officer on all matters concerning the safety of the operations of the corporation and of any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. 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 15 investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an Agent (as hereinafter defined) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding, or any appeal therein, if the Agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the Agent did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that his or her conduct was unlawful. For purposes of this Article, an "Agent" shall be: (i) any director, officer or employee of the corporation; (ii) any person who, being or having been such a director, officer or employee, is or was serving on behalf of the corporation at the request of an authorized officer of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise; or (iii) any person who is or was serving on behalf of the corporation at the request of the Chairman of the Board or the President of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in 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 16 adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. DETERMINATION OF RIGHT OF INDEMNIFICATION OR CONTRIBUTION. Unless otherwise ordered by a court, any indemnification under Section 1 or 2, and any contribution under Section 6, of this Article shall be made by the corporation to an Agent unless a determination is reasonably and promptly made, either (i) by the Board of Directors acting by a majority vote of a quorum consisting of Directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or if obtainable and such quorum so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such Agent acted in bad faith and in a manner that such Agent did not believe to be in or not opposed to the best interests of the corporation or, with respect to any criminal proceeding, that such Agent believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 4. ADVANCES OF EXPENSES. Except as limited by Section 5 of this Article, costs, charges and expenses (including attorneys' fees) incurred by an Agent in defense of any action, suit, proceeding or investigation of the nature referred to in Section 1 or 2 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter; provided, however, that if the General Corporation Law of Delaware then so requires, such payment shall be made only if the Agent shall undertake to reimburse the corporation for such payment in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. SECTION 5. RIGHT OF AGENT TO INDEMNIFICATION OR ADVANCE UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Section 1 or 2, or advance under Section 4, of this Article shall be made promptly and in any event within 90 days, upon the written request of the Agent, unless with respect to an application under said Sections 1 or 2 an adverse determination is reasonably and promptly made pursuant to Section 3 of this Article or unless with respect to an application under said Section 4 an adverse determination is made pursuant to said Section 4. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction if the Board of Directors or independent 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 17 action, suit or proceeding in advance of its final disposition where any required undertaking has been tendered to the corporation) that the Agent has not met the standards of conduct which would require the corporation to indemnify or advance the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including the Board of Directors, independent legal counsel and the stockholders) to have made a determination prior to the commencement of such action that indemnification of the Agent is proper in the circumstances because he or she has met the applicable standard of conduct, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel and the stockholders) that the Agent had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Agent had not met the applicable standard of conduct. The Agent's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation. SECTION 6. CONTRIBUTION. In the event that the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an Agent in whole or in part, then in respect of any threatened, pending or completed action, suit or proceeding in which the corporation is jointly liable with the Agent (or would be if joined in such action, suit or proceeding), to the extent permitted by the General Corporation Law of Delaware the corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the corporation on the one hand and the Agent on the other from the transaction from which such action, suit or proceeding arose and (ii) the relative fault of the corporation on the one hand and of the Agent on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the corporation on the one hand and of the Agent on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. SECTION 7. OTHER RIGHTS AND REMEDIES. Indemnification under this Article shall be provided regardless of when the events alleged to underlie any action, suit or proceeding may 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 18 and administrators of such a person. All rights to indemnification and advancement of expenses under this Article shall be deemed to be provided by a contract between the corporation and the Agent who serves as such at any time while these By-Laws and other relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. SECTION 8. INSURANCE. Upon resolution passed by the Board of Directors, the corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would have the power to indemnify such person against such liability under the provisions of this Article. The corporation may create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 9. CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the corporation" include all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer or employee of such a constituent corporation or who, being or having been such a director, officer or employee, is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity. SECTION 10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprise" in Sections 1 and 9 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service by an Agent as director, officer, employee, trustee or agent of the corporation which imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall 19 be deemed to have acted in a manner "not opposed to the best interest of the corporation" for purposes of this Article. SECTION 11. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees, judgments, fines and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by the applicable portion of this Article that shall not have been invalidated, or by any other applicable law. SECTION 12. ACTIONS INITIATED BY AGENT. Anything to the contrary in this Article notwithstanding, the corporation shall indemnify any Agent in connection with an action, suit or proceeding initiated by such Agent (other than actions, suits, or proceedings commenced pursuant to Section 5 of this Article) only if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INDEMNIFICATION. Notwithstanding any other provision of this Article, the corporation shall indemnify any Agent and advance expenses incurred by such Agent in any action, suit or proceeding of the nature referred to in Section 1 or 2 of this Article to the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, except that no amount shall be paid pursuant to this Article: (i) in the event of an adverse determination pursuant to Section 3 of this Article; (ii) in respect of remuneration to the extent that it shall be determined to have been paid in violation of law; (iii) in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934; or (iv) in contravention of any federal law or applicable regulation of any federal bank regulatory agency. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may also provide indemnification and advancement of expenses to other persons or entities to the extent deemed appropriate. 20 ARTICLE V MISCELLANEOUS SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year. SECTION 2. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate representing the number of shares of the stock of the corporation owned by such stockholder and the class or series of such shares. Each certificate shall be signed in the name of the corporation by (i) the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and (ii) the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. Any of the signatures on the certificate may be facsimile. Prior to due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner for any share of stock of the corporation shall be treated as the person exclusively entitled to vote, to receive notice, and to exercise all other rights and receive all other entitlements of a stockholder with respect to such share, except as may be provided otherwise by law. SECTION 3. EXECUTION OF WRITTEN INSTRUMENTS. All written instruments shall be binding upon the corporation if signed on its behalf by (i) any two of the following officers: the Chairman of the Board, the President, the Vice Chairman of the Board, the Vice Chairmen or the Executive Vice Presidents; or (ii) any one of the foregoing officers signing jointly with any Senior Vice President. Whenever any other officer or person shall be authorized to execute any agreement, document or instrument by resolution of the Board of Directors, or by the Chief Executive Officer, or by any two of the officers identified in the immediately preceding sentence, such execution by such other officer or person shall be equally binding upon the corporation. SECTION 4. SUBSIDIARY. As used in these By-Laws the term "subsidiary" or "subsidiaries" means any corporation 25 percent or more of whose voting shares is directly or indirectly owned or controlled by the corporation, or any other affiliate of the corporation designated in writing as a subsidiary of the corporation by the Chief Executive Officer of the corporation. All such written designations shall be filed with the Secretary of the corporation. SECTION 5. AMENDMENTS. These By-Laws may be altered, amended or repealed by a vote of the stockholders entitled to exercise a majority of the voting power of the corporation, by 21 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 notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 22 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) 1998 1997 1998 1997 - ---------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Net income $ 337 $ 228 $ 652 $ 568 Less preferred dividends 4 6 9 17 ----- ----- ----- ----- Net income for calculating earnings per common share $ 333 $ 222 $ 643 $ 551 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 85.2 89.0 85.5 89.9 ----- ----- ----- ----- ----- ----- ----- ----- EARNINGS PER COMMON SHARE $3.91 $2.49 $7.52 $6.12 ----- ----- ----- ----- ----- ----- ----- ----- DILUTED EARNINGS PER COMMON SHARE Net income $ 337 $ 228 $ 652 $ 568 Less preferred dividends 4 6 9 17 ----- ----- ----- ----- Net income for calculating diluted earnings per common share $ 333 $ 222 $ 643 $ 551 ----- ----- ----- ----- ----- ----- ----- ----- Average common shares outstanding 85.2 89.0 85.5 89.9 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 .9 .9 .9 1.0 ----- ----- ----- ----- Diluted average common shares outstanding 86.1 89.9 86.4 90.9 ----- ----- ----- ----- ----- ----- ----- ----- DILUTED EARNINGS PER COMMON SHARE $3.87 $2.47 $7.45 $6.06 ----- ----- ----- ----- ----- ----- ----- ----- - ----------------------------------------------------------------------------
EX-27 4 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,130 0 590 1,018 8,449 0 0 64,320 1,835 93,200 70,450 1,549 2,449 5,714 0 275 425 12,250 93,200 3,027 275 59 3,361 811 1,082 2,279 350 23 2,189 1,200 652 0 0 652 7.52 7.45 6.12 517 203 0 0 1,828 481 138 1,835 0 0 0 Amount represents basic earnings per common share pursuant to FAS 128.
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) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 619 $ 440 $1,200 $1,070 Fixed charges 556 600 1,146 1,195 ------ ------ ------ ------ $1,175 $1,040 $2,346 $2,265 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges (1): Interest expense $ 525 $ 569 $1,082 $1,131 Estimated interest component of net rental expense 31 31 64 64 ------ ------ ------ ------ $ 556 $ 600 $1,146 $1,195 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 2.11 1.73 2.05 1.90 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 619 $ 440 $1,200 $1,070 Fixed charges 153 171 335 344 ------ ------ ------ ------ $ 772 $ 611 $1,535 $1,414 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense $ 525 $ 569 $1,082 $1,131 Estimated interest component of net rental expense 31 31 64 64 Less interest on deposits 403 429 811 851 ------ ------ ------ ------ $ 153 $ 171 $ 335 $ 344 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 5.05 3.57 4.58 4.11 ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------
(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) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 619 $ 440 $1,200 $1,070 Fixed charges 556 600 1,146 1,195 ------ ------ ------ ------ $1,175 $1,040 $2,346 $2,265 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividend requirement $ 4 $ 6 $ 9 $ 17 Ratio of income before income tax expense to net income 1.84 1.92 1.84 1.88 ------ ------ ------ ------ Preferred dividends (2) $ 7 $ 12 $ 17 $ 32 ------ ------ ------ ------ Fixed charges (1): Interest expense 525 569 1,082 1,131 Estimated interest component of net rental expense 31 31 64 64 ------ ------ ------ ------ 556 600 1,146 1,195 ------ ------ ------ ------ Fixed charges and preferred dividends $ 563 $ 612 $1,163 $1,227 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 2.09 1.70 2.02 1.85 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 619 $ 440 $1,200 $1,070 Fixed charges 153 171 335 344 ------ ------ ------ ------ $ 772 $ 611 $1,535 $1,414 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends (2) $ 7 $ 12 $ 17 $ 32 ------ ------ ------ ------ Fixed charges: Interest expense 525 569 1,082 1,131 Estimated interest component of net rental expense 31 31 64 64 Less interest on deposits 403 429 811 851 ------ ------ ------ ------ 153 171 335 344 ------ ------ ------ ------ Fixed charges and preferred dividends $ 160 $ 183 $ 352 $ 376 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 4.83 3.34 4.36 3.76 ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------
(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-----