-----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, FkXAbUCYVY2p01ZhcRSEDyf85eziNBuvkx+PzdYgiv0gUaletKt555TeLJM4ETVI iaVOvwqDE3AnmdSo7LPsrQ== 0001047469-98-010068.txt : 19980317 0001047469-98-010068.hdr.sgml : 19980317 ACCESSION NUMBER: 0001047469-98-010068 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 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-K405 SEC ACT: SEC FILE NUMBER: 001-06214 FILM NUMBER: 98566619 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-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1997 Commission file number 1-6214 ----------------------- WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware No. 13-2553920 (State of incorporation) (I.R.S. Employer 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, par value $5 New York Stock Exchange Pacific Exchange Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained herein, or will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No ----- ----- As of February 20, 1998 (the latest practicable date), 85,746,327 shares of common stock were outstanding. On the same date, the aggregate market value of common stock held by nonaffiliates was approximately $26,845 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders - Incorporated into Parts I, II and IV. Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders - Incorporated into Part III. FORM 10-K CROSS-REFERENCE INDEX
Page -------------------------------------------- FORM Annual Proxy 10-K Report (1) Statement (2) ---- ------ --------- PART I Item 1. Business Description of Business 2-5 10-72 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 6 16-19 -- Investment Portfolio -- 21-22, 39-40, 44-45 -- Loan Portfolio 7-11 22-26, 40-41, 46-48 -- Summary of Loan Loss Experience 11-13 26-27, 40-41, 47 -- Deposits -- 18-19, 28, 50 -- Return on Equity and Assets -- 10-11 -- Short-Term Borrowings -- 50 -- Item 2. Properties 14 -- -- Item 3. Legal Proceedings -- 64 -- Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1997) (3) -- -- -- Executive Officers of the Registrant 15 -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- 34, 43-44 -- Item 6. Selected Financial Data -- 12 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- 10-34 -- Item 8. Financial Statements and Supplementary Data -- 35-72 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant 15 -- 7-9 Item 11. Executive Compensation -- -- 3-4, 10-15 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 5-6 Item 13. Certain Relationships and Related Transactions -- -- 18-20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16-18 35-72 -- SIGNATURES 19 -- -- - -------------------------------------------------------------------------------------------------------------------
(1) The 1997 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) The Proxy Statement dated March 16, 1998 for the 1998 Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K. (3) None. 1 DESCRIPTION OF BUSINESS GENERAL Wells Fargo & Company (Parent) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Based on assets as of December 31, 1997, it was the tenth largest bank holding company in the United States. Its principal subsidiary is Wells Fargo Bank, N.A. (Bank). Wells Fargo & Company and its subsidiaries are hereinafter referred to as the Company. THE BANK HISTORY AND GROWTH The Bank is the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. The California banking business was separated from the express business in 1905 and was merged in 1960 with American Trust Company, another of the oldest banks in the Western United States. The Bank became Wells Fargo Bank, N.A., a national banking association, in 1968. Its head office is located in San Francisco, California. In 1986, the Company acquired from Midland Bank plc all the common stock of Crocker National Corporation, a bank holding company whose principal subsidiary was Crocker National Bank, the 17th largest bank in the U.S. at the time. In 1988, the Company acquired Barclays Bank of California with assets of $1.3 billion. In 1990 and 1991, the Company completed the two-phase purchase of the 130-branch California network of Great American Bank (GA), a Federal Savings Bank. The Company acquired assets with a GA book value of $5.8 billion. Also during 1990, the Company completed the acquisition of four California banking companies with combined assets of $1.9 billion: Valley National Bank of Glendale, Central Pacific Corporation of Bakersfield, the Torrey Pines Group of Solana Beach and Citizens Holdings and its two banking subsidiaries in Orange County. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate). The Company acquired assets with a First Interstate book value of approximately $55 billion. The purchase price was approximately $11.3 billion. The Merger was accounted for as a purchase transaction. Accordingly, the results of operations and assets/liabilities of First Interstate are included with those of the Company for periods subsequent to the date of the Merger (i.e., the financial information for periods prior to April 1, 1996 included in this 10-K exclude First Interstate). The Merger is discussed in the 1997 Annual Report to Shareholders. 2 For further information, see the Line of Business Results section of the 1997 Annual Report to Shareholders. The following table shows selected information for the Bank:
- --------------------------------------------------------------------------------------------------------- December 31, ----------------------------------------------- (dollars in billions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Investment securities $ 8.8 $12.3 $ 8.5 $11.2 $12.7 Loans $61.0 $61.5 $34.6 $35.7 $32.4 Assets $89.2 $98.7 $48.6 $51.9 $50.7 Deposits $68.1 $75.9 $39.0 $42.4 $42.4 Staff (active, full-time equivalent) 30,504 33,939 18,129 19,117 19,324 Physical distribution offices (all domestic) 1,754 1,835 974 634 624 - ---------------------------------------------------------------------------------------------------------
OTHER BANK SUBSIDIARIES In 1995, the Company formed Wells Fargo Bank (Arizona), N.A., a national bank subsidiary, to operate the Company's credit card business. The Company also has a majority ownership interest in the Wells Fargo HSBC Trade Bank, N.A. established in 1995 that provides trade financing, letters of credit and collection services. On April 1, 1996, the California bank of First Interstate merged into the Bank. In June 1996, the Company merged former First Interstate bank subsidiaries in six states (Idaho, Nevada, New Mexico, Oregon, Utah and Washington) into the Bank. In September 1996, Wells Fargo Bank of Arizona, N.A. (formerly First Interstate Bank of Arizona, N.A.) merged into the Bank. In June 1997, Wells Fargo Bank (Colorado), N.A. (formerly First Interstate Bank of Denver, N.A.) was merged into the Bank. In addition, the Company completed the sales of the First Interstate banks in Wyoming, Montana and Alaska in the fourth quarter of 1996. Each bank had three branches. The three banks had aggregate assets of approximately $.6 billion and aggregate deposits of approximately $.5 billion. The remaining former First Interstate bank subsidiary, Wells Fargo Bank (Texas), N.A. (formerly First Interstate Bank, Texas), is expected to merge into the Bank as soon as permitted by applicable state law (i.e., not earlier than September 1999). NONBANK SUBSIDIARIES The Company has wholly-owned subsidiaries that provide various banking-related services. In the aggregate, these subsidiaries are not material to the Company's assets or net income. 3 COMPETITION The Company competes for deposits, loans and other banking services in its principal geographic market in the Western United States, as well as in selected national markets as opportunities arise. The banking business is highly competitive and has become increasingly so in recent years; the industry continues to consolidate and strong, unregulated competitors have entered core banking markets with focused products targeted at highly profitable customer segments. These unregulated competitors, such as investment companies, specialized lenders and multinational financial services companies, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue. Within the banking industry, ongoing consolidation has increased pressure on the Company from its most significant competitor in California, Bank of America, the fifth largest bank holding company in the United States based on assets as of December 31, 1997. Moreover, federal and state legislation adopted in recent years has increased competition by allowing banking organizations from other parts of the country to enter the Company's core geographic market (see "Supervision and Regulation" for further discussion of such legislation and the competitive environment in which the Company operates). Among commercial banks, the Bank is presently the second largest holder of customer deposits in California. There is no meaningful measure of overall market share within the broadly defined financial services industry. MONETARY POLICY The earnings of the Company are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities in the U.S. and abroad. In particular, the Federal Reserve System exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. SUPERVISION AND REGULATION Under the Bank Holding Company Act, the Company is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Further, the Act restricts the activities in which the Company may engage and the nature of any company in which the Parent may own more than 5% of any class of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks, and activities so closely related to banking as determined by the Board of Governors to be proper incidents thereto. Under the Act, the acquisition of substantially all of the assets of any domestic bank or savings association or the ownership or control of more than 5% of its voting shares by a 4 bank holding company is subject to prior approval by the Board of Governors. Under the Riegle-Neal Act, bank holding companies which are adequately capitalized and adequately managed are now permitted to make interstate acquisitions of banks without regard to state law restrictions. The merger of commonly owned banks in different states is also permitted, except in states, such as Texas, which have passed legislation to prohibit such mergers. The statute permits banks to establish branches outside their home state in states which pass legislation to permit such interstate branching. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the terms of transactions between the Bank and its affiliates and on any extension of credit to its affiliates. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency are limited by a formula. For more information regarding restrictions on loans and dividends by the Bank to its affiliates, see Note 3 to the Financial Statements in the 1997 Annual Report to Shareholders. There are various requirements and restrictions in the laws of the U.S. and the states in which the Bank operates, including restrictions on the amount of its loans to a borrower and its affiliates and the nature and amount of its investments, its ability to act as an underwriter of securities, its opening of branches and its acquisition of other banks or savings associations. The Bank, as a national bank, is subject to regulation and examination by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the FDIC. Major regulatory changes affecting the Bank, banking and the financial services industry in general have occurred in the last several years and can be expected to occur in the future. Federal banking legislation since 1980 has deregulated interest rate ceilings on deposits at banks and thrift institutions and has increased the types of accounts that can be offered. Generally, federal banking legislation has narrowed the functional distinctions among financial institutions. The consumer and commercial banking powers of thrift institutions have expanded, and state-chartered banks in certain states are authorized to engage in all activities which are permissible for national banks and in certain cases may, with approval of the FDIC, engage in activities, such as insurance underwriting, which are not authorized for national banks. Non-depository institutions can be expected to increase the extent to which they act as financial intermediaries, particularly in the area of consumer credit services. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system. These changes create significant opportunities for the Company, as well as the financial services industry, to compete in financial markets on a less-regulated basis. They also suggest that the Company and, particularly, the Bank will face new and major competitors in geographic and product markets in which their operations historically have been protected by banking laws and regulations. 5 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.
- -------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------- 1997 OVER 1996 1996 over 1995 -------------------------- ------------------------ (in millions) VOLUME RATE TOTAL Volume Rate Total - -------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Federal funds sold and securities purchased under resale agreements $ (11) $-- $ (11) $ 25 $ -- $ 25 Investment securities: At fair value: U.S. Treasury securities 15 6 21 114 (3) 111 Securities of U.S. government agencies and corporations (89) 16 (73) 344 10 354 Private collateralized mortgage obligations 8 7 15 101 2 103 Other securities (7) (2) (9) 33 (16) 17 At cost (1): U.S. Treasury securities -- -- -- (61) -- (61) Securities of U.S. government agencies and corporations -- -- -- (269) -- (269) Private collateralized mortgage obligations -- -- -- (66) -- (66) Other securities -- -- -- (10) -- (10) Mortgage loans held for sale -- -- -- (76) -- (76) Loans: Commercial 175 8 183 728 (80) 648 Real estate 1-4 family first mortgage 8 7 15 277 4 281 Other real estate mortgage 13 45 58 319 (16) 303 Real estate construction 22 (7) 15 99 3 102 Consumer: Real estate 1-4 family junior lien mortgage 19 17 36 223 17 240 Credit card 29 (21) 8 209 (27) 182 Other revolving credit and monthly payment 39 (22) 17 473 (29) 444 Lease financing 78 -- 78 94 (6) 88 Foreign (2) -- (2) 8 -- 8 Other 29 3 32 23 1 24 ------ ------ ------ ------ ------ ------ Total increase (decrease) in interest income 326 57 383 2,588 (140) 2,448 ------ ------ ------ ------ ------ ------ Increase (decrease) in interest expense: Deposits: Interest-bearing checking (32) 3 (29) 3 11 14 Market rate and other savings 69 (9) 60 367 5 372 Savings certificates 57 29 86 315 (27) 288 Other time deposits (10) (7) (17) -- 3 3 Deposits in foreign offices 16 1 17 (76) (12) (88) Federal funds purchased and securities sold under repurchase agreements 59 3 62 (88) (19) (107) Commercial paper and other short-term borrowings (4) 5 1 (8) (8) (16) Senior debt (18) 4 (14) 38 (9) 29 Subordinated debt 25 2 27 64 6 70 Guaranteed preferred beneficial interests in Company's subordinated debentures 95 -- 95 6 -- 6 ------ ------ ------ ------ ------ ------ Total increase (decrease) in interest expense 257 31 288 621 (50) 571 ------ ------ ------ ------ ------ ------ Increase (decrease) in net interest income on a taxable-equivalent basis $ 69 $ 26 $ 95 $1,967 $ (90) $1,877 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - --------------------------------------------------------------------------------------------------------------
(1) As investment securities at cost were reclassified to the at-fair-value portfolio on November 30, 1995, the decrease in net interest income for 1996 over 1995 was entirely due to volume. 6 LOAN PORTFOLIO The following table presents the remaining contractual principal maturities of selected loan categories at December 31, 1997 and a summary of the major categories of loans outstanding at the end of the last five years. At December 31, 1997, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 ------------------------------------------------------------- OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ------------------- ------------------- FLOATING FLOATING OR OR ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE December 31, ---------------------------------- (in millions) OR LESS RATE RATE RATE RATE TOTAL 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Selected loan maturities: Commercial $ 9,896 $ 1,007 $ 7,453 $ 412 $1,376 $20,144 $19,515 $ 9,750 $ 8,162 $ 6,912 Real estate 1-4 family first mortgage (1) 781 530 129 3,244 4,185 8,869 10,425 4,448 9,050 7,458 Other real estate mortgage 1,704 1,361 3,763 2,918 2,440 12,186 11,860 8,263 8,079 8,286 Real estate construction 1,283 79 767 79 112 2,320 2,303 1,366 1,013 1,110 Foreign 29 18 21 10 1 79 169 31 27 18 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Total selected loan maturities $13,693 $ 2,995 $12,133 $6,663 $8,114 43,598 44,272 23,858 26,331 23,784 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------ Other loan categories: Real estate 1-4 family junior lien mortgage 5,865 6,278 3,358 3,332 3,583 Credit card 5,039 5,462 4,001 3,125 2,600 Other revolving credit and monthly payment 7,185 8,374 2,576 2,229 1,920 ------- ------- ------- ------- ------- Total consumer 18,089 20,114 9,935 8,686 8,103 Lease financing 4,047 3,003 1,789 1,330 1,212 ------- ------- ------- ------- ------- Total loans $65,734 $67,389 $35,582 $36,347 $33,099 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes approximately $1 billion of fixed-initial-rate mortgage (FIRM) loans in the over 5 year fixed rate category. FIRM loans carry fixed rates during the first 3, 5, 7 or 10 years (based on the period selected by the borrower) of the loan term and carry adjustable rates thereafter. 7 UNDERWRITING POLICIES AND PRACTICES It is the policy of the Company to grant credit in accordance with the principles of sound risk management and the Company's business strategy. The Company obtains and analyzes sufficient information to ensure that the purpose of a credit extension is lawful and productive and that the borrower is able to repay as scheduled. Credit is structured in a manner consistent with such supporting analysis and is monitored to detect changes in quality. The Company's credit policies establish the fundamental credit principles which guide the Company in granting loans, leases, lines of credit, standby and commercial letters of credit, acceptances and commitments ("direct credit") to customers on an unsecured, partially secured or fully secured basis. The credit product line for both businesses and individuals includes standardized products as well as customized, individual accommodations. In addition, the Company provides products and services which could become direct credit exposure unless such products are offered on a "cash only" basis. These include: automated clearing house services, controlled disbursement, wire services, foreign exchange services, interest rate protection products, Federal fund lines to banks, cash letters and deposit accounts which create exposure by allowing use of funds advanced/uncollected funds ("operating credit"). Standardized documentation and underwriting and a study of the requirements of the secondary market are an explicit consideration in credit product development. The Company requires some degree of background check into character and credit history of all its credit customers. Extensions of credit must be supported by current financial information on the borrower (and guarantor) which is appropriate to the size and type of credit being offered; such information can denote any material which serves to inform the Company about the financial health of its credit customers. An accompanying credit analysis includes, at a minimum, an evaluation of the customer's financial strength and probability of repayment, with due consideration given to the negative factors which may affect the borrower's ability to meet repayment schedules. Collateral is valued in accordance with Company appraisal standards and, where applicable, appraisal regulations issued under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and other applicable law. For commercial real estate transactions, the recommending officer reviews and evaluates the key assumptions supporting the appraised value. In addition to a broad range of laws and regulations and the Company's credit policies, the Company has established minimum underwriting standards which delineate criteria for sources of repayment, financial strength and enhancements such as guarantees. The primary source of repayment will be recurring cash flow of the borrower or cash flow from the real estate project being financed. Underwriting standards include: minimum financial condition and cash flow hurdles for unsecured credit; maximum loan to collateral value ratios for secured products; minimum cash flow coverage of debt service, or debt to income ratios, for term products; minimum liquidity and maximum financial leverage requirements when lending to highly leveraged borrowers; and, for certain products, a description of any credit scoring criteria and methodology employed. Prudent credit practice will permit credit extensions which are an exception to the minimum underwriting standards; procedures for 8 approval of exceptions are included in Company policy; and certain exceptions are reported to the Board of Directors. Generally, the Company's minimum underwriting standards for commercial real estate include various maximum loan-to-value ("LTV") ratios ranging from 50% to 80%, depending on the type of collateral and the size and purpose of the loan; minimum debt service (stabilized net income divided by debt service cost) ranging from 1.10 to 1.30 depending on the type of property financed; and maximum terms ranging from 2 to 15 years for certain commercial property loans depending on the same loan/collateral characteristics. For example, a typical owner-occupied commercial real estate loan would most often have a maximum LTV of 80%, debt service coverage of 1.25 and a term of 4 to 15 years. For community reinvestment projects, the Company applies special underwriting criteria to its financing of construction of affordable multi-family housing in California built by non-profit as well as for-profit developers. The Company has devoted a limited portion of its commercial real estate portfolio to higher-risk loans, for which a commensurate return is expected. Such transactions include purchases of performing or distressed real estate loans at a discount, acquisition of rated and unrated tranches of commercial mortgage obligations, senior loan originations, mezzanine financing and origination of single assets for securitization. Many of the higher-yielding transactions may contain non-recourse provisions. In general, this business is more "opportunistic" in nature, as opposed to representing a highly defined lending program. As such, higher LTVs (up to 90% or 95%) will be underwritten on occasion, particularly in the case of junior and senior participating debt. Generally, commercial loan categories include unsecured loans and lines of credit with minimum debt service coverage (earnings before interest, taxes, depreciation and amortization divided by debt service cost) dependent on the specific credit analysis. Common forms of collateral pledged to secure commercial credit accommodations include accounts receivable, inventories, equipment, agricultural crops or livestock, marketable securities and cash or cash equivalent. In addition to the minimum debt service requirements, most transactions have maximum terms of 1 to 7 years and/or LTVs in the range of 65% to 85%, based on an analysis of the collateral pledged. Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit, foreign exchange services and collection services, generally uses the same underwriting guidelines as the Company has established for its commercial lending functions. The Company also allocates a small percentage of its commercial loan portfolio to the origination of asset-based loans secured by "hard assets" (accounts receivable, inventory, equipment and/or real estate). In contrast to traditional commercial lending, asset-based borrowers generally do not have the ability to repay their debts through cash flow; therefore, such loans are fully secured and tailored to the growth and turnover of the borrower's self-liquidating asset base. Maximum LTVs are generally in the range of 65% to 85%, with specialized collateral monitoring and control procedures in place to mitigate risk exposure. 9 The Company has devoted a focused product group to providing a full range of credit products to small businesses with annual sales of up to $10 million and in which the owner of the business is also the principal financial decision maker. Credit products include lines of credit, receivables and inventory financing, equipment loans and leases and real estate financing. In addition, the group employs a variety of government sponsored credit programs designed to meet the credit needs of small businesses who fit "near bankable" business profiles. The group utilizes automated credit decision methods, including credit scoring and rule-based criteria, to approve or decline requests for credit. In some cases, more traditional analysis is employed. An evaluation of the soundness and desirability of collateral, if any, is also required before an extension of credit will be made. Loan-to-value, debt service coverage and maximum loan term underwriting guidelines employed are, in general, similar to those described earlier for commercial and commercial real estate loan products. The Company is an active participant in the national transportation finance market, underwriting primarily consumer auto leases and indirect auto loans (sales finance contracts). Direct (branch-originated) loans and marine and recreational vehicle loans are also offered as accommodation products for our retail customers and a select group of dealers in the Western states. Most applicants for these credit products are assigned a credit score which is indicative of their relative probability of repayment. The credit scoring models are validated as to their predictive power on a periodic basis. The lending group includes in its credit decisioning criteria other judgmental factors, such as advance rate and debt to income ratio, which are used to augment this credit score. However, all credit decisions made contrary to an established cut-off score must be supported and documented by a credit officer with the appropriate approval authority. The Company has recently refined its target market for offering consumer credit cards and consumer loans and lines of credit to focus solely on its franchise states in the Western U.S., although some accounts from previous national campaigns remain in the portfolio. The majority of the customer base resides in California. The credit review process includes initial screens to ensure that applicants meet minimum age and income level requirements for the product requested. Fraud screens are also completed. Credit bureau reports are used to calculate the debt-to-income ratios and credit scores on which an evaluation of creditworthiness is based. If accepted by the credit score, applicants with major derogatory bureau information, minimal credit references or high debt ratios are reviewed by an analyst for possible overrides, with income verification and/or collateral verification required for certain products and loan amounts. Judgmental overrides of credit score declines will also occur occasionally. The Company offers first mortgage loan products to customers through Wells Resource Real Estate Services, a joint venture with PHH Mortgage Services. The loan products are underwritten and funded by the joint venture partner (PHH Mortgage Services), who packages the loans for sale in the secondary mortgage markets. A limited number of these loans are purchased by the Company, typically for community lending purposes or other client accommodations. The Company continues to provide second mortgage loans and lines of credit secured by first and second deeds of trust directly to its customers. The Company relies 10 on cash flow as the primary source of repayment for these equity products. The nature of the credit review that is conducted depends on the product, but typically consists of an evaluation of the applicant's debt ratios and credit history, either judgmentally or using a credit score, along with a review of the collateral. Maximum combined LTVs will range from 50% to 100% depending on the nature, amount and term of the loan. The above underwriting practices are general standards that are subject to change; the actual terms and conditions of a specific credit transaction are dependent on an analysis of the specific transaction. CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------- (in millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 2,018 $1,794 $2,082 $2,122 $2,067 Allowance of First Interstate -- 770 -- -- -- Sale of former First Interstate banks -- (11) -- -- -- Provision for loan losses 615 105 -- 200 550 Loan charge-offs: Commercial (269) (140) (55) (54) (110) Real estate 1-4 family first mortgage (19) (18) (13) (18) (25) Other real estate mortgage (18) (40) (52) (66) (197) Real estate construction (3) (13) (10) (19) (68) Consumer: Real estate 1-4 family junior lien mortgage (23) (28) (16) (24) (28) Credit card (486) (404) (208) (138) (177) Other revolving credit and monthly payment (219) (186) (53) (36) (41) ------- ------ ----- ------ ------ Total consumer (728) (618) (277) (198) (246) Lease financing (41) (31) (15) (14) (18) ------- ------ ----- ------ ------ Total loan charge-offs (1,078) (860) (422) (369) (664) ------- ------ ----- ------ ------ Loan recoveries: Commercial 70 54 38 37 71 Real estate 1-4 family first mortgage 4 8 3 6 2 Other real estate mortgage 53 47 53 22 47 Real estate construction 11 11 1 15 4 Consumer: Real estate 1-4 family junior lien mortgage 8 9 3 4 3 Credit card 48 36 13 18 21 Other revolving credit and monthly payment 67 47 12 11 12 ------- ------ ----- ------ ------ Total consumer 123 92 28 33 36 Lease financing 12 8 11 16 9 ------- ------ ----- ------ ------ Total loan recoveries 273 220 134 129 169 ------- ------ ----- ------ ------ Total net loan charge-offs (805) (640) (288) (240) (495) ------- ------ ----- ------ ------ BALANCE, END OF YEAR $ 1,828 $2,018 $1,794 $2,082 $2,122 ------- ------ ----- ------ ------ ------- ------ ----- ------ ------ Total net loan charge-offs as a percentage of average total loans 1.25% 1.05% .83% .70% 1.44% ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ Allowance as a percentage of total loans 2.78% 3.00% 5.04% 5.73% 6.41% ------ ------ ----- ------ ------ ------ ------ ----- ------ ------ - ----------------------------------------------------------------------------------------------------
11 The Securities and Exchange Commission requires the Company to present the ratio of the allowance for loan losses to total nonaccrual loans. This ratio was 346% and 283% at December 31, 1997 and 1996, respectively. This ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, the prospects of borrowers and the value and marketability of collateral as well as, for the nonaccrual portfolio taken as a whole, wide variances from period to period in terms of delinquency and relationship of book to contractual principal balance. Classification of a loan as nonaccrual does not necessarily indicate that the principal of a loan is uncollectible in whole or in part. Consequently, the ratio of the allowance for loan losses to nonaccrual loans, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan losses. Indicators of the credit quality of the Company's loan portfolio and the method of determining the allowance for loan losses are discussed in the 1997 Annual Report to Shareholders. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table on the following page provides a breakdown of the allowance for loan losses by loan category. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to FAS 114) and loans analyzed on a pool basis. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. The Company has deemed it prudent, when reviewing the overall allowance, to maintain a total allowance in excess of projected losses. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. 12
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1997 1996 (1) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Commercial $ 367 $ 277 $ 148 $ 109 $ 152 Real estate 1-4 family first mortgage 23 29 46 41 39 Other real estate mortgage 166 232 165 212 357 Real estate construction 29 40 49 45 92 Consumer: Credit card (2) 428 401 332 87 96 Other consumer 163 206 87 70 87 ------ ------ ------ ------ ------ Total consumer 591 607 419 157 183 Lease financing 43 33 28 21 19 Foreign 1 2 -- -- -- ------ ------ ------ ------ ------ Total allocated 1,220 1,220 855 585 842 Unallocated component of the allowance (3) 608 798 939 1,497 1,280 ------ ------ ------ ------ ------ Total $1,828 $2,018 $1,794 $2,082 $2,122 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
December 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ----------------- ----------------- ----------------- ------------------- ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry AS % AS % as % as % as % as % as % as % as % as % OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total CATGRY LOANS catgry loans catgry loans catgry loans catgry loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial 1.82% 31% 1.42% 30% 1.52% 27% 1.34% 22% 2.20% 21% Real estate 1-4 family first mortgage .26 13 .28 15 1.03 13 .45 25 .52 23 Other real estate mortgage 1.36 19 1.96 18 2.00 23 2.62 22 4.31 25 Real estate construction 1.25 4 1.74 3 3.59 4 4.44 3 8.29 3 Consumer: Credit card (2) 8.49 8 7.34 8 8.30 11 2.78 9 3.69 8 Other consumer 1.25 20 1.41 22 1.47 17 1.26 15 1.58 16 ---- ---- ---- ---- ---- Total consumer 3.27 28 3.02 30 4.22 28 1.81 24 2.26 24 Lease financing 1.06 5 1.10 4 1.57 5 1.58 4 1.57 4 Foreign 1.27 -- 1.18 -- -- -- -- -- -- -- ---- ---- ---- ---- ---- Total allocated 1.86 100% 1.81 100% 2.40 100% 1.61 100% 2.54 100% Unallocated component of the allowance (3) .92 1.19 2.64 4.12 3.87 ---- ---- ---- ---- ---- Total 2.78% 3.00% 5.04% 5.73% 6.41% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
(1) In 1996, the methods used for the allocation of the allowance for loan losses for all loan categories were modified. For example, the modification of the method for determining the allocation for real estate 1-4 family first mortgage loans (and "other consumer" loans) generally reduced the number of months of projected losses covered compared with the method used in prior years. The new methodology provided approximately 12 months coverage of projected loan losses for the real estate 1-4 family first mortgage loans in 1997 and approximately 13 months coverage in 1996, compared with approximately 40 months coverage in 1995. (2) The allocation for credit card loans in 1997, 1996 and 1995 approximated 12 months of projected losses, compared with 7 months in 1994 and 1993. (3) This amount and any unabsorbed portion of the allocated allowance are also available for any of the above listed loan categories. 13 PROPERTIES The Company occupied 2,146 premises, consisting of physical distribution offices and administrative buildings, in 10 Western states as of December 31, 1997. On that date, 813 premises were owned, 1,294 premises were leased and 39 premises were owned in part and leased in part. The leases are generally for terms not exceeding 30 years. The Company owns its 12-story headquarters building in San Francisco, California; the Wells Fargo Centers in Phoenix, Arizona and Portland, Oregon; and three data processing and operation centers totaling approximately 1,240,000 square feet in California, Oregon and Arizona. The Company is also a joint venture partner in two office buildings in downtown Los Angeles and one in Sacramento, of which approximately 540,000 square feet is occupied by administrative staff and 560,000 square feet is sublet. In addition, the Company leases approximately 8,900,000 square feet of office space for data processing support and various administrative departments in major locations in California, Texas, Arizona, Colorado and Oregon. At December 31, 1997, the Company had 956 traditional branches, 523 in-store branches, 377 banking centers and 27 business centers in 10 Western states. Motor banking facilities ("motorbanks") are available at 52 of the traditional branches. 14 EXECUTIVE OFFICERS OF THE REGISTRANT
Date from Name Office held which held Age - ------------------- -------------------------- ---------- --- *Paul Hazen Chairman of the Board, President January 1995 56 and Chief Executive Officer *Rodney L. Jacobs Vice Chairman and January 1990 57 Chief Financial Officer *Terri A. Dial Vice Chairman March 1996 48 *Charles M. Johnson Vice Chairman January 1992 56 *Clyde W. Ostler Vice Chairman January 1990 51 Michael J. Gillfillan Vice Chairman and January 1992 49 Chief Credit Officer David A. Hoyt Vice Chairman May 1997 42 Joseph P. Stiglich Vice Chairman May 1997 50 Paul M. Watson Vice Chairman March 1996 58 Leslie L. Altick Executive Vice President and July 1995 47 Director of Corporate Communications Ross J. Kari Executive Vice President November 1995 39 and Finance Group Head Frank A. Moeslein Executive Vice President May 1990 54 and Controller Michael M. Patriarca Executive Vice President and April 1997 47 General Auditor Guy Rounsaville, Jr. Executive Vice President, March 1985 54 Chief Counsel and Secretary Eric D. Shand Executive Vice President and July 1995 45 Chief Loan Examiner Kevin J. Sullivan Executive Vice President September 1997 56 and Personnel Director
- ----------------------- * Office of the Chairman The principal occupation of each of the executive officers during the past five years has been in the position reported above or in other positions as an officer with the Company, except for Kevin J. Sullivan, who has been with the Company since September 1997; prior to that, he was Senior Consultant, Human Resources Strategy at Watson Wyatt from 1996 to 1997, and Senior Vice President, Human Resources at Apple, Inc. from 1987 to 1996. There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits: (1) The consolidated financial statements and related notes, the independent auditors' report thereon and supplementary data that appear on pages 35 through 72 of the 1997 Annual Report to Shareholders are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because the conditions requiring their filing do not exist. (3) Exhibits: Exhibit number Description ------- ----------- 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) of Form 10-K filed March 21, 1994 (b) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Adjustable Rate Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(c) of Form 10-K filed March 21, 1994 (c) Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof, Which Have Not Been Set Forth in the Certificate of Incorporation or in any Amendment Thereto, of the Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H, incorporated by reference to Exhibit 4(a) of Form 8-K/A filed September 23, 1996 (d) By-Laws, incorporated by reference to Exhibit 3(ii) of Form 10- Q filed August 13, 1997 4(a) The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. 10(a) Benefits Restoration Program, as amended through April 18, 1995, incorporated by reference to Exhibit 10(a) of Form 10-K for the year ended December 31, 1995 (b) Deferral Plan for Directors, as amended through November 19, 1991 (c) 1990 Director Option Plan, as amended through November 19, 1991 (d) 1987 Director Option Plan, as amended through February 21, 1995, incorporated by reference to Exhibit A to the Company's Proxy Statement filed March 10, 1995, and as further amended by the amendment adopted September 16, 1997, incorporated by reference to Exhibit 10 to Form 10-Q filed November 13, 1997 16 10(e) Director Retirement Plan, incorporated by reference to Exhibit 10(e) of Form 10-K for the year ended December 31, 1993 (f) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) of Form 10-K for the year ended December 31, 1995 (g) 1982 Equity Incentive Plan, as amended through November 15, 1988, incorporated by reference to Exhibit 10(g) of Form 10-K for the year ended December 31, 1993 (h) Executive Incentive Pay Plan, incorporated by reference to Exhibit 10(h) of Form 10-K for the year ended December 31, 1995 (i) Executive Loan Plan, incorporated by reference to Exhibit 10(i) of Form 10-K for the year ended December 31, 1994 (j) Long-Term Incentive Plan, incorporated by reference to Exhibit A of the Proxy Statement filed March 14, 1994 (k) Senior Executive Performance Plan, incorporated by reference to Exhibit B of the Proxy Statement filed March 14, 1994 12(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.89, 1.93, 2.19, 2.20 and 1.90 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.03, 4.64, 4.56, 5.04 and 4.53 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. 12(b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 1.86, 1.82, 2.09, 2.07 and 1.77 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.78, 3.78, 3.99, 4.18 and 3.51 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. 13 1997 Annual Report to Shareholders, pages 10 through 72 21 Subsidiaries of the Registrant -- Wells Fargo & Company's only significant subsidiary, as defined, is Wells Fargo Bank, N.A. 23 Consent of Independent Accountants 27 Financial Data Schedule 17 (b) The Company filed the following reports on Form 8-K during the fourth quarter of 1997 and through the date hereof in 1998: (1) October 21, 1997 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1997 (2) October 22, 1997 under Item 5, containing the Press Release that announced the Company's additional share repurchase authorization and quarterly common stock dividend (3) January 20, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter and year ended December 31, 1997 STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 1997, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents filed prior to January 1, 1998 pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 16, 1998. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN --------------------------------- Frank A. Moeslein (Executive Vice President and Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 1998:
Signature Capacity - --------- -------- PAUL HAZEN Chairman of the Board, President and Chief - --------------------------- Executive Officer (Principal Executive (Paul Hazen) Officer) RODNEY L. JACOBS Vice Chairman and Chief Financial Officer - --------------------------- (Principal Financial Officer) (Rodney L. Jacobs) FRANK A. MOESLEIN Executive Vice President and Controller - --------------------------- (Principal Accounting Officer) (Frank A. Moeslein) H. JESSE ARNELLE Director - --------------------------- (H. Jesse Arnelle) Director - --------------------------- (Michael R. Bowlin) EDWARD M. CARSON Director - --------------------------- (Edward M. Carson) WILLIAM S. DAVILA Director - --------------------------- (William S. Davila) RAYBURN S. DEZEMBER Director - --------------------------- (Rayburn S. Dezember) Director - --------------------------- (Robert K. Jaedicke) Director - --------------------------- (Thomas L. Lee) ELLEN M. NEWMAN Director - --------------------------- (Ellen M. Newman) PHILIP J. QUIGLEY Director - --------------------------- (Philip J. Quigley) CARL E. REICHARDT Director - --------------------------- (Carl E. Reichardt) DONALD B. RICE Director - --------------------------- (Donald B. Rice) RICHARD J. STEGEMEIER Director - --------------------------- (Richard J. Stegemeier) SUSAN G. SWENSON Director - --------------------------- (Susan G. Swenson) DANIEL M. TELLEP Director - --------------------------- (Daniel M. Tellep) CHANG-LIN TIEN Director - --------------------------- (Chang-Lin Tien) JOHN A. YOUNG Director - --------------------------- (John A. Young)
19 EX-10.B 2 EXHIBIT 10B WELLS FARGO & COMPANY DEFERRAL PLAN FOR DIRECTORS I. PURPOSE OF THE PLAN The purpose of this Plan ("Plan") is to offer those members of the Board of Directors of Wells Fargo & Company ("Company") whose service with the Company is limited to Board membership the opportunity to participate in a compensation arrangement which will allow them to defer the receipt of all or a portion of their remuneration from the Company each year. This Plan is effective as of January 1, 1992 and supersedes the prior Plan. II. ADMINISTRATION OF THE PLAN (A) The Plan shall be administered by the Company's Board of Directors ("Board"), which shall have sole authority to interpret and construe the provisions of the Plan and to adopt rules and regulations for administering the Plan. Decisions of the Board shall be final and binding on all parties who have an interest in the Plan. (B) Only remuneration for services rendered as a Board member may be the subject of deferral under this Plan. III. DEFERRAL ELECTION (A) Each member of the Board who serves the Company in no capacity other than as a Board member shall be eligible to participate in this Plan. The participation of each such member shall commence with his/her election to the Board and shall continue throughout his/her period of Board membership. 1 (B) Each participant shall have the right to make an annual election to defer the receipt of the remuneration payable to him/her for services rendered as a Board member for each calendar year for which he/she is a participant in the Plan and shall have the right to elect as to each such deferral to have such deferred remuneration accounted for under paragraph IV as either units based on stock value or as cash with interest by delivering a notice to the Board or its designate prior to the commencement date of the calendar year for which the remuneration is payable. (C) Each participant may elect to defer either: (1) one hundred percent (100%) of his/her annual retainer fee; (2) one hundred percent (100%) of his/her meeting fees; or (3) one hundred percent (100%) of his/her total remuneration from the Company. (D) The election, once made, shall be irrevocable with respect to the calendar year for which it was made. IV. DEFERRED COMPENSATION ACCOUNT Deferred compensation will, at the participant's election under paragraph III, be accounted for in either of the following manners: (A) AS CASH WITH INTEREST. The Company shall establish on its books a deferred earnings account for each participant who properly exercises his/her deferral election under the Plan. The 2 amount of the remuneration deferred by a participant shall be credited to his/her deferred earnings account as of the first day of each month in which retainer fees and/or meeting fees would have been paid had they not been deferred. As of each December 31 there shall be added to the deferred earnings account of each participant an interest equivalent on the amount in the account for the preceding year at a rate equal to the average annualized rate for 3-year Treasury Notes over the preceding calendar year. Each participant shall at all times have a fully vested and non-forfeitable right to all amounts properly credited to his/her deferred earnings account. (B) AS UNITS BASED ON STOCK VALUE. The Company shall establish on its books a deferred earnings account for each participant who properly exercises his/her deferral election under the Plan. As of the first day of each month, each deferred earnings account will be credited with the number of units ("Units"), calculated to the nearest thousandth of a Unit determined by (1) taking the amount of retainer fees and/or meeting fees which would otherwise been paid during the month had they not been deferred and dividing by the closing market price of the Company's common stock as reported in the Wall Street Journal for the last business day of the preceding month (the "Stock Price"), (2) multiplying the number of Units in each participant's deferred earnings account (including Units credited under the preceding Section (I) for the month) by any cash dividends declared by the Company on its common stock and dividing the 3 product by the Stock Price, and (3) multiply the number of Units in the participant's deferred earnings account by any stock dividends declared by the Company on its common stock. Each deferred earnings account will continue to be credited with interest equivalents or Units, as specified above, until it has been fully distributed in accordance with paragraph V. Each participant shall at all times have a fully vested and non-forfeitable right to all amounts properly credited to his/her deferred earnings account. V. PAYMENT OF DEFERRED COMPENSATION (A) The deferred earnings account of each participant shall be divided into a series of sub-accounts, one for each year remuneration is deferred by the participant, together with the related interest equivalents or Units. Payments of each sub-account shall commence on the January 1 next following the earliest of: (1) his/her cessation of Board membership. (2) the expiration of a designated period of years as designated by the participant pursuant to subparagraph B below. (3) the death of the participant. (B) Each participant shall designate on the notice of deferral election: (1) a period of years (with a minimum of one year between the year of deferral and the year of distribution) after which payment is to commence prior 4 to his/her death or cessation of Board membership and (2) the manner of payment upon commencement (i.e., lump sum or periodic payment). The designations shall be made at the same time as the deferral election pursuant to paragraph III and shall be irrevocable with respect to the year in question. (C) Upon commencement of payment pursuant to subparagraph (A) above each sub-account of a participant shall be distributed pursuant to his/her election(s) under subparagraph (B) either in one lump sum payment or in a series of annual installments over a designated period of years. If a participant elected annual installments, the amount distributed each year shall be equal to the total value of the sub-account divided by the number of installments remaining to be made, including the current installment. Should a participant elect to receive payment in a series of installment payments, then he/she shall further designate whether any balance in his deferred earnings account upon his/her death shall be paid to his/her beneficiary in a lump sum or over a further period of years. (D) Each payment shall be made within thirty (30) days after the date it becomes payable. VI. GENERAL PROVISIONS (A) The obligation to pay the deferred remuneration and the related interest equivalent or Units shall at all times be an unfunded and unsecured obligation of the Company. The Company shall not establish any trust, escrow arrangement or other fiduciary relationship for the purpose of segregating funds for 5 the payment of such deferred remuneration or earnings attributable thereto, nor shall the Company be under any obligation to invest any portion of its general assets in mutual funds, stocks, bonds, securities or other similar investments in order to accumulate funds for the satisfaction of its obligations under the Plan. The participant and his/her beneficiary shall look solely and exclusively to the general assets of the Company for the payment of the participant's deferred earnings account. (B) The Plan shall become effective upon its adoption by the Board. The Board may at any time amend, suspend or terminate the Plan; provided, however, that such action shall not adversely affect rights previously vested and non-forfeitable under the Plan. (C) The participant shall have no right to alienate, pledge or encumber his/her interest in his/her deferred earnings account, nor shall such account be subject in any way to the claims of a participant's creditors or to attachment, execution or other process of law. (D) In the event of the participant's death, the balance of his/her deferred earnings account, if any, shall be paid, pursuant to the provisions of paragraph V, to the participant's designated beneficiary or, in the absence of such designation, in accordance with the participant's will or the laws of descent and distribution. A participant may from time to time revoke his/her beneficiary designation and file a new beneficiary designation with the Board. All beneficiary designations must be on the form prescribed by the Board. 6 EX-10.C 3 EXHIBIT 10C WELLS FARGO & COMPANY 1990 DIRECTOR OPTION PLAN I. PURPOSE The purpose of this 1990 Director Option Plan (the "Plan") of Wells Fargo & Company (the "Company") is to encourage ownership in the Company by outside directors of the Company whose continued services are considered essential to the Company's continued progress and to provide them with a further incentive to continue as directors of the Company. II. ELIGIBILITY Each director of the Company is eligible to participate in the Plan, unless he or she is an employee of the Company or any subsidiary of the Company. III. STOCK SUBJECT TO THE PLAN A. CLASS. The stock which is the subject of options granted under the Plan shall be the Company's authorized but unissued Common Stock, par value $5 per share ("Common Stock"). In connection with the issuance of shares of Common Stock under the Plan, the Company may repurchase shares in the open market or otherwise. B. AGGREGATE ANNUAL AMOUNT. The total number of shares subject to options granted under the Plan in any one calendar year shall not exceed 20,000 shares (subject to adjustment under Section VIII). IV. TERMS, CONDITIONS AND FORM OF OPTIONS Each option granted under this Plan shall be evidenced by a written agreement in substantially the form attached hereto as Exhibit A, which agreement shall comply with and be subject to the following terms and conditions: A. NON-STATUTORY STOCK OPTIONS. All options granted under the Plan shall be non-statutory options not entitled to special tax treatment under Section 422A of the Internal Revenue Code of 1986, as amended to date and as may be further amended from time to time (the "Code"), B. OPTION GRANT DATES. Options shall be granted automatically on the date of adoption of the Plan by the Board of Directors and on the date of each annual meeting of the Company's stockholders ("Annual Meeting") beginning with the 1991 Annual Meeting. If, after the date of adoption of the Plan , a director first becomes an eligible director on a date other than an Annual Meeting, an option shall be granted to such director on the date that he or she first becomes eligible. C. NUMBER OF OPTION SHARES. An option granted to an eligible director on the date of adoption of the Plan or the date of an Annual Meeting shall be an option to acquire five hundred (500) shares. The number of shares granted to a director on a date other than the date of an Annual Meeting shall be equal to forty-two (42) multiplied by the number of full months remaining after the date of grant and prior to the next following Annual Meeting. D. TRANSFERABILITY. Each option granted under the Plan by its terms shall not be transferable by the director otherwise than by will, or by the laws of descent and distribution, and shall be exercised during the lifetime of the director only by such director. E. TERM OF OPTION. Options become exercisable on the first anniversary of the date upon which they were granted; provided, however, that any option granted pursuant to the Plan shall become exercisable in full upon the death of the director or retirement because of total and permanent disability or, in the case of an option that has been outstanding for at least six (6) months, retirement by reason of age in accordance with Company policy. In no event, however, shall any option become exercisable prior to stockholder approval of the Plan in accordance with Article IX. Unless terminated earlier in accordance with the terms of the Plan, each option shall terminate upon the expiration of ten (10) years after such option was granted. F. MANNER OF EXERCISE. Options may be exercised only by written notice to the Company at its head office accompanied by payment of the full consideration for the shares as to which they are exercised in one or a combination of the following alternative forms: i. cash; ii. shares of Common Stock held for at least six (6) months, valued as of the exercise date; or iii. to the extent that such exercise would not result in a violation of Section 16(b) of the Securities Exchange Act of 1934, by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price; provided that such exercise shall be conditioned upon, and no shares shall be issued pursuant to such exercise until, receipt of such amount by the Corporation. G. TERMINATION OF DIRECTORSHIP. All rights of a director in an option, to the extent that it has not been exercised, shall terminate upon the termination of his or her services as a director for any reason other than the death of the director or retirement because of age in accordance with Company policy or retirement because of total and permanent disability, In the case of such a retirement, whether by reason of disability or age, a director's option shall terminate three (3) years after the date of retirement or, if earlier, on the original expiration date of the option. The foregoing notwithstanding, any option granted to a director under the Plan and outstanding on the date of the director's death may be exercised by the personal representative of the director's estate or by the person or persons to whom the option is transferred pursuant to the director's will or in accordance with the laws of descent and distribution, at any time prior to the earlier of the three years after the date of the director's death or the original expiration date of such option; upon the earlier of such events the option shall terminate. V. OPTION PRICE The option price per share for the shares covered by each option shall be the fair market value of one share of Common Stock as of the date of grant of the option. VI. VALUATION OF COMMON STOCK For all valuation purposes under the Plan, the fair market value of a share of Common Stock shall be its closing price as quoted on the New York Stock Exchange Composite Tape, on the day immediately prior to the date in question. If there is no quotation available for such day, then the closing price on the next preceding day for which there does exist such a quotation shall be determinative of fair market value. VII. NO RIGHT TO CONTINUE AS A DIRECTOR Neither the Plan nor the granting of an option nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation. VIII. ADJUSTMENT TO STOCK In the event any change is made to the Common Stock subject to the Plan or subject to any outstanding option granted under the Plan (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or otherwise), then appropriate adjustments shall be made to the maximum number of shares that may be the subject of options granted under the Plan in any one calendar year and the number of shares and price per share of stock subject to outstanding options. The grant of options under the Plan shall not affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IX. EFFECTIVE DATE The Plan shall take effect on the date of adoption by the Board of Directors of the Company, but no shares of Common Stock shall be issued under the Plan and no options granted under the Plan shall be exercisable before the Plan is approved by the holders of at least a majority of the Corporation's voting stock present or represented and voting at a duly-held meeting at which a quorum is present or represented. If such shareholder approval is not obtained, then any options previously granted under the Plan shall terminate and no further options shall be granted. X. AMENDMENT OF THE PLAN The Board of Directors of the Company may suspend or discontinue the Plan or revise or amend it in any respect whatsoever; provided that the Board shall not, without the approval of the Company's stockholders (i) change the number of shares of Common Stock which may be issued under the Plan (unless necessary to effect the adjustments required under Article VIII), (ii) modify the eligibility requirements for awards under the Plan or (iii) make any other change with respect to which the Board determines that shareholder approval is required by applicable law or regulatory standards; nor shall any amendment adversely affect a director's rights under any option previously granted without the director's consent. XI. USE OF PROCEEDS The cash proceeds received by the Company from the issuance of shares pursuant to options under the Plan shall be used for general corporate purposes. XII. REGULATORY APPROVALS The implementation of the Plan, the granting of any option under the Plan, and the issuance of Common Stock upon the exercise of any such option shall be subject to the Company's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it or the Common Stock issued pursuant to it. XIII. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of California and construed accordingly, WELLS FARGO & COMPANY 1990 DIRECTOR OPTION PLAN Amendment No. 1 The Wells Fargo & Company 1990 Director Option Plan (the "Plan") is hereby amended as set forth herein, effective as of January 1. 1992: 1. The following sentence is added as the last sentence of Section X: "In addition, the provisions of the plan relating to eligibility for awards under the Plan and the amount, type, price and timing of awards under the Plan shall not be amended more than once every six months, other than to conform to changes to the Internal Revenue Code, the Employee Retirement Income Security Act or the rules thereunder." 2. The term "Section 42211 shall be substituted for the term "Section 422A" wherever the latter shall appear in the Plan. 3. Except as modified by this Amendment, all the terms and provisions of the Plan shall continue in full force and effect. EX-12.A 4 EXHIBIT 12A EXHIBIT 12(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------ Year ended December 31, ---------------------------------------------- (in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $2,154 $1,979 $1,777 $1,454 $1,038 Fixed charges 2,415 2,130 1,496 1,214 1,157 ------ ------ ------ ------ ------ $4,569 $4,109 $3,273 $2,668 $2,195 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges (1): Interest expense $2,290 $2,002 $1,431 $1,155 $1,104 Estimated interest component of net rental expense 125 128 65 59 53 ------ ------ ------ ------ ------ $2,415 $2,130 $1,496 $1,214 $1,157 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 1.89 1.93 2.19 2.20 1.90 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $2,154 $1,979 $1,777 $1,454 $1,038 Fixed charges 712 544 499 360 294 ------ ------ ------ ------ ------ $2,866 $2,523 $2,276 $1,814 $1,332 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense $2,290 $2,002 $1,431 $1,155 $1,104 Less interest on deposits 1,703 1,586 997 854 863 Estimated interest component of net rental expense 125 128 65 59 53 ------ ------ ------ ------ ------ $ 712 $ 544 $ 499 $ 360 $ 294 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 4.03 4.64 4.56 5.04 4.53 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------
(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 were 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 were 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-12.B 5 EXHIBIT 12B EXHIBIT 12(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ---------------------------------------------------------------------------------------------------------------------- Year ended December 31, ---------------------------------------------- (in millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $2,154 $1,979 $1,777 $1,454 $1,038 Fixed charges 2,415 2,130 1,496 1,214 1,157 ------ ------ ------ ------ ------ $4,569 $4,109 $3,273 $2,668 $2,195 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividend requirement $ 25 $ 67 $ 42 $ 43 $ 50 Ratio of income before income tax expense to net income 1.86 1.85 1.72 1.73 1.70 ------ ------ ------ ------ ------ Preferred dividends (2) $ 47 $ 124 $ 72 $ 74 $ 85 ------ ------ ------ ------ ------ Fixed charges (1): Interest expense 2,290 2,002 1,431 1,155 1,104 Estimated interest component of net rental expense 125 128 65 59 53 ------ ------ ------ ------ ------ 2,415 2,130 1,496 1,214 1,157 ------ ------ ------ ------ ------ Fixed charges and preferred dividends $2,462 $2,254 $1,568 $1,288 $1,242 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 1.86 1.82 2.09 2.07 1.77 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $2,154 $1,979 $1,777 $1,454 $1,038 Fixed charges 712 544 499 360 294 ------ ------ ------ ------ ------ $2,866 $2,523 $2,276 $1,814 $1,332 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends (2) $ 47 $ 124 $ 72 $ 74 $ 85 ------ ------ ------ ------ ------ Fixed charges: Interest expense 2,290 2,002 1,431 1,155 1,104 Less interest on deposits 1,703 1,586 997 854 863 Estimated interest component of net rental expense 125 128 65 59 53 ------ ------ ------ ------ ------ 712 544 499 360 294 ------ ------ ------ ------ ------ Fixed charges and preferred dividends $ 759 $ 668 $ 571 $ 434 $ 379 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 3.78 3.78 3.99 4.18 3.51 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ----------------------------------------------------------------------------------------------------------------------
(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. EX-13 6 EXHIBIT 13 FINANCIAL REVIEW OVERVIEW Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Annual Report, Wells Fargo & Company and its subsidiaries are referred to as the Company. On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate). As a result, the financial information presented in this Annual Report for the years ended December 31, 1997 and 1996 reflects the effects of the acquisition subsequent to the Merger's consummation (i.e., the year 1997 reflects twelve months of combined operations, compared with nine months for the year 1996). Since the Company's results of operations subsequent to April 1, 1996 reflect amounts recognized from the combined operations, they cannot be divided between or attributed directly to either of the two former entities nor can they be directly compared with prior periods. RETURN ON AVERAGE TOTAL ASSETS (ROA) (%) [LINE GRAPH] RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) (%) [LINE GRAPH] Net income in 1997 was $1,155 million, compared with $1,071 million in 1996, an increase of 8%. Earnings per common share were $12.77, compared with $12.21 in 1996, an increase of 5%. Return on average assets (ROA) was 1.16% and return on average common equity (ROE) was 8.79% in 1997, compared with 1.15% and 8.83%, respectively, in 1996. Earnings before the amortization of goodwill and nonqualifying core deposit intangible (CDI) ("cash" or "tangible" earnings) were $17.96 per share in 1997, compared with $16.74 in 1996. On the same basis, ROA was 1.77% and ROE was 34.39% in 1997, compared with 1.66% and 28.46%, respectively, in 1996. Net interest income on a taxable-equivalent basis was $4,627 million in 1997, compared with $4,532 million a year ago. The Company's net interest margin was 5.99% for 1997, compared with 6.11% in 1996. Noninterest income increased from $2,200 million in 1996 to $2,704 million in 1997, an increase of 23%. A significant portion of the increase was due to higher credit card and ATM fees reflecting an industry trend toward increased fees. Noninterest expense decreased from $4,637 million in 1996 to $4,549 million in 1997, a decrease of 2%. As of year-end 1997, the Company realized approximately $700 million in annualized cost savings as a result of the Merger, compared to the pre-merger objective of about $800 million. The Company failed to realize all of the efficiencies from the Merger due to the focus on maintaining a stable operating environment in 1997, which caused a delay in branch closures and a higher staff level requirement than originally anticipated. For discussion of the Company's plan for former First Interstate branch closures and consolidations, see Note 2 to Financial Statements. The provision for loan losses was $615 million in 1997, compared with $105 million in 1996. During 1997, net charge-offs were $805 million, or 1.25% of average total loans, compared with $640 million, or 1.05%, during 1996. The allowance for loan losses was $1,828 million, or 2.78% of total loans, at December 31, 1997, compared with $2,018 million, or 3.00%, at December 31, 1996. At December 31, 1997, total nonaccrual and restructured loans were $537 million, or .8% of total loans, compared with $724 million, or 1.1%, at December 31, 1996. Foreclosed assets were $158 million at December 31, 1997, compared with $219 million at December 31, 1996. 10 The Company's direct credit risk related to the ongoing volatility of the financial markets in Asia is predominantly short-term in nature and is not significant. However, the primary risk to the Company is the long-term impact of the Asian financial markets on the economy of the U. S. (in particular, California) and the Company's borrowers. Understanding this risk is more difficult and is dependent on the passage of time. At December 31, 1997, the ratio of common stockholders' equity to total assets was 12.94%, compared with 12.41% at December 31, 1996. The Company's total risk-based capital (RBC) ratio at December 31, 1997 was 11.49% and its Tier 1 RBC ratio was 7.61%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. The Company's ratios at December 31, 1996 were 11.70% and 7.68%, respectively. The Company's leverage ratios were 6.95% and 6.65% at December 31, 1997 and 1996, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline for banks of 5%. A discussion of RBC and leverage ratio guidelines is in the Capital Adequacy/Ratios section. The Company has bought in the past, and will continue to buy, shares to offset 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 repurchased a total of 5.3 million shares (net of shares issued) in 1997, compared with 7.7 million shares (net of shares issued) in 1996. The Company currently expects to continue repurchasing shares in 1998 using cash earnings not required to support balance sheet growth. The Company adopted on December 31, 1997 Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. This Statement establishes standards for computing and presenting earnings per common share. It replaces the presentation of primary earnings per common share (net income applicable to common stock divided by average common shares outstanding and, if dilution is 3% or more, common stock equivalents) with a presentation of Table 1 RATIOS AND PER COMMON SHARE DATA
- ------------------------------------------------------------------------------------------ Year ended December 31, -------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------ PROFITABILITY RATIOS Net income to average total assets (ROA) 1.16% 1.15% 2.03% Net income applicable to common stock to average common stockholders' equity (ROE) 8.79 8.83 29.70 Net income to average stockholders' equity 8.74 8.81 26.99 EFFICIENCY RATIO (1) 62.2% 69.0% 55.3% NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (2) Net income applicable to common stock $ 1,588 $ 1,376 $ 1,025 Earnings per common share 17.96 16.74 21.08 Earnings per common share - assuming dilution 17.77 16.52 20.76 ROA 1.77% 1.66% 2.12% ROE 34.39 28.46 34.92 Efficiency ratio 54.6 62.2 54.5 CAPITAL RATIOS At year end: Common stockholders' equity to assets 12.94% 12.41% 7.09% Stockholders' equity to assets 13.22 12.96 8.06 Risk-based capital (3) Tier 1 capital 7.61 7.68 8.81 Total capital 11.49 11.70 12.46 Leverage (3) 6.95 6.65 7.46 Average balances: Common stockholders' equity to assets 12.92 12.17 6.57 Stockholders' equity to assets 13.28 13.01 7.53 PER COMMON SHARE DATA Dividend payout (4) 41% 43% 23% Book value $146.41 $147.72 $ 75.93 Market prices (5): High $339.44 $289.88 $229.00 Low 246.00 203.13 143.38 Year end 339.44 269.75 216.00 - ------------------------------------------------------------------------------------------
(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 $132 million and $1,023 million, respectively, for the year ended December 31, 1997. Goodwill amortization and average balance (which are not tax effected) were $326 million and $7,218 million, respectively, for the year ended December 31, 1997. See page 20 for additional information. (3) See the Capital Adequacy/Ratios section for additional information. (4) Dividends declared per common share as a percentage of earnings per common share. (5) Based on daily closing prices reported on the New York Stock Exchange Composite Transaction Reporting System. 11 (basic) earnings per common share (net income applicable to common stock divided by average common shares outstanding), which the Company previously presented. It also requires dual presentation of earnings per common share and earnings per common share - assuming dilution on the face of the income statement and a reconciliation of the numerator and denominator of both earnings per common share computations. The Statement requires restatement of all prior period earnings per common share data presented, including interim periods. In June 1997, the Financial Accounting Standards Board (FASB) issued FAS 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It requires that a company classify items of other comprehensive income, as defined by accounting standards, by their nature (e.g., unrealized gains or losses on securities) in a financial statement, but does not require a specific format for that statement. The accumulated balance of other comprehensive income is to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This Statement is effective with the year-end 1998 financial statements; however, a total for comprehensive income is required in the financial statements of interim periods beginning with the first quarter of 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. This Annual Report includes forward-looking statements that involve inherent risks and uncertainties. The Company cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the progress of integrating First Interstate, economic conditions, customer disintermediation, technology changes and competition in the geographic and business areas in which the Company conducts its operations.
Table 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------- % CHANGE FIVE-YEAR 1997/ COMPOUND (in millions) 1997 1996 1995 1994 1993 1992 1996 GROWTH RATE - ------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 4,614 $ 4,521 $ 2,654 $ 2,610 $ 2,657 $ 2,691 2 % 11% Provision for loan losses 615 105 -- 200 550 1,215 486 (13) Noninterest income 2,704 2,200 1,324 1,200 1,093 1,059 23 21 Noninterest expense 4,549 4,637 2,201 2,156 2,162 2,035 (2) 17 Net income 1,155 1,071 1,032 841 612 283 8 32 Earnings per common share $ 12.77 $ 12.21 $ 20.37 $ 14.78 $ 10.10 $ 4.44 5 24 Earnings per common share - assuming dilution 12.64 12.05 20.06 14.54 9.96 4.39 5 24 Dividends declared per common share 5.20 5.20 4.60 4.00 2.25 1.50 -- 28 BALANCE SHEET (at year end) Investment securities $ 9,888 $ 13,505 $ 8,920 $11,608 $13,058 $ 9,338 (27)% 1% Loans 65,734 67,389 35,582 36,347 33,099 36,903 (2) 12 Allowance for loan losses 1,828 2,018 1,794 2,082 2,122 2,067 (9) (2) Goodwill 7,031 7,322 382 416 477 523 (4) 68 Assets 97,456 108,888 50,316 53,374 52,513 52,537 (10) 13 Core deposits 71,397 81,581 37,858 38,508 41,291 41,879 (12) 11 Common stockholders' equity 12,614 13,512 3,566 3,422 3,676 3,170 (7) 32 Stockholders' equity 12,889 14,112 4,055 3,911 4,315 3,809 (9) 28 Tier 1 capital 6,119 6,565 3,635 3,562 3,776 3,287 (7) 13 Total capital 9,242 10,000 5,141 5,157 5,446 5,255 (8) 12 - -------------------------------------------------------------------------------------------------------------------
12 LINE OF BUSINESS RESULTS The Company has identified six distinct lines of business for the purposes of management reporting, as shown in Table 3. The line of business results show the financial performance of the major business units. Line of business results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible business unit. This process is dynamic and somewhat subjective. Unlike financial accounting, there is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the business lines based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. First Interstate results prior to April 1, 1996 are not included and, therefore, the year 1997 is not comparable to 1996. 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. Internal expense allocations are independently negotiated between business units and, where possible, service and price is measured against comparable services available in the external marketplace. The following describes the six 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. In 1997, the Retail Distribution Group continued the consolidation of the former First Interstate physical distribution network into the Wells Fargo physical distribution network. This consolidation consisted of the closure and sale of traditional branches as well as the continued opening of in-store branches and banking centers. The Company closed 124 traditional branches in California and 88 traditional branches in other states. The Company also sold 30 traditional branches in California and sold 87 traditional branches in other states. The distribution network opened 70 in-store locations in California and 171 in other states. As of December 31, 1997, the Company had 956 traditional branches, 523 in-store branches, 377 banking centers and 27 business centers in 10 Western states. Motor banking facilities ("motorbanks") are available at 52 of the traditional branches. The in-store branches and banking centers continue to be part of the ongoing effort to provide higher-convenience, lower-cost service to customers. The business centers are designed primarily to service small and medium-sized businesses and are typically located in or near areas with a high concentration of these businesses. The number of ATMs continued to increase in 1997, reaching a total of 4,400 at December 31, 1997, compared with 4,283 at December 31, 1996. THE BUSINESS BANKING GROUP provides a full range of credit products and financial services to small businesses and their owners. These include lines of credit, receivables and inventory financing, equipment loans and leases, real estate financing, SBA financing, cash management, deposit and investment accounts, payroll services, retirement plans, 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 is also the principal financial decision maker. Business Banking distributes credit products in all 50 states and Canada through national direct marketing and 140 commercial loan specialists in small business lending offices in 22 markets in the Western United States. Business Banking jointly owns with First Data Corp. a merchant card processing alliance, which acquires customers through a 150-person sales force. Business Banking provides access to customers through a wide range of channels. These include Business Banking Officers who are relationship managers for the premier segment of small business customers, as well as Wells Fargo's extensive network of traditional and in-store branches, banking centers, ATMs and business centers. Business Banking also serves customers through its National Business Banking Center, a 24-hour telephone center dedicated to the small business customer, and through Business Gateway, a personal computer banking service exclusively for the small business customer. Business Banking has partnered with the National Association of Women Business Owners to lend $10 billion to women-owned businesses and with the United States Hispanic Chamber of Commerce to lend $1 billion to Latino-owned businesses over the next six years. In the third quarter of 1997, the Company launched the first phase of a direct lending program to selected Canadian business owners. Via mail and telephone, small businesses can contact Wells Fargo in the U.S. and receive a loan decision within 48 hours. In 1998, the Company will launch its lending program to Canada nationally. 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 13
Table 3 LINE OF BUSINESS RESULTS (ESTIMATED) - --------------------------------------------------------------------------------------------------------- (income/expense in millions, average balances in billions) - --------------------------------------------------------------------------------------------------------- Retail Business Distribution Banking Investment Group Group Group ---------------- ---------------- ----------------- 1997 1996 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------- Net interest income (1) $ 979 $ 821 $ 783 $ 651 $ 774 $ 744 Provision for loan losses (2) -- -- 136 92 5 4 Noninterest income (3) 1,168 1,022 278 247 549 479 Noninterest expense (3) 1,863 1,812 459 450 647 648 ------ ------ ----- ----- ----- ----- Income before income tax expense (benefit) 284 31 466 356 671 571 Income tax expense (benefit) (4) 117 13 191 147 275 235 ------ ------ ----- ----- ----- ----- Net income (loss) $ 167 $ 18 $ 275 $ 209 $ 396 $ 336 ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- Average loans $ -- $ -- $ 5.6 $ 4.3 $ 2.0 $ 1.6 Average assets 2.9 3.1 7.4 6.4 2.7 2.3 Average core deposits 18.5 16.7 12.0 11.5 33.6 32.5 Return on equity (5) 16% 2% 36% 34% 57% 53% Risk-adjusted efficiency ratio (6) 96% 108% 66% 71% 59% 63% - ---------------------------------------------------------------------------------------------------------
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups for 1997 and 1996 is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (3) Retail Distribution Group's charges to the product groups are shown as noninterest income to the physical distribution channels and noninterest expense to the product groups. They amounted to $329 million and $392 million for 1997 and 1996, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. well as personal trust, employee benefit trust and agency assets. It also includes product management for market rate accounts, savings deposits, Individual Retirement Accounts (IRAs) and time deposits. Within this Group, Private Client Services operates as a fully integrated financial services organization focusing on banking/credit, trust services, investment management and full-service and discount brokerage. In the first quarter of 1997, the Company sold the Corporate and Municipal Bond Administration (Corporate Trust) business to the Bank of New York. During the second quarter of 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 is occurring in several stages, the first of which was in the third quarter of 1997, with completion expected by the end of 1998. In 1997, the Bank announced an alliance with Morgan Stanley, Dean Witter, Discover & Co., whereby Dean Witter would provide technology, investment products, services and sales and marketing support to Wells Fargo Securities and its full-service brokerage clients. The full range of Dean Witter's services will be available to Wells Fargo customers under private label by the end of first quarter 1998. In addition, the Bank entered into an alliance in December 1997 with BHC Securities whereby BHC will offer a broad range of investment products to Wells Fargo's discount brokerage customers through the Internet and telephone channels. Assets under management at December 31, 1997 were $66 billion, compared with $57 billion at year-end 1996. THE REAL ESTATE GROUP provides a complete line of services supporting the commercial real estate market. Products and services include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Real Estate Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications and commercial real estate loan servicing. During 1997, the Real Estate Group generated noninterest income from the sale of loans totaling $31 million. Noninterest expense for 1997 includes net gains on the sale of foreclosed assets totaling $50 million. 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 14
Table 3 LINE OF BUSINESS RESULTS (ESTIMATED) - ------------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, average balances in billions) - ------------------------------------------------------------------------------------------------------------------------------- Wholesale Real Estate Products Consumer Consolidated Group Group Lending Other Company ------------ ------------ ------------ ----------- ------------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ 393 $ 388 $ 724 $ 728 $1,110 $1,004 $(149) $ 185 $4,614 $4,521 Provision for loan losses (2) 43 42 76 72 449 425 (94) (530) 615 105 Noninterest income (3) 126 86 337 295 459 319 (213) (248) 2,704 2,200 Noninterest expense (3) 72 110 430 382 487 501 591 734 4,549 4,637 ---- ---- ---- ---- ------ ----- ----- ----- ------ ------ Income before income tax expense (benefit) 404 322 555 569 633 397 (859) (267) 2,154 1,979 Income tax expense (benefit) (4) 166 133 228 235 260 164 (238) (19) 999 908 ---- ---- ---- ---- ------ ----- ----- ----- ------ ------ Net income (loss) $ 238 $ 189 $ 327 $ 334 $ 373 $ 233 $(621) $(248) $1,155 $1,071 ---- ---- ---- ---- ------ ----- ----- ----- ------ ------ ---- ---- ---- ---- ------ ----- ----- ----- ------ ------ Average loans $ 9.5 $ 9.4 $16.8 $16.0 $ 23.7 $ 21.3 $ 7.0 $ 8.0 $ 64.6 $ 60.6 Average assets 10.5 10.0 20.7 19.8 24.7 22.2 30.7 29.6 99.6 93.4 Average core deposits 0.4 0.4 8.0 8.4 0.5 0.4 -- 1.0 73.0 70.9 Return on equity (5) 23% 20% 19% 21% 25% 17% --% --% 9% 9% Risk-adjusted efficiency ratio (6) 56% 67% 77% 73% 69% 85% --% --% --% --% - -------------------------------------------------------------------------------------------------------------------------------
(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 rate 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. commercial loans and lines, letters of credit, international trade facilities, foreign exchange services, cash management and electronic products. The Wholesale Products Group now operates 35 regional commercial banking offices in 10 Western states and five offices which serve the large corporate segment. The WellsOne electronic commerce product, introduced in November 1996, now has nearly 2,000 customers. WellsOne allows businesses with multi-state operations to maintain one master bank account, rather than separate accounts in each state. 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. The Trade Bank's loan balances grew by 26% during 1997 and overall fee income increased 42%. 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. As a result of legislation approved by voters in November, Wells Fargo entered the Texas home equity loan market in the first quarter of 1998. The increase in noninterest income was largely due to higher fee income on credit cards. 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. Net interest income during 1997 reflects the impact of lower investment securities and higher short-term borrowings. The decrease in noninterest expense for 1997 includes merger-related cost savings in the unallocated systems and other support groups, partially offset by operating losses for 1997 related to resolving various merger-related operations and back office issues (see page 20 for additional information). In 1997, the FASB issued FAS 131, Disclosures about Segments of an Enterprise and Related Information. The Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement is effective for the year-end 1998 audited financial statements. 15 EARNINGS PERFORMANCE The Bank generated net income of $1,127 million and $1,006 million in 1997 and 1996, respectively. The Parent (excluding its equity in earnings of subsidiaries) and its other bank and nonbank subsidiaries had net income of $28 million and $65 million in 1997 and 1996, respectively. NET INTEREST INCOME Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable-equivalent basis was $4,627 million in 1997, compared with $4,532 million in 1996. Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. For 1997, the net interest margin was 5.99%, compared with 6.11% in 1996. Table 6 presents the individual components of net interest income and net interest margin. The decrease in the margin in 1997 compared with 1996 was primarily due to the issuance of $1.15 billion of trust preferred securities in late 1996. The increase in net interest income for 1997 compared with 1996 was primarily due to an increase in earning assets. Interest income included hedging income of $78 million in 1997, compared with $81 million in 1996. Interest expense included hedging income of $.1 million in 1997, compared with $3.4 million in 1996. NET INTEREST MARGIN (%) [LINE GRAPH] NONINTEREST INCOME Table 4 shows the major components of noninterest income.
Table 4 NONINTEREST INCOME - ------------------------------------------------------------------------------------------ % Change Year ended December 31, -------------- ------------------------ 1997/ 1996/ (in millions) 1997 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------ Fees and commissions: Credit card membership and other credit card fees $ 227 $ 116 $ 95 96% 22% Shared ATM network fees 168 102 51 65 100 Charges and fees on loans 139 112 52 24 115 Debit and credit card merchant fees 98 112 65 (13) 72 Mutual fund and annuity sales fees 69 61 33 13 85 All other (1) 245 237 137 3 73 ------ ------ ------ Total fees and commissions 946 740 433 28 71 Service charges on deposit accounts 861 868 478 (1) 82 Trust and investment services income: Asset management and custody fees 249 214 129 16 66 Mutual fund management fees 175 129 71 36 82 All other 26 34 41 (24) (17) ------ ------ ------ Total trust and investment services income 450 377 241 19 56 Investment securities gains (losses) 20 10 (17) 100 -- Sale of joint venture interest -- -- 163 -- (100) Income from equity investments accounted for by the: Cost method 157 137 58 15 136 Equity method 57 24 39 138 (38) Check printing charges 70 61 39 15 56 Gains (losses) on sales of loans 52 22 (40) 136 -- Gain (losses) from dispositions of operations 15 (95) (89) -- 7 Losses on dispositions of premises and equipment (63) (46) (31) 37 48 All other 139 102 50 36 104 ------ ------ ------ Total $2,704 $2,200 $1,324 23% 66% ------ ------ ------ --- --- ------ ------ ------ --- --- - ------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $98 million, $82 million and $55 million for purchased mortgage servicing rights for 1997, 1996 and 1995, respectively. Also includes the related amortization expense of $69 million, $63 million and $39 million for 1997, 1996 and 1995, respectively. Credit card membership and other credit card fees increased $111 million, or 96%, from 1996 reflecting an industry trend of increased fees. 16 The increase in shared ATM network fees was due to higher surcharge and debit card fees, slightly offset by lower network fees. The increase in trust and investment services income for 1997 was primarily due to greater mutual fund management fees, reflecting the overall growth in the fund families' net assets, including the Pacifica funds previously managed by First Interstate. This increase was substantially offset by a reduction in income due to the sale of the Corporate Trust business and the Institutional Custody businesses to The Bank of New York. The Institutional Custody businesses are being sold to The Bank of New York in several stages, the first of which was during the third quarter of 1997, with completion expected by the end of 1998. The net income for 1997 generated by the Institutional Custody businesses was approximately $11 million. 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 36 mutual funds consisting of $23.3 billion of assets at December 31, 1997, compared with 42 mutual funds consisting of $19.3 billion of assets (including 14 Overland Express Funds consisting of $5.1 billion of assets) at December 31, 1996. In addition to managing Stagecoach Funds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $149 billion and $300 billion (including $245 billion from First Interstate) at December 31, 1997 and 1996, respectively. The decrease in assets managed or maintained was due to the sale of the Corporate Trust business in the first quarter of 1997 and the sale of the Institutional Custody businesses which was substantially completed in the last half of 1997. The Company managed $9.3 billion of Institutional Custody assets at December 31, 1997, compared with $85.0 billion at December 31, 1996. Income from cost method equity investments in both 1997 and 1996 reflected net gains on the sales of and distributions from nonmarketable equity investments. At December 31, 1996, the Company had a liability of $111 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with branches not acquired as a result of the Merger. Of this amount, $15 million represented the balance of the 1995 accrual for the sale of 13 branches and the closures of 9 branches which were completed in 1997. At December 31, 1996, the remaining balance consisted of a fourth quarter 1996 accrual of $96 million for the disposition of 137 traditional branches in California. Of the $96 million, $48 million was associated with 68 branches that were closed in 1997. In the fourth quarter of 1997, the Company evaluated the remaining 69 scheduled branch closures and decided to retain 37 branches, which resulted in reducing the liability by $27 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 37 branches. These developments were not anticipated or foreseen at the time this accrual was originally recorded. The remaining $21 million liability at December 31, 1997 was related to 32 branches that are expected to be closed in 1998. In addition, an expense accrual of $27 million was made in the fourth quarter of 1997 representing disposition of premises and, to a lesser extent, severance and communication expenses associated with the disposition in 1998 of 33 traditional branches located mostly outside of California. (See Note 2 to Financial Statements for other, former First Interstate branch dispositions.) At December 31, 1997, the Company had 956 traditional branches, 523 in-store branches, 377 banking centers and 27 business centers in 10 Western states. Motor banking facilities ("motorbanks") are available at 52 of the traditional branches. NONINTEREST EXPENSE Table 5 shows the major components of noninterest expense.
Table 5 NONINTEREST EXPENSE - -------------------------------------------------------------------------------- % Change Year Ended December 31, ---------------- ------------------------ 1997/ 1996/ (in millions) 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Salaries $1,269 $1,357 $ 713 (6)% 90% Incentive compensation 195 227 126 (14) 80 Employee benefits 332 373 187 (11) 99 Equipment 385 399 193 (4) 107 Net occupancy 388 366 211 6 73 Goodwill 326 250 35 30 614 Core deposit intangible: Nonqualifying (1) 223 206 -- 8 -- Qualifying 32 37 42 (14) (12) Operating losses 320 145 45 121 222 Contract services 236 295 149 (20) 98 Telecommunications 143 140 58 2 141 Security 87 56 21 55 167 Postage 83 96 52 (14) 85 Outside professional services 79 112 45 (29) 149 Advertising and promotion 74 116 73 (36) 59 Stationery and supplies 69 76 37 (9) 105 Travel and entertainment 62 78 36 (21) 117 Check printing 55 43 25 28 72 Outside data processing 49 55 11 (11) 400 Foreclosed assets (33) 7 1 -- 600 All other 175 203 141 (14) 44 ------ ------ ------ Total $4,549 $4,637 $2,201 (2)% 111% ------ ------ ------ ---- ---- ------ ------ ------ ---- ---- - --------------------------------------------------------------------------------
(1) Amortization of core deposit intangibles acquired after February 1992 that are subtracted from stockholders' equity in computing regulatory capital for bank holding companies. 17
Table 6 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) - ------------------------------------------------------------------------------------------------------------------------ 1997 1996 --------------------------- --------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 318 5.58% $ 18 $ 522 5.55% $ 29 Investment securities: At fair value (3): U.S. Treasury securities 2,709 6.03 163 2,460 5.77 142 Securities of U.S. government agencies and corporations 5,640 6.44 362 6,980 6.20 435 Private collateralized mortgage obligations 2,821 6.65 189 2,691 6.39 174 Other securities 333 6.28 19 455 6.84 28 -------- ------ -------- ------ Total investment securities at fair value 11,503 6.39 733 12,586 6.18 779 At cost: U.S. Treasury securities -- -- -- -- -- -- Securities of U.S. government agencies and corporations -- -- -- -- -- -- Private collateralized mortgage obligations -- -- -- -- -- -- Other securities -- -- -- -- -- -- -------- ------ -------- ------ Total investment securities at cost -- -- -- -- -- -- -------- ------ -------- ------ Total investment securities 11,503 6.39 733 12,586 6.18 779 Mortgage loans held for sale (3) -- -- -- -- -- -- Loans: Commercial 18,567 9.07 1,684 16,640 9.02 1,501 Real estate 1-4 family first mortgage 9,697 7.50 728 9,601 7.43 713 Other real estate mortgage 11,608 9.70 1,126 11,470 9.31 1,068 Real estate construction 2,302 10.12 233 2,093 10.43 218 Consumer: Real estate 1-4 family junior lien mortgage 6,005 9.39 564 5,801 9.09 528 Credit card 5,131 14.45 742 4,938 14.87 734 Other revolving credit and monthly payment 7,750 9.27 718 7,329 9.57 701 -------- ------ -------- ------ Total consumer 18,886 10.72 2,024 18,068 10.87 1,963 Lease financing 3,446 8.82 304 2,557 8.82 226 Foreign 119 6.95 8 145 6.62 10 -------- ------ -------- ------ Total loans (4)(5) 64,625 9.45 6,107 60,574 9.41 5,699 Other 853 6.91 59 432 6.29 27 -------- ------ -------- ------ Total earning assets $77,299 8.95 6,917 $74,114 8.81 6,534 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,803 1.34 24 $ 4,236 1.26 53 Market rate and other savings 32,031 2.61 837 29,482 2.64 777 Savings certificates 15,562 5.13 798 14,433 4.93 712 Other time deposits 212 4.56 10 385 6.64 27 Deposits in foreign offices 629 5.37 34 336 5.19 17 -------- ------ -------- ------ Total interest-bearing deposits 50,237 3.39 1,703 48,872 3.25 1,586 Federal funds purchased and securities sold under repurchase agreements 2,844 5.40 154 1,769 5.22 92 Commercial paper and other short-term borrowings 287 5.90 17 369 4.13 16 Senior debt 1,933 6.31 122 2,213 6.13 136 Subordinated debt 2,751 7.03 193 2,403 6.93 166 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,287 7.82 101 82 7.82 6 -------- ------ -------- ------ Total interest-bearing liabilities 59,339 3.86 2,290 55,708 3.59 2,002 Portion of noninterest-bearing funding sources 17,960 -- -- 18,406 -- -- -------- ------ -------- ------ Total funding sources $77,299 2.96 2,290 $74,114 2.70 2,002 -------- ------ -------- ------ -------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.99% $4,627 6.11% $4,532 ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 8,020 $ 7,977 Goodwill 7,218 5,614 Other 7,023 5,687 -------- -------- Total noninterest-earning assets $22,261 $19,278 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $23,600 $22,739 Other liabilities 3,396 2,796 Preferred stockholders' equity 366 779 Common stockholders' equity 12,859 11,370 Noninterest-bearing funding sources used to fund earning assets (17,960) (18,406) -------- -------- Net noninterest-bearing funding sources $22,261 $19,278 -------- -------- -------- -------- TOTAL ASSETS $99,560 $93,392 -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Bank was 8.44%, 8.27%, 8.83%, 7.14% and 6.00% for 1997, 1996, 1995, 1994 and 1993, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.74%, 5.51%, 6.04%, 4.75% and 3.29% for the same years, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. The average amortized cost balances for investment securities at fair value totaled $11,467 million, $12,610 million, $3,144 million and $3,131 million in 1997, 1996, 1995 and 1994, respectively. The average amortized cost balance for mortgage loans held for sale totaled $1,012 million in 1995. 18
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) - ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 --------------------------- -------------------------- --------------------------- Interest Interest Interest Average Yields/ income/ Average Yields/ income/ Average Yields/ income/ balance rates expense balance rates expense balance rates expense - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 69 5.94% $ 4 $ 189 3.51% $ 7 $ 734 3.17% $ 23 Investment securities: At fair value (3): U.S. Treasury securities 499 6.34 31 190 6.66 13 -- -- -- Securities of U.S. government agencies and corporations 1,426 5.55 81 1,547 5.82 93 -- -- -- Private collateralized mortgage obligations 1,095 6.24 71 1,240 6.14 80 -- -- -- Other securities 81 19.69 11 76 14.13 6 -- -- -- ------- ------ ------- ------ ------- ------ Total investment securities 3,101 6.17 194 3,053 6.12 192 -- -- -- at fair value At cost: U.S. Treasury securities 1,246 4.88 61 2,376 4.77 113 2,283 5.03 115 Securities of U.S. government agencies and corporations 4,428 6.07 269 5,902 6.05 357 7,974 6.41 511 Private collateralized mortgage obligations 1,124 5.87 66 1,242 5.74 71 864 4.16 36 Other securities 145 6.90 10 133 5.75 8 189 5.67 11 ------- ------ ------- ------ ------- ------ Total investment securities at cost 6,943 5.84 406 9,653 5.69 549 11,310 5.95 673 ------- ------ ------- ------ ------- ------ Total investment securities 10,044 5.94 600 12,706 5.79 741 11,310 5.95 673 Mortgage loans held for sale (3) 1,002 7.48 76 -- -- -- -- -- -- Loans: Commercial 8,635 9.88 853 7,092 9.19 652 7,154 9.36 670 Real estate 1-4 family first mortgage 5,867 7.36 432 8,484 6.85 581 6,787 7.92 538 Other real estate mortgage 8,046 9.50 765 8,071 8.68 700 9,467 8.20 776 Real estate construction 1,146 10.16 116 977 9.29 91 1,303 8.50 111 Consumer: Real estate 1-4 family junior lien mortgage 3,349 8.61 288 3,387 7.75 262 3,916 6.97 273 Credit card 3,547 15.59 552 2,703 15.39 416 2,587 15.62 404 Other revolving credit and monthly payment 2,397 10.68 257 2,023 9.60 194 1,893 9.45 179 ------- ------ ------- ------ ------- ------ Total consumer 9,293 11.81 1,097 8,113 10.75 872 8,396 10.19 856 Lease financing 1,498 9.22 138 1,271 9.16 116 1,190 9.83 117 Foreign 23 7.54 2 31 5.06 2 7 -- -- ------- ------ ------- ------ ------- ------ Total loans (4)(5) 34,508 9.86 3,403 34,039 8.85 3,014 34,304 8.94 3,068 Other 62 5.47 3 54 5.89 3 -- -- -- ------- ------ ------- ------ ------- ------ Total earning assets $45,685 8.93 4,086 $46,988 8.00 3,765 $46,348 8.12 3,764 ------- ------ ------- ------ ------- ------ ------- ------- ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 3,907 1.00 39 $ 4,622 .98 45 $ 4,626 1.18 55 Market rate and other savings 15,552 2.61 405 18,921 2.34 442 19,333 2.26 438 Savings certificates 8,080 5.25 424 7,030 4.28 301 7,948 4.37 347 Other time deposits 385 6.14 24 304 7.35 22 331 7.19 24 Deposits in foreign offices 1,771 5.91 105 925 4.75 44 7 -- -- ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 29,695 3.36 997 31,802 2.69 854 32,245 2.68 864 Federal funds purchased and securities sold under repurchase agreements 3,401 5.84 199 2,223 4.45 99 1,051 2.79 29 Commercial paper and other short-term borrowings 544 5.82 32 224 4.25 10 207 2.90 6 Senior debt 1,618 6.67 107 1,930 5.29 102 2,174 4.75 103 Subordinated debt 1,459 6.55 96 1,510 5.94 90 1,958 5.23 103 Guaranteed preferred beneficial interests in Company's subordinated debentures -- -- -- -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 36,717 3.90 1,431 37,689 3.06 1,155 37,635 2.93 1,105 Portion of noninterest-bearing funding sources 8,968 -- -- 9,299 -- -- 8,713 -- -- ------- ------ ------- ------ ------- ------ Total funding sources $45,685 3.13 1,431 $46,988 2.45 1,155 $46,348 2.38 1,105 ------- ------ ------- ------ ------- ------ ------- ------- ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.80% $2,655 5.55% $2,610 5.74% $2,659 ---- ------ ---- ------ ----- ------ ---- ------ ---- ------ ----- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 2,681 $ 2,618 $ 2,456 Goodwill 399 458 501 Other 2,002 1,785 1,805 ------- ------- ------- Total noninterest-earning assets $ 5,082 $ 4,861 $ 4,762 ------- ------- ------- ------- ------- ------- NONINTEREST-BEARING FUNDING SOURCES $ 9,085 $ 9,019 $ 8,482 Deposits 1,142 1,062 997 Other liabilities 489 521 639 Preferred stockholders' equity 3,334 3,558 3,357 Common stockholders' equity Noninterest-bearing funding sources used (8,968) (9,299) (8,713) to fund earning assets ------- ------- ------- $ 5,082 $ 4,861 $ 4,762 Net noninterest-bearing funding sources ------- ------- ------- ------- ------- ------- $50,767 $51,849 $51,110 TOTAL ASSETS ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------------------------------------------
(4) Interest income includes loan fees, net of deferred costs, of approximately $86 million, $74 million, $41 million, $40 million and $41 million in 1997, 1996, 1995, 1994 and 1993, respectively. (5) Nonaccrual loans and related income are included in their respective loan categories. (6) 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 years presented. 19 Salaries, incentive compensation and employee benefits expense decreased $161 million in 1997 compared with 1996. This was due to staff reductions after the merger with First Interstate. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 33,100 at December 31, 1997, compared with 36,902 at December 31, 1996. The increase in operating losses in 1997 was predominantly a result of back-office problems which arose subsequent to certain systems conversions and other changes to operating processes that were part of the First Interstate integration. These problems were related to clearing accounts with other banks, misposting of deposits and loan payments to customer accounts and processing of returned items. Since the inception of these problems, management dedicated resources to resolve the increasing volume of ensuing suspense items. In the second quarter of 1997, based on the age and volume of suspense items as well as additional research and better insight, management determined that many of the items would not be cleared or collected. Consequently, it was determined that there was a need to record an operating loss related to the outstanding items. Substantially all of these items were written off in the third quarter. Goodwill and CDI amortization resulting from the Merger were $292 million and $223 million, respectively, for the year ended December 31, 1997, compared with $216 million and $206 million, respectively, for the year ended December 31, 1996. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be $177 million, $158 million and $144 million, respectively. The related impact on income tax expense is expected to be a benefit of $72 million, $64 million and $58 million in 1998, 1999 and 2000, respectively. 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, communications with significant customers and vendors have been initiated 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. The Company's noninterest expense for 1997 includes approximately $10 million associated with the Year 2000 issue. The Company currently estimates that it will incur (and expense) additional incremental, out-of-pocket costs in the area of $100 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. EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI Table 7 reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible amortization ("cash" or "tangible") for the year ended December 31, 1997. Table 8 presents the calculation of the ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the year ended December 31, 1997. 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 and Note 3 to Financial Statements for other information regarding funds available for use by management.
Table 7 EARNINGS EXCLUDING GOODWILL AND NONQUALIFYING CDI - ----------------------------------------------------------------------------------------------- Year ended (in millions) December 31, 1997 - ----------------------------------------------------------------------------------------------- Amortization ----------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ----------------------------------------------------------------------------------------------- Income before income tax expense $2,154 $ 326 $ 223 $2,703 Income tax expense 999 -- 91 1,090 ------ ----- ----- ------ Net income 1,155 326 132 1,613 Preferred stock dividends 25 -- -- 25 ------ ----- ----- ------ Net income applicable to common stock $1,130 $ 326 $ 132 $1,588 ------ ----- ----- ------ ------ ----- ----- ------ Earnings per common share $12.77 $3.69 $1.49 $17.96 ------ ----- ----- ------ ------ ----- ----- ------ Earnings per common share - assuming dilution $12.64 $3.65 $1.47 $17.77 ------ ----- ----- ------ ------ ----- ----- ------ - -----------------------------------------------------------------------------------------------
Table 8 RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI - -------------------------------------------------------------------------------------------------------- Year ended (in millions) December 31, 1997 - -------------------------------------------------------------------------------------------------------- ROA: A / (C-E) = 1.77% ROE: B / (D-E) = 34.39% Efficiency: (F-G) / H = 54.64% Net income $ 1,613 (A) Net income applicable to common stock 1,588 (B) Average total assets 99,560 (C) Average common stockholders' equity 12,859 (D) Average goodwill ($7,218) and after-tax nonqualifying core deposit intangible ($1,023) 8,241 (E) Noninterest expense 4,549 (F) Amortization expense for goodwill and nonqualifying core deposit intangible 549 (G) Net interest income plus noninterest income 7,318 (H) - --------------------------------------------------------------------------------------------------------
20 BALANCE SHEET ANALYSIS A comparison between the year-end 1997 and 1996 balance sheets is presented below. The Bank's assets of $89.2 billion and $98.7 billion at December 31, 1997 and 1996, respectively, represented more than 90% of the Company's consolidated assets at those dates. INVESTMENT SECURITIES Total investment securities averaged $11.5 billion in 1997, a 9% decrease from $12.6 billion in 1996. Total investment securities were $9.9 billion at December 31, 1997, a 27% decrease from $13.5 billion at December 31, 1996. Table 9 provides expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio. The weighted average expected remaining maturity of the debt securities portfolio was 1 year and 11 months at December 31, 1997, compared with 2 years and 2 months at December 31, 1996. It has been the intention of the Company to maintain a relatively short-term expected maturity position in order to provide additional liquidity and to fund future loan growth. Expected remaining maturities will differ from remaining contractual maturities because borrowers may have the right to prepay certain obligations with or without penalties. It is more appropriate to monitor investment security maturities and yields using prepayment assumptions since this better reflects what the Company expects to occur. (Note 4 to Financial Statements shows the remaining contractual principal maturities and yields of debt securities.)
Table 9 INVESTMENT SECURITIES EXPECTED REMAINING MATURITIES AND YIELDS - ---------------------------------------------------------------------------------------------------------------- Weighted average expected remaining After one year Weighted maturity Within one year through five years Total average (in yrs. --------------- ------------------- (in millions) amount yield - mos.) Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $2,535 6.04% 1-3 $1,130 5.83% $1,404 6.21% Securities of U.S. government agencies and corporations 4,390 6.68 2-3 1,910 6.80 2,032 6.58 Private collateralized mortgage obligations 2,390 6.76 1-6 1,097 7.04 1,265 6.41 Other 441 8.11 4-2 73 7.33 232 7.74 ------ ------ ------ TOTAL COST OF DEBT SECURITIES (1) $9,756 6.60% 1-11 $4,210 6.61% $4,933 6.49% ------ ---- ---- ------ ---- ------ ---- ------ ---- ---- ------ ---- ------ ---- ESTIMATED FAIR VALUE $9,823 $4,229 $4,972 ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------------------- December 31, 1997 - ----------------------------------------------------------------------------- After five years through ten years After ten years ----------------- ---------------- (in millions) Amount Yield Amount Yield - ----------------------------------------------------------------------------- U.S. Treasury securities $ 1 6.67% $ -- --% Securities of U.S. government agencies and corporations 371 6.90 77 5.30 Private collateralized mortgage obligations 24 10.08 4 20.17 Other 121 9.02 15 10.50 ---- ---- TOTAL COST OF DEBT SECURITIES (1) $517 7.54% $ 96 6.69% ---- ---- ---- ----- ---- ---- ---- ----- ESTIMATED FAIR VALUE $522 $100 ---- ---- ---- ---- - -----------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale debt securities carried at fair value. See Note 4 to Financial Statements for fair value of available-for-sale securities by type of security. The available-for-sale portfolio includes both debt and marketable equity securities. At December 31, 1997, the available-for-sale securities 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 December 31, 1996, the available-for-sale securities portfolio had an unrealized net gain of $41 million, comprised of unrealized gross gains of $107 million and unrealized gross losses of $66 million. The unrealized net gain or loss on available-for-sale securities is reported on an after-tax basis as a valuation allowance that is a separate component of stockholders' equity. At December 31, 1997, the valuation allowance amounted to an unrealized net gain of $55 million, compared with an unrealized net gain of $23 million at December 31, 1996. The unrealized net gain in the debt securities portion of the available-for- sale portfolio at December 31, 1997 was primarily attributable to mortgage- backed securities, reflecting a decrease in interest rates since the time of purchase. The Company may decide to sell certain of the available-for-sale securities to manage the level of earning assets (for example, to offset loan growth that may exceed expected 21 maturities and prepayments of securities). (See Note 4 to Financial Statements for investment securities carried at fair value by security type.) At December 31, 1997, mortgage-backed securities included in securities of U.S. government agencies and corporations primarily consisted of pass-through securities and collateralized mortgage obligations (CMOs) and substantially all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $6,780 million, or 69% of the Company's investment securities portfolio at December 31, 1997. The CMO securities held by the Company (including the private issues) are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. As an indication of interest rate risk, the Company has estimated the impact of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on this rate scenario, mortgage-backed securities would decrease in fair value from $6,821 million to $6,594 million and the expected remaining maturity of these securities would increase from 2 years and 0 months to 2 years and 6 months. LOAN PORTFOLIO A comparative schedule of average loan balances is presented in Table 6; year-end balances are presented in Note 5 to Financial Statements. Loans averaged $64.6 billion in 1997, compared with $60.6 billion in 1996. Total loans at December 31, 1997 were $65.7 billion, compared with $67.4 billion at year-end 1996. The decrease in loans is primarily due to the run-off LOAN MIX AT YEAR END (%) [BAR GRAPH] in the residential mortgage and direct auto loan portfolios, where the Company has withdrawn from the business of being an active originator for its own balance sheet. Except for those portfolios, the Company expects to see growth in all major categories in 1998. The Company's total unfunded loan commitments decreased to $54.0 billion at December 31, 1997, from $55.2 billion at December 31, 1996. Commercial loans grew 3% to $20.1 billion at year-end 1997, from $19.5 billion at December 31, 1996. Total unfunded commercial loan commitments decreased from $28.1 billion at December 31, 1996 to $27.5 billion at December 31, 1997. Included in the commercial loan portfolio are agricultural loans of $1,599 million and $1,409 million at December 31, 1997 and 1996, respectively. Agricultural loans consist of loans to finance agricultural production and other loans to farmers. Table 10 presents comparative period-end commercial real estate loans.
Table 10 COMMERCIAL REAL ESTATE LOANS - ------------------------------------------------------------------------------------- % Change December 31, --------------- --------------------------- 1997/ 1996/ (in millions) 1997 1996 1995 1996 1995 - ------------------------------------------------------------------------------------- Commercial loans to real estate developers and REITs (1) $ 1,772 $ 1,070 $ 700 66 % 53% Other real estate mortgage (2) 12,186 11,860 8,263 3 44 Real estate construction 2,320 2,303 1,366 1 69 ------- ------- ------- Total $16,278 $15,233 $10,329 7 % 47% ------- ------- ------- --- --- ------- ------- ------- --- --- Nonaccrual loans $ 252 $ 376 $ 371 (33)% 1% ------- ------- ------- --- --- ------- ------- ------- --- --- Nonaccrual loans as a % of total 1.5% 2.5% 3.6% ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------
(1) Included in commercial loans. (REITs are real estate investment trusts.) (2) Includes agricultural loans that are primarily secured by real estate of $343 million, $325 million and $250 million at December 31, 1997, 1996 and 1995, respectively. Table 11 summarizes other real estate mortgage loans by state and property type. Table 12 summarizes real estate construction loans by state and project type. 22
Table 11 REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE (EXCLUDING 1-4 FAMILY FIRST MORTGAGE LOANS) - -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ Other California Texas Nevada(2) Washington states (3) ---------------- --------------- ---------- -------------- --------------- Total Non- Total Non- Total Total Non- Total Non- (in millions) loans accrual loans accrual loans loans accrual loans accrual - -------------------------------------------------------------------------------------------------------------- Office buildings $2,200 $ 79 $197 $-- $ 76 $101 $-- $ 603 $24 Retail buildings 1,513 24 159 3 49 148 1 552 4 Industrial 1,543 14 49 -- 57 31 1 171 8 Hotels/motels 399 4 107 -- 364 12 -- 492 -- Apartments 927 17 71 1 23 132 1 215 1 Institutional 334 9 29 -- 8 64 -- 49 3 Agricultural 277 9 12 -- -- 13 -- 37 4 Land 204 8 13 -- 14 4 -- 35 -- 1-4 family structures (1) 2 -- -- -- -- 5 -- -- -- Other 394 8 77 4 44 91 -- 289(4) 1 ------ ---- ---- --- ---- ---- --- ------ --- Total by state $7,793 $172 $714 $ 8 $635 $601 $ 3 $2,443 $45 ------ ---- ---- --- ---- ---- --- ------ --- ------ ---- ---- --- ---- ---- --- ------ --- % of total loans 64% 6% 5% 5% 20% ------ ---- ---- ---- ------ ------ ---- ---- ---- ------ Nonaccruals as a % of total by state 2% 1% --% 2% ---- --- --- --- ---- --- --- --- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------- December 31, 1997 ----------------------------- Non- All states accruals ------------------ as a % Total Non- of total (in millions) loans accrual by type - -------------------------------------------------------- Office buildings $ 3,177 $103 3% Retail buildings 2,421 32 1 Industrial 1,851 23 1 Hotels/motels 1,374 4 -- Apartments 1,368 20 1 Institutional 484 12 2 Agricultural 339 13 4 Land 270 8 3 1-4 family structures (1) 7 -- -- Other 895 13 1 ------- ---- Total by state $12,186 $228 2% ------- ---- -- ------- ---- -- % of total loans 100% ------- ------- Nonaccruals as a % of total by state - --------------------------------------------------------
(1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) There were no loans on nonaccrual at December 31, 1997. (3) Consists of 35 states; no state had loans in excess of $370 million at December 31, 1997. (4) Includes loans secured by collateral pools of approximately $100 million (where the pool is a mixture of various real estate property types located in various states, non-real estate-related assets and other guarantees).
Table 12 REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE - ---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Other California Nevada (1) Texas Arizona(1) Oregon(1) states(2) --------------- ---------- --------------- ---------- --------- --------------- Total Non- Total Total Non- Total Total Total Non- (in millions) loans accrual loans loans accrual loans loans loans accrual - ---------------------------------------------------------------------------------------------------------------------- Retail buildings $ 136 $-- $ 23 $ 10 $-- $ 6 $ 9 $163 $-- 1-4 family: Land 238 -- 8 7 -- -- 7 77 -- Structures 187 15 11 29 -- 27 3 50 -- Land (excluding 1-4 family) 132 -- 3 48 -- 2 3 66 7 Apartments 100 -- 14 7 -- 6 46 53 -- Office buildings 82 -- 1 20 -- 24 12 34 -- Industrial 81 -- 6 9 -- 5 2 24 -- Hotels/motels 15 -- 36 6 -- 48 7 5 -- Institutional 7 -- 4 3 -- 2 25 2 -- Agricultural 1 -- -- -- -- 4 -- -- -- Other 131 -- 99 38 1 10 6 100 -- ------ --- ---- ---- --- ---- ---- ---- --- Total by state $1,110 $15 $205 $177 $ 1 $134 $120 $574 $ 7 ------ --- ---- ---- --- ---- ---- ---- --- ------ --- ---- ---- --- ---- ---- ---- --- % of total loans 48% 9% 7% 6% 5% 25% ------ ---- ---- ---- ---- ---- ------ ---- ---- ---- ---- ---- Nonaccruals as a % of total by state 1% 1% 1% --- --- --- --- --- --- - ---------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------- December 31, 1997 ------------------------------- Non- All states accruals ----------------- as a % Total Non- of total (in millions) loans accrual by type - --------------------------------------------------------- Retail buildings $ 347 $-- --% 1-4 family: Land 337 -- -- Structures 307 15 5 Land (excluding 1-4 family) 253 7 3 Apartments 226 -- -- Office buildings 173 -- -- Industrial 127 -- -- Hotels/motels 117 -- -- Institutional 43 -- -- Agricultural 5 -- -- Other 385 1 -- ------ --- Total by state $2,320 $23 1% ------ --- --- ------ --- --- % of total loans 100% ------ ------ Nonaccruals as a % of total by state - --------------------------------------------------------
(1) There were no loans on nonaccrual at December 31, 1997. (2) Consists of 21 states; no state had loans in excess of $75 million at December 31, 1997. 23 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS Table 13 presents comparative data for nonaccrual and restructured loans and other assets. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Table 13 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. This information is presented in Table 16. Notwithstanding, real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 150 days of becoming past due and are shown in the table below. (Notes 1 and 5 to Financial Statements describe the Company's accounting policies relating to nonaccrual and restructured loans and foreclosed assets, respectively.) Table 14 summarizes the approximate changes in nonaccrual loans. 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. 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
Table 13 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS - ----------------------------------------------------------------------------------------------- December 31, -------------------------------------------- (in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (1)(2) $155 $223 $112 $ 88 $ 252 Real estate 1-4 family first mortgage 104 99 64 81 99 Other real estate mortgage (3) 228 349 307 328 578 Real estate construction 23 25 46 58 235 Consumer: Real estate 1-4 family junior lien mortgage 17 15 8 11 27 Other revolving credit and monthly payment 1 1 1 1 3 Lease financing -- 2 -- -- -- ---- ---- ---- ---- ------ Total nonaccrual loans (4) 528 714 538 567 1,194 Restructured loans (5) 9 10 14 15 6 ---- ---- ---- ---- ------ Nonaccrual and restructured loans (6) 537 724 552 582 1,200 As a percentage of total loans .8% 1.1% 1.6% 1.6% 3.6% Foreclosed assets (7) 158 219 186 272 348 Real estate investments (8) 4 4 12 17 15 ---- ---- ---- ---- ------ Total nonaccrual and restructured loans and other assets $699 $947 $750 $871 $1,563 ---- ---- ---- ---- ------ ---- ---- ---- ---- ------ - -----------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and REITs of $1 million, $2 million, $18 million, $30 million and $91 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (2) Includes agricultural loans of $13 million, $13 million, $6 million, $1 million and $9 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (3) Includes agricultural loans secured by real estate of $13 million, $10 million, $1 million, $3 million and $24 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (4) Of the total nonaccrual loans, $298 million, $493 million and $408 million at December 31, 1997, 1996 and 1995, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (5) In addition to originated loans that were subsequently restructured, there were loans of $23 million, $50 million and $50 million at December 31, 1997, 1996 and 1995, 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, $50 million and $50 million were considered impaired under FAS 114 at December 31, 1997, 1996 and 1995, respectively. (6) Related commitments to lend additional funds were approximately $14 million at December 31, 1997. (7) Includes agricultural properties of $16 million, $17 million, $22 million, $23 million and $26 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (8) 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 $172 million, $154 million, $95 million, $54 million and $34 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. 24
Table 14 CHANGES IN NONACCRUAL LOANS - ---------------------------------------------------------------------- Year ended ----------------- DEC. 31, Dec. 31, (in millions) 1997 1996 - ---------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 714 $ 538 Nonaccrual loans of First Interstate -- 201 New loans placed on nonaccrual 441 655 Charge-offs (171) (148) Payments (434) (312) Transfers to foreclosed assets (5) (101) Loans returned to accrual (17) (119) ----- ----- BALANCE, END OF YEAR $ 528 $ 714 ----- ----- ----- ----- - ----------------------------------------------------------------------
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 $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. NONACCRUAL LOANS ($ BILLIONS) [LINE GRAPH] NEW LOANS PLACED ON NONACCRUAL ($ BILLIONS) [LINE GRAPH] If interest due on the book balances of all nonaccrual and restructured loans (including loans no longer on nonaccrual or restructured at year end) had been accrued under their original terms, $55 million of interest would have been recorded in 1997, compared with $23 million actually recorded. Table 15 summarizes the changes in foreclosed assets. Foreclosed assets at December 31, 1997 decreased to $158 million from $219 million at December 31, 1996. Approximately 61% of foreclosed assets at December 31, 1997 have been in the portfolio three years or less, with land and agricultural properties representing the majority of the amount greater than three years old. Table 15 CHANGES IN FORECLOSED ASSETS
- --------------------------------------------------------------------- Year ended ----------------- DEC. 31, Dec. 31, (in millions) 1997 1996 - --------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 219 $ 186 Foreclosed assets of First Interstate -- 51 Additions 95 141 Sales (146) (129) Charge-offs (11) (20) Write-downs (5) (5) Other 6 (5) ----- ----- BALANCE, END OF YEAR $ 158 $ 219 ----- ----- ----- ----- - ---------------------------------------------------------------------
25 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 16 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 Table 16.
Table 16 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING - ---------------------------------------------------------------------------------------------------- December 31, --------------------------------------------- (in millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- Commercial $ 8 $ 65 $ 12 $ 6 $ 4 Real estate 1-4 family first mortgage 35 42 8 18 19 Other real estate mortgage 5 59 24 47 14 Real estate construction 1 4 -- -- 8 Consumer: Real estate 1-4 family junior lien mortgage 42 23 4 4 6 Credit card 133 120 95 42 43 Other revolving credit and monthly payment 19 20 1 1 1 ---- ---- ---- ---- --- Total consumer 194 163 100 47 50 ---- ---- ---- ---- --- Total $243 $333 $144 $118 $95 ---- ---- ---- ---- --- ---- ---- ---- ---- --- - ----------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is presented in Note 5 to Financial Statements. At December 31, 1997, the allowance for loan losses was $1,828 million, or 2.78% of total loans, compared with $2,018 million, or 3.00%, at December 31, 1996 and $1,794 million, or 5.04%, at December 31, 1995. During 1991 and 1992, the Company had a significantly higher provision for loan losses than prior years resulting from a nationwide (particularly California) recession as well as the Company's examination process and that of its regulators. As both the economic environment and the credit quality of the Company's loan portfolio improved, the Company began reducing its provision in 1993 and 1994. In 1995, as California continued to make progress in its economic recovery and as the Company considered the allowance for loan losses adequate in relation to its existing loan portfolio, no provision was made. In April 1996, the Company absorbed the $770 million allowance for loan losses of First Interstate as a result of the Merger. In the third quarter of 1996, the Company began making a provision for loan losses of $35 million due to the level of charge-offs and increased that amount by $35 million for each succeeding quarter through the third quarter of 1997. The provision for loan losses totaled $105 million in 1996 and $615 million in 1997. As it had done in the fourth quarter of 1997, the Company anticipates that it will continue to make a provision for loan losses of approximately $195 million each quarter in 1998, which is expected to approximate net charge-offs. Net charge-offs in 1997 were $805 million, or 1.25% of average total loans, compared with $640 million, or 1.05%, in 1996 and $288 million, or .83%, in 1995. Loan loss recoveries were $273 million in 1997, compared with $220 million in 1996 and $134 million in 1995. Table 17 summarizes net charge-offs by loan category. The commercial loan category in 1997 includes net charge-offs for the commercial loan component of small business loans of $109 million (or 2.91% of average small business loans in this category), compared with $50 million (or 1.89%) in 1996 and $18 million (or 1.27%) in 1995. During 1997, the period for charging off past due loans for the Business Direct product within this portfolio was changed from 180 to 120 days. The impact of this change was an increase in gross charge-offs of approximately $15 million. The target market for small business loans is expected to experience higher loss rates on a recurring basis than is the case with loans to middle market and corporate borrowers, and such loans are priced at appropriately higher spreads. The largest category of net charge-offs in all periods presented was credit card loans, comprising more than 50% of the total net charge-offs. During 1997, credit card gross charge-offs due to bankruptcies were $204 million, or 42%, of total credit card charge-offs, compared with $163 million, or 40%, and $82 million, or 39%, in 1996 and 1995, respectively. In addition, credit card loans 30 to 89 days past due and still accruing totaled $173 million at December 31, 1997, compared with $199 million and $127 million at December 31, 1996 and 1995, respectively. 26
Table 17 NET CHARGE-OFFS BY LOAN CATEGORY - ------------------------------------------------------------------------------------------------------ Year ended December 31, ----------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ---------------- % OF % of % of AVERAGE average average (in millions) AMOUNT LOANS Amount loans Amount loans - ------------------------------------------------------------------------------------------------------ Commercial $199 1.06% $ 86 .50% $ 17 .19% Real estate 1-4 family first mortgage 15 .15 10 .11 10 .17 Other real estate mortgage (35) (.30) (7) (.06) (1) (.02) Real estate construction (8) (.34) 2 .09 9 .80 Consumer: Real estate 1-4 family junior lien mortgage 15 .25 19 .33 13 .40 Credit card 438 8.54 368 7.44 195 5.46 Other revolving credit and monthly payment 152 1.98 139 1.91 41 1.73 ---- ---- ---- Total consumer 605 3.21 526 2.91 249 2.67 Lease financing 29 .86 23 .89 4 .31 ---- ---- ---- Total net loan charge-offs $805 1.25% $640 1.05% $288 .83% ---- ----- ---- ---- ---- ---- ---- ----- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------
Any loan that is past due as to principal or interest and that is not both well-secured and in the process of collection is generally charged off (to the extent that it exceeds the fair value of any related collateral) after a predetermined period of time that is based on loan category. For example, credit card loans generally are charged off within 180 days of becoming past due. Additionally, loans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to FAS 114) and loans analyzed on a pool basis. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. The Company has deemed it prudent, when reviewing the overall allowance, to maintain a total allowance in excess of projected losses. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. 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's) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that reports to the Board of Directors and continuously reviews loan quality. Such reviews also assist management in establishing the level of the allowance. Similar to a number of other large national banks, the Bank has been for several years and continues to be examined by its primary regulator, the Office of the Comptroller of the Currency (OCC), and has OCC examiners in residence. These examinations occur throughout the year and target various activities of the Bank, including specific segments of the loan portfolio (for example, commercial real estate and shared national credits). In addition to the Bank being examined by the OCC, the Parent and its nonbank subsidiaries are examined by the Federal Reserve. The Company considers the allowance for loan losses of $1,828 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at December 31, 1997. 27 DEPOSITS Comparative detail of average deposit balances is presented in Table 6. Average core deposits increased 3% in 1997 compared with 1996 largely due to the Merger. This was partially offset by divestitures of branches and sales of former First Interstate banks which occurred in 1996 and sales of branches in 1996 and 1997, including $3.9 billion of core deposits. Average core deposits funded 73% and 76% of the Company's average total assets in 1997 and 1996, respectively. Year-end deposit balances are presented in Table 18.
Table 18 DEPOSITS - -------------------------------------------------------------------------- December 31, ----------------- % (in millions) 1997 1996 Change - -------------------------------------------------------------------------- Noninterest-bearing $23,953 $29,073 (18)% Interest-bearing checking 2,155 2,792 (23) Market rate and other savings 29,940 33,947 (12) Savings certificates 15,349 15,769 (3) ------- ------- Core deposits 71,397 81,581 (12) Other time deposits 205 186 10 Deposits in foreign offices 597 54 -- ------- ------- Total deposits $72,199 $81,821 (12)% ------- ------- --- ------- ------- --- - --------------------------------------------------------------------------
CORE DEPOSITS AT YEAR END ($ BILLIONS) [BAR GRAPH] CERTAIN FAIR VALUE INFORMATION FAS 107 (Disclosures about Fair Value of Financial Instruments) requires that the Company disclose estimated fair values for certain financial instruments. Quoted market prices, when available, are used to reflect fair values. If market quotes are not available, which is the case for most of the Company's financial instruments, management has provided its best estimate of the calculation of the fair values using discounted cash flows. Fair value amounts differ from book balances because fair values attempt to capture the effect of current market conditions (for example, interest rates) on the Company's financial instruments. There was an increase in the excess (premium) of the fair value over the carrying value of the Company's financial instruments at December 31, 1997 compared with December 31, 1996. The Company's FAS 107 disclosures are presented in Note 20 to Financial Statements. CAPITAL ADEQUACY/RATIOS The Company uses a variety of measures to evaluate capital adequacy. Management reviews the various capital measures monthly and takes appropriate action to ensure that they are within established internal and external guidelines. The Company's current capital position exceeds current guidelines established by industry regulators. RISK-BASED CAPITAL RATIOS The Federal Reserve Board (FRB) and the OCC issue risk-based capital (RBC) guidelines for bank holding companies and national banks, respectively. The FRB is the primary regulator for the Parent and the OCC is the primary regulator for the Bank. RBC guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. (See Note 18 to Financial Statements for additional information.) The Company's total RBC ratio at December 31, 1997 was 11.49% and its Tier 1 RBC ratio was 7.61%, exceeding the minimum guidelines of 8% and 4%, respectively. The ratios at December 31, 1996 were 11.70% and 7.68%, respectively. The decrease in the Company's RBC ratios at December 31, 1997 compared with 1996 resulted substantially from the repurchase of common stock. The Company's risk-weighted assets are calculated as shown in Table 19. Risk-weighted balance sheet assets were $19.9 billion and $26.7 billion less than total assets on the consolidated balance sheet of $97.5 billion and $108.9 billion at December 31, 1997 and 1996, respectively, as a result of weighting certain types of assets at less than 100%; such assets, for both December 31, 1997 and 1996, substantially consisted of claims on or guarantees by the U.S. government or its agencies (risk-weighted at 0% to 20%), cash 28 and due from banks (0% to 20%), 1-4 family first mortgage loans (50%) and private collateralized mortgage obligations backed by 1-4 family first mortgage loans (50%).
Table 19 RISK-BASED CAPITAL AND LEVERAGE RATIOS - --------------------------------------------------------------------- December 31, ---------------- (in billions) 1997 1996 - --------------------------------------------------------------------- Tier 1: Common stockholders' equity $12.6 $13.5 Preferred stock (1) .3 .4 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.2 Goodwill and other deductions (2) (8.1) (8.5) ------ ------ Total Tier 1 capital 6.1 6.6 ------ ------ Tier 2: Mandatory convertible debt .1 .2 Subordinated debt and unsecured senior debt 2.0 2.1 Allowance for loan losses allowable in Tier 2 1.0 1.1 ------ ------ Total Tier 2 capital 3.1 3.4 ------ ------ Total risk-based capital $ 9.2 $10.0 ------ ------ ------ ------ Risk-weighted balance sheet assets $77.6 $82.2 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.4 10.1 Standby letters of credit 1.6 2.1 Other .7 .5 ------ ------ Total risk-weighted off-balance sheet items 11.7 12.7 ------ ------ Goodwill and other deductions (2) (8.1) (8.5) Allowance for loan losses not included in Tier 2 (.8) (.9) ------ ------ Total risk-weighted assets $80.4 $85.5 ------ ------ ------ ------ Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.61% 7.68% Total capital (8% minimum requirement) 11.49 11.70 Leverage ratio (3% minimum requirement) (3) 6.95% 6.65% - ---------------------------------------------------------------------
(1) Excludes $175 million of Series D preferred stock at December 31, 1996 due to the Company's December 1996 announcement to redeem this series in March 1997. (2) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on available-for-sale securities carried at fair value. (3) Tier 1 capital divided by quarterly average total assets (excluding goodwill, nonqualifying CDI and other items which were deducted to arrive at Tier 1 capital). LEVERAGE RATIO To supplement the RBC guidelines, the FRB established a leverage ratio guideline. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking organizations are expected to have ratios of at least 4% to 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Company's leverage ratios were 6.95% and 6.65% at December 31, 1997 and 1996, respectively. The increase in the leverage ratio at December 31, 1997 compared with December 31, 1996 resulted primarily from a decrease in quarterly average total assets. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA) In addition to adopting a risk-based assessment system, FDICIA required that the federal regulatory agencies adopt regulations defining five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. The Bank had a Tier 1 RBC ratio of 8.34%, a total capital ratio of 11.18% and a leverage ratio of 7.21% at December 31, 1997, compared with 8.53%, 11.00% and 6.81% at December 31, 1996, respectively. MARKET RISKS Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. The majority of the Company's interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, investment securities, deposit liabilities, short-term borrowings, senior and subordinated debt and derivative financial instruments used for asset/liability management. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between assets 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 two most significant components of basis risk are the spread between Prime-based loans and market rate account (MRA) savings deposits and the rate paid on savings and interest-bearing checking accounts as compared to LIBOR-based loans. 29 Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage the sensitivity of net interest spreads to potential changes in interest rates and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of option pricing models, in the case of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The 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. For example, the low-rate scenario would have the 5-year Treasury rate of 4.61% at December 31, 1998, compared with the actual rate of 5.71% at December 31, 1997. 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 year. As of December 31, 1997, the simulation showed a decline in the net interest margin of 5 basis points (.05%, or $38 million decline in net interest income) 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. For example, the Company uses interest rate futures to shorten the rate maturity of MRA savings deposits to better match the maturity of Prime-based loans. The Company also purchases interest rate floors to protect against the loss in interest income on LIBOR-based loans during a decreasing interest rate environment. Additionally, receive-fixed rate swaps are used to convert floating-rate loans into fixed rates to better match the liabilities that fund the loans. Looking toward managing interest rate risk in 1998, the Company will continue to face term structure risk and basis risk and may be confronted with several risk scenarios. If interest rates rise, net interest income may actually increase if deposit rates lag increases in market rates (e.g. Prime, LIBOR). The Company could, however, experience significant pressure on net interest income if there is a substantial increase in deposit rates relative to market rates. This basis risk potentially could be hedged with interest rate caps, but the Company believes they are not cost-effective in relation to the risk they would mitigate. A declining interest rate environment might result in a decrease in loan rates, while deposit rates remain relatively stable, as they did between 1994 and 1996. This rate scenario could also create significant risk to net interest income. The Company has partially hedged against this risk with interest rate floor and receive-fixed rate swap contracts. The Company will be entering into new receive-fixed rate swaps in the first quarter of 1998 to replace maturing swaps and help maintain the existing hedge against a falling interest rate environment. Based on its current and projected balance sheet, the Company does not expect that a change in interest rates would affect its liquidity position. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge the Company's exposure to interest rate fluctuations. The Company also offers contracts to its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. Table 20 reconciles the beginning and ending notional or contractual amounts for derivative financial instruments for 1997 and shows the expected remaining maturity at year-end 1997. Table 21 summarizes the notional amount, expected maturities and weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements, together with an indication of the asset/liability hedged. For a further discussion of derivative financial instruments, refer to Note 19 to Financial Statements. 30
Table 20 DERIVATIVE ACTIVITIES - -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 ------------------------------------------------------------------------------------------ Weighted average expected remaining (notional or contractual Beginning Ending maturity (in amounts in millions) balance Additions Expirations Terminations (2) balance yrs.-mos.) - -------------------------------------------------------------------------------------------------------------------------- Interest rate contracts: Swaps $18,986 $19,138 $18,399 $266 $19,459(3) 2-9 Futures 5,198 26,335 22,145(1) 742 8,646 0-10 Floors purchased 21,044 2,798 1,819 155 21,868(4) 2-1 Caps purchased 2,523 1,633 1,080 -- 3,076 2-4 Floors written 405 823 106 -- 1,122 3-0 Caps written 2,174 1,682 968 17 2,871 2-5 Options purchased -- 540 461 -- 79 0-1 Options written -- 27 -- -- 27 0-1 Forwards -- 59 -- -- 59 0-4 Foreign exchange contracts: Forwards and spots 1,377 73,365 72,832 -- 1,910 0-2 Options purchased 65 320 275 -- 110 0-3 Options written 59 316 265 -- 110 0-6 - --------------------------------------------------------------------------------------------------------------------------
(1) To facilitate the settlement process, the Company enters into offsetting contracts 2 to 45 days prior to their maturity date. Concurrent with the closing of these positions, the Company generally enters into new interest rate futures and forward contracts with a later expiration date since the Company's use of these contracts predominantly relates to ongoing hedging programs. (2) Terminations occur if a customer that purchased a contract decides to cancel it before the maturity date. If the customer contract was hedged, the Company terminates the interest rate derivative instrument used to hedge the customer's contract upon cancellation. The impact of terminations on income before income taxes for 1997 was a loss of less than $.5 million. (3) See Table 21 for further details of maturities and average rates received or paid. (4) Includes forward floors, which will hedge loans, of $3 million starting in February 1998, $2,000 million starting in October 1998, $1,200 million starting in January 1999, $20 million starting in March 1999, $63 million starting in June 1999 and $5 million starting in October 2000.
Table 21 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES (1) - --------------------------------------------------------------------------------------------------- There- (notional amounts in millions) 1998 1999 2000 2001 after Total - --------------------------------------------------------------------------------------------------- Receive-fixed rate (hedges loans) Notional amount $1,900 $2,628 $3,639 $2,607 $ 88 $10,862 Weighted average rate received 5.94% 6.84% 6.74% 6.59% 6.77% 6.59% Weighted average rate paid 5.99 5.97 5.94 5.87 6.26 5.94 Receive-fixed rate (hedges senior and subordinated debt) Notional amount $ 67 $ -- $ -- $ 314 $1,158 $ 1,539 Weighted average rate received 8.38% --% --% 7.52% 7.40% 7.47% Weighted average rate paid 5.97 -- -- 5.89 6.05 6.02 Receive-fixed rate (hedges purchased mortgage servicing rights) Notional amount $ 200 $ -- $ -- $ 200 $ -- $ 400 Weighted average rate received 5.92% --% --% 5.67% --% 5.80% Weighted average rate paid 5.89 -- -- 5.91 -- 5.90 Receive-fixed rate (hedges deposits) Notional amount $ -- $ 250 $1,700 $1,550 $ -- $ 3,500 Weighted average rate received --% 6.07% 5.36% 5.55% --% 5.49% Weighted average rate paid -- 5.84 5.89 5.92 -- 5.90 Other swaps (2) Notional amount $ 720 $ 632 $ 544 $ 617 $ 645 $ 3,158 Weighted average rate received 6.21% 6.19% 6.33% 6.02% 6.24% 6.19% Weighted average rate paid 6.15 6.14 6.25 5.98 6.11 6.12 Total notional amount $2,887 $3,510 $5,883 $5,288 $1,891 $19,459 ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------- - ---------------------------------------------------------------------------------------------------
(1) Variable interest rates are presented on the basis of rates in effect at December 31, 1997. These rates may change substantially in the future due to open market factors. (2) Represents customer accommodation swaps not used for asset/liability management purposes. The notional amount reflects customer accommodations as well as the swaps used to hedge the customer accommodations. 31 LIQUIDITY MANAGEMENT Liquidity refers to the Company's ability to maintain a cash flow adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. In recent years, core deposits have provided the Company with a sizable source of relatively stable and low-cost funds. The Company's average core deposits and stockholders' equity funded 87% and 89% of its average total assets in 1997 and 1996, respectively. The remaining funding of average total assets was mostly provided by senior and subordinated debt, deposits in foreign offices, short-term borrowings (comprised of federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Senior and subordinated debt averaged $4.7 billion and $4.6 billion in 1997 and 1996, respectively. Short-term borrowings averaged $3.1 billion and $2.1 billion in 1997 and 1996, respectively. Trust preferred securities averaged $1.3 billion and $82 million in 1997 and 1996, respectively. The weighted average expected remaining maturity of the debt securities within the investment securities portfolio was 1 year and 11 months at December 31, 1997. Of the $9.8 billion debt securities that were available for sale at December 31, 1997, $4.2 billion, or 43%, is expected to mature or be prepaid in 1998 and an additional $2.6 billion, or 27%, is expected to mature or be prepaid in 1999. Other sources of liquidity include maturity extensions of short-term borrowings and sale or runoff of assets. Commercial and real estate loans totaled $43.5 billion at December 31, 1997. Of these loans, $13.7 billion matures in one year or less, $15.0 billion matures in over one year through five years and $14.8 billion matures in over five years. Of the $29.8 billion that matures in over one year, $20.2 billion has floating or adjustable rates and $9.6 billion has fixed rates. Of the $9.6 billion of fixed-rate loans, approximately $1.7 billion represents fixed initial-rate mortgage (FIRM) loans. FIRM loans carry fixed rates for a minimum of 3 years to a maximum of 10 years of the loan term and carry adjustable rates thereafter. (Refer to the Consolidated Statement of Cash Flows for further information on the Company's cash flows from its operating, investing and financing activities.) 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 December 31, 1997, 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. In 1996, the Company also filed a universal shelf registration statement with the SEC that allows for the issuance of $750 million of senior and subordinated debt, preferred stock and common stock of the Company and preferred securities of special purpose subsidiary trusts. The registration allows each special purpose subsidiary to issue trust preferred securities which qualify as Tier 1 capital of the Company for regulatory purposes. The special purpose subsidiary holds junior subordinated deferrable interest debentures (debentures) of the Company. Interest paid on these debentures will be distributed to the holders of the trust preferred securities. As a result, distributions to the holders of the trust preferred securities will be tax deductible and treated as interest expense in the consolidated statement of income. This provides the Company with a more cost-effective means of obtaining Tier 1 capital than if the Company itself were to issue additional preferred stock. In December 1996, the Company issued $400 million in trust preferred securities through one trust, Wells Fargo Capital I. In January 1997, the Company issued an additional $150 million in trust preferred securities through a separate trust, Wells Fargo Capital II. At December 31, 1997, $200 million remained unissued under this shelf registration. (See Note 10 to Financial Statements.) In addition to the publicly registered trust preferred securities, the Company established in 1996 three special purpose trusts, which collectively issued $750 million of trust preferred securities in private placements (see Note 10 to Financial Statements). Similar to the registered trust preferred securities, these preferred securities qualify as Tier 1 capital for regulatory purposes and the interest on the debentures is paid as tax-deductible distributions to the trust preferred security holders. The proceeds from these publicly registered and private placement issuances were invested in debentures of the Company. The proceeds from the sale of these debentures were used by the Company for general corporate purposes. In 1997, the Parent's primary source of funding was dividends paid by the Bank totaling $2.0 billion. The dividends received helped to fund the Company's stock repurchase program. The Company expects the Parent to continue to receive dividends from the Bank in 1998. (See Notes 3 and 16 to Financial Statements for a discussion of the restrictions on the Bank's ability to pay dividends and the Parent Company's financial statements, respectively.) 32 To accommodate future growth and current business needs, the Company has a capital expenditure program. Capital expenditures for 1998 are estimated at about $300 million for equipment for supermarket branches, banking centers and business centers, relocation and remodeling of Company facilities and routine replacement of furniture and equipment. The Company will fund these expenditures from various sources, including retained earnings of the Company and borrowings of various maturities. COMPARISON OF 1996 VERSUS 1995 On April 1, 1996, the Company completed its acquisition (Merger) of First Interstate Bancorp (First Interstate), which has been accounted for as a purchase business combination. As a result, the financial information presented in this Annual Report reflects the effects of the acquisition subsequent to the Merger's consummation. Since the Company's results of operations subsequent to April 1, 1996 reflect amounts recognized from the combined operations, they cannot be divided between or attributed directly to either of the two former entities nor can they be directly compared with prior periods. In substantially all of the Company's income and expense categories, the increases in the amounts reported for the year ended December 31, 1996 compared to the amounts reported in the corresponding period in 1995 resulted from the Merger. The increases in substantially all of the categories of the Company's balance sheet between amounts reported at December 31, 1996 and those reported at December 31, 1995 also resulted from the Merger. Other significant factors affecting the comparison of the Company's results of operations and financial position are described below. Net income in 1996 was $1,071 million, compared with $1,032 million in 1995, an increase of 4%. Earnings per common share were $12.21 in 1996, compared with $20.37 in 1995, a decrease of 40%. Return on average assets (ROA) was 1.15% and return on average common equity (ROE) was 8.83% in 1996, compared with 2.03% and 29.70%, respectively, in 1995. The increase in earnings in 1996 compared with 1995 reflected the results of the Merger, substantially offset by a $163 million ($94 million after tax) gain resulting from the sale of the Company's joint venture interest in Wells Fargo Nikko Investment Advisors (WFNIA) in 1995 and a $105 million loan loss provision in 1996 compared with none in 1995. Earnings before the amortization of goodwill and nonqualifying core deposit intangible (CDI) ("cash" or "tangible" earnings) were $16.74 per share ($16.52 assuming dilution) in 1996, compared with $21.08 ($20.76 assuming dilution) in 1995. This decrease is substantially due to the estimated expenses related to the First Interstate integration of about $440 million and a loan loss provision of $105 million. On the same basis, ROA was 1.66% and ROE was 28.46% in 1996, compared with 2.12% and 34.92%, respectively, in 1995. Net interest income on a taxable-equivalent basis was $4,532 million in 1996, compared with $2,655 million in 1995. The Company's net interest margin was 6.11% for 1996, compared with 5.80% in 1995. The increase in the margin was primarily due to the mix of funding sources due to the Merger, as core deposits replaced more expensive short-term borrowings. The increase in net interest income for 1996 compared with 1995 was primarily due to an increase in average earning assets as a result of the Merger. Noninterest income increased from $1,324 million in 1995 to $2,200 million in 1996, an increase of 66%. In addition to the effects of the Merger, the increase reflects the loss on sale in 1995 of certain product types within the real estate 1-4 family first mortgage portfolio. The increase in 1996 was partially offset by the 1995 sale of the Company's joint venture interest in WFNIA. In December 1995, the Company sold its joint venture interest in WFNIA as well as its MasterWorks division to Barclays PLC of the U.K., resulting in a $163 million pre-tax gain. The Company's joint venture interest in WFNIA was accounted for as an equity investment under the equity method. The income from the equity investment in WFNIA, included in noninterest income, totaled $27 million in 1995. Noninterest income from the MasterWorks division, included in "all other" trust and investment services income totaled $26 million in 1995. In 1996, losses from dispositions of operations included a $96 million fourth quarter 1996 accrual representing dispositions of premises and, to a lesser extent, severance and communications expenses associated with the disposition of 137 traditional branches in California. (See page 17 for additional information.) 33 Gains and losses on sales of loans for 1995 included a first quarter $83 million write-down to the lower of cost or estimated market resulting from the reclassification of certain types of products within the real estate 1-4 family first mortgage loan portfolio to mortgage loans held for sale. During the second half of 1995, as all mortgage loans held for sale were sold and because such sales were at prices greater than originally estimated, the Company recorded a $19 million gain on sale. Noninterest expense increased from $2,201 million in 1995 to $4,637 million in 1996. In addition to the effect of combining operations of First Interstate with the Company, the increase reflected goodwill and nonqualifying CDI amortization, severance for Wells Fargo employees and other integration expenditures. The Company's active, full-time equivalent staff, including hourly employees was 36,902 at December 31, 1996, compared with 19,249 at December 31, 1995. Excluding the effects of the Merger, the increase in equipment expense to $399 million in 1996 compared with $193 million in 1995 was related to a higher level of spending on software and technology for product development and increased depreciation expense on equipment related to business initiatives and system upgrades. The Company's effective tax rate was 46% for 1996 and 42% for 1995. The increase in the effective tax rate for 1996 was due to increased goodwill amortization related to the Merger, which is not tax deductible. The decrease in federal deposit insurance expense in 1996, compared with 1995, was substantially due to the revised rate structure effective June 1, 1995, partially offset by the passage of the Deposit Insurance Funds Act of 1996 (DIFA). DIFA was enacted, in part, to increase the Federal Deposit Insurance Corporation Savings Association Insurance Fund reserve ratio to 1.25% and levied a 65.7 cent fee on every $100 of thrift deposits held on March 31, 1995. The Company acquired thrift deposits through the Merger. Accordingly, $22 million was paid in 1996 based on the thrift deposits of First Interstate. There was a provision for loan losses of $105 million in 1996, compared with no provision in 1995. Net charge-offs in 1996 were $640 million, or 1.05% of average total loans, compared with $288 million, or .83%, in 1995. The allowance for loan losses was 3.00% of total loans at December 31, 1996, compared with 5.04% at December 31, 1995. Total nonaccrual and restructured loans were $724 million, or 1.1% of total loans, at December 31, 1996, compared with $552 million, or 1.6% of total loans, at December 31, 1995. Foreclosed assets were $219 million at December 31, 1996, compared with $186 million at December 31, 1995. ADDITIONAL INFORMATION Common stock of the Company is traded on the New York Stock Exchange, the Pacific Exchange, the London Stock Exchange and the Frankfurt Stock Exchange. The high, low and end-of-period annual and quarterly closing prices of the Company's stock as reported on the New York Stock Exchange Composite Transaction Reporting System are presented in the graphs. The number of holders of record of the Company's common stock was 42,299 as of January 31, 1998. Common dividends declared per share totaled $5.20 in 1997, $5.20 in 1996 and $4.60 in 1995. The dividend was last increased in the first quarter of 1996 to $1.30 per share from $1.15 per share. Quarterly dividends are considered at the Board of Directors meeting the month following quarter end. Dividends declared are payable the second month after quarter end. The Company, with the approval of the Board of Directors, intends to continue its present policy of paying quarterly cash dividends to stockholders. The level of future dividends will be determined by the Board of Directors in light of the earnings and financial condition of the Company. PRICE RANGE OF COMMON STOCK - ANNUAL ($) [BAR GRAPH] PRICE RANGE OF COMMON STOCK - QUARTERLY ($) [BAR GRAPH] 34 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------------------------------- Year ended December 31, ---------------------------------- (in millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 18 $ 29 $ 4 Investment securities 732 779 599 Mortgage loans held for sale -- -- 76 Loans 6,094 5,688 3,403 Other 60 27 3 ------ ------ ------ Total interest income 6,904 6,523 4,085 ------ ------ ------ INTEREST EXPENSE Deposits 1,703 1,586 997 Federal funds purchased and securities sold under repurchase agreements 154 92 199 Commercial paper and other short-term borrowings 17 16 32 Senior and subordinated debt 315 302 203 Guaranteed preferred beneficial interests in Company's subordinated debentures 101 6 -- ------ ------ ------ Total interest expense 2,290 2,002 1,431 ------ ------ ------ NET INTEREST INCOME 4,614 5,521 2,654 Provision for loan losses 615 105 -- ------ ------ ------ Net interest income after provision for loan losses 3,999 4,416 2,654 ------ ------ ------ NONINTEREST INCOME Fees and commissions 946 740 433 Service charges on deposit accounts 861 868 478 Trust and investment services income 450 377 241 Investment securities gains (losses) 20 10 (17) Sale of joint venture interest -- -- 163 Other 427 205 26 ------ ------ ------ Total noninterest income 2,704 2,200 1,324 ------ ------ ------ NONINTEREST EXPENSE Salaries 1,269 1,357 713 Incentive compensation 195 227 126 Employee benefits 332 373 187 Equipment 385 399 193 Net occupancy 388 366 211 Goodwill 326 250 35 Core deposit intangible 255 243 42 Operating losses 320 145 45 Other 1,079 1,277 649 ------ ------ ------ Total noninterest expense 4,549 4,637 2,201 ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 2,154 1,979 1,777 Income tax expense 999 908 745 ------ ------ ------ NET INCOME $1,155 $1,071 $1,032 ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $1,130 $1,004 $ 990 ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE $12.77 $12.21 $20.37 ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE - ASSUMING DILUTION $12.64 $12.05 $20.06 ------ ------ ------ ------ ------ ------ DIVIDENDS DECLARED PER COMMON SHARE $ 5.20 $ 5.20 $ 4.60 ------ ------ ------ ------ ------ ------ Average common shares outstanding 88.4 82.2 48.6 ------ ------ ------ ------ ------ ------ Average common shares outstanding - assuming dilution 89.4 83.3 49.4 ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 35 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------- December 31, ----------------------- (in millions) 1997 1996 - --------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 8,169 $ 11,736 Federal funds sold and securities purchased under resale agreements 82 187 Investment securities at fair value 9,888 13,505 Loans 65,734 67,389 Allowance for loan losses 1,828 2,018 ------- -------- Net loans 63,906 65,371 ------- -------- Due from customers on acceptances 98 197 Accrued interest receivable 507 665 Premises and equipment, net 2,117 2,406 Core deposit intangible 1,709 2,038 Goodwill 7,031 7,322 Other assets 3,949 5,461 ------- -------- Total assets $97,456 $108,888 ------- -------- ------- -------- LIABILITIES Noninterest-bearing deposits $23,953 $ 29,073 Interest-bearing deposits 48,246 52,748 ------- -------- Total deposits 72,199 81,821 Federal funds purchased and securities sold under repurchase agreements 3,576 2,029 Commercial paper and other short-term borrowings 249 401 Acceptances outstanding 98 197 Accrued interest payable 175 171 Other liabilities 2,403 3,947 Senior debt 1,983 2,120 Subordinated debt 2,585 2,940 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,150 STOCKHOLDERS' EQUITY Preferred stock 275 600 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 86,152,779 shares and 91,474,425 shares 431 457 Additional paid-in capital 8,712 10,287 Retained earnings 3,416 2,749 Cumulative foreign currency translation adjustments -- (4) Investment securities valuation allowance 55 23 ------- -------- Total stockholders' equity 12,889 14,112 ------- -------- Total liabilities and stockholders' equity $97,456 $108,888 ------- -------- ------- -------- - ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 36 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------- Foreign Investment Total Additional currency securities stock- Preferred Common paid-in Retained translation valuation holders' (in millions) stock stock capital earnings adjustments allowance equity - --------------------------------------------------------------------------------------- ------------------------------------ BALANCE DECEMBER 31, 1994 $ 489 $256 $ 871 $ 2,409 $(4) $(110) $ 3,911 ----- ---- ------- ------- --- ----- ------- Net income -1995 1,032 1,032 Common stock issued under employee benefit and dividend reinvestment plans 4 86 90 Common stock repurchased (25) (822) (847) Preferred stock dividends (42) (42) Common stock dividends (225) (225) Change in unrealized net losses, after applicable taxes 136 136 Transfer 1,000 (1,000) -- ----- ---- ------- ------- --- ----- ------- Net change -- (21) 264 (235) -- 136 144 ----- ---- ------- ------- --- ----- ------- BALANCE DECEMBER 31, 1995 489 235 1,135 2,174 (4) 26 4,055 ----- ---- ------- ------- --- ----- ------- Net income-1996 1,071 1,071 Preferred stock issued to First Interstate stockholders 350 10 360 Preferred stock issued, net of issuance costs 200 (3) 197 Common stock issued to First Interstate stockholders 260 11,037 11,297 Common stock issued under employee benefit and dividend reinvestment plans 4 113 117 Preferred stock redeemed (439) (439) Common stock repurchased (42) (2,116) (2,158) Preferred stock dividends (67) (67) Common stock dividends (429) (429) Change in unrealized net gains, after applicable taxes (3) (3) Fair value adjustment related to First Interstate stock options 111 111 ----- ---- ------- ------- --- ----- ------- Net change 111 222 9,152 575 -- (3) 10,057 ----- ---- ------- ------- --- ----- ------- BALANCE DECEMBER 31, 1996 600 457 10,287 2,749 (4) 23 14,112 ----- ---- ------- ------- --- ----- ------- Net income-1997 1,155 1,155 Common stock issued under employee benefit and dividend reinvestment plans 3 85 88 Preferred stock redeemed (325) (325) Common stock repurchased (29) (1,660) (1,689) Preferred stock dividends (25) (25) Common stock dividends (463) (463) Translation adjustments 4 4 Change in unrealized net gains, after applicable taxes 32 32 ----- ---- ------- ------- --- ----- ------- Net change (325) (26) (1,575) 667 4 32 (1,223) ----- ---- ------- ------- --- ----- ------- BALANCE DECEMBER 31, 1997 $ 275 $431 $ 8,712 $ 3,416 $-- $ 55 $12,889 ----- ---- ------- ------- --- ----- ------- ----- ---- ------- ------- --- ----- ------- - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 37 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------- (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,155 $ 1,071 $ 1,032 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 615 105 -- Depreciation and amortization 917 809 272 (Gains) losses on disposition of operations (15) 95 89 Gain on sale of joint venture interest -- -- (163) Deferred income tax expense 165 169 17 Increase (decrease) in net deferred loan fees 21 22 (6) Net (increase) decrease in accrued interest receivable 158 (49) 20 Writedown on mortgage loans held for sale -- -- 64 Net (decrease) increase in accrued interest payable 4 (1) 25 Net decrease (increase) in loans acquired for sale (652) 390 (535) Other, net 775 (1,536) (139) -------- ------- ------- Net cash provided by operating activities 3,143 1,075 676 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At fair value: Proceeds from sales 310 719 673 Proceeds from prepayments and maturities 4,376 5,047 229 Purchases (780) (2,759) (77) At cost: Proceeds from prepayments and maturities -- -- 2,191 Purchases -- -- (104) Cash acquired from First Interstate -- 6,030 -- Proceeds from sales of mortgage loans held for sale -- -- 4,273 Net (increase) decrease in loans resulting from originations and collections 1,063 2,301 (3,700) Proceeds from sales (including participations) of loans 437 364 770 Purchases (including participations) of loans (314) (133) (233) Proceeds from sales of foreclosed assets 211 155 202 Net decrease in federal funds sold and securities purchased under resale agreements 105 2,064 83 Other, net 47 (756) (172) -------- ------- ------- Net cash provided by investing activities 5,455 13,032 4,135 -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (9,622) (4,609) (3,350) Net (decrease) increase in short-term borrowings 1,395 (892) (235) Proceeds from issuance of senior debt 700 1,260 1,230 Repayment of senior debt (810) (1,183) (811) Proceeds from issuance of subordinated debt -- 800 -- Repayment of subordinated debt (351) -- (210) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 149 1,150 -- Proceeds from issuance of preferred stock -- 197 -- Proceeds from issuance of common stock 88 117 90 Redemption of preferred stock (325) (439) -- Repurchase of common stock (1,689) (2,158) (847) Payment of cash dividends on preferred stock (25) (73) (42) Payment of cash dividends on common stock (463) (429) (225) Other, net (1,212) 513 (10) -------- ------- ------- Net cash used by financing activities (12,165) (5,746) (4,410) -------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (3,567) 8,361 401 Cash and cash equivalents at beginning of year 11,736 3,375 2,974 -------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,169 $11,736 $ 3,375 -------- ------- ------- -------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 2,286 $ 1,916 $ 1,406 Income taxes $ 711 $ 641 $ 618 Noncash investing and financing activities: Transfers from investment securities at cost to investment securities at fair value $ -- $ -- $ 6,532 Transfers from loans to foreclosed assets $ 95 $ 141 $ 115 Transfers from loans to mortgage loans held for sale $ -- $ -- $ 4,440 Acquisition of First Interstate: Common stock issued $ -- $11,297 $ -- Fair value of preferred stock issued -- 360 -- Fair value of stock options -- 111 -- Fair value of assets acquired -- 55,797 -- Fair value of liabilities assumed -- 51,214 -- - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 38 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). Besides servicing millions of customers in 10 Western states, Wells Fargo & Company and Subsidiaries (Company) provide a full range of banking and financial services to commercial, agribusiness, real estate and small business customers across the nation. The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP) and prevailing practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the financial statements for prior years have been reclassified to conform with the current financial statement presentation. The following is a description of the significant accounting policies of the Company. CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Parent, the Bank and other bank and nonbank subsidiaries of the Parent. Significant majority-owned subsidiaries are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other subsidiaries and affiliates in which there is at least 20% ownership are generally accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost. Subsidiaries and affiliates that are accounted for by either the equity or cost method are included in other assets. SECURITIES Securities are accounted for according to their purpose and holding period. INVESTMENT SECURITIES Securities generally acquired to meet long-term investment objectives, including yield and liquidity management purposes, are classified as investment securities. Realized gains and losses are recorded in noninterest income using the identified certificate method. For certain debt securities (for example, Government National Mortgage Association securities), the Company anticipates prepayments of principal in the calculation of the effective yield. SECURITIES AT FAIR VALUE Debt securities that may not be held until maturity and marketable equity securities are considered available for sale and, as such, are classified as securities carried at fair value, with unrealized gains and losses, after applicable taxes, reported in a separate component of stockholders' equity. The estimated fair value of investments is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income as a loss on investment securities. SECURITIES AT COST Debt securities acquired with the positive intent and ability to hold to maturity are classified as securities carried at historical cost, adjusted for amortization of premium and accretion of discount, where appropriate. If it is probable that the carrying value of any debt security will not be realized due to other-than-temporary impairment, the estimated loss is recorded in noninterest income as a loss on investment securities. If a decision is made to dispose of securities at cost or should the Company become unable to hold securities until maturity, they would be reclassified to securities at fair value. TRADING SECURITIES Securities acquired for short-term appreciation or other trading purposes are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in noninterest income. 39 NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities are acquired for various purposes, such as troubled debt restructurings and as a regulatory requirement (for example, Federal Reserve Bank stock). These securities are accounted for at cost and are included in other assets as they do not fall within the definition of an investment security since there are restrictions on their sale or liquidation. The asset value is reduced when declines in value are considered to be other than temporary and the estimated loss is recorded in noninterest income as a loss from equity investments. LOANS Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the contractual life of the loan using an interest method or the straight-line method if it is not materially different. Loans identified as held for sale are carried at the lower of cost or market value. Nonrefundable fees, related direct loan origination costs and related hedging gains or losses, if any, are deferred and recognized as a component of the gain or loss on sale recorded in noninterest income. NONACCRUAL LOANS Loans are 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. Generally, consumer loans not secured by real estate are only placed on nonaccrual status when a portion of the principal has been charged off. Generally, such loans are entirely charged off within 180 days of becoming past due. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection. IMPAIRED LOANS Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, 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. This assessment for impairment occurs 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. RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired loans in the calendar years subsequent to the restructuring if they are not impaired based on the modified terms. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. ALLOWANCE FOR LOAN LOSSES The Company's determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual 40 borrowers and the Company's ongoing examination process and that of its regulators. The Company considers the allowance for loan losses adequate to cover losses inherent in loans, loan commitments and standby letters of credit. TRANSFERS AND SERVICING OF FINANCIAL ASSETS Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125 (FAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, except for those provisions related to repurchase agreements and similar collateralized transactions for which the Financial Accounting Standards Board (FASB) deferred the effective date to January 1, 1998. A transfer of financial assets is accounted for as a sale when control is surrendered over the assets transferred. Servicing rights and other retained interests in the assets sold are recorded by allocating the previous recorded investment between the asset sold and the interest retained based on their relative fair values, if practicable to determine, at the date of transfer. Purchased mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. For purposes of evaluating and measuring impairment for purchased mortgage servicing rights, the Company stratifies these rights based on the type and interest rate of the underlying loans. Impairment is measured as the amount by which the purchased mortgage servicing rights for a stratum exceed their fair value. Fair value of the purchased mortgage servicing rights is determined based on valuation techniques utilizing discounted cash flows incorporating assumptions that market participants would use. Impairment, net of hedge results, is recognized through a valuation allowance for each individual stratum. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment, at the capitalized amount less accumulated amortization. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for furniture and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases, which generally range from 20 to 35 years. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from acquisitions made by the Company. Substantially all of the Company's goodwill is being amortized using the straight-line method over 25 years. The remaining period of amortization, on a weighted average basis, approximated 23 years at December 31, 1997. Core deposit intangibles are amortized on an accelerated basis based on an estimated useful life of 10 to 15 years. Certain identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over an original life of 5 to 15 years. Approximately 35% of the December 31, 1997 remaining balance will be amortized in 3 years. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. INCOME TAXES The Company files a consolidated federal income tax return. Consolidated or combined state tax returns are filed in certain states, including California. Income taxes are generally allocated to individual subsidiaries as if each had filed a separate return. Payments are made to the Parent by those subsidiaries with net tax liabilities on a separate return basis. Subsidiaries with net tax losses and excess tax credits receive payment for these benefits from the Parent. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. EARNINGS PER COMMON SHARE Earnings per common share are presented under two formats: earnings per common share and earnings per common share - assuming dilution. Earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year. Earnings per common share - assuming dilution are computed by dividing net 41 income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year, plus the impact of those common stock equivalents (i.e., stock options and restricted share rights) that are dilutive. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE DERIVATIVES The Company uses interest rate derivative financial instruments (futures, caps, floors and swaps) primarily to hedge mismatches in the rate maturity of loans and their funding sources. These instruments serve to reduce rather than increase the Company's exposure to movements in interest rates. At the inception of the hedge, the Company identifies an individual asset or liability, or an identifiable group of essentially similar assets or liabilities that expose the Company to interest rate risk at the consolidated or enterprise level. Interest rate derivatives are accounted for by the deferral or accrual method only if they are designated as a hedge and are expected to be and are effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Futures contracts must meet specific correlation tests (i.e., the change in their fair values must be within 80 to 120 percent of the opposite change in the fair values of the hedged assets or liabilities). For caps, floors and swaps, their notional amount, interest rate index and life must closely match the related terms of the hedged assets or liabilities. Further, for futures, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives are closed out or settled; previously unrecognized hedge results, and the net settlement upon close-out or termination that offset changes in value of the hedged asset or liability are deferred and amortized over the life of the asset or liability with excess amounts recognized in noninterest income. Gains and losses on futures contracts result from the daily settlement of their open positions and are deferred and classified on the balance sheet with the hedged asset or liability. They are recognized in income when the effects of the related fair value changes of the hedged asset or liability are recognized (e.g., amortized as a component of the interest income or expense reported on the hedged asset or liability). Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in the interest income or expense reported on the hedged asset or liability. Fees associated with these financial contracts are included on the balance sheet at the time that the fee is paid and are classified with the hedged asset or liability. These fees are amortized over their contractual life as a component of the interest reported on the hedged asset or liability. If a hedged asset or liability settles before maturity of the hedging interest rate derivatives, the derivatives are closed out or settled, and previously unrecognized hedge results and the net settlement upon close-out or termination are accounted for as part of the gains and losses on the hedged asset or liability. If interest rate derivatives used in an effective hedge are closed out or terminated before the hedged item settles, previously unrecognized hedge results and the net settlement upon close-out or termination are deferred and amortized over the life of the hedged asset or liability. Cash flows resulting from interest rate derivatives (including any related fees) that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows from the items being hedged and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Interest rate derivatives entered into as an accommodation to customers and interest rate derivatives used to offset the interest rate risk of those contracts are carried at fair value with unrealized gains and losses recorded in noninterest income. Cash flows resulting from interest rate derivative financial instruments carried at fair value are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Credit risk related to interest rate derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivatives. All contracts are carried at fair value, with unrealized gains and losses recorded in noninterest income. Cash flows resulting from foreign exchange derivatives are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the foreign exchange derivatives are collected, paid or settled. Credit risk related to foreign exchange derivatives is considered and, if material, provided for separately from the allowance for loan losses. 42 2. MERGER WITH FIRST INTERSTATE BANCORP On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp (First Interstate). The Merger was accounted for as a purchase transaction. Accordingly, the results of operations of First Interstate are included with those of the Company for periods subsequent to the date of the Merger. The major components of management's plan for the combined company include the realignment of First Interstate's businesses to reflect Wells Fargo's structure, consolidation of retail branches and administrative facilities and reduction in staffing levels. As a result of this plan, the adjustments to goodwill since April 1, 1996 included accruals totaling approximately $324 million ($191 million after tax) related to the disposition of premises, including an accrual of $127 million ($75 million after tax) associated with the dispositions of traditional former First Interstate branches in California and out of state. At December 31, 1997, the remaining accrual associated with the disposition of traditional former First Interstate branches was $8 million. The California dispositions included 175 branch closures during 1996, 47 branch closures during 1997 and 2 branches scheduled to be closed by June 30, 1998. The Company also entered into definitive agreements with several institutions to sell 20 former First Interstate branches, including deposits, located in California. The sales of 17 of these branches were completed in 1997, with the remaining three branches expected to be completed by June 30, 1998. The out-of-state dispositions included 88 branch closures that were completed in 1997 and 68 closures scheduled to be completed by June 30, 1998. The Company also sold 87 former First Interstate out-of-state branches, including deposits, in 1997. Additionally, the adjustments to goodwill included accruals of approximately $481 million ($284 million after tax) related to severance of former First Interstate employees throughout the Company who have been or will be displaced. Severance payments totaling $372 million were paid since the second quarter of 1996, including $143 million in 1997. In June 1997, Wells Fargo Bank (Colorado), N.A. (formerly First Interstate Bank of Denver, N.A.) was merged with the Bank. In 1997, the Company sold the Corporate and Municipal Bond Administration (Corporate Trust) business to The Bank of New York. 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 is occurring in several stages, the first of which was during the third quarter of 1997. 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 is being deducted from goodwill, while the remaining net proceeds attributable to business originated by the Company will be recorded as a gain in 1998 when the transfers are finalized. The $7,230 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. 3. CASH, LOAN AND DIVIDEND RESTRICTIONS Federal Reserve Board regulations require reserve balances on deposits to be maintained by the Company's banking subsidiaries with the Federal Reserve Banks. The average required reserve balance was $2.0 billion in both 1997 and 1996. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on extensions of credit to its affiliates. In particular, the Bank is prohibited from lending to the Parent and its nonbank subsidiaries unless the loans are secured by specified collateral. Such secured loans and other regulated transactions made by the Bank (including its subsidiaries) are limited in amount as to each of its affiliates, including the Parent, to 10% of the Bank's capital stock and surplus (as defined, which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) and, in the aggregate to all of its affiliates, to 20% of the Bank's capital stock and surplus. The capital stock and surplus at December 31, 1997 was $8 billion. Dividends payable by the Bank to the Parent without the express approval of the Office of the Comptroller of the Currency (OCC) are limited to the Bank's retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits are defined by the OCC as net income, less dividends declared during the period, both of which are based on regulatory accounting 43 principles. Based on this definition, the Bank, with the express approval of the OCC, declared dividends in 1997 and 1996 of $1.5 billion in excess of its net income of $2.0 billion for those years. (The total dividends declared by the Bank in 1997, 1996 and 1995 were $2.0 billion, $1.5 billion and $1.6 billion (including a $.5 billion deemed dividend), respectively.) Therefore, before it can declare dividends in 1998 without the approval of the OCC, the Bank must have net income of $1.5 billion plus an amount equal to or greater than the dividends declared in 1998. Since it is not expected to have net income of $1.5 billion plus an amount equal to or greater than the dividends expected to be declared in 1998, the Bank will again need to obtain the approval of the OCC before any dividends are declared in 1998. The Company's other banking subsidiaries are subject to the same restrictions as the Bank. However, any such restrictions have not had a material impact on the banking subsidiaries or the Company. 4. INVESTMENT SECURITIES The following table provides the cost and fair value for the major components of available-for-sale securities carried at fair value (there were no held-to-maturity investment securities at cost at the end of the last three years):
- ----------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------------- 1997 1996 ----------------------------------------- ------------------------------------------ ESTIMATED ESTIMATED Estimated Estimated UNREALIZED UNREALIZED ESTIMATED unrealized unrealized Estimated GROSS GROSS FAIR gross gross fair (in millions) COST GAINS LOSSES VALUE Cost gains losses value - --------------------------------------------------------------------------- ------------------------------------------ U.S. Treasury securities $2,535 $ 15 $ 1 $2,549 $ 2,824 $ 16 $ 3 $ 2,837 Securities of U.S. government agencies and corporations (1) 4,390 43 8 4,425 7,043 46 39 7,050 Private collateralized mortgage obligations (2) 2,390 16 10 2,396 3,237 16 23 3,230 Other 441 12 -- 453 342 2 1 343 ------ ---- --- ------ ------- ---- --- ------- Total debt securities 9,756 86 19 9,823 13,446 80 66 13,460 Marketable equity securities 40 26 1 65 18 27 -- 45 ------ ---- --- ------ ------- ---- --- ------- Total $9,796 $112 $20 $9,888 $13,464 $107 $66 $13,505 ------ ---- --- ------ ------- ---- --- ------- ------ ---- --- ------ ------- ---- --- ------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------- December 31, ----------------- 1995 ----------------- Estimated fair (in millions) Cost value - ----------------------------------------------------- U.S. Treasury securities $1,347 $1,357 Securities of U.S. government agencies and corporations (1) 5,218 5,223 Private collateralized mortgage obligations (2) 2,121 2,122 Other 169 181 ------ ------ Total debt securities 8,855 8,883 Marketable equity securities 18 37 ------ ------ Total $8,873 $8,920 ------ ------ ------ ------ - -----------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. At December 31, 1997, there were no investment securities (excluding the U.S. government and its agencies and corporations) that exceeded 10% of stockholders equity. Proceeds from the sale of securities in the available-for-sale portfolio totaled $310 million, $719 million and $673 million in 1997, 1996 and 1995, respectively. The sales of debt securities in the available-for-sale portfolio resulted in a $6 million gain, $1 million gain and $13 million loss in 1997, 1996 and 1995, respectively. These were sold for asset/liability management purposes. The sales of marketable equity securities in the available-for-sale portfolio resulted in a gain of $14 million, $9 million and none in 1997, 1996 and 1995, respectively. Additionally, a $4 million loss was realized in 1995 resulting from a write-down of certain equity securities due to other-than-temporary impairment. 44 The following table provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of available-for-sale debt securities within the investment portfolio. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. (See the Investment Securities section of the Financial Review for expected remaining maturities and yields.)
- ------------------------------------------------------------------------------------------------------------- December 31, 1997 ---------------------------------------------------------------- Remaining contractual principal maturity ---------------------------------------- Weighted average remaining After one year Weighted maturity Within one year through five years Total average (in yrs. --------------- ------------------ (in millions) amount yield - mos.) Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $2,535 6.04% 1-3 $1,130 5.83% $1,404 6.21% Securities of U.S. government agencies and corporations 4,390 6.68 5-2 1,053 6.87 1,859 6.70 Private collateralized mortgage obligations 2,390 6.76 6-4 286 8.00 851 7.07 Other 441 8.11 4-6 56 7.56 223 7.82 ------ ------ ------ TOTAL COST OF DEBT SECURITIES(1) $9,756 6.60% 4-5 $2,525 6.55% $4,337 6.67% ------ ---- --- ------ ---- ------ ---- ------ ---- --- ------ ---- ------ ---- ESTIMATED FAIR VALUE $9,823 $2,539 $4,375 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------ December 31, 1997 ---------------------------------------- Remaining contractual principal maturity ---------------------------------------- After five years through ten years After ten years ----------------- ---------------- (in millions) Amount Yield Amount Yield - ------------------------------------------------------------------------------------ U.S Treasury securities $ 1 6.67% $ -- --% Securities of U.S. government agencies and corporations 819 7.23 659 5.59 Private collateralized mortgage obligations 725 7.07 528 5.20 Other 136 8.78 26 8.07 ------ ------ TOTAL COST OF DEBT SECURITIES(1) $1,681 7.29% $1,213 5.47% ------ ---- ------ ---- ------ ---- ------ ---- ESTIMATED FAIR VALUE $1,687 $1,222 ------ ------ ------ ------ - ------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale debt securities carried at fair value. There was no dividend income in 1997, 1996 and 1995 included in interest income on investment securities in the Consolidated Statement of Income. Substantially all income on investment securities is taxable. Investment securities pledged primarily to secure trust and public deposits and for other purposes as required or permitted by law was $6.4 billion, $5.3 billion and $4.8 billion at December 31, 1997, 1996 and 1995, respectively. 45 5. LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of the major categories of loans outstanding and related unfunded commitments to extend credit is shown in the following table. At December 31, 1997 and 1996, the commercial loan category and related commitments did not have an industry concentration that exceeded 10% of total loans and commitments. Tables 11 and 12 in the Loan Portfolio section of the Financial Review summarize real estate mortgage loans (excluding 1-4 family first mortgage loans) by state and property type and real estate construction loans by state and project type. A majority of the Company's real estate 1-4 family first mortgages and consumer loans are with customers located in California.
- ------------------------------------------------------------------------------------------------ December 31, -------------------------------------------- 1997 1996 ---------------------- --------------------- COMMITMENTS Commitments OUT- TO EXTEND Out- to extend (in millions) STANDING CREDIT standing credit - ------------------------------------------------------------------------------------------------ Commercial (1) $20,144 $27,458 $19,515 $28,125 Real estate 1-4 family first mortgage (2) 8,869 833 10,425 778 Other real estate mortgage 12,186 1,086 11,860 872 Real estate construction 2,320 1,552 2,303 1,719 Consumer: Real estate 1-4 family junior lien mortgage 5,865 4,681 6,278 4,781 Credit card 5,039 15,453 5,462 15,737 Other revolving credit and monthly payment 7,185 2,913 8,374 3,123 ------- ------- ------- ------- Total consumer 18,089 23,047 20,114 23,641 Lease financing 4,047 -- 3,003 -- Foreign 79 43 169 101 ------- ------- ------- ------- Total loans (3) $65,734 $54,019 $67,389 $55,236 ------- ------- ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------
(1) Outstanding balances include loans (primarily unsecured) to real estate developers and REITs of $1,772 million and $1,070 million at December 31, 1997 and 1996, respectively. (2) Substantially all of the commitments to extend credit relate to those equity lines that are effectively first mortgages. (3) Outstanding loan balances at December 31, 1997 and 1996 are net of unearned income, including net deferred loan fees, of $832 million and $654 million, respectively. In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management determines a requisite amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment). A commitment to extend credit is a legally binding agreement to lend funds to a customer and is usually for a specified interest rate and purpose. These commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit shown in the table above because a significant portion of these commitments is expected to expire without being drawn upon. Certain commitments are subject to a loan agreement containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its credit activities. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses. 46 Standby letters of credit totaled $2,612 million and $2,981 million at December 31, 1997 and 1996, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The liquidity risk to the Company arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing letters of credit and the Company's management of that credit risk is considered in management's determination of the allowance for loan losses. At December 31, 1997 and 1996, standby letters of credit included approximately $200 million and $243 million, respectively, of participations purchased, net of approximately $85 million and $61 million, respectively, of participations sold. Approximately 68% of the Company's year-end 1997 standby letters of credit had maturities of one year or less and substantially all had maturities of seven years or less. Included in standby letters of credit are those that back financial instruments (financial guarantees). The Company had issued or purchased participations in financial guarantees of approximately $1,293 million and $1,798 million at December 31, 1997 and 1996, respectively. The Company also had commitments for commercial and similar letters of credit of $337 million and $406 million at December 31, 1997 and 1996, respectively. Substantially all fees received from the issuance of financial guarantees are deferred and amortized on a straight-line basis over the term of the guarantee. Losses on standby letters of credit and other similar letters of credit have been immaterial. The Company considers the allowance for loan losses of $1,828 million adequate to cover losses inherent in loans, loan commitments and standby letters of credit at December 31, 1997. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of the factors then prevailing, including economic conditions and the Company's ongoing examination process and that of its regulators, will not require significant increases in the allowance for loan losses. Loans held for sale are included in their respective loan categories and recorded at the lower of cost or market. At December 31, 1997 and 1996, loans held for sale were $1,127 million and $308 million, respectively. Changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------- Year ended December 31, --------------------------- (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 2,018 $1,794 $2,082 Allowance of First Interstate -- 770 -- Sale of former First Interstate banks -- (11) -- Provision for loan losses 615 105 -- Loan charge-offs: Commercial (1) (269) (140) (55) Real estate 1-4 family first mortgage (19) (18) (13) Other real estate mortgage (18) (40) (52) Real estate construction (3) (13) (10) Consumer: Real estate 1-4 family junior lien mortgage (23) (28) (16) Credit card (486) (404) (208) Other revolving credit and monthly payment (219) (186) (53) ------- ------- ------- Total consumer (728) (618) (277) Lease financing (41) (31) (15) ------- ------- ------- Total loan charge-offs (1,078) (860) (422) ------- ------- ------- Loan recoveries: Commercial (2) 70 54 38 Real estate 1-4 family first mortgage 4 8 3 Other real estate mortgage 53 47 53 Real estate construction 11 11 1 Consumer: Real estate 1-4 family junior lien mortgage 8 9 3 Credit card 48 36 13 Other revolving credit and monthly payment 67 47 12 ------- ------- ------- Total consumer 123 92 28 Lease financing 12 8 11 ------- ------- ------- Total loan recoveries 273 220 134 ------- ------- ------- Total net loan charge-offs (805) (640) (288) ------- ------- ------- BALANCE, END OF YEAR $ 1,828 $2,018 $1,794 ------- ------- ------- ------- ------- ------- Total net loan charge-offs as a percentage of average total loans (3) 1.25% 1.05% .83% ------- ------- ------- ------- ------- ------- Allowance as a percentage of total loans 2.78% 3.00% 5.04% ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------
(1) Includes charge-offs of loans (primarily unsecured) to real estate developers and REITs of none, $2 million and none in 1997, 1996 and 1995, respectively. (2) Includes recoveries from loans to real estate developers and REITs of $3 million, $10 million and $3 million in 1997, 1996 and 1995, respectively. (3) Average total loans exclude first mortgage loans held for sale in 1995. 47 In accordance with FAS 114, the table below shows the recorded investment in impaired loans by loan category and the related methodology used to measure impairment at December 31, 1997 and 1996:
- --------------------------------------------------------------- December 31, (in millions) 1997 1996 - --------------------------------------------------------------- Commercial $103 $155 Real estate 1-4 family first mortgage 2 1 Other real estate mortgage (1) 193 362 Real estate construction 22 24 Other 1 1 ---- ---- Total (2) $321 $543 ---- ---- ---- ---- Impairment measurement based on: Collateral value method $233 $416 Discounted cash flow method 61 101 Historical loss factors 27 26 ---- ---- $321 $543 ---- ---- ---- ---- - ---------------------------------------------------------------
(1) Includes accruing loans of $23 million and $50 million at December 31, 1997 and 1996, respectively, that were purchased at a steep discount whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $27 million of impaired loans with a related FAS 114 allowance of $2 million at December 31, 1997 and 1996. The average recorded investment in impaired loans during 1997, 1996 and 1995 was $410 million, $542 million and $472 million, respectively. Total interest income recognized on impaired loans during 1997, 1996 and 1995 was $13 million, $17 million and $15 million, respectively, substantially all of which was recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. 6. PREMISES, EQUIPMENT, LEASE COMMITMENTS AND OTHER ASSETS The following table presents comparative data for premises and equipment:
- -------------------------------------------------------------------------- December 31, ---------------- (in millions) 1997 1996 - -------------------------------------------------------------------------- Land $ 199 $ 234 Buildings 1,529 1,687 Furniture and equipment 1,281 1,362 Leasehold improvements 395 392 Premises leased under capital leases 106 111 ------ ------ Total 3,510 3,786 Less accumulated depreciation and amortization 1,393 1,380 ------ ------ Net book value $2,117 $2,406 ------ ------ ------ ------ - --------------------------------------------------------------------------
Depreciation and amortization expense was $257 million, $238 million and $154 million in 1997, 1996 and 1995, respectively. Losses on disposition of premises and equipment, recorded in noninterest income, were $63 million, $46 million and $31 million in 1997, 1996 and 1995, respectively. Also recorded in noninterest income were gains (losses) from disposition of operations of $15 million, $(95) million and $(89) million in 1997, 1996 and 1995, respectively. The losses were primarily related to the disposition of premises associated with scheduled branch closures. 48 The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms up to 25 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. The following table shows future minimum payments under noncancelable operating leases and capital leases with terms in excess of one year as of December 31, 1997:
- -------------------------------------------------------------------------------- (in millions) Operating leases Capital leases - -------------------------------------------------------------------------------- Year ended December 31, 1998 $ 269 $ 12 1999 237 12 2000 188 11 2001 147 10 2002 120 10 Thereafter 480 61 ------ ---- Total minimum lease payments $1,441 116 ------ ------ Executory costs (3) Amounts representing interest (54) ---- Present value of net minimum lease payments $ 59 ---- - --------------------------------------------------------------------------------
Total future minimum payments to be received under noncancelable operating subleases at December 31, 1997 were approximately $255 million; these payments are not reflected in the preceding table. Rental expense, net of rental income, for all operating leases was $228 million, $199 million and $111 million in 1997, 1996 and 1995, respectively. The components of other assets at December 31, 1997 and 1996 were as follows:
- ----------------------------------------------------------------------- December 31, ------------------- (in millions) 1997 1996 - ----------------------------------------------------------------------- Nonmarketable equity investments (1) $1,113 $1,085 Trading assets 815 404 Certain identifiable intangible assets 479 471 Net deferred tax asset (2) 209 346 Foreclosed assets 158 219 Other 1,175 2,936 ------ ------ Total other assets $3,949 $5,461 ------ ------ ------ ------ - -----------------------------------------------------------------------
(1) Commitments related to nonmarketable equity investments totaled $363 million and $376 million at December 31, 1997 and 1996, respectively. (2) See Note 14 to Financial Statements. Income from nonmarketable equity investments accounted for using the cost method was $157 million, $137 million and $58 million in 1997, 1996 and 1995, respectively. Trading assets consist predominantly of securities, including corporate debt and U.S. government agency obligations. Gains from trading assets were $72 million, $44 million and $27 million in 1997, 1996 and 1995, respectively. Included in certain identifiable intangible assets were purchased mortgage servicing rights of $292 million and $257 million at December 31, 1997 and 1996, respectively. The purchased mortgage loan servicing portfolio totaled $24 billion and $22 billion at December 31, 1997 and 1996, respectively. Mortgage servicing rights purchased during 1997 and 1996 were $102 million and $165 million, respectively. (For loan sales, there were no retained servicing rights recognized during the same periods.) Amortization expense, recorded in noninterest income, totaled $69 million, $63 million and $39 million for 1997, 1996 and 1995, respectively. The fair value of purchased mortgage servicing rights totaled $338 million and $289 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the balance of the valuation allowances totaled none and $582 thousand, respectively. Amortization expense for the other identifiable intangible assets included in other assets was $29 million, $26 million and $12 million in 1997, 1996 and 1995, respectively. Foreclosed assets consist of assets (substantially real estate) acquired in satisfaction of troubled debt and are carried at the lower of fair value (less estimated costs to sell) or cost. Foreclosed assets income (expense), including disposition gains and losses, was $33 million, $(7) million and $(1) million in 1997, 1996 and 1995, respectively. 49 7. DEPOSITS The aggregate amount of time certificates of deposit and other time deposits issued by domestic offices was $15,560 million and $15,955 million at December 31, 1997 and 1996, respectively. At December 31, 1997, the contractual maturities of these deposits were as follows: $12,927 million in 1998, $1,338 million in 1999, $727 million in 2000, $218 million in 2001, $155 million in 2002 and $195 million thereafter. Substantially all of these deposits were interest bearing. Of the total above, the amount of time deposits with a denomination of $100,000 or more was $3,849 million and $3,495 million at December 31, 1997 and 1996, respectively. At December 31, 1997, the contractual maturities of these deposits were as follows: $1,894 million in 3 months or less, $829 million over 3 through 6 months, $727 million over 6 through 12 months and $399 million over 12 months. Time certificates of deposit and other time deposits issued by foreign offices with a denomination of $100,000 or more represent substantially all of the foreign deposit liabilities of $597 million and $54 million at December 31, 1997 and 1996, respectively. Demand deposit overdrafts that have been reclassified as loan balances were $316 million and $800 million at December 31, 1997 and 1996, respectively. 8. SHORT-TERM BORROWINGS The table on the right shows selected information for short-term borrowings. These borrowings generally mature in less than 30 days.
- -------------------------------------------------------------------- Year ended December 31, ------------------------- (in millions) 1997 1996 1995 - -------------------------------------------------------------------- FEDERAL FUNDS PURCHASED Average amount outstanding (1) $1,760 $1,079 $1,613 Daily average rate 5.40% 5.21% 5.79% Highest month-end balance (2) $3,010 $2,151 $3,042 Year-end balance 2,199 1,496 1,885 Weighted average rate on outstandings at year end 5.46% 4.89% 5.32% SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Average amount outstanding (1) $1,084 $ 690 $1,788 Daily average rate 5.40% 5.23% 5.89% Highest month-end balance (3) $1,533 $1,100 $2,776 Year-end balance 1,377 533 896 Weighted average rate on outstandings at year end 5.46% 5.21% 5.47% - --------------------------------------------------------------------
(1) Average balances were computed using daily amounts. (2) Highest month-end balance in each of the last three years occurred in September 1997, April 1996 and March 1995, respectively. (3) Highest month-end balance in each of the last three years occurred in August 1997, February 1996 and April 1995, respectively. 50 9. SENIOR AND SUBORDINATED DEBT The following is a summary of senior and subordinated debt (reflecting unamortized debt discounts and premiums, where applicable) owed by the Parent and its subsidiaries:
- ------------------------------------------------------------------------------------------------------------------------------ December 31, Maturity Interest -------------------- (in millions) date rate 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ SENIOR Parent: Floating-Rate Medium-Term Notes 1998-99 Various $1,460 $1,571 Notes (1) 1998 11.00% 55 55 Medium-Term Notes (1)(8) 1998-2002 7.78-10.90% 356 359 Notes payable by subsidiaries 53 68 Obligations of subsidiaries under capital leases (Note 6) 59 67 ------ ------ Total senior debt 1,983 2,120 ------ ------ SUBORDINATED Parent: Floating-Rate Notes (2)(3) 1997 Various -- 100 Floating-Rate Notes (2)(4)(5) 1997 Various -- 100 Floating-Rate Notes (2)(4) 1997 Various -- 83 Floating-Rate Capital Notes (2)(4)(6) 1998 Various 200 200 Floating-Rate Notes (2)(4) 2000 Various 118 118 Capital Notes (6) 1999 8.625% 186 190 Notes 1997 12.75% -- 70 Notes (1)(7)(8) 2002 8.15% 101 97 Notes 2002 8.75% 200 201 Notes 2002 8.375% 149 149 Notes 2003 6.875% 150 150 Notes 2003 6.125% 249 249 Notes (1)(8) 2004 9.125% 137 137 Notes (1)(7)(8) 2004 9.0% 124 121 Notes (1) 2006 6.875% 499 499 Notes (1)(8) 2006 7.125% 299 299 Medium-Term Notes (1) 1998-2002 9.38-11.25% 173 177 ------ ------ Total subordinated debt 2,585 2,940 ------ ------ Total senior and subordinated debt $4,568 $5,060 ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially all of these Notes, whereby the Company receives fixed-rate interest payments approximately equal to interest on the Notes and makes interest payments based on an average three-month or six-month LIBOR rate. (2) Notes are currently redeemable in whole or in part, at par. (3) Subject to a maximum interest rate of 13% due to the purchase of an interest rate cap. (4) May be redeemed in whole, at par, at any time in the event withholding taxes are imposed by the United States. (5) Subject to a maximum interest rate of 13%. (6) Mandatory Equity Notes. (7) These Notes are redeemable in whole or in part, at par, prior to maturity. (8) The interest rate swap agreement for these Notes is callable by the counterparty prior to the maturity of the Notes. At December 31, 1997, the principal payments, including sinking fund payments, on senior and subordinated debt are due as follows in the table on the right. The interest rates on floating-rate notes are determined periodically by formulas based on certain money market rates, subject, on certain notes, to minimum or maximum interest rates. The Company's mandatory convertible debt, which is identified by note (6) to the table above, qualifies as Tier 2 capital but is subject to discounting and note fund restric-
------------------------------------------------ (in millions) Parent Company ------------------------------------------------ 1998 $1,794 $1,802 1999 468 476 2000 118 130 2001 354 365 2002 388 399 Thereafter 1,334 1,396 ------ ------ Total $4,456 $4,568 ------ ------ ------ ------ ------------------------------------------------
51 tions under the risk-based capital rules. The terms of the Mandatory Equity Notes of $200 million, due in 1998, and $186 million, due in 1999, require the Company to sell or exchange with the noteholder the Company's common stock, perpetual preferred stock or other capital securities at maturity or earlier redemption of the Notes. At December 31, 1997, $264 million of stockholders' equity had been designated for the retirement or redemption of these Notes. Certain of the agreements under which debt has been issued contain provisions that may limit the merger or sale of the Bank and the issuance of its capital stock or convertible securities. The Company was in compliance with the provisions of the borrowing agreements at December 31, 1997. 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES In 1996, the Company established four separate special purpose trusts, which collectively issued $1,150 million in trust preferred securities. In 1997, the Company issued an additional $150 million in trust preferred securities through a separate trust. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested in junior subordinated deferrable interest debentures (debentures) of the Company. The purpose of issuing these trust preferred securities was to provide the Company with a more cost-effective means of obtaining Tier 1 capital for regulatory purposes than if the Company itself were to issue additional preferred stock because the Company is allowed to deduct, for income tax purposes, distributions to the holders of the trust preferred securities. The sole assets of these special purpose trusts are the debentures. These debentures rank junior to the senior and subordinated debt issued by the Company. The Company owns all of the common securities of the five trusts. The preferred securities issued by the trusts rank senior to the common securities. Concurrent with the issuance of the preferred securities by the trusts, the Company issued guarantees for the benefit of the security holders. The obligations of the Company under the debentures, the indentures, the relevant trust agreements and the guarantees, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the trusts under the trust preferred securities and rank subordinate and junior in right of payment to all liabilities of the Company. Listed below are the series of trust preferred securities of Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C, Wells Fargo Capital I and Wells Fargo Capital II issued at $1,000 per security. The distributions are cumulative and payable semi-annually on the first day of June and December for Wells Fargo Capital A, Wells Fargo Capital B and Wells Fargo Capital C and on the fifteenth day of June and December for Wells Fargo Capital I. The distributions are cumulative and payable quarterly on the 30th of January, April, July and October for Wells Fargo Capital II. The trust preferred securities are subject to mandatory redemption at the stated maturity date of the debentures, upon repayment of the debentures or earlier, pursuant to the terms of the Trust Agreement. WELLS FARGO CAPITAL A This trust issued $300 million in trust preferred securities in November 1996 and concurrently invested $309.3 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $40.63 per security (8.13% annualized rate). WELLS FARGO CAPITAL B This trust issued $200 million in trust preferred securities in November 1996 and concurrently invested $206.2 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $39.75 per security (7.95% annualized rate). WELLS FARGO CAPITAL C This trust issued $250 million in trust preferred securities in November 1996 and concurrently invested $257.8 million in debentures of the Company with a stated maturity of December 1, 2026. This class of trust preferred securities will accrue semi-annual distributions of $38.65 per security (7.73% annualized rate). WELLS FARGO CAPITAL I This trust issued $400 million in trust preferred securities in December 1996 and concurrently invested $412.4 million in debentures of the Company with a stated maturity of December 15, 2026. This class of trust preferred securities will accrue semi-annual distributions of $39.80 per security (7.96% annualized rate). WELLS FARGO CAPITAL II This trust issued $150 million in trust preferred securities in January 1997 and concurrently invested $154.7 million in debentures of the Company with a stated maturity of January 30, 2027. This class of trust preferred securities will accrue quarterly distributions at a variable annual rate of LIBOR plus 0.5%. 52 On or after December 2006 for Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I and on or after January 2007 for Wells Fargo Capital II, each of the series of trust preferred securities may be redeemed and the corresponding debentures may be prepaid at the option of the Company, subject to Federal Reserve approval, at declining redemption prices. Prior to December 2006 for Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I and prior to January 2007 for Wells Fargo Capital II, the securities may be redeemed at the option of the Company on the occurrence of certain events that result in a negative tax impact, negative regulatory impact on the trust preferred securities of the Company or negative legal or regulatory impact on the appropriate special purpose trust which would define it as an investment company. In addition, the Company has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities for up to five years. 11. PREFERRED STOCK Of the 25,000,000 shares authorized, there were 5,500,000 shares and 6,600,000 shares of preferred stock issued and outstanding at December 31, 1997 and 1996, respectively. All preferred shares rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. The following is a summary of preferred stock (adjustable and fixed):
- --------------------------------------------------------------------------------------------------------------------------------- Shares issued Carrying amount Dividends declared and outstanding (in millions) (in millions) --------------------- ----------- Adjustable ---------------------- December 31, December 31, dividends rate Year ended December 31, --------------------- ------------ ----------------- ---------------------- 1997 1996 1997 1996 Minimum Maximum 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Adjustable-Rate Cumulative, Series B 1,500,000 1,500,000 $ 75 $ 75 5.5% 10.5% $ 4 $ 4 $ 5 (Liquidation preference $50) 9% Cumulative, Series C -- -- -- -- -- -- -- 21 21 (Liquidation preference $500) (1) 8-7/8% Cumulative, Series D -- 350,000 -- 175 -- -- 3 16 16 (Liquidation preference $500) (2) 9-7/8% Cumulative, Series F -- -- -- -- -- -- -- 12 -- (Liquidation preference $200) (3) (4) 9% Cumulative, Series G -- 750,000 -- 150 -- -- 5 10 -- (Liquidation preference $200) (3) (5) 6.59%/Adjustable Rate Noncumulative 4,000,000 4,000,000 200 200 7.0 13.0 13 4 -- Preferred Stock, Series H (Liquidation preference $50) --------- --------- ---- ---- --- --- --- Total 5,500,000 6,600,000 $275 $600 $25 $67 $42 --------- --------- ---- ---- --- --- --- --------- --------- ---- ---- --- --- --- - ---------------------------------------------------------------------------------------------------------------------------------
(1) In December 1996, the Company redeemed all $239 million (477,500 shares) of its Series C preferred stock. (2) In March 1997, the Company redeemed all $175 million (350,000 shares) of its Series D preferred stock. (3) In April 1996, the Series F and Series G preferred stock were converted from First Interstate preferred stock into the right to receive one share of the Company's preferred stock. (4) In November 1996, the Company redeemed all $200 million (1,000,000 shares) of its Series F preferred stock. (5) In May 1997, the Company redeemed all $150 million (750,000 shares) of its Series G preferred stock. ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares were redeemable at the option of the Company through May 14, 1996 at a price of $51.50 per share and, thereafter, at $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of February, May, August and November. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasury bill 53 discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The average dividend rate was 5.5%, 5.5% and 5.8% during 1997, 1996 and 1995, respectively. 9% CUMULATIVE PREFERRED STOCK, SERIES C In December 1996, the Company redeemed all $239 million of its Series C preferred stock at a price of $500 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-twentieth of a share of the Series C preferred stock. Dividends of $11.25 per share (9% annualized rate) were cumulative and payable on the last day of each calendar quarter. 8-7/8% CUMULATIVE PREFERRED STOCK, SERIES D In March 1997, the Company redeemed all $175 million of its Series D preferred stock at a price of $500 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-twentieth of a share of the Series D preferred stock. Dividends of $11.09 per share (8-7/8% annualized rate) were cumulative and payable on the last day of each calendar quarter. 9-7/8% CUMULATIVE PREFERRED STOCK, SERIES F In November 1996, the Company redeemed all $200 million of its Series F preferred stock at a price of $200 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-eighth of a share of the Series F preferred stock. Dividends of $4.94 per share (9-7/8% annualized rate) were cumulative and payable on the last day of each calendar quarter. 9% CUMULATIVE PREFERRED STOCK, SERIES G In May 1997, the Company redeemed all $150 million of its Series G preferred stock at a price of $200 per share plus accrued and unpaid dividends. This class of preferred stock had been issued as depositary shares, each representing one-eighth of a share of Series G preferred stock. Dividends of $4.50 per share (9% annualized rate) were cumulative and payable on the last day of each calendar quarter. 6.59%/ADJUSTABLE RATE NONCUMULATIVE PREFERRED STOCK, SERIES H These shares are redeemable at the option of the Company on or after October 1, 2001 at a price of $50 per share plus accrued and unpaid dividends. Dividends are noncumulative and payable on the first day of each calendar quarter at an annualized rate of 6.59% through October 1, 2001. The dividend rate after October 1, 2001 will be equal to .44% plus the highest of the Treasury bill discount rate, the 10-year constant maturity rate and the 30-year constant maturity rate, as determined in advance of such dividend period, limited to a minimum of 7% and a maximum of 13%. 12. COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND STOCK PLANS COMMON STOCK The table on the right summarizes common stock reserved, issued, outstanding and authorized as of December 31, 1997:
- ------------------------------------------------------------------------------- Number of shares - ------------------------------------------------------------------------------- Tax Advantage and Retirement Plan 2,718,228 Long-Term and Equity Incentive Plans 3,262,145 Dividend Reinvestment and Common Stock Purchase Plan 4,094,173 Employee Stock Purchase Plan 587,220 Director Option Plans 161,676 Stock Bonus Plan 10,212 ----------- Total shares reserved 10,833,654 Shares issued and outstanding 86,152,779 Shares not reserved 53,013,567 ----------- Total shares authorized (1) 150,000,000 ----------- ----------- - -------------------------------------------------------------------------------
(1) In 1996, shareholders approved an increase in the authorized shares of common stock to 500,000,000. This will become effective when an amendment to the Restated Certificate of Incorporation is filed with the Secretary of State of Delaware. 54 Under the terms of mandatory convertible debt, the Company must exchange with the noteholder, or sell, various capital securities of the Company as described in Note 9. During 1997, the Company repurchased approximately 5.9 million shares of its outstanding common stock and issued .6 million shares under various employee benefit and dividend reinvestment plans. ADDITIONAL PAID-IN CAPITAL Repurchases made in connection with the Company's stock repurchase program result in a reduction of the additional paid-in capital (APIC) account equal to the amount paid in repurchasing the stock, less the $5 per share representing par value that is charged to the common stock account. In order to absorb future repurchases of common stock, the Company transferred $1 billion from Retained Earnings to APIC in 1995. DIRECTOR OPTION PLANS The 1990 Director Option Plan (1990 DOP) provides for annual grants of options to purchase 500 shares of common stock to each non-employee director elected or re-elected at the annual meeting of shareholders. Non-employee directors who join the Board between annual meetings receive options on a prorated basis. The options may be exercised until the tenth anniversary of the date of grant; they become exercisable after one year at an exercise price equal to the fair market value of the stock at the time of grant. The maximum total number of shares of common stock issuable under the 1990 DOP is 100,000 in the aggregate and 20,000 in any one calendar year. No compensation expense was recorded for the stock options under the 1990 DOP, as the exercise price was equal to the quoted market price of the stock at the time of grant. The 1987 Director Option Plan (1987 DOP) allows participating directors to file an irrevocable election to receive stock options in lieu of their retainer to be earned in any one calendar year. The options become exercisable after one year and may be exercised until the tenth anniversary of the date of grant. Options granted prior to 1995 have an exercise price of $1 per share. Commencing in 1995, options granted have an exercise price equal to 50 percent of the quoted market price of the stock at the time of grant. Compensation expense for the 1987 DOP is measured as the quoted market price of the stock at the date of grant less the option exercise price. This expense is accrued as retainers are earned. EMPLOYEE STOCK PLANS LONG-TERM AND EQUITY INCENTIVE PLANS The Wells Fargo & Company Long-Term Incentive Plan (LTIP) became effective in 1994. The LTIP supersedes the 1990 Equity Incentive Plan (1990 EIP), which is itself the successor to the original 1982 Equity Incentive Plan (1982 EIP). No additional awards or grants will be issued under the 1990 or 1982 EIPs. The LTIP provides for awards of restricted shares, stock options, stock appreciation rights and share rights. Employee stock options granted under the LTIP can be granted with exercise prices at or above the current value of the common stock and, except for incentive stock options, can have terms longer than 10 years. Employee stock options generally become fully exercisable over three years from the grant date. Upon termination of employment, the option period is reduced or the options are canceled. The LTIP also provides for grants to recipients not limited to present key employees of the Company. The total number of shares of common stock issuable under the LTIP is 2,500,000 in the aggregate (excluding outstanding awards under the 1990 and 1982 EIPs) and 800,000 in any one calendar year. No compensation expense was recorded for the stock options under the LTIP, as the exercise price was equal to the quoted market price of the stock at the time of grant. Loans may be made, at the discretion of the Company, to assist the participants of the LTIP and the EIPs in the acquisition of shares under options. The total of such interest-bearing loans were $5.1 million and $2.9 million at December 31, 1997 and 1996, respectively. The holders of the restricted share rights are entitled at no cost to the shares of common stock represented by the restricted share rights held by each person five years after the restricted share rights were granted. Upon receipt of the restricted share rights, holders are entitled to receive quarterly cash payments equal to the cash dividends that would be paid on the number of common shares equal to the number of restricted share rights. Except in limited circumstances, restricted share rights are canceled upon termination of employment. In 1997, 1996 and 1995, there were 28,002, 95,233 and 69,778 restricted share rights granted, respectively, with a weighted-average grant-date fair value of $308.88, $236.87 and $173.90, respectively. As of December 31, 1997, the LTIP, the 1990 EIP and the 1982 EIP had 208,454, 109,700 and 10,437 restricted share rights outstanding, respectively, to 1,314, 528 and 42 employees or their beneficiaries, respectively. The compensation expense for the restricted share rights equals the market price at the time of grant and is accrued on a straight-line basis over the vesting period of five years. The total compensation expense recognized for the restricted share rights was $11 million, $10 million and $8 million in 1997, 1996 and 1995, respectively. 55 OTHER STOCK PLANS Pursuant to the Merger agreement, the First Interstate stock option plans were converted into stock option plans to purchase the Company's common stock based on the original stock option plan and the agreed-upon exchange ratio. (First Interstate shareholders received two-thirds of a share of Wells Fargo common stock for each share of common stock owned. See Note 2 for additional information concerning the Merger). As a result of the change in control, all outstanding First Interstate options became exercisable as of April 1, 1996. Also as of that date, all outstanding restricted shares granted under the First Interstate stock plans became vested and were issued. As no additional awards were made under these plans and all outstanding grants became fully vested at the time of the Merger, no compensation expense has been recognized by the Company for these plans. The following table is a summary of the Company's stock option activity and related information for the three years ended December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------------------- 1990 and 1987 DOP LTIP 1990 and 1982 EIP First Interstate --------------------- ---------------------- ---------------------- --------------------- Weighted- Weighted- Weighted- Weighted- average average average average exercise exercise exercise exercise Number price Number price Number price Number price - ------------------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1994 28,307 $ 85.18 655,180 $126.27 1,274,388 $66.86 ------ --------- --------- 1995: Granted 7,264(2) 134.83 284,700(3) 209.27 -- -- Canceled -- -- (8,500) 121.34 (2,330) 75.63 Exercised (2,000) 72.47 (66,870) 110.75 (471,625) 63.73 ------ --------- --------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1995 33,571 96.68 864,510 154.87 800,433 68.69 ------ --------- --------- 1996: Granted 11,391(2) 225.70 232,620(3) 273.86 -- -- Acquired (1) -- -- -- -- -- -- 926,857 $93.78 Canceled -- -- (9,280) 215.27 -- -- (10,420) 95.49 Exercised (500) 66.25 (33,922) 130.73 (121,444) 65.48 (499,472) 97.94 ------ --------- --------- ------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1996 44,462 130.08 1,053,928 181.38 678,989 69.26 416,965 88.74 ------ --------- --------- ------- 1997: GRANTED 10,389(2) 234.88 475,375(3) 280.88 -- -- -- -- CANCELED -- -- (28,595) 215.43 -- -- (19,795) 81.57 EXERCISED (2,923) 98.73 (84,802) 131.81 (324,654) 65.46 (141,885) 93.89 ------ --------- --------- ------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1997 51,928 $152.81 1,415,906 $217.07 354,335 $72.74 255,285 $86.43 ------ ------- --------- ------- --------- ------ ------- ------ ------ ------- --------- ------- --------- ------ ------- ------ Outstanding options exercisable as of: DECEMBER 31, 1997 41,792 $132.30 732,807 $168.31 354,335 $72.74 255,285 $86.43 December 31, 1996 33,071 97.14 544,508 138.54 678,989 69.26 416,965 88.74 December 31, 1995 26,307 86.15 287,875 121.78 800,433 68.69 - -------------------------------------------------------------------------------------------------------------------------------
(1) Options acquired from First Interstate pursuant to the Merger agreement. (2) The weighted-average per share fair value of options granted was $102.55, $90.51 and $70.98 for 1997, 1996 and 1995, respectively. (3) The weighted-average per share fair value of options granted was $86.17, $90.86 and $73.27 for 1997, 1996 and 1995, respectively. 56 The following table is a summary of selected information for the Company's stock option plans described on the preceding page:
- ----------------------------------------------------------------------------------- December 31, 1997 ----------------------------------------- Weighted- average Weighted- remaining average contractual exercise life (in yrs.) Number price - ----------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES 1990 AND 1987 DOP $1.00 Options outstanding / exercisable 4.4 4,139 $ 1.00 $44.63-$66.25 Options outstanding / exercisable 4.2 4,354 64.72 $72.50-$108.00 Options outstanding / exercisable 3.9 8,623 81.31 $119.38-$160.00 Options outstanding 6.4 17,350 142.22 Options exercisable 15,214 143.25 $236.38-$264.75 Options outstanding 8.3 17,462 256.59 Options exercisable 9,462 249.69 LTIP $107.25-$159.63 Options outstanding 6.4 467,618 129.59 Options exercisable 463,948 129.38 $211.38-$314.25 Options outstanding 8.3 948,288 260.20 Options exercisable 268,859 235.49 1990 AND 1982 EIP $54.00-$75.63 Options outstanding / exercisable 3.8 354,335 72.74 FIRST INTERSTATE $27.75-$83.06 Options outstanding / exercisable 3.2 137,273 64.04 $100.31-$125.81 Options outstanding / exercisable 6.7 118,012 112.48 - -----------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN Options to purchase 750,000 shares of common stock may be granted under the Employee Stock Purchase Plan (ESPP). Employees of the Company who have completed their introductory period of employment, except hourly employees, are eligible to participate. Certain highly compensated employees may be excluded from participation at the discretion of the Management Development and Compensation Committee of the Board of Directors. The plan provides for a purchase price of the lower of market value at grant date or 85% to 100% (as determined by the Board of Directors for each period) of the market value at the end of a one-year period. For the current period ending July 31, 1998, the Board approved a closing purchase price of 85% of the market value. The plan is noncompensatory and results in no expense to the Company. Transactions involving the ESPP are summarized in the table below:
- -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- -------------------------- ------------------------- Weighted- Weighted- Weighted- average average average Number exercise price Number exercise price Number exercise price - -------------------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 148,531 $227.80 129,980 $182.25 143,404 $153.38 Granted (1) 151,018 270.15 157,878 227.80 143,072 182.25 Canceled (2) (77,021) 235.75 (62,524) 189.06 (73,359) 158.53 Exercised (85,977) 227.80 (76,803) 182.25 (83,137) 153.38 ------- ------- ------- Options outstanding, end of year (3) 136,551 (4) $270.15 148,531 $227.80 129,980 $182.25 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------------------
(1) The weighted-average per share fair value of options granted was $65.48, $52.46 and $39.25 for 1997, 1996 and 1995, respectively. (2) At the beginning of the option period, participants are granted an additional 50% of options that are exercised only to the extent that the closing option price is sufficiently below the market value at grant date and based on the participant's level of participation. Since the closing option price was higher in 1997, 1996 and 1995, the additional option grants were canceled. These options represent a majority of the canceled options shown above. (3) None of the options outstanding as of December 31, 1997, 1996 and 1995 were exercisable. (4) The weighted-average remaining contractual life was eight months. 57 In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation. As provided for under FAS 123, the Company elected to continue to apply the provisions of the Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, in accounting for the stock plans described above. Had compensation cost for these stock plans been determined based on the (optional) fair value method established by FAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
- ----------------------------------------------------------------------------------- Year ended December 31, ------------------------------- (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------- Net income As reported $1,155 $1,071 $1,032 Pro forma (1) 1,139 1,063 1,030 Earnings per common share As reported $12.77 $12.21 $20.37 Pro forma (1) 12.60 12.12 20.33 Earnings per common share - assuming dilution As reported $12.64 $12.05 $20.06 Pro forma (1) 12.46 11.96 20.00 - -----------------------------------------------------------------------------------
(1) The pro forma amounts noted above only reflect the effects of stock-based compensation grants made after 1994. Because stock options are granted each year and generally vest over three years, these pro forma amounts may not reflect the full effect of applying the (optional) fair value method established by FAS 123 that would be expected if all outstanding stock option grants were accounted for under this method. The fair value of each option grant is estimated based on the date of grant using a modified Black Scholes option-pricing model. For the stock option plans, the following weighted-average assumptions were used for 1997, 1996 and 1995, respectively: expected dividend yield of 1.5%, 1.4% and 1.6%; expected volatility of 25.2%, 29.0% and 33.3%; risk-free interest rates of 6.0%, 6.0% and 5.7%, and expected life of 5.4 years for all years. For the ESPP, the following assumptions were used for 1997, 1996 and 1995, respectively: expected dividend yield of 1.5%, 1.8% and 1.8%, expected volatility of 25.5%, 23.8% and 18.0%, risk-free interest rates of 5.5%, 5.8% and 5.7%, and expected life of one year for all years. For information on employee stock ownership through the Tax Advantage and Retirement Plan, see Note 13. DIVIDEND REINVESTMENT PLAN The Dividend Reinvestment and Common Stock Purchase and Share Custody Plan allows holders of the Company's common stock to purchase additional shares either by reinvesting all or part of their dividends, or by making optional cash payments. Participants making optional cash payments to purchase additional shares may do so by making payments between $150 and $2,000 per month. All purchases of additional shares are made at fair market value. Shares may also be held in custody under the plan even without the reinvestment of dividends. During 1997 and 1996, 86,078 and 103,580 shares, respectively, were issued under the plan. 13. EMPLOYEE BENEFITS AND OTHER EXPENSES RETIREMENT PLAN The Company's retirement plan is known as the Tax Advantage and Retirement Plan (TAP), a defined contribution plan. As part of TAP, the Company makes basic retirement contributions to employee retirement accounts. Effective July 1994, the Company increased its basic retirement contributions from 4% to 6% of the total of employee base salary plus payments from certain bonus plans (covered compensation). The Company also makes special transition contributions related to the termination of a prior defined benefit plan of the Company ranging from .5% to 5% of covered compensation for certain employees. The plan covers salaried employees with at least one year of service and contains a vesting schedule graduated from three to seven years of service. Prior to July 1994, the Company made supplemental retirement contributions of 2% of employee-covered compensation. All salaried employees with at least one year of service were eligible to receive these Company contributions, which vested immediately. Effective July 1994, the supplemental retirement contributions were discontinued, except for those contributions that are made to employees hired before January 1, 1992. Those employees will continue to receive the supplemental 2% contribution and the 4% basic retirement contributions until fully vested. Upon becoming 100% vested, the basic retirement contribution will increase to 6% of employee-covered compensation and the supplemental 2% contributions will end. Salaried employees who have at least one year of service are eligible to contribute to TAP up to 10% of their pretax covered compensation through salary deductions under 58 Section 401(k) of the Internal Revenue Code, although a lower contribution limit may be applied to certain employees in order to maintain the qualified status of the plan. The Company makes matching contributions of up to 4% of an employee's covered compensation for those who have at least three years of service and elect to contribute under the plan. Effective July 1994, the Company began to partially match contributions by employees with at least one but less than three years of service. For such employees who elect to contribute under the plan, the Company matches 50% of each dollar on the first 4% of the employee's covered compensation. The Company's matching contributions are immediately vested and, similar to retirement contributions, are tax deductible by the Company. Employees direct the investment of their TAP funds and may elect to invest in the Company's common stock. Expenses related to TAP for 1997, 1996 and 1995 were $107 million, $95 million and $57 million, respectively. First Interstate had a noncontributory defined benefit plan that provides retirement benefits that are a function of both years of service and the highest average compensation for any five (consecutive) year period during the last 10 years before retirement. Pursuant to the Merger agreement, accrued benefits, as of June 30, 1996, for all participants employed as of March 28, 1996 became fully vested. Effective June 30, 1996, all accrued benefits under the plan were frozen. There is no intention at the present time to terminate the plan. The funding policy for the defined benefit retirement plan is to make contributions sufficient to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974, with additional contributions being made periodically when deemed appropriate. The following table sets forth the funded status of the plan as of its measurement date (September 30, 1997 and 1996) and amounts included in the Company's Consolidated Balance Sheet as of December 31, 1997 and 1996.
- ------------------------------------------------------------------------------------- December 31, -------------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation (fully vested) $1,058.3 $975.2 -------- ------ -------- ------ Plan assets at fair value (1) $1,182.7 $988.5 Projected benefit obligation 1,058.3 975.2 -------- ------ Plan assets in excess of projected benefit obligation 124.4 13.3 Unrecognized net gain (due to past experience different from assumptions made and effects of changes in assumptions) (124.4) (13.3) -------- ------ Prepaid pension asset (accrued pension liability) $ -- $ -- -------- ------ -------- ------ - -------------------------------------------------------------------------------------
(1) Primarily invested in equity securities. The net periodic pension cost for 1997 and 1996 included the following:
- --------------------------------------------------------------------------------- Year ended December 31, -------------------- (in millions) 1997 1996 - --------------------------------------------------------------------------------- Service cost (benefits earned during the period) $ -- $ 7.4 Interest cost on projected benefit obligation 71.5 52.9 Actual return on plan assets (239.2) (59.1) Net amortization and deferral 167.7 (1.2) ------- ------- Net periodic pension cost $ -- $ -- ------- ------- ------- ------- - ---------------------------------------------------------------------------------
The weighted-average discount rate used in determining the pension benefit obligation was 7.0% and 7.5% in 1997 and 1996, respectively. No increase in future salary levels was assumed as all accrued benefits under the plan were frozen effective June 30, 1996. The expected long-term rate of return on assets was 8.5% in both 1997 and 1996. HEALTH CARE AND LIFE INSURANCE The Company provides health care and life insurance benefits for certain active and retired employees. The Company reserves its right to terminate these benefits at any time. The health care benefits for active eligible and retired employees are self-funded by the Company with the Point-of-Service Managed Care Plan or provided through health maintenance organizations (HMOs). Life insurance benefits for active eligible and retired employees are provided through an insurance company. The Company recognized the cost of health care benefits for active eligible employees by expensing contributions totaling $78 million, $78 million and $37 million in 1997, 1996 and 1995, respectively. The Company recognizes the cost of life insurance benefits for active eligible employees by expensing the annual insurance premiums, which were $1.0 million, $1.2 million and $2.0 million in 1997, 1996 and 1995, respectively. The amount of subsidized health care coverage for employees who retired prior to January 1, 1993 is based upon their Medicare eligibility. The amount of subsidized health care coverage for employees who retire after December 31, 1992 is based upon their eligibility to retire as of January 1, 1993 and their years of service at the time of retirement. Active employees with an adjusted service date after September 30, 1992 are not eligible for subsidized health care coverage upon retirement. 59 The following table sets forth the net periodic cost for postretirement health care benefits for 1997, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------ Year ended December 31, ----------------------------- (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Service cost (benefits attributed to service during the period) $ 2.0 $ 2.0 $ 1.1 Interest cost on accumulated postretirement benefit obligation (APBO) 15.2 14.3 8.5 Amortization of transition obligation (1) 7.1 7.1 7.1 Amortization of net gain (4.2) (4.2) (3.5) ----- ----- ----- Total $20.1 $19.2 $13.2 ----- ----- ----- ----- ----- ----- - ------------------------------------------------------------------------------------------------------
(1) The unrecognized APBO at the time of adoption of Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions (transition obligation) of $142 million is being amortized on a straight-line basis over 20 years. The remaining unrecognized APBO at December 31, 1997 was $106.6 million. The following table sets forth the funded status for postretirement health care benefits and provides an analysis of the accrued postretirement benefit cost (reported in other liabilities), which is included in the Company's Consolidated Balance Sheet at December 31, 1997 and 1996.
- ---------------------------------------------------------------------------- Year ended December 31, ---------------------- (in millions) 1997 1996 - ---------------------------------------------------------------------------- APBO (1): Retirees $ 192.6 $ 174.7 Eligible active employees 13.4 11.4 Other active employees 31.0 35.1 ------- ------- 237.0 221.2 Plan assets at fair value -- -- ------- ------- APBO in excess of plan assets 237.0 221.2 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 35.0 62.0 Unrecognized transition obligation (106.6) (113.7) ------- ------- Accrued postretirement benefit cost $ 165.4 $ 169.5 ------- ------- ------- ------- - ----------------------------------------------------------------------------
(1) Based on a discount rate of 6.9% and 7.2% in 1997 and 1996, respectively. For measurement purposes, a health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. Average annual increases of 5.5% for HMOs and 7.0% for all other types of coverage in the per capita cost of covered health care benefits were assumed for 1998. The rate for other coverage was assumed to decrease gradually to 5.5% in 2001 and remain at that level thereafter. Increasing the assumed health care trend by one percentage point in each year would increase the APBO as of December 31, 1997 by $10.5 million and the aggregate of the interest cost and service cost components of the net periodic cost for 1997 by $.4 million. The Company also provides postretirement life insurance to certain existing retirees. The APBO and expenses related to these benefits were not material. Employees with an adjusted service date after January 1, 1994 are not eligible for Company paid life insurance benefits. OTHER EXPENSES The following table shows expenses which exceeded 1% of total interest income and noninterest income and which are not otherwise shown separately in the financial statements or notes thereto.
- ------------------------------------------------------------------------- Year ended December 31, ---------------------- (in millions) 1997 1996 1995 - ------------------------------------------------------------------------- Contract services $236 $295 $149 Telecommunications 143 140 58 Postage 83 96 52 Outside professional services 79 112 45 Advertising and promotion 74 116 73 - -------------------------------------------------------------------------
60 14. INCOME TAXES Total income taxes for the years ended December 31, 1997, 1996 and 1995 were recorded as follows:
- ------------------------------------------------------------------------------------------------------ Year ended December 31, --------------------------- (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Income taxes applicable to income before income tax expense $999 $908 $745 Stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (37) (17) (24) Stockholders' equity for tax effect of the change in net unrealized gain (loss) on investment securities 21 (3) 100 ---- ---- ---- Total income taxes $983 $888 $821 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------
The following is a summary of the components of income tax expense (benefit) applicable to income before income taxes:
- ----------------------------------------------------------- Year ended December 31, --------------------------- (in millions) 1997 1996 1995 - ----------------------------------------------------------- Current: Federal $635 $500 $507 State and local 199 150 183 ---- ---- ---- 834 650 690 ---- ---- ---- Deferred: Federal 129 196 37 State and local 36 62 18 ---- ---- ---- 165 258 55 ---- ---- ---- Total $999 $908 $745 ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1996 are primarily a result of adjustments to conform to tax returns as filed. The Company's income tax expense (benefit) related to investment securities gains (losses) was $8 million, $4 million and $(7) million for 1997, 1996 and 1995, respectively. The Company had net deferred tax assets of $209 million and $346 million at December 31, 1997 and 1996, respectively. The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 1997 and 1996 are presented below:
- ----------------------------------------------------------------------------------------- Year ended December 31, ---------------------- (in millions) 1997 1996 - ----------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Allowance for loan losses $ 743 $ 805 Net tax-deferred expenses 614 661 State tax expense 55 27 Premises and equipment 36 58 Foreclosed assets 30 42 ------ ------ 1,478 1,593 Valuation allowance -- -- ------ ------ Total deferred tax assets, less valuation allowance 1,478 1,593 ------ ------ DEFERRED TAX LIABILITIES Core deposit intangible 624 751 Leasing 538 413 Certain identifiable intangibles 66 50 Investments 31 8 Other 10 25 ------ ------ Total deferred tax liabilities 1,269 1,247 ------ ------ NET DEFERRED TAX ASSET $ 209 $ 346 ------ ------ ------ ------ - -----------------------------------------------------------------------------------------
Substantially all of the Company's net deferred tax asset of $209 million at December 31, 1997 related to net expenses (the largest of which were the allowance for loan losses and the net tax-deferred expenses, offset by the core deposit intangible) that have been reflected in the financial statements, but which will reduce future taxable income. At December 31, 1997, the Company did not have any net operating loss carryforwards. The Company estimates that approximately $201 million of the $209 million net deferred tax asset at December 31, 1997 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $8 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 carryforward periods are reduced. 61 The following is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
- ---------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ---------------- (in millions) AMOUNT % Amount % Amount % - ---------------------------------------------------------------------------------------------------------- Statutory federal income tax expense and rate $754 35.0% $693 35.0% $622 35.0% Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 131 6.1 124 6.3 132 7.4 Amortization of goodwill not deductible for tax return purposes 132 6.1 102 5.2 14 .8 Other (18) (.8) (11) (.6) (23) (1.2) ---- ---- ---- ---- ---- ---- Effective income tax expense and rate $999 46.4% $908 45.9% $745 42.0% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------
The Company has not recognized a federal deferred tax liability of $36 million on $102 million of undistributed earnings of a foreign subsidiary because such earnings are indefinitely reinvested in the subsidiary and are not taxable under current law. A deferred tax liability would be recognized to the extent the Company changed its intent to not indefinitely reinvest a portion or all of such undistributed earnings. In addition, a current tax liability would be recognized if the Company recovered those undistributed earnings in a taxable manner, such as through the receipt of dividends or sale of the entity, or if the tax law changed. 15. EARNINGS PER COMMON SHARE On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings per Share. This Statement replaces the presentation of primary earnings per common share (net income applicable to common stock divided by average common shares outstanding and, if dilution is 3% or more, common stock equivalents) with a presentation of (basic) earnings per common share (net income applicable to common stock divided by average common shares outstanding), which the Company previously presented. The Statement also requires dual presentation of earnings per common share and earnings per common share - assuming dilution on the face of the income statement and a reconciliation of the numerator and denominator of both earnings per common share calculations, which is presented in the table on the right.
- ------------------------------------------------------------------------------------- Year ended December 31, ------------------------ (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------- Net income $1,155 $1,071 $1,032 Less: Preferred stock dividends 25 67 42 ------- ------- ------- Net income applicable to common stock $1,130 $1,004 $ 990 ------- ------- ------- ------- ------- ------- EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $1,130 $1,004 $ 990 ------- ------- ------- ------- ------- ------- Average common shares outstanding (denominator) 88.4 82.2 48.6 ------- ------- ------- ------- ------- ------- Per share $12.77 $12.21 $20.37 ------- ------- ------- ------- ------- ------- EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net income applicable to common stock (numerator) $1,130 $1,004 $ 990 ------- ------- ------- ------- ------- ------- Average common shares outstanding 88.4 82.2 48.6 Add: Stock options .7 .8 .5 Restricted share rights .3 .3 .3 ------- ------- ------- Average common shares outstanding - assuming dilution (denominator) 89.4 83.3 49.4 ------- ------- ------- ------- ------- ------- Per share $12.64 $12.05 $20.06 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------
62 16. PARENT COMPANY Condensed financial information of Wells Fargo & Company (Parent) is presented below. For information regarding the Parent's long-term debt, see Note 9. CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------- Year ended December 31, ------------------------ (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries: Wells Fargo Bank, N.A. $2,006 $1,461 $1,131 Other bank subsidiaries 69 33 -- Nonbank subsidiaries -- 1 -- Interest income from: Wells Fargo Bank, N.A. 145 99 86 Other bank subsidiaries 18 9 3 Nonbank subsidiaries 4 8 12 Other 43 71 53 Noninterest income 172 163 52 ------- ------- ------- Total income 2,457 1,845 1,337 ------- ------- ------- EXPENSE Interest on: Commercial paper and other short-term borrowings 14 10 14 Senior and subordinated debt 394 299 194 Noninterest expense 120 93 35 ------- ------- ------- Total expense 528 402 243 ------- ------- ------- Income before income tax benefit and undistributed income of subsidiaries 1,929 1,443 1,094 Income tax benefit 35 17 17 Equity in undistributed income of subsidiaries: Wells Fargo Bank, N.A. (1) (879) (455) (26) Other bank subsidiaries 42 48 (65) Nonbank subsidiaries 28 18 12 ------- ------- ------- NET INCOME $1,155 $1,071 $1,032 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------
(1) Amounts represent dividends distributed by Wells Fargo Bank, N.A. in excess of its 1997, 1996 and 1995 net income of $1,127 million, $1,006 million and $1,105 million, respectively. CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------- December 31, -------------- (in millions) 1997 1996 - ------------------------------------------------------------------------------------- ASSETS Cash and due from Wells Fargo Bank, N.A. (includes interest- earning deposits of $650 million and $1,000 million) $ 707 $ 1,043 Investment securities at fair value 461 395 Loans 152 220 Allowance for loan losses 66 66 -------- -------- Net loans 86 154 -------- -------- Loans and advances to subsidiaries: Wells Fargo Bank, N.A. 1,778 2,156 Other bank subsidiaries 255 275 Nonbank subsidiaries 31 90 Investment in subsidiaries (1): Wells Fargo Bank, N.A. 13,224 13,912 Other bank subsidiaries 1,319 1,439 Nonbank subsidiaries 244 213 Other assets 1,465 1,457 -------- -------- Total assets $19,570 $21,134 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 222 $ 170 Other liabilities 664 742 Senior debt 1,871 1,984 Subordinated debt 2,585 2,940 Indebtedness to subsidiaries 1,339 1,186 Stockholders' equity 12,889 14,112 -------- -------- Total liabilities and stockholders' equity $19,570 $21,134 -------- -------- -------- -------- - -------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's total equity investment in subsidiaries to its total stockholders' equity, was 115% and 110% at December 31, 1997 and 1996, respectively. 63 CONDENSED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------- Year ended December 31, ------------------------ (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,155 $ 1,071 $1,032 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax (benefit) 1 (3) (15) Equity in undistributed loss of subsidiaries 809 389 79 Other, net (220) 155 (52) ------- ------- ------- Net cash provided by operating activities 1,745 1,612 1,044 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: At fair value: Proceeds from sales 30 11 4 Proceeds from prepayments and maturities 178 206 2 Purchases (259) (183) (59) At cost: Proceeds from prepayments and maturities -- -- 56 Net decrease in loans 68 51 70 Net (increase) decrease in loans and advances to subsidiaries 457 289 (192) Net increase in investment in subsidiaries (9) (216) (266) Other, net 135 (88) 119 ------- ------- ------- Net cash provided (used) by investing activities 600 70 (266) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short-term borrowings 52 10 27 Proceeds from issuance of senior debt 700 1,260 1,230 Repayment of senior debt (810) (1,183) (811) Proceeds from issuance of subordinated debt -- 800 -- Repayment of subordinated debt (351) -- (210) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 153 1,186 -- Proceeds from issuance of preferred stock -- 197 -- Proceeds from issuance of common stock 88 117 90 Redemption of preferred stock (325) (439) -- Repurchase of common stock (1,689) (2,158) (847) Payment of cash dividends on preferred stock (25) (73) (42) Payment of cash dividends on common stock (463) (429) (225) Other, net (11) 42 16 ------- ------- ------- Net cash used by financing activities (2,681) (670) (772) ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM WELLS FARGO BANK, N.A.) (336) 1,012 6 Cash and cash equivalents at beginning of year 1,043 31 25 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 707 $ 1,043 $ 31 ------- ------- ------- ------- ------- ------- Noncash investing activities: Transfers from investment securities at cost to investment securities at fair value $ -- $ -- $ 147 ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------
17. LEGAL ACTIONS In the normal course of business, the Company is at all times subject to numerous pending and threatened legal actions, some for which the relief or damages sought are substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on stockholders' equity of the Company; the Company is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and its relationship to the future results of operations are not known. 64 18. RISK-BASED CAPITAL The Company and the Bank are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and the OCC, respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and the Bank maintain minimum ratios (set forth in the table below) of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on available-for-sale securities carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Parent and the allowance for loan losses, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments and derivative financial instruments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. (See Notes 5 and 19 for further discussion of off-balance sheet items.) The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 1997, the Company and Bank met all capital adequacy requirements to which they are subject. Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the OCC categorized the Bank as well capitalized. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the Bank's risk-based capital category. - --------------------------------------------------------------------------------------------------------------------- To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions -------------- ------------------- -------------------- (in billions) Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------- ----- ------ ----- ------ ----- As of December 31, 1997: Total capital (to risk-weighted assets) Wells Fargo & Company $9.2 11.49% > = $6.4 > = 8.00% Wells Fargo Bank, N.A. 7.8 11.18 > = 5.6 > = 8.00 > = $7.0 > = 10.00% Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $6.1 7.61% > = $3.2 > = 4.00% Wells Fargo Bank, N.A. 5.8 8.34 > = 2.8 > = 4.00 > = $4.2 > = 6.00% Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $6.1 6.95% > = $3.5 > = 4.00%(1) Wells Fargo Bank, N.A. 5.8 7.21 > = 3.2 > = 4.00 (1) > = $4.0 > = 5.00% - ---------------------------------------------------------------------------------------------------------------------
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations. 65 19. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps, options and interest rate swap agreements. The contract or notional amounts of derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contract or notional amounts do not represent exposure to liquidity risk. The Company is not a dealer but an end-user of these instruments and does not use them speculatively. The Company also offers contracts to its customers, but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. The Company 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. The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value for the Company's derivative financial instruments at December 31, 1997 and 1996.
- ------------------------------------------------------------------------------------------------------------------- December 31, ----------------------------------------------------------------------- 1997 1996 ----------------------------------- ---------------------------------- 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) $16,301 $233 $174 $16,661 $217 $117 Futures 6,259 -- -- 5,188 -- -- Floors purchased (1) 20,727 63 63 20,640 101 101 Caps purchased (1) 240 1 1 435 3 3 Options purchased 42 -- -- -- -- -- Foreign exchange contracts: Forward contracts (1) 57 1 1 64 -- -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 3,158 13 4 2,325 12 2 Futures 2,387 -- -- 10 -- -- Floors purchased (1) 1,141 13 13 404 9 9 Caps purchased (1) 2,836 8 8 2,088 4 4 Floors written 1,122 -- (13) 405 -- (10) Caps written 2,871 -- (9) 2,174 -- (4) Options purchased (1) 37 -- -- -- -- -- Options written (1) 27 -- -- -- -- -- Forwards (1) 59 2 2 -- -- -- Foreign exchange contracts: Forwards and spots (1) 1,853 29 3 1,313 14 1 Options purchased (1) 110 -- -- 65 1 1 Options written 110 -- -- 59 -- (1) - -------------------------------------------------------------------------------------------------------------------
(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. 66 Interest rate futures contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific financial instrument at a predetermined price or yield. Gains and losses on futures contracts are settled daily based on a notional (underlying) principal value and do not involve an actual transfer of the specific instrument. Futures contracts are standardized and are traded on exchanges. The exchange assumes the risk that a counterparty will not pay and generally requires margin payments to minimize such risk. Market risks arise from movements in interest rates and security values. The Company uses 90- to 120-day futures contracts on Eurodollar deposits and U.S. Treasury notes to shorten the interest rate maturity of deposits and to reduce the price risk of loans. Initial margin requirements on futures contracts are provided by investment securities pledged as collateral. The net deferred losses related to interest rate futures contracts were $17 million at December 31, 1997, which will be fully amortized in 1998. Interest rate floors and caps are interest rate protection instruments that involve the payment from the seller to the buyer of an interest differential. This differential represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate, the strike rate, applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential by a counterparty, should the current short-term rate fall below the strike level of the agreement. The Company generally receives cash quarterly on purchased floors (when the current interest rate falls below the strike rate) and purchased caps (when the current interest rate exceeds the strike rate). The premiums paid for interest rate purchased floor and cap agreements are included with the assets or liabilities hedged. The primary risk associated with purchased floors and caps is the ability of the counterparties to meet the terms of the contract. Of the total purchased floors for asset/liability management of $21 billion at December 31, 1997, the Company had $16 billion of floors to protect variable-rate loans from a drop in interest rates. These contracts have a weighted average maturity of 1 year and 10 months. Included in purchased floors are forward starting contracts of $3 million starting in February 1998, $2,000 million starting in October 1998, $1,200 million starting in January 1999, $20 million starting in March 1999, $63 million starting in June 1999 and $5 million starting in October 2000. The remaining purchased floors of $5 billion and purchased caps of $.2 billion at December 31, 1997 were used to hedge interest rate risk of various other specific assets and liabilities. Interest rate swap contracts are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a notional principal amount. Payments related to the Company's swap contracts are made either monthly, quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The primary risk associated with swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. At December 31, 1997, the Company had $16 billion of interest rate swaps outstanding for interest rate risk management purposes on which the Company receives payments based on fixed interest rates and makes payments based on variable rates (i.e., one-or three-month LIBOR rate). Included in this amount, $11 billion was used to convert floating-rate loans into fixed-rate assets. These contracts have a weighted average maturity of 2 years and 3 months, a weighted average receive rate of 6.59% and a weighted average pay rate of 5.94%. An additional $4 billion was used to convert fixed-rate deposits into floating-rate deposits. These contracts have a weighted average maturity of 2 years and 11 months, a weighted average receive rate of 5.49% and a weighted average pay rate of 5.90%. The remaining swap contracts used for interest rate risk management of $1 billion at December 31, 1997 were used to hedge interest rate risk of various other specific assets and liabilities. 67 20. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions set forth below for the Company's financial instruments are made solely to comply with the requirements of FAS 107 and should be read in conjunction with the financial statements and notes in this Annual Report. The carrying amounts in the table are recorded in the Consolidated Balance Sheet under the indicated captions, except for the derivative financial instruments, which are recorded in the specific asset or liability balance being hedged or in other assets if the derivative financial instrument is a customer accommodation. Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit, credit card and trust customers, since these intangibles are not financial instruments. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. FINANCIAL ASSETS SHORT-TERM FINANCIAL ASSETS This category includes cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. INVESTMENT SECURITIES Investment securities at fair value at December 31, 1997 and 1996 are set forth in Note 4. LOANS The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. Discount rates presented in the paragraphs below have a wide range due to the Company's mix of fixed- and variable-rate products. The Company used variable discount rates which incorporate relative credit quality to reflect the credit risk, where appropriate, on the fair value calculation. The fair value of commercial loans, other real estate mortgage loans and real estate construction loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. Most of the discount rates for commercial loans, other real estate mortgage loans and real estate construction loans are between 7.75% and 10.0%, 7.75% and 11.25%, and 7.25% and 9.75%, respectively, at December 31, 1997. Most of the discount rates for the same portfolios in 1996 were between 7.75% and 9.5%, 7.75% and 12.25%, and 7.75% and 11.0%, respectively. For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates, using discount rates based on current industry pricing for loans of similar size, type, remaining maturity and repricing characteristics. Most of the discount rates applied to this portfolio are between 5.5% and 7.75% at December 31, 1997 and 5.5% and 8.5% at December 31, 1996. For credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. 68 The following table presents a summary of the Company's financial instruments, as defined by FAS 107: - -------------------------------------------------------------------------------------------------------------- December 31, ----------------------------------------------------- 1997 1996 ----------------------- ----------------------- CARRYING ESTIMATED Carrying Estimated (in millions) AMOUNT FAIR VALUE amount fair value - -------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 8,169 $ 8,169 $11,736 $11,736 Federal funds sold and securities purchased under resale agreements 82 82 187 187 Investment securities at fair value 9,888 9,888 13,505 13,505 Loans: Commercial 20,144 20,229 19,515 19,550 Real estate 1-4 family first mortgage 8,869 8,895 10,425 10,343 Other real estate mortgage 12,186 12,276 11,860 11,772 Real estate construction 2,320 2,351 2,303 2,319 Consumer 18,089 17,410 20,114 19,149 Lease financing 4,047 4,005 3,003 3,022 Foreign 79 71 169 162 ------- ------- ------- ------- 65,734 65,237 67,389 66,317 Less: Allowance for loan losses 1,828 -- 2,018 -- Net deferred fees on loan commitments and standby letters of credit 64 -- 76 -- ------- ------- ------- ------- Net loans 63,842 65,237 65,295 66,317 Due from customers on acceptances 98 98 197 197 Nonmarketable equity investments 1,113 1,338 1,085 1,361 Other financial assets 1,010 1,010 637 637 FINANCIAL LIABILITIES Deposits $72,199 $72,290 $81,821 $81,943 Federal funds purchased and securities sold under repurchase agreements 3,576 3,576 2,029 2,029 Commercial paper and other short-term borrowings 249 249 401 401 Acceptances outstanding 98 98 197 197 Senior debt (1) 1,924 1,990 2,053 2,117 Subordinated debt 2,585 2,447 2,940 2,806 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,339 1,150 1,151 DERIVATIVE FINANCIAL INSTRUMENTS (2) Interest rate contracts: Floors purchased $ 76 $ 76 $ 82 $ 110 Floors written (13) (13) (10) (10) Caps purchased 10 9 8 7 Caps written (9) (9) (4) (4) Swaps in a gain position -- 246 -- 229 Swaps in a loss position -- (68) -- (110) Forwards in a gain position -- 2 -- -- Foreign exchange contracts in a gain position 29 30 15 15 Foreign exchange contracts in a loss position (26) (26) (14) (14) - --------------------------------------------------------------------------------------------------------------
(1) The carrying amount and fair value exclude obligations under capital leases of $59 million and $67 million at December 31, 1997 and 1996, respectively. (2) The carrying amounts include unamortized fees paid or received, deferred gains or losses and gains or losses on derivative financial instruments receiving mark-to-market treatment. 69 For other consumer loans, the fair value is calculated by discounting the contractual cash flows, adjusted for prepayment estimates, based on the current rates offered by the Company for loans with similar characteristics. Most of the discount rates applied to this portfolio are between 7.75% and 10.0% at December 31, 1997 and 8.0% and 10.5% at December 31, 1996. For auto lease financing, the fair value is calculated by discounting the contractual cash flows at the Company's current pricing for items of similar remaining term, without including any tax benefits. The discount rate applied to this portfolio was 8.45% at December 31, 1997 and 8.22% at December 31, 1996. Commitments, standby letters of credit and commercial and similar letters of credit not included in the previous table have contractual values of $54,019 million, $2,612 million and $337 million, respectively, at December 31, 1997, and $55,236 million, $2,981 million and $406 million, respectively, at December 31, 1996. These instruments generate ongoing fees at the Company's current pricing levels. Of the commitments at December 31, 1997, 64% mature within one year and 83% are commitments to extend credit at a floating rate. NONMARKETABLE EQUITY INVESTMENTS The Company's nonmarketable equity investments, including securities, are carried at cost and have a book value of $1,113 million and $1,085 million and an estimated fair value of $1,338 million and $1,361 million at December 31, 1997 and 1996, respectively. There are restrictions on the sale and/or liquidation of the Company's interest, which is generally in the form of limited partnerships; and the Company has no direct control over the investment decisions of the limited partnerships. To estimate fair value, a significant portion of the underlying limited partnerships' investments are valued based on market quotes. FINANCIAL LIABILITIES DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and market rate and other savings, is equal to the amount payable on demand at the measurement date. Although the FASB's requirement for these categories is not consistent with the market practice of using prevailing interest rates to value these amounts, the amount included for these deposits in the previous table is their carrying value at December 31, 1997 and 1996. The fair value of other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. SHORT-TERM FINANCIAL LIABILITIES This category includes federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. SENIOR AND SUBORDINATED DEBT The fair value of the Company's underwritten senior and subordinated debt is estimated based on the quoted market prices of the instruments. The fair value of the medium-term note programs, which are part of senior debt, is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remaining maturities. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The fair value of the Company's trust preferred securities is estimated based on the quoted market prices of the instruments. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are fair valued based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. LIMITATIONS These fair value disclosures are made solely to comply with the requirements of FAS 107. The calculations represent management's best estimates; however, due to the lack of broad markets and the significant items excluded from this disclosure, the calculations do not represent the underlying value of the Company. The information presented is based on fair value calculations and market quotes as of December 31, 1997 and 1996. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. 70 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Wells Fargo & Company: We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo & Company and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Certified Public Accountants San Francisco, California January 19, 1998 71 QUARTERLY FINANCIAL DATA WELLS FARGO & COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME--QUARTERLY
- ------------------------------------------------------------------------------------------------------------------------ 1997 1996 QUARTER ENDED Quarter ended ------------------------------------- ------------------------------------- (in millions) DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30 June 30 Mar. 31 - ------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME $1,706 $1,707 $1,716 $1,773 $1,812 $1,847 $1,858 $1,006 INTEREST EXPENSE 579 579 569 561 562 552 558 330 ------ ------ ------ ------ ------ ------ ------ ------ NET INTEREST INCOME 1,127 1,128 1,147 1,212 1,250 1,295 1,300 676 Provision for loan losses 195 175 140 105 70 35 -- -- ------ ------ ------ ------ ------ ------ ------ ------ Net interest income after provision for loan losses 932 953 1,007 1,107 1,180 1,260 1,300 676 ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME Fees and commissions 252 246 234 214 207 205 211 118 Service charges on deposit accounts 212 214 214 221 233 254 258 122 Trust and investment services income 113 117 112 109 110 104 104 59 Investment securities gains (losses) 14 (1) 3 4 8 -- 3 -- Other 117 101 116 92 6 80 63 55 ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income 708 677 679 640 564 643 639 354 ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 305 308 316 341 397 378 400 181 Incentive compensation 52 54 49 41 80 53 61 32 Employee benefits 75 80 81 95 112 105 102 54 Equipment 96 97 98 94 129 103 111 55 Net occupancy 95 96 95 102 109 96 108 53 Goodwill 81 81 81 83 80 81 81 9 Core deposit intangible 62 64 67 62 73 78 82 10 Operating losses 58 40 180 42 73 31 27 14 Other 274 267 279 257 435 380 305 159 ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense 1,098 1,087 1,246 1,117 1,488 1,305 1,277 567 ------ ------ ------ ------ ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 542 543 440 630 256 598 662 463 Income tax expense 244 253 212 291 133 277 299 199 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME $ 298 $ 290 $ 228 $ 339 $ 123 $ 321 $ 363 $ 264 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 294 $ 285 $ 222 $ 329 $ 103 $ 302 $ 344 $ 254 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE $ 3.40 $ 3.26 $ 2.49 $ 3.62 $ 1.12 $ 3.23 $ 3.61 $ 5.39 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 3.36 $ 3.23 $ 2.47 $ 3.58 $ 1.11 $ 3.19 $ 3.56 $ 5.30 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30 $ 1.30 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 86.5 87.5 89.0 90.8 92.2 93.7 95.6 47.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding - assuming dilution 87.3 88.4 89.9 91.9 93.3 94.8 96.9 47.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------------
72 WELLS FARGO & COMPANY APPENDIX TO EXHIBIT 13 Description Page number 1. Line graph of Return on Average Total Assets (ROA) and "Cash" ROA for 1997, 1996, 1995, 1994, and 1993 (SHOWN IN %). ROA "Cash" ROA 1997 1.16 1.77 1996 1.15 1.66 1995 2.03 2.12 1994 1.62 1.71 1993 1.20 1.28 10
2. Line graph of Return on Common Stockholders' Equity (ROE) and "Cash" ROE for 1997, 1996, 1995, 1994, and 1993 (shown in %). ROE "Cash" ROE 1997 8.79 34.39 1996 8.83 28.46 1995 29.70 34.92 1994 22.41 26.88 1993 16.74 20.98 10
3. Line graph of Net Interest Margin for 1997, 1996 and 1995 (shown in %). Also presented is the yield on total earning assets and the rate on total funding sources for the same periods. This information is also presented in Table 6 - AVERAGE BALANCES, YIELDS AND RATES PAID on pages 18 and 19. 16 4. Bar graph of the Loan Mix at Year End shown as a percentage of total loans at December 31, 1997, 1996 and 1995. 1997 1996 1995 Commercial 31% 29% 27% Real Estate 1-4 family first mortgage 13 15 13 Other real estate mortgage 19 19 23 Real estate construction 4 3 4 Consumer 28 30 28 Lease Financing 6 4 5 ---- ---- ---- Total 100% 100% 100% 22
5. Line graph of Nonaccrual Loans at December 31, 1997, 1996, 1995, 1994 and 1993 (shown in billions). This information is also presented in Table 13-NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS on page 24. 25 6. Line graph of New Loans Placed on Nonaccrual at December 31, 1997, 1996, 1995, 1994 and 1993 (shown in billions). 1997 0.4 1996 0.7 1995 0.5 1994 0.3 1993 0.8 25
7. Bar graph of Core Deposits at Year End at December 31, 1997, 1996 and 1995 (shown in billions). 1997 1996 1995 Noninterest-bearing 24.0 29.1 10.4 Interest-bearing checking 2.2 2.8 .9 Market rate and other savings 29.9 33.9 17.9 Savings certificates 15.3 15.8 8.6 ------ ------ ------ Total Core Deposits $71.4 $81.6 $37.9 28
8. Bar graph on the Price Range of Common Stock (high, low, closing price) on an annual basis for 1997, 1996 and 1995 (shown in dollars). This information is also presented in Table 1- RATIOS AND PER COMMON SHARE DATA on page 11. 34 9. Bar graph on the Price Range of Common Stock (high, low, closing price) on a quarterly basis for 1997 and 1996 (shown in dollars). HIGH LOW QTR END 1997 1Q $319.25 $271.00 $284.13 2Q 287.88 246.00 269.50 3Q 279.88 250.13 275.00 4Q 339.44 275.75 339.44 1996 1Q $261.25 $203.13 $261.25 2Q 264.50 232.13 239.13 3Q 264.00 220.13 260.00 4Q 289.88 250.25 269.75 34
EX-23 7 EXHIBIT 23 EXHIBIT 23 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Wells Fargo & Company: We consent to the incorporation by reference in the Registration Statements noted below on Forms S-3 and S-8 of Wells Fargo & Company of our report dated January 19, 1998, relating to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 Annual Report on Form 10-K of Wells Fargo & Company.
Registration Statement Number Form Description - ---------------- ---- ----------- 333-10501 S-8 Employee Stock Purchase Plan 33-7274, 33-40781 S-8 Equity Incentive Plans 33-26052, 33-41731 S-8 Director Option Plans 2-93338 S-8 Tax Advantage Plan and Tax Advantage Plan Sales by Wells Fargo Bank 33-54441 S-8 Long-Term Incentive Plan 2-88534, 33-47434 S-3 Dividend Reinvestment and Common Stock Purchase and Share Custody Plan 33-64575 S-8 Common stock issuable under employee stock and option plans of First Interstate Bancorp assumed in the acquisition 333-10469 S-3 Shelf registration of senior and subordinated debt securities, preferred stock, depositary shares and common stock 333-15253 S-3 Shelf registration of senior and subordinated debt securities, preferred stock, depositary shares and common stock
KPMG PEAT MARWICK LLP San Francisco, California March 12, 1998 EX-27 8 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K DATED MARCH 16, 1998 FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 YEAR DEC-31-1997 DEC-31-1997 8,169 0 82 0 9,888 0 0 65,734 1,828 97,456 72,199 3,825 2,578 5,867 0 275 431 12,183 97,456 6,094 732 60 6,904 1,703 2,290 4,614 615 20 4,549 2,154 1,155 0 0 1,155 12.77 12.64 5.99 528 243 9 0 2,018 (1,078) 273 1,828 0 0 0
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