-----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, KyDEJhkltix8w4PIXE15BkeZZ7Y5mO+5qczOfrgDZuOp+oqOnJmGiGGbLm2XfB/Q eAqjFG4xqQ2+o5FPedDupw== 0001047469-98-020173.txt : 19980515 0001047469-98-020173.hdr.sgml : 19980515 ACCESSION NUMBER: 0001047469-98-020173 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO CENTRAL INDEX KEY: 0000105598 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132553920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06214 FILM NUMBER: 98620399 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 8004114932 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission file number 1-6214 --------------------- WELLS FARGO & COMPANY (Exact name of Registrant as specified in its charter) Delaware 13-2553920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares Outstanding April 30, 1998 ------------------ Common stock, $5 par value 85,351,707
FORM 10-Q TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Statement of Income. . . . . . . . . . . . . . . . 2 Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . 3 Consolidated Statement of Changes in Stockholders' Equity . . . 4 Consolidated Statement of Cash Flows. . . . . . . . . . . . . . 5 Notes to Financial Statements . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data. . . . . . . . . . . . . . . . . . . . . 9 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Line of Business Results. . . . . . . . . . . . . . . . . . . . 11 Earnings Performance. . . . . . . . . . . . . . . . . . . . . . 17 Net Interest Income . . . . . . . . . . . . . . . . . . . . . 17 Noninterest Income. . . . . . . . . . . . . . . . . . . . . . 19 Noninterest Expense . . . . . . . . . . . . . . . . . . . . . 21 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI . . 23 Balance Sheet Analysis. . . . . . . . . . . . . . . . . . . . . 24 Investment Securities . . . . . . . . . . . . . . . . . . . . 24 Loan Portfolio. . . . . . . . . . . . . . . . . . . . . . . . 26 Commercial real estate . . . . . . . . . . . . . . . . . . . 26 Nonaccrual and Restructured Loans and Other Assets . . . . . . 27 Changes in total nonaccrual loans. . . . . . . . . . . . . . 27 Changes in foreclosed assets . . . . . . . . . . . . . . . . 30 Loans 90 days past due and still accruing. . . . . . . . . . 30 Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . 31 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 33 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Capital Adequacy/Ratios. . . . . . . . . . . . . . . . . . . . 34 Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . 36 Derivative Financial Instruments . . . . . . . . . . . . . . . 37 Liquidity Management . . . . . . . . . . . . . . . . . . . . . 38 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 39 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 39 SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
- -------------------------------------------------------------------------------- The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. In addition, this Form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. Wells Fargo & Company (the Company) cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the completion of the First Interstate Bancorp integration, customer disintermediation, technology changes and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. The interim financial information should be read in conjunction with the Company's 1997 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------- Quarter ended March 31, ------------------ (in millions) 1998 1997 - -------------------------------------------------------------------------------- INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 6 $ 5 Investment securities 145 208 Loans 1,512 1,549 Other 21 11 ------ ------ Total interest income 1,684 1,773 ------ ------ INTEREST EXPENSE Deposits 410 422 Federal funds purchased and securities sold under repurchase agreements 40 31 Commercial paper and other short-term borrowings 7 2 Senior and subordinated debt 75 81 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 25 ------ ------ Total interest expense 557 561 ------ ------ NET INTEREST INCOME 1,127 1,212 Provision for loan losses 180 105 ------ ------ Net interest income after provision for loan losses 947 1,107 ------ ------ NONINTEREST INCOME Fees and commissions 255 214 Service charges on deposit accounts 208 221 Trust and investment services income 114 109 Investment securities gains 5 4 Other 144 92 ------ ------ Total noninterest income 726 640 ------ ------ NONINTEREST EXPENSE Salaries 305 341 Incentive compensation 53 41 Employee benefits 91 95 Equipment 98 94 Net occupancy 101 102 Goodwill 81 83 Core deposit intangible 60 62 Operating losses 31 42 Other 272 257 ------ ------ Total noninterest expense 1,092 1,117 ------ ------ INCOME BEFORE INCOME TAX EXPENSE 581 630 Income tax expense 266 291 ------ ------ NET INCOME $ 315 $ 339 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 311 $ 329 ------ ------ ------ ------ EARNINGS PER COMMON SHARE $ 3.62 $ 3.62 ------ ------ ------ ------ DILUTED EARNINGS PER COMMON SHARE $ 3.58 $ 3.58 ------ ------ ------ ------ DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.30 ------ ------ ------ ------ Average common shares outstanding 85.8 90.8 ------ ------ ------ ------ Diluted average common shares outstanding 86.6 91.9 ------ ------ ------ ------
- -------------------------------------------------------------------------------- 2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1998 1997 1997 - --------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 8,303 $ 8,169 $ 8,530 Federal funds sold and securities purchased under resale agreements 111 82 209 Investment securities at fair value 8,676 9,888 12,634 Loans 64,504 65,734 65,436 Allowance for loan losses 1,830 1,828 1,922 -------- -------- -------- Net loans 62,674 63,906 63,514 -------- -------- -------- Due from customers on acceptances 77 98 96 Accrued interest receivable 504 507 611 Premises and equipment, net 2,081 2,117 2,310 Core deposit intangible 1,649 1,709 1,901 Goodwill 6,943 7,031 7,312 Other assets 3,802 3,949 4,746 -------- -------- -------- Total assets $94,820 $97,456 $101,863 -------- -------- -------- -------- -------- -------- LIABILITIES Noninterest-bearing deposits $24,421 $23,953 $ 25,337 Interest-bearing deposits 47,895 48,246 51,090 -------- -------- -------- Total deposits 72,316 72,199 76,427 Federal funds purchased and securities sold under repurchase agreements 1,068 3,576 1,685 Commercial paper and other short-term borrowings 324 249 241 Acceptances outstanding 77 98 96 Accrued interest payable 235 175 242 Other liabilities 2,438 2,403 3,400 Senior debt 1,751 1,983 1,940 Subordinated debt 2,509 2,585 2,938 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,299 1,299 STOCKHOLDERS' EQUITY Preferred stock 275 275 425 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 85,284,480 shares, 86,152,779 shares and 89,977,610 shares 426 431 450 Additional paid-in capital 8,431 8,712 9,801 Retained earnings 3,615 3,416 2,959 Cumulative other comprehensive income (loss) 56 55 (40) -------- -------- -------- Total stockholders' equity 12,803 12,889 13,595 -------- -------- -------- Total liabilities and stockholders' equity $94,820 $97,456 $101,863 -------- -------- -------- -------- -------- -------- - ---------------------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ---------------------------------------------------- 1998 1997 ----------------------- --------------------- STOCK- COMPRE- Stock- Compre- HOLDERS' HENSIVE holders' hensive (in millions) EQUITY INCOME equity income - ---------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of quarter $ 275 $ 600 Preferred stock redeemed -- (175) ------- ------- Balance, end of quarter 275 425 ------- ------- COMMON STOCK Balance, beginning of quarter 431 457 Common stock issued under employee benefit and dividend reinvestment plans 1 1 Common stock repurchased (6) (8) ------- ------- Balance, end of quarter 426 450 ------- ------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of quarter 8,712 10,287 Common stock issued under employee benefit and dividend reinvestment plans 25 23 Common stock repurchased (306) (509) ------- ------- Balance, end of quarter 8,431 9,801 ------- ------- RETAINED EARNINGS Balance, beginning of quarter 3,416 2,749 Net income 315 $315 339 $339 Preferred stock dividends (4) (10) Common stock dividends (112) (119) ------- ------- Balance, end of quarter 3,615 2,959 ------- ------- CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of quarter 55 19 Unrealized gains (losses) on investment securities arising during the quarter, net of tax of $3 million and ($42) million 4 4 (61) (61) Reclassification adjustment for investment securities gains included in net income, net of tax of $2 million and $2 million (3) (3) (2) (2) Foreign currency translation adjustments, net of tax of ($4) million -- -- 4 4 ------- ---- ------- ---- Balance, end of quarter 56 (40) ------- ------- COMPREHENSIVE INCOME $316 $280 ---- ---- ---- ---- Total stockholders' equity $12,803 $13,595 ------- ------- ------- ------- - ----------------------------------------------------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ----------------------- (in millions) 1998 1997 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 315 $ 339 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 180 105 Depreciation and amortization 231 223 Net decrease in accrued interest receivable 3 54 Net increase in accrued interest payable 60 71 Net decrease (increase) in loans originated for sale 466 (143) Other, net 161 525 ------- ------- Net cash provided by operating activities 1,416 1,174 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities at fair value Proceeds from sales 24 150 Proceeds from prepayments and maturities 1,356 1,100 Purchases (162) (478) Net (increase) decrease in loans resulting from originations and collections (522) 1,833 Proceeds from sales (including participations) of loans 1,179 81 Purchases (including participations) of loans (53) (39) Proceeds from sales of foreclosed assets 27 48 Net increase in federal funds sold and securities purchased under resale agreements (29) (22) Other, net 56 272 ------- ------- Net cash provided by investing activities 1,876 2,945 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 117 (5,394) Net decrease in short-term borrowings (2,433) (504) Repayment of senior debt (228) (175) Proceeds from issuance of subordinated debt 25 -- Repayment of subordinated debt (100) -- Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures -- 149 Proceeds from issuance of common stock 26 24 Redemption of preferred stock -- (175) Repurchase of common stock (312) (517) Payment of cash dividends on preferred stock (4) (10) Payment of cash dividends on common stock (112) (119) Other, net (137) (604) ------- ------- Net cash used by financing activities (3,158) (7,325) ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) 134 (3,206) ------- ------- Cash and cash equivalents at beginning of quarter 8,169 11,736 ------- ------- CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 8,303 $ 8,530 ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid during the quarter for: Interest $ 497 $ 490 Income taxes $ 34 $ 73 Noncash investing activities: Transfers from loans to foreclosed assets $ 20 $ 26 - --------------------------------------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 130 Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (FAS 130), Reporting of 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 in the financial statements. Other comprehensive income, as defined, is net of income taxes. Cumulative other comprehensive income is displayed separately in the equity section of the balance sheet and the consolidated statement of changes in stockholders' equity. Amounts in the financial statements for earlier periods have been reclassified for comparative purposes, as required by FAS 130. 2. MERGER WITH FIRST INTERSTATE BANCORP (MERGER) On April 1, 1996, the Company completed its acquisition of First Interstate Bancorp (First Interstate). The Merger was accounted for as a purchase transaction. 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 March 31, 1998, the remaining accrual associated with the disposition of traditional former First Interstate branches was $5 million. The California dispositions included 175 branch closures during 1996, 47 branch closures during 1997 and one branch closure in the first quarter of 1998. The Company also sold 17 former First Interstate branches located in California, including deposits, in 1997. The out-of-state dispositions included 88 branch closures that were completed in 1997, 30 branch closures in the first quarter of 1998 and 38 branch closures scheduled to be completed by June 30, 1998. The Company also sold 87 former First Interstate out-of-state branches, including deposits, in 1997. (See Noninterest Income section for information on other branch dispositions.) Additionally, the adjustments to goodwill included accruals of approximately $481 million ($284 million after tax) related to severance of former First Interstate employees throughout the Company who have been or, in the case of scheduled branch closures, will be displaced by June 30, 1998. Severance payments totaling $400 million were paid since the second quarter of 1996, including $28 million in the first quarter of 1998. During 1997, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. Transfer of the accounts 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; 6 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. Net proceeds of approximately $2 million attributable to business originated by the Company were recorded as a gain in the first quarter of 1998. Substantially all of the remaining gain of about $7 million will be recorded in the second quarter of 1998. The $7,223 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. 7 [This page intentionally left blank.] 8 FINANCIAL REVIEW SUMMARY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------ % Change Quarter Ended Mar. 31, 1998 from -------------------------------------- ----------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ FOR THE QUARTER Net income $ 315 $ 298 $ 339 6% (7)% Net income applicable to common stock 311 294 329 6 (5) Earnings per common share $ 3.62 $ 3.40 $ 3.62 6 -- Diluted earnings per common share 3.58 3.36 3.58 7 -- Dividends declared per common share 1.30 1.30 1.30 -- -- Average common shares outstanding 85.8 86.5 90.8 (1) (6) Diluted average common shares outstanding 86.6 87.3 91.9 (1) (6) Profitability ratios (annualized) Net income to average total assets (ROA) 1.34% 1.23% 1.31% 9 2 Net income applicable to common stock to average common stockholders' equity (ROE) 10.07 9.29 10.02 8 -- Efficiency ratio (1) 58.9% 59.9% 60.3% (2) (2) Average loans $65,067 $64,545 $ 65,493 1 (1) Average assets 95,258 96,170 105,430 (1) (10) Average core deposits 69,858 70,198 77,622 -- (10) Net interest margin 6.01% 5.94% 6.14% 1 (2) NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE AMORTIZATION AND BALANCES ("CASH" OR "TANGIBLE") (2) Net income applicable to common stock $ 423 $ 407 $ 443 4 (5) Earnings per common share 4.92 4.71 4.88 4 1 Diluted earnings per common share 4.88 4.66 4.83 5 1 ROA 1.98% 1.85% 1.90% 7 4 ROE 37.46 36.15 36.67 4 2 Efficiency ratio 51.7 52.5 52.9 (2) (2) AT QUARTER END Investment securities $ 8,676 $ 9,888 $ 12,634 (12) (31) Loans 64,504 65,734 65,436 (2) (1) Allowance for loan losses 1,830 1,828 1,922 -- (5) Goodwill 6,943 7,031 7,312 (1) (5) Assets 94,820 97,456 101,863 (3) (7) Core deposits 72,041 71,397 76,156 1 (5) Common stockholders' equity 12,528 12,614 13,170 (1) (5) Stockholders' equity 12,803 12,889 13,595 (1) (6) Tier 1 capital (3) 6,141 6,119 6,407 -- (4) Total capital (Tiers 1 and 2) (3) 9,161 9,242 9,891 (1) (7) Capital ratios Common stockholders' equity to assets 13.21% 12.94% 12.93% 2 2 Stockholders' equity to assets 13.50 13.22 13.35 2 1 Risk-based capital (3) Tier 1 capital 7.76 7.61 7.80 2 (1) Total capital 11.58 11.49 12.05 1 (4) Leverage (3) 7.04 6.95 6.61 1 7 Book value per common share $146.90 $146.41 $ 146.37 -- -- Staff (active, full-time equivalent) 32,414 33,100 34,486 (2) (6) COMMON STOCK PRICE High $337.88 $339.44 $ 319.25 -- 6 Low 295.00 275.75 271.00 7 9 Quarter End 331.25 339.44 284.13 (2) 17 - ------------------------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by the total of net interest income and noninterest income. (2) Nonqualifying core deposit intangible (CDI) amortization and average balance excluded from these calculations are, with the exception of the efficiency ratio, net of applicable taxes. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $31 million and $944 million, respectively, for the quarter ended March 31, 1998. Goodwill amortization and average balance (which are not tax effected) were $81 million and $6,990 million, respectively, for the quarter ended March 31, 1998. (3) See the Capital Adequacy/Ratios section for additional information. 9 OVERVIEW Wells Fargo & Company (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, Wells Fargo & Company and its subsidiaries are referred to as the Company. Net income for the first quarter of 1998 was $315 million, compared with $298 million for the fourth quarter of 1997 and $339 million for the first quarter of 1997. Earnings per share for the first quarter of 1998 were $3.62, compared with $3.40 for the fourth quarter of 1997 and $3.62 for the first quarter of 1997. Return on average assets (ROA) was 1.34% and return on average common equity (ROE) was 10.07% for the first quarter of 1998, compared with 1.23% and 9.29%, respectively, for the fourth quarter of 1997 and 1.31% and 10.02%, respectively, for the first quarter of 1997. Earnings before the amortization of goodwill and nonqualifying CDI ("cash" or "tangible" earnings) for the first quarter of 1998 were $4.92 per share, compared with $4.71 for the fourth quarter of 1997 and $4.88 per share for the first quarter of 1997. On the same basis, ROA was 1.98% and ROE was 37.46% in the first quarter of 1998, compared with 1.85% and 36.15%, respectively, for the fourth quarter of 1997 and 1.90% and 36.67%, respectively, for the first quarter of 1997. Net interest income on a taxable-equivalent basis was $1,130 million in the first quarter of 1998, compared with $1,130 million in the fourth quarter of 1997 and $1,216 million in the first quarter of 1997. The decrease in net interest income in the first quarter of 1998 compared with the same period of 1997 was primarily due to a decline in earning assets. The Company's net interest margin was 6.01% for the first quarter of 1998, compared with 5.94% in the fourth quarter of 1997 and 6.14% in the first quarter of 1997. Noninterest income was $726 million in the first quarter of 1998, compared with $708 million in the fourth quarter of 1997 and $640 million in the first quarter of 1997. The increase from a year ago was primarily due to gains on sales of loans, higher credit card fees and lower losses on dispositions of premises and equipment. Noninterest expense in the first quarter of 1998 was $1,092 million, compared with $1,098 million in the fourth quarter of 1997 and $1,117 million in the first quarter of 1997. The provision for loan losses in the first quarter of 1998 was $180 million, compared with $195 million for the fourth quarter of 1997 and $105 million for the first quarter of 1997. During the first quarter of 1998, net charge-offs totaled $178 million, or 1.11% of average loans (annualized). This compared with $190 million, or 1.17%, during the fourth quarter of 1997 and $201 million, or 1.23%, during the first quarter of 1997. The allowance for loan losses of $1,830 million was 2.84% of total loans at March 31, 1998, compared with 2.78% at December 31, 1997 and 2.94% at March 31, 1997. 10 Total nonaccrual and restructured loans were $512 million, or .8% of total loans, at March 31, 1998, compared with $537 million, or .8%, at December 31, 1997 and $655 million, or 1.0%, at March 31, 1997. Foreclosed assets amounted to $155 million at March 31, 1998, compared with $158 million at December 31, 1997 and $207 million at March 31, 1997. Common stockholders' equity to total assets was 13.21% at March 31, 1998, compared with 12.94% and 12.93% at December 31, 1997 and March 31, 1997, respectively. The Company's total risk-based capital (RBC) ratio at March 31, 1998 was 11.58% and its Tier 1 RBC ratio was 7.76%, exceeding minimum guidelines of 8% and 4%, respectively, for bank holding companies and the "well capitalized" guidelines for banks of 10% and 6%, respectively. At December 31, 1997, the Company's ratios were 11.49% and 7.61%, respectively; at March 31, 1997, these ratios were 12.05% and 7.80%, respectively. The Company's leverage ratios were 7.04%, 6.95% and 6.61% at March 31, 1998, December 31, 1997 and March 31, 1997, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline for banks of 5%. The Company has bought in the past, and will continue to buy, shares to offset common stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in April 1996 the repurchase of up to 9.6 million shares of the Company's outstanding common stock under a repurchase program begun in 1994. In October 1997, the Board of Directors authorized the repurchase from time to time of up to an additional 8.6 million shares of the Company's outstanding stock under the same program. Under these programs, the Company has repurchased 7.7 million shares (net of shares issued) in 1996, 5.3 million shares (net of shares issued) in 1997 and .9 million shares (net of shares issued) in the first quarter of 1998. The Company currently expects to continue repurchasing shares from time to time in 1998 using cash earnings not required to support balance sheet growth. LINE OF BUSINESS RESULTS The line of business results show the financial performance of the Company's major business units. The table on pages 12 and 13 presents the line of business results for the quarters ended March 31, 1998 and 1997. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated to allow comparability from one period to the next. 11 The following table provides the line of business results (estimated) for the Company's six major business units.
- ----------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Retail Business average balances in billions) Distribution Banking Investment Group Group Group --------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1998 1997 1998 1997 1998 1997 Net interest income (1) $ 230 $ 252 $ 194 $ 186 $ 183 $ 199 Provision for loan losses (2) -- -- 38 30 1 1 Noninterest income (3) 267 288 72 67 140 134 Noninterest expense (3) 453 476 99 103 168 163 ----- ----- ----- ----- ----- ----- Income before income tax expense (benefit) 44 64 129 120 154 169 Income tax expense (benefit) (4) 18 26 53 49 62 69 ----- ----- ----- ----- ----- ----- Net income $ 26 $ 38 $ 76 $ 71 $ 92 $ 100 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Average loans $ -- $ -- $ 6.1 $ 5.2 $ 2.1 $ 1.9 Average assets 2.6 3.3 7.8 7.4 2.7 3.0 Average core deposits 18.1 19.5 11.1 12.2 32.4 35.3 Return on equity (5) 10% 15% 40% 40% 53% 58% Risk-adjusted efficiency ratio (6) 101% 97% 60% 64% 63% 59% - -----------------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Groups are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) The provision allocated to the line groups in 1998 and 1997 is based on management's current assessment of the normalized net charge-off ratio for each line of business. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference between the normalized provision and the Company provision is included in Other. (3) The Retail Distribution Group's charges to the product groups are shown as noninterest income to the retail distribution channels and noninterest expense to the product groups. They amounted to $83 million and $89 million for the quarters ended March 31, 1998 and 1997, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company totals for noninterest income and expense. The following describes the major business units. The Retail Distribution Group sells and services a complete line of retail financial products for consumers and small businesses. In addition to the 24-hour Telephone Banking Centers and Wells Fargo's Online Financial Services (the Company's personal computer banking services), the Group encompasses Physical Distribution's network of traditional branches, in-store branches, banking centers, business centers and ATMs. Retail Distribution also includes the consumer checking business, which primarily uses the network as a source of new customers. As of March 31, 1998, the Company had 920 traditional branches, 546 in-store branches, 376 banking centers and 33 business centers. Motor banking facilities ("motorbanks") were available at 45 of the traditional branches. There were 4,627 ATMs as of March 31, 1998. Retail Distribution Group's net income for the first quarter 1998 decreased $12 million, or 32%, from first quarter 1997. Net interest income for the first quarter 1998 declined largely due to lower core deposit balances related to branch dispositions and lower spreads on core deposits, partially offset by lower nonearning asset (cash) balances. The decline in noninterest income reflected higher losses on the disposition of premises due to branch closures, lower sales and service charges to the product groups and lower service charges on deposit accounts. Noninterest expense improved due to branch closures and merger-related cost savings. 12
- ----------------------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Wholesale average balances in billions) Real Estate Products Consumer Consolidated Group Group Lending Other Company --------------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 Net interest income (1) $ 97 $ 112 $ 168 $ 200 $ 272 $ 274 $ (17) $ (11) $1,127 $1,212 Provision for loan losses (2) 12 10 19 19 106 114 4 (69) 180 105 Noninterest income (3) 70 18 93 84 124 98 (40) (49) 726 640 Noninterest expense (3) 31 19 121 111 117 120 103 125 1,092 1,117 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Income before income tax expense (benefit) 124 101 121 154 173 138 (164) (116) 581 630 Income tax expense (benefit) (4) 50 41 49 63 70 57 (36) (14) 266 291 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Net income $ 74 $ 60 $ 72 $ 91 $ 103 $ 81 $(128) $(102) $ 315 $ 339 ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ Average loans $10.7 $ 9.4 $17.2 $17.0 $22.8 $24.3 $ 6.2 $ 7.7 $ 65.1 $ 65.5 Average assets 12.0 10.1 20.8 22.2 23.8 25.6 25.6 33.8 95.3 105.4 Average core deposits .4 .4 7.3 9.3 .6 .4 -- .5 69.9 77.6 Return on equity (5) 25% 26 % 17% 20% 29% 21% --% --% 10% 10% Risk-adjusted efficiency ratio (6) 56% 54 % 83% 75% 63% 75% --% --% --% --% - ---------------------------------------------------------------------------------------------------------------------------------
(4) Businesses are taxed at the Company's marginal (statutory) tax rate, adjusted for any nondeductible expenses. Any differences between the marginal and effective tax rates are in Other. (5) Equity is allocated to the lines of business based on an assessment of the inherent risk associated with each business so that the returns on allocated equity are on a risk-adjusted basis and comparable across business lines. (6) The risk-adjusted efficiency ratio is defined as noninterest expense plus the cost of capital divided by revenues (net interest income and noninterest income) less normalized loan losses. The Business Banking Group provides a full range of credit products and financial services to small businesses and their owners. These include lines of credit, receivables and inventory financing, equipment loans and leases, real estate financing, SBA financing, cash management, deposit and investment accounts, payroll services, medical savings accounts and credit and debit card processing. Business Banking customers are small businesses with annual sales up to $10 million in which the owner of the business is also the principal financial decision maker. Business Banking's net income for the first quarter of 1998 increased $5 million, or 7%. The increase in net interest income was due to higher volume and spreads on commercial loans and higher spreads on core deposits. This was partially offset by lower core deposit balances. The provision was higher due to the volume of loans acquired through direct market mailings. Noninterest income increased due to higher fees on loans. Noninterest expense improved due to lower costs in the direct market lending area. The Investment Group is responsible for the sales and management of savings and investment products, investment management and fiduciary and brokerage services to institutions, retail customers and high net worth individuals. This includes the Stagecoach family of mutual funds as well as personal trust, employee benefit trust and agency assets. It also includes product management for market rate accounts, savings deposits, Individual Retirement Accounts (IRAs) and time deposits. Within this Group, Private Client Services operates as a fully integrated financial services organization focusing on banking/credit, trust services, investment management and full-service and discount brokerage. 13 The Group also includes Wells Capital Management, a registered investment adviser and wholly owned subsidiary of the Bank. Wells Capital Management provides investment management services to institutional clients as well as the Bank's proprietary trust funds. In 1997, the Bank signed a definitive agreement to sell its Institutional Custody businesses to The Bank of New York and its affiliate, BNY Western Trust Company. Transfer of accounts is occurring in several stages, the first of which was in the third quarter of 1997, with substantial completion expected by the end of the second quarter of 1998. Also in 1997, the Bank announced an alliance with Morgan Stanley Dean Witter & 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. Substantially all of these services are now available to Wells Fargo customers under private label. In addition, the Bank entered into an alliance in December 1997 with BHC Securities as its clearing broker which will allow Wells Fargo Securities' on-line brokerage (Wells Trade) to offer a broad range of investment products to customers through the Internet and telephone channels. Assets under management at March 31, 1998 were $67.9 billion, compared with $57.4 billion at March 31, 1997. Investment Group's net income for the first quarter of 1998 declined by $8 million, or 8%. Net interest income decreased due to lower core deposit balances and spreads, which were partially offset by interest recoveries on loans previously charged off. The increase in noninterest income was largely due to higher fee income in the mutual funds, trust and brokerage areas and gains on the sale of the Institutional Custody businesses. This was primarily offset by the loss of ongoing fee income related to the businesses sold during 1997. The increase in noninterest expense reflects higher sales force growth and sales in the brokerage business which was partially offset by cost savings realized after the sale of the Corporate Trust and Institutional Custody businesses. The Real Estate Group provides a complete line of services supporting the commercial real estate market. Products and services include construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Real Estate Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications and commercial real estate loan servicing. The Real Estate Group's net income for the first quarter of 1998 increased $14 million, or 23%. Net interest income for the quarter decreased primarily due to lower interest recoveries on loans where interest had previously been applied to principal and narrower spreads on 14 loans. This was partially offset by higher average loan and investment security balances. Noninterest income was higher primarily due to gains from the securitization of loans as well as higher Acquisition, Development or Construction (ADC) investment income, gains from investment securities and income from equity investments. Noninterest expense for the first quarter increased due to lower foreclosed asset gains in 1998 and higher incentive compensation expense. The Wholesale Products Group serves businesses with annual sales in excess of $5 million and maintains relationships with major corporations throughout the United States. The Group is responsible for soliciting and maintaining credit and noncredit relationships with businesses by offering a variety of products and services, including traditional commercial loans and lines, letters of credit, international trade facilities, foreign exchange services, cash management and electronic products. The Group includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade and Eximbank (a public corporation offering export finance support programs for American-made products) financing, letters of credit and collection services. Wholesale Products Group's net income in the first quarter of 1998 decreased $19 million, or 21%. Net interest income declined due to lower core deposit balances and lower recoveries on loans where interest had previously been applied to principal. A significant portion of the increase in noninterest income was due to income from foreign exchange and trust and investment services. Noninterest expense increased primarily due to expense recoveries in 1997. Consumer Lending offers a full array of consumer loan products, including credit cards, transportation (auto, recreational vehicle, marine) financing, home equity lines and loans, lines of credit and installment loans. The loan portfolio for the first quarter averaged $22.8 billion, consisting of $4.8 billion in credit cards, $10.9 billion in equity/unsecured loans and $7.1 billion in transportation financing. This compares with $5.3 billion in credit cards, $11.9 billion in equity/unsecured loans and $7.1 billion in transportation financing in first quarter 1997. In April 1998, Wells Fargo entered into a letter of intent to sell its mortgage servicing business to GMAC Mortgage Corporation. (See page 33 for additional information.) Consumer Lending's net income for the first quarter of 1998 increased $22 million, or 27%. Net interest income decreased due to lower credit card and equity/unsecured loan balances and higher interest losses related to an increase in loans charged off in the consumer portfolio which were partially offset by higher spreads on credit cards and higher auto lease volume. The increase in noninterest income was due largely to higher fee income on credit cards. 15 The Other category includes the Company's 1-4 family first mortgage portfolio, the investment securities portfolio, goodwill and the nonqualifying core deposit intangible, the difference between the normalized provision for the line groups and the Company provision for loan losses, the net impact of transfer pricing loan and deposit balances, the cost of external debt, the elimination of intergroup noninterest income and expense, and any residual effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage interest rate sensitivity. The net loss for the Other category for the quarter ended March 31, 1998 increased by $26 million from 1997. Net interest income in the first quarter of 1998 reflects the impact of lower investment securities and lower first mortgage balances, which was partially offset by lower funding costs. Noninterest expense improved due to merger-related cost savings in the systems and other support groups. In 1997, the Financial Accounting Standards Board (FASB) issued FAS 131, Disclosures about Segments of an Enterprise and Related Information. The Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. While that is the basis of the above line of business presentation, this Statement requires it to be part of the annual audited financial statements effective year-end 1998. 16 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1,130 million in the first quarter of 1998, compared with $1,216 million in the first quarter of 1997. The Company's net interest margin was 6.01% in the first quarter of 1998, compared with 6.14% in the first quarter of 1997. The Company expects the net interest margin to remain in the area of 6.0% for the remainder of 1998. Interest income included hedging income of $18 million in the first quarter of 1998, compared with $25 million in the first quarter of 1997. Interest expense included hedging expense of $3 million in the first quarter of 1998, compared with $1 million in the same quarter of 1997. Individual components of net interest income and the net interest margin are presented in the rate/yield table on page 18. Loans averaged $65.1 billion in the first quarter of 1998, compared with $65.5 billion in the first quarter of 1997. The Company anticipates overall loan growth for the remainder of 1998, particularly in the commercial portfolio. This growth is expected to be partially offset by declines due to decreased credit card marketing efforts and continuing run-off in the residential mortgage and direct auto loan portfolios, where the Company has withdrawn from the business of being an active originator. Investment securities averaged $9.1 billion during the first quarter of 1998, a 31% decrease from $13.1 billion in the first quarter of 1997. The decrease was predominantly due to maturities. Average core deposits were $69.9 billion and $77.6 billion and funded 73% and 74% of the Company's average total assets in the first quarter of 1998 and 1997, respectively. The decrease in average core deposits from the first quarter of 1997 was largely due to net run-off. In addition, a significant portion of the decrease was due to sales of branches in 1997, including $1.6 billion of core deposits. 17
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2) - ----------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ---------------------------------------------------------------------- 1998 1997 -------------------------------- --------------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ----------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 428 5.69% $ 6 $ 374 5.43% $ 5 Investment securities at fair value (3): U.S. Treasury securities 2,466 6.08 37 2,916 6.04 43 Securities of U.S. government agencies and corporations 3,991 6.61 65 6,703 6.41 107 Private collateralized mortgage obligations 2,180 6.71 37 3,134 6.57 52 Other securities 487 7.36 8 368 6.35 6 -------- ------ -------- ------ Total investment securities at fair value 9,124 6.53 147 13,121 6.36 208 Loans: Commercial 20,019 9.13 451 18,406 8.98 409 Real estate 1-4 family first mortgage 8,668 7.50 162 10,236 7.41 189 Other real estate mortgage 12,138 9.19 275 11,550 10.89 310 Real estate construction 2,339 9.66 56 2,299 9.75 55 Consumer: Real estate 1-4 family junior lien mortgage 5,720 9.53 135 6,170 9.30 142 Credit card 4,835 14.98 181 5,330 14.07 188 Other revolving credit and monthly payment 7,078 9.15 160 8,271 9.27 189 -------- ------ -------- ------ Total consumer 17,633 10.87 476 19,771 10.57 519 Lease financing 4,165 8.73 91 3,079 8.84 68 Foreign 105 8.33 2 152 7.34 3 -------- ------ -------- ------ Total loans 65,067 9.39 1,513 65,493 9.57 1,553 Other 1,148 7.46 21 706 6.25 11 -------- ------ -------- ------ Total earning assets $75,767 8.99 1,687 $79,694 8.99 1,777 -------- ------ -------- ------ -------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,725 1.47 6 $ 1,913 1.14 5 Market rate and other savings 30,476 2.68 202 34,103 2.55 214 Savings certificates 15,182 5.16 193 15,518 5.05 193 Other time deposits 281 4.90 3 180 3.94 2 Deposits in foreign offices 379 5.22 5 559 5.13 7 -------- ------ -------- ------ Total interest-bearing deposits 48,043 3.46 409 52,273 3.27 421 Federal funds purchased and securities sold under repurchase agreements 2,984 5.45 40 2,425 5.18 31 Commercial paper and other short-term borrowings 460 5.97 7 230 5.07 2 Senior debt 1,912 6.31 30 2,001 6.19 31 Subordinated debt 2,578 7.10 46 2,939 6.92 51 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 7.80 25 1,251 7.85 25 -------- ------ -------- ------ Total interest-bearing liabilities 57,276 3.94 557 61,119 3.72 561 Portion of noninterest-bearing funding sources 18,491 -- -- 18,575 -- -- -------- ------ -------- ------ Total funding sources $75,767 2.98 557 $ 79,694 2.85 561 -------- ------ -------- ------ -------- ------ -------- ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (4) 6.01% $1,130 6.14% $1,216 ---- ------ ---- ------ ---- ------ ---- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 6,808 $ 9,956 Goodwill 6,990 7,306 Other 5,693 8,474 -------- -------- Total noninterest-earning assets $19,491 $ 25,736 -------- -------- -------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $22,475 $ 26,088 Other liabilities 2,724 4,370 Preferred stockholders' equity 275 548 Common stockholders' equity 12,508 13,305 Noninterest-bearing funding sources used to fund earning assets (18,491) (18,575) -------- -------- Net noninterest-bearing funding sources $19,491 $ 25,736 -------- -------- -------- -------- TOTAL ASSETS $95,258 $105,430 -------- -------- -------- -------- - ------------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50%, and 8.27% for the quarters ended March 31, 1998 and 1997, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.66%, and 5.57% for the same quarters, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. The average amortized cost balances for investment securities at fair value totaled $9,022 million and $13,116 million for the quarters ended March 31, 1998 and 1997, respectively. (4) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for both quarters presented. 18 NONINTEREST INCOME
- ---------------------------------------------------------------------------------------------------- Quarter ended March 31, -------------------- % (in millions) 1998 1997 Change - ---------------------------------------------------------------------------------------------------- Fees and commissions: Credit card membership and other credit card fees $ 66 $ 45 47 % ATM network fees 44 39 13 Charges and fees on loans 41 31 32 Debit and credit card merchant fees 21 22 (5) Mutual fund and annuity sales fees 21 16 31 All other (1) 62 61 2 ---- ---- Total fees and commissions 255 214 19 Service charges on deposit accounts 208 221 (6) Trust and investment services income: Asset management and custody fees 63 61 3 Mutual fund management fees 45 40 13 All other 6 8 (25) ---- ---- Total trust and investment services income 114 109 5 Investment securities gains 5 4 25 Income from equity investments accounted for by the: Cost method 50 51 (2) Equity method 15 16 (6) Check printing charges 18 17 6 Gains on sales of loans 36 6 500 Gains (losses) from dispositions of operations (3) 7 -- Losses on dispositions of premises and equipment (9) (30) (70) All other 37 25 48 ---- ---- Total $726 $640 13 % ---- ---- --- ---- ---- --- - ----------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $24 million for purchased mortgage servicing rights and the related amortization expense of $18 million for both quarters presented. (See page 33 for additional information.) Credit card membership and other credit card fees increased $21 million, or 47%, from the first quarter of 1997 reflecting an industry trend of increased fees. The increase in trust and investment services income for the first quarter ended March 31, 1998 reflected the growth in assets under management from $57.4 billion at March 31, 1997 to $67.9 billion at March 31, 1998. The majority of this increase was 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 and its affiliate, BNY Western Trust Company. Trust and investment services income for the first quarter of 1998 generated by the Corporate Trust and Institutional Custody businesses was approximately $.5 million, compared with $11.1 million for the first quarter of 1997. 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 37 mutual funds consisting of $24.5 billion of assets at March 31, 1998, compared with 42 mutual funds consisting of $19.6 billion of assets (including 14 Overland Express Funds consisting of $5.2 billion of assets) at March 31, 1997. In addition to managing Stagecoach Funds, the Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $127 billion and $191 billion at March 31, 1998 and 1997, respectively. The 19 decrease in assets managed and maintained was due to the sale of the Institutional Custody businesses which was substantially completed in the last half of 1997. The increase in gains on sales of loans is primarily due to gains from the securitization of commercial mortgage loans. The Company expects to complete at least two such securitizations of loans during the remainder of 1998. At December 31, 1997, the Company had a liability of $48 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with branches not acquired as a result of the acquisition of First Interstate Bancorp (First Interstate) or with First Interstate branches that were identified in the fourth quarter of 1997 for closure in 1998. Of this amount, $21 million represented the balance of the fourth-quarter 1996 accrual related to 32 traditional branches in California and $27 million represented the fourth-quarter 1997 accrual for the disposition of 33 traditional branches located mostly outside of California. Of the total 65 branches, three branches were closed in the first quarter of 1998. The remaining balance of $46 million at March 31, 1998 is for the expected closure of 62 branches by year-end 1998. (See Note 2 to Financial Statements for other, former First Interstate branch dispositions.) At March 31, 1998, the Company had 920 traditional branches, 546 in-store branches, 376 banking centers and 33 business centers. Motor banking facilities ("motorbanks") were available at 45 of the traditional branches. 20 NONINTEREST EXPENSE
- -------------------------------------------------------------------------------- Quarter ended March 31, ------------------- % (in millions) 1998 1997 Change - -------------------------------------------------------------------------------- Salaries $ 305 $ 341 (11)% Incentive compensation 53 41 29 Employee benefits 91 95 (4) Equipment 98 94 4 Net occupancy 101 102 (1) Goodwill 81 83 (2) Core deposit intangible: Nonqualifying (1) 52 54 (4) Qualifying 8 8 -- Operating losses 31 42 (26) Contract services 65 56 16 Telecommunications 31 38 (18) Security 22 22 -- Postage 19 23 (17) Outside professional services 20 15 33 Advertising and promotion 21 13 62 Stationery and supplies 14 21 (33) Travel and entertainment 16 14 14 Check printing 12 15 (20) Outside data processing 13 13 -- Foreclosed assets 5 (9) -- All other 34 36 (6) ------ ------ Total $1,092 $1,117 (2)% ------ ------ --- ------ ------ --- - --------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. Salaries expense decreased $36 million in the first quarter of 1998 due to reduced staff levels. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 32,414 at March 31, 1998, compared with 34,486 at March 31, 1997. Goodwill and CDI amortization resulting from the acquisition of First Interstate on April 1, 1996 were $72 million and $52 million, respectively, for the quarter ended March 31, 1998, compared with $74 million and $54 million, respectively, for the quarter ended March 31, 1997. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be $199 million, $178 million and $162 million, respectively. The related impact on income tax expense is expected to be a benefit of $81 million, $72 million and $66 million in 1998, 1999 and 2000, respectively. The Company has determined that a significant number of its computer software applications will need to be reprogrammed or, to a far lesser extent, replaced in order to maintain their functionality as the year 2000 approaches. A comprehensive plan has been developed, with system conversions and testing to be substantially completed by December 31, 1998. Additionally, the Company continues to communicate with significant customers and vendors 21 to determine the extent of risk created by those third parties' failure to remediate their own Year 2000 issue. However, it is not possible, at present, to determine the financial effect if significant customer and vendor remediation efforts are not resolved in a timely manner. Cumulative charges to noninterest expense for incremental costs associated with the Year 2000 issue were approximately $30 million, including approximately $20 million in the first quarter of 1998. The Company currently estimates that it will incur (and expense) additional incremental, out-of-pocket costs in the area of $90 million. Other costs associated with the redeployment of internal systems technology resources to the Year 2000 issue are expected to be significantly less than the incremental costs. In February 1998, the FASB issued FAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which will be effective for the year-end 1998 financial statements. FAS 132 only addresses disclosure issues; it does not address measurement and recognition of pensions and other postretirement benefits. FAS 132 requires the reconciliation of changes in benefit obligation and plan assets for both pensions and other postretirement benefits, showing the effects of the major components separately for each reconciliation. FAS 132 will be adopted at year-end 1998 and is not expected to materially change the Company's current pension and other postretirement disclosures. 22 EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI The following table reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for the quarter ended March 31, 1998:
- ---------------------------------------------------------------------------------------------------- Quarter ended (in millions) March 31, 1998 - ---------------------------------------------------------------------------------------------------- Amortization ----------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ---------------------------------------------------------------------------------------------------- Income before income tax expense $ 581 $ 81 $ 52 $ 714 Income tax expense 266 -- 21 287 ----- ---- ---- ----- Net income 315 81 31 427 Preferred stock dividends 4 -- -- 4 ----- ---- ---- ----- Net income applicable to common stock $ 311 $ 81 $ 31 $ 423 ----- ---- ---- ----- ----- ---- ---- ----- Earnings per common share $3.62 $.94 $.36 $4.92 ----- ---- ---- ----- ----- ---- ---- ----- Diluted earnings per common share $3.58 $.94 $.36 $4.88 ----- ---- ---- ----- ----- ---- ---- ----- - ----------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended March 31, 1998 were calculated as follows:
- ---------------------------------------------------------------------------------------------------------- Quarter ended (in millions) March 31, 1998 - ---------------------------------------------------------------------------------------------------------- ROA: A*/ (C-E) = 1.98% ROE: B*/ (D-E) = 37.46% Efficiency: (F-G) / H = 51.72% Net income $ 427 (A) Net income applicable to common stock 423 (B) Average total assets 95,258 (C) Average common stockholders' equity 12,508 (D) Average goodwill ($6,990) and after-tax nonqualifying core deposit intangible ($944) 7,934 (E) Noninterest expense 1,092 (F) Amortization expense for goodwill and nonqualifying core deposit intangible 133 (G) Net interest income plus noninterest income 1,853 (H) - ----------------------------------------------------------------------------------------------------------
* Annualized These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" or "tangible" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows on page 5 for other information regarding funds available for use by management. 23 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES The following table provides the cost and fair value for the major components of available-for-sale securities carried at fair value:
- -------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, 1998 1997 1997 ------------------ ------------------ ------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - -------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $2,243 $2,258 $2,535 $2,549 $ 2,847 $ 2,830 Securities of U.S. government agencies and corporations (1) 3,731 3,766 4,390 4,425 6,423 6,388 Private collateralized mortgage obligations (2) 2,166 2,175 2,390 2,396 3,102 3,065 Other 399 407 441 453 310 309 ------- ------ ------- ------- ------- ------- Total debt securities 8,539 8,606 9,756 9,823 12,682 12,592 Marketable equity securities 43 70 40 65 18 42 ------- ------ ------- ------- ------- ------- Total $8,582 $8,676 $9,796 $9,888 $12,700 $12,634 ------- ------ ------- ------- ------- ------- ------- ------ ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages. The available-for-sale portfolio includes both debt and marketable equity securities. At March 31, 1998, the available-for-sale securities portfolio had an unrealized net gain of $94 million, or less than 2% of the cost of the portfolio, comprised of unrealized gross gains of $107 million and unrealized gross losses of $13 million. 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 March 31, 1997, the available-for-sale securities portfolio had an unrealized net loss of $66 million, comprised of unrealized gross losses of $120 million and unrealized gross gains of $54 million. The unrealized net gain or loss on available-for-sale securities is included as a separate component of cumulative other comprehensive income in stockholders' equity. At March 31, 1998, the amount included in cumulative other comprehensive income on a net of tax basis was an unrealized net gain of $56 million, compared with an unrealized net gain of $55 million at December 31, 1997 and an unrealized net loss of $40 million at March 31, 1997. The major portion of the unrealized net gain in the available-for-sale portfolio at March 31, 1998 was due to investments in mortgage-backed securities. This unrealized net gain reflected current interest rates that were lower than those at the time the investments were purchased. The Company may decide to sell certain of the available-for-sale securities to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities). 24 Realized gross gains resulting from the sale of available-for-sale securities were $5 million and $4 million in the first three months of 1998 and 1997, respectively. Realized gross losses in both periods were zero. The following table provides the expected remaining maturities and yields (taxable-equivalent basis) of debt securities within the investment portfolio.
- ------------------------------------------------------------------------------------------------------ March 31, 1998 ---------------------------------------------------------------------- Expected remaining principal maturity ---------------------------------------------------------------------- Weighted average expected After one year Weighted remaining Within one year through five years Total average maturity --------------- ------------------ (in millions) amount yield (in yrs.-mos.) Amount Yield Amount Yield - -------------------------------------------------------------------------------------------------------- U.S. Treasury securities $2,243 6.07% 1-2 $1,063 5.80% $1,179 6.32% Securities of U.S. government agencies and corporations 3,731 6.69 2-3 1,631 6.93 1,703 6.50 Private collateralized mortgage obligations 2,166 6.70 1-6 1,063 6.90 1,036 6.34 Other 399 8.01 4-2 52 7.04 212 7.61 ------ ------ ------ TOTAL COST OF DEBT SECURITIES(1) $8,539 6.59% 1-10 $3,809 6.61% $4,130 6.47% ------ ---- ---- ------ ---- ------ ---- ------ ---- ---- ------ ---- ------ ---- ESTIMATED FAIR VALUE $8,606 $3,826 $4,169 ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------ - ---------------------------------------------------------------------- March 31, 1998 -------------------------------------- Expected remaining principal maturity -------------------------------------- After five years through ten years After ten years ----------------- --------------- (in millions) Amount Yield Amount Yield - ---------------------------------------------------------------------- U.S. Treasury securities $ 1 6.70% $-- --% Securities of U.S. government agencies and corporations 330 6.81 67 5.24 Private collateralized mortgage obligations 64 8.14 3 29.96 Other 117 8.91 18 9.67 ---- --- TOTAL COST OF DEBT SECURITIES(1) $512 7.46% $88 6.99% ---- ---- --- ---- ---- ---- --- ---- ESTIMATED FAIR VALUE $519 $92 ---- --- ---- --- - ----------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of available-for-sale securities carried at fair value. The weighted average expected remaining maturity of the debt securities portfolio was 1 year and 10 months at March 31, 1998, compared with 1 year and 11 months at December 31, 1997 and 2 years and 3 months at March 31, 1997. The short-term debt securities portfolio serves to maintain asset liquidity and to fund loan growth. At March 31, 1998, mortgage-backed securities included in securities of U.S. government agencies and corporations primarily consisted of pass-through securities and collateralized mortgage obligations (CMOs) and substantially all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $5,941 million, or 68%, of the Company's investment securities portfolio at March 31, 1998. The CMO securities held by the Company (including the private issues) are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. As an indication of interest rate risk, the Company has estimated the impact of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on this rate scenario, mortgage-backed securities would decrease in fair value from $5,941 million to $5,751 million and the expected remaining maturity of these securities would increase from 1 year and 11 months to 2 years and 4 months. 25 LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------ % Change Mar. 31, 1998 from -------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------ Commercial (1)(2) $20,424 $20,144 $19,025 1% 7% Real estate 1-4 family first mortgage 8,349 8,869 10,032 (6) (17) Other real estate mortgage (3) 11,722 12,186 11,497 (4) 2 Real estate construction 2,383 2,320 2,243 3 6 Consumer: Real estate 1-4 family junior lien mortgage 5,588 5,865 6,112 (5) (9) Credit card 4,675 5,039 5,232 (7) (11) Other revolving credit and monthly payment 6,982 7,185 7,984 (3) (13) ------- ------- ------- Total consumer 17,245 18,089 19,328 (5) (11) Lease financing 4,274 4,047 3,152 6 36 Foreign 107 79 159 35 (33) ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $833, $832 and $598) $64,504 $65,734 $65,436 (2)% (1)% ------- ------- ------- --- -- ------- ------- ------- --- -- - ------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $1,805 million, $1,772 million and $968 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,432 million, $1,599 million and $1,282 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. (3) Includes agricultural loans that are secured by real estate of $338 million, $343 million and $332 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------ % Change Mar. 31, 1998 from -------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------ Commercial loans to real estate developers and REITs (1) $ 1,805 $ 1,772 $ 968 2% 86% Other real estate mortgage 11,722 12,186 11,497 (4) 2 Real estate construction 2,383 2,320 2,243 3 6 ------- ------- ------- Total $15,910 $16,278 $14,708 (2)% 8% ------- ------- ------- -- --- ------- ------- ------- -- --- Nonaccrual loans $ 236 $ 252 $ 330 (6)% (28)% ------- ------- ------- -- --- ------- ------- ------- -- --- Nonaccrual loans as a % of total 1.5% 1.5% 2.2% ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 26 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------ Nonaccrual loans: Commercial (2)(3) $163 $155 $199 Real estate 1-4 family first mortgage 89 104 97 Other real estate mortgage (4) 208 228 306 Real estate construction 28 23 24 Consumer: Real estate 1-4 family junior lien mortgage 12 17 16 Other revolving credit and monthly payment 3 1 1 Lease financing -- -- 2 ---- ---- ---- Total nonaccrual loans (5) 503 528 645 Restructured loans (6) 9 9 10 ---- ---- ---- Nonaccrual and restructured loans 512 537 655 As a percentage of total loans .8% .8% 1.0% Foreclosed assets 155 158 207 Real estate investments (7) 4 4 5 ---- ---- ---- Total nonaccrual and restructured loans and other assets $671 $699 $867 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes loans (primarily unsecured) to real estate developers and REITs of none, $1 million and none at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. (3) Includes agricultural loans of $12 million, $13 million and $18 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. (4) Includes agricultural loans secured by real estate of $13 million, $13 million and $10 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. (5) Of the total nonaccrual loans, $313 million, $321 million and $419 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (6) In addition to originated loans that were subsequently restructured, there were loans of $23 million, $23 million and $50 million at March 31, 1998, December 31, 1997 and March 31, 1997 that were purchased at a steep discount whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. Of the total restructured loans and loans purchased at a steep discount, $23 million, $23 million and $50 million were considered impaired under FAS 114 at March 31, 1998, December 31, 1997 and March 31, 1997. (7) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were loans. Real estate investments totaled $162 million, $172 million and $158 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. The table below summarizes the changes in total nonaccrual loans.
- ------------------------------------------------------------------------ MARCH 31, March 31, (in millions) 1998 1997 - ------------------------------------------------------------------------ BALANCE, BEGINNING OF QUARTER $528 $714 New loans placed on nonaccrual 66 107 Charge-offs (2) (52) Payments (83) (120) Transfers to foreclosed assets (3) (1) Loans returned to accrual (3) (3) ---- ---- BALANCE, END OF QUARTER $503 $645 ---- ---- ---- ---- - ------------------------------------------------------------------------
27 The Company generally identifies loans to be evaluated for impairment under FAS 114 (Accounting by Creditors for Impairment of a Loan) when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 150 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. Not all impaired loans are necessarily placed on nonaccrual status. That is, restructured loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. The average recorded investment in impaired loans was $333 million during the first quarter of 1998 and $480 million during the first quarter of 1997. Total interest income recognized on impaired loans was $3 million during the first quarter of 1998 and $5 million during the first quarter of 1997. The interest income for all periods was recorded using the cash method. 28 The table below shows the recorded investment in impaired loans by loan category at March 31, 1998, December 31, 1997 and March 31, 1997:
- ------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------ Commercial $108 $103 $122 Real estate 1-4 family first mortgage 2 2 2 Other real estate mortgage (1) 196 216 320 Real estate construction 27 22 23 Other 3 1 2 ---- ---- ---- Total (2) $336 $344 $469 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $250 $256 $362 Discounted cash flow method 62 61 79 Historical loss factors 24 27 28 ---- ---- ---- $336 $344 $469 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------
(1) Includes accruing loans of $23 million, $23 million and $50 million purchased at a steep discount at March 31, 1998, December 31, 1997 and March 31, 1997 whose contractual terms were modified after acquisition. The modified terms did not affect the book balance nor the yields expected at the date of purchase. (2) Includes $24 million, $27 million and $28 million of impaired loans (with a related FAS 114 allowance of $2 million) at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates normal influxes of nonaccrual loans as it further increases its lending activity as well as resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be impacted by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on its policies. 29 The table below summarizes the changes in foreclosed assets.
- ------------------------------------------------------------------------ MARCH 31, March 31, (in millions) 1998 1997 - ------------------------------------------------------------------------ BALANCE, BEGINNING OF QUARTER $158 $219 Additions 20 25 Sales (23) (34) Charge-offs (2) (3) Write-downs (2) (1) Other 4 1 ---- ---- BALANCE, END OF QUARTER $155 $207 ---- ---- ---- ---- - ------------------------------------------------------------------------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual because they are automatically charged off after being past due for a prescribed period (generally, 180 days). Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 150 days of becoming past due and such nonaccrual loans are excluded from the following table.
- ------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------ Commercial $ 13 $ 8 $ 29 Real estate 1-4 family first mortgage 38 35 45 Other real estate mortgage 7 5 28 Real estate construction -- 1 3 Consumer: Real estate 1-4 family junior lien mortgage 40 42 32 Credit card 135 133 139 Other revolving credit and monthly payment 13 19 20 ---- ---- ---- Total consumer 188 194 191 ---- ---- ---- Total $246 $243 $296 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------
30 ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------ Quarter ended March 31, ----------------------- (in millions) 1998 1997 - ------------------------------------------------------------------------ BALANCE, BEGINNING OF QUARTER $1,828 $2,018 Provision for loan losses 180 105 Loan charge-offs: Commercial (1) (49) (69) Real estate 1-4 family first mortgage (4) (5) Other real estate mortgage -- (8) Real estate construction (1) (1) Consumer: Real estate 1-4 family junior lien mortgage (3) (6) Credit card (118) (115) Other revolving credit and monthly payment (55) (56) ------ ------ Total consumer (176) (177) Lease financing (11) (10) ------ ------ Total loan charge-offs (241) (270) ------ ------ Loan recoveries: Commercial (2) 19 13 Real estate 1-4 family first mortgage 3 1 Other real estate mortgage 9 22 Real estate construction -- 1 Consumer: Real estate 1-4 family junior lien mortgage 2 2 Credit card 11 11 Other revolving credit and monthly payment 16 16 ------ ------ Total consumer 29 29 Lease financing 3 3 ------ ------ Total loan recoveries 63 69 ------ ------ Total net loan charge-offs (178) (201) ------ ------ BALANCE, END OF QUARTER $1,830 $1,922 ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) 1.11% 1.23% ------ ------ ------ ------ Allowance as a percentage of total loans 2.84% 2.94% ------ ------ ------ ------ - ------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate developers and REITs for either quarter presented. (2) Includes recoveries from loans (primarily unsecured) to real estate developers and REITs of none and $1 million in the quarters ended March 31, 1998 and 1997, respectively. 31 The table below presents net charge-offs by loan category.
- ------------------------------------------------------------------------------------------------ Quarter ended March 31, ------------------------------------------ 1998 1997 -------------------- ------------------- % OF % of AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) - ------------------------------------------------------------------------------------------------ Commercial $ 30 .61% $ 56 1.17% Real estate 1-4 family first mortgage 1 .08 4 .16 Other real estate mortgage (9) (.28) (14) (.47) Real estate construction 1 .07 -- -- Consumer: Real estate 1-4 family junior lien mortgage 1 .11 4 .26 Credit card 107 8.95 104 7.92 Other revolving credit and monthly payment 39 2.16 40 1.94 ---- ---- Total consumer 147 3.36 148 3.05 Lease financing 8 .83 7 .86 ---- ---- Total net loan charge-offs $178 1.11% $201 1.23% ---- ---- ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. The commercial loan category includes net charge-offs for the commercial loan component of small business loans of $33 million (or 3.31% of average small business loans in this category), compared with $34 million (or 3.43%) in the fourth quarter of 1997 and $19 million (or 2.18%) in the first quarter of 1997. During the last half of 1997, the period of charging off past due loans for the Business Direct product within this portfolio was changed from 180 to 120 days. The target market for small business loans is expected to experience higher loss rates on a recurring basis than is the case with loans to middle market and corporate borrowers, and such loans are priced at appropriately higher spreads. The largest category of net charge-offs in the first quarter of 1998 and 1997 was credit card loans, comprising 60% and 52%, respectively, of total net charge-offs. During the first quarter of 1998, credit card gross charge-offs due to bankruptcies were $46 million, or 39%, of total credit card gross charge-offs, compared with $46 million, or 40%, in the fourth quarter of 1997 and $45 million, or 39%, in the first quarter of 1997. In addition, credit card loans 30 to 89 days past due and still accruing totaled $154 million at March 31, 1998, compared with $173 million at December 31, 1997 and $189 million at March 31, 1997. The total amount of credit card charge-offs is expected to decline modestly over the remainder of 1998 compared to prior year levels. However, due to run-off in portfolio outstandings, the percentage of net charge-offs to average credit card loans is expected to continue for the remainder of 1998 at a level consistent with or slightly higher than prior year levels. The Company considers the allowance for loan losses of $1,830 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at March 31, 1998. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company made a $180 million provision in the first quarter of 1998. To maintain the allowance 32 at its approximate current level, the Company anticipates that it will continue to make a provision for loan losses of about $180 million for each quarter of 1998, which is expected to approximate net charge-offs. OTHER ASSETS
- --------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1998 1997 1997 - --------------------------------------------------------------------------------------- Nonmarketable equity investments $1,125 $1,113 $1,090 Trading assets 791 815 230 Net deferred tax asset 175 209 540 Certain identifiable intangible assets 482 479 493 Foreclosed assets 155 158 207 Other 1,074 1,175 2,186 ------ ------ ------ Total other assets $3,802 $3,949 $4,746 ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------
Income from nonmarketable equity investments accounted for using the cost method was $50 million and $51 million in the first quarter of 1998 and 1997, respectively. Trading assets consist predominantly of securities, including corporate debt and U.S. government agency obligations. Gains from trading assets were $20 million and $16 million in the first quarter of 1998 and 1997, respectively. The Company estimates that approximately $170 million of the $175 million net deferred tax asset at March 31, 1998 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $5 million primarily relates to net deductions that are expected to reduce future state taxable income. The Company believes that it is more likely than not that it will have sufficient future state taxable income to fully utilize these deductions. The amount of the total deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward periods are reduced. Included in certain identifiable intangible assets were purchased mortgage servicing rights of $303 million, $292 million and $287 million at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. In April 1998, Wells Fargo entered into a letter of intent to sell its mortgage servicing business to GMAC Mortgage Corporation. The transaction is anticipated to close in the second quarter, although there is no assurance that the transaction will be completed. 33 The other identifiable intangible assets included in other assets are generally amortized using an accelerated method, which is based on estimated useful lives ranging from 5 to 15 years. Amortization expense was $6 million and $7 million for the quarters ended March 31, 1998 and 1997, respectively. DEPOSITS
- --------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 1998 1997 1997 - --------------------------------------------------------------------------------------- Noninterest-bearing $24,421 $23,953 $25,337 Interest-bearing checking 2,412 2,155 2,350 Market rate and other savings 30,121 29,940 33,055 Savings certificates 15,087 15,349 15,414 ------- ------- ------- Core deposits 72,041 71,397 76,156 Other time deposits 223 205 173 Deposits in foreign offices 52 597 98 ------- ------- ------- Total deposits $72,316 $72,199 $76,427 ------- ------- ------- ------- ------- ------- - ---------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The decrease in the Company's total RBC ratio at March 31, 1998 compared with March 31, 1997 was primarily due to a decrease in subordinated debt. The increase in the Company's leverage ratio at March 31, 1998 compared with March 31, 1997 was predominantly due to a decrease in quarterly average total assets. 34 The table below presents the Company's risk-based capital and leverage ratios.
- ------------------------------------------------------------------------------------------ MAR. 31, Dec. 31, Mar. 31, (in billions) 1998 1997 1997 - ------------------------------------------------------------------------------------------ Tier 1: Common stockholders' equity $12.5 $12.6 $13.2 Preferred stock .3 .3 .4 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.3 1.2 Goodwill and other deductions (1) (8.0) (8.1) (8.4) ----- ----- ----- Total Tier 1 capital 6.1 6.1 6.4 ----- ----- ----- Tier 2: Preferred securities in excess of Tier 1 limitation -- -- .1 Mandatory convertible debt .1 .1 .2 Subordinated debt and unsecured senior debt 1.9 2.0 2.2 Allowance for loan losses allowable in Tier 2 1.0 1.0 1.0 ----- ----- ----- Total Tier 2 capital 3.0 3.1 3.5 ----- ----- ----- Total risk-based capital $ 9.1 $ 9.2 $ 9.9 ----- ----- ----- ----- ----- ----- Risk-weighted balance sheet assets $75.9 $77.6 $79.0 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.4 9.4 10.1 Standby letters of credit 1.5 1.6 1.7 Other 1.1 .7 .6 ----- ----- ----- Total risk-weighted off-balance sheet items 12.0 11.7 12.4 ----- ----- ----- Goodwill and other deductions (1) (8.0) (8.1) (8.4) Allowance for loan losses not included in Tier 2 (.8) (.8) (.9) ----- ----- ----- Total risk-weighted assets $79.1 $80.4 $82.1 ----- ----- ----- ----- ----- ----- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 7.76% 7.61% 7.80% Total capital (8% minimum requirement) 11.58 11.49 12.05 Leverage ratio (3% minimum requirement) (2) 7.04% 6.95% 6.61% - ------------------------------------------------------------------------------------------
(1) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on available-for-sale investment securities carried at fair value. (2) Tier 1 capital divided by quarterly average total assets (excluding goodwill, nonqualifying CDI and other items which were deducted to arrive at Tier 1 capital). Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At March 31, 1998, the Bank had a Tier 1 RBC ratio of 8.23%, a combined Tier 1 and Tier 2 ratio of 11.27% and a leverage ratio of 7.06%. 35 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. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk;" it is the Company's main source of interest rate risk and is significantly more difficult to quantify and manage than term structure risk. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of option pricing models, in the case of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The Company uses four standard scenarios - rates unchanged, expected rates, high rates and low rates - in analyzing interest rate sensitivity. The expected scenario is based on the Company's projected future interest rates, while the high-rate and low-rate scenarios cover 90% probable upward and downward rate movements based on the Company's own interest rate models. The current interest rate risk limit using the net interest income simulation allows up to 30 basis points (.30%) of sensitivity in the expected average net interest margin over the next 12 months. As of March 31, 1998, the simulation showed a decline in the net interest margin of 6 basis points (.06%, or $46 million decline in net interest income over the next 12 months) for the low-rate scenario case relative to the expected case. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures indicated by the net interest income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. 36 DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value of the Company's derivative financial instruments at March 31, 1998 and December 31, 1997.
- ---------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 1998 December 31, 1997 ----------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT (2) VALUE amount amount (2) value - ---------------------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $20,242 $232 $161 $16,301 $233 $174 Futures 5,765 -- -- 6,259 -- -- Floors purchased (1) 21,785 67 67 20,727 63 63 Caps purchased (1) 226 1 1 240 1 1 Options purchased 49 -- -- 42 -- -- Foreign exchange contracts: Forwards (1) 113 1 1 57 1 1 CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 3,628 17 4 3,158 13 4 Futures 3,655 -- -- 2,387 -- -- Floors purchased (1) 1,083 16 16 1,141 13 13 Caps purchased (1) 2,732 4 4 2,836 8 8 Floors written 1,066 -- (16) 1,122 -- (13) Caps written 2,715 -- (5) 2,871 -- (8) Options purchased(1) -- -- -- 37 -- -- Options written(1) -- -- -- 27 -- -- Forwards (1) 63 1 1 59 2 2 Foreign exchange contracts: Forwards and spots (1) 2,641 29 3 1,853 29 3 Options purchased (1) 93 2 2 110 -- -- Options written 78 -- (2) 110 -- -- - ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these or the underlying financial instruments. (2) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps and interest rate swap agreements. The contractual or notional amounts of derivatives do not represent amounts exchanged by the parties and therefore are not a measure of exposure through the use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives. The contractual or notional amounts do not represent exposure to liquidity risk. The Company is not a dealer but an end-user of these instruments and does not use them speculatively. The Company also offers contracts to its customers, but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. 37 The Company also enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivative financial instruments. The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts (except futures contracts and floor, cap and option contracts written for which credit risk is DE MINIMUS) through credit approvals, limits and monitoring procedures. Credit risk related to derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. As the Company generally enters into transactions only with high quality counterparties, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. LIQUIDITY MANAGEMENT Liquidity for the Parent Company and its subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, and through dividends from subsidiaries and lines of credit. In 1996, the Company filed a shelf registration with the Securities and Exchange Commission (SEC) that allows for the issuance of $3.5 billion of senior or subordinated debt or preferred stock. The proceeds from the sale of any securities will be used for general corporate purposes. As of March 31, 1998, the Company had issued $.2 billion of preferred stock and $.7 billion of medium-term notes under this shelf registration, with $2.6 billion of securities remaining unissued. In 1996, the Company also filed a universal shelf registration statement with the SEC that allowed 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. As of March 31, 1998, the Company had issued $550 million of trust preferred securities and $200 million remained unissued under this shelf registration. In April 1998, the Company issued $200 million of subordinated debt under this shelf registration. 38 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on April 21, 1998. (b) Each of the persons named in the Proxy Statement as a nominee for director was elected; and the selection of KPMG Peat Marwick LLP as the Company's independent auditors for 1998 was ratified. The following are the voting results on each of the matters:
Against For or Withheld Abstentions ---------- ----------- ----------- (1) Election of Directors H. Jesse Arnelle 73,362,414 451,992 -- Michael R. Bowlin 69,896,713 3,917,693 -- Edward M. Carson 73,398,818 415,588 -- William S. Davila 73,369,374 445,032 -- Rayburn S. Dezember 73,402,576 411,830 -- Paul Hazen 73,371,578 442,828 -- Robert K. Jaedicke 73,378,075 436,331 -- Thomas L. Lee 73,411,091 403,315 -- Philip J. Quigley 69,925,293 3,889,113 -- Donald B. Rice 69,935,962 3,878,444 -- Susan G. Swenson 69,901,427 3,912,979 -- Daniel M. Tellep 69,905,662 3,908,744 -- Chang-Lin Tien 73,384,846 429,560 -- John A. Young 69,921,081 3,893,325 -- (2) Ratification of KPMG Peat Marwick LLP as independent auditors for 1998. 73,473,967 232,104 108,335
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(ii) By-Laws 4 The Company hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of securities of the Company. 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 39 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.98 and 2.06 for the quarters ended March 31, 1998 and 1997, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.21 and 4.66 for the quarters ended March 31, 1998 and 1997, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 1.96 and 2.00 for the quarters ended March 31, 1998 and 1997, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.05 and 4.20 for the quarters ended March 31, 1998 and 1997, respectively. (b) The Company filed the following reports on Form 8-K during the first quarter of 1998 and through the date hereof: (1) 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 (2) March 20, 1998 under Item 5, providing information about the beneficial ownership by Oppenheimer Capital of the Common Stock of the Company (3) April 3, 1998 under Item 5, announcing that on April 2, 1998 Wells Fargo Bank, N.A. and GMAC Mortgage Corporation entered into a letter of intent with respect to the acquisition by GMAC Mortgage of Wells Fargo's mortgage servicing business (4) April 21, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended March 31, 1998 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 1998. WELLS FARGO & COMPANY By: FRANK A. MOESLEIN ----------------------------------------- Frank A. Moeslein Executive Vice President and Controller (Principal Accounting Officer) 40 EX-3.(II) 2 EXHIBIT 3(II) BY-LAWS OF WELLS FARGO & COMPANY (A DELAWARE CORPORATION), AS AMENDED APRIL 21, 1998 -------------- ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of stockholders of Wells Fargo & Company (the "corporation") shall be held on the third Tuesday of April in each year at such time of day as may be fixed by the Board of Directors, at the principal office of the corporation, if not a bank holiday, and if a bank holiday then on the next succeeding business day at the same hour and place, or at such other time, date or place, within or without the State of Delaware, as may be determined by the Board of Directors. At such meeting, Directors shall be elected, reports of the affairs of the corporation may be considered, and any other proper business may be transacted. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders, unless otherwise regulated by statute, for any purpose or purposes whatsoever, may be called at any time by the Board of Directors, the Chairman of the Board, the President, the Chief Executive Officer (if other than the Chairman of the Board or the President), or one or more stockholders holding not less than 10 percent of the voting power of the corporation. Such meetings may be held at any place within or without the State of Delaware designated by the Board of Directors of the corporation. SECTION 3. NOTICE OF MEETINGS. Notice of all meetings of the stockholders, both annual and special, shall be given by the Secretary in writing to stockholders entitled to vote. A notice may be given either personally or by mail or other means of written communication, charges prepaid, addressed to any stockholder at his address appearing on the books of the corporation or at the address given by such stockholder to the corporation for the purpose of notice. Notice of any meeting of stockholders shall be sent to each stockholder entitled thereto not less than 10 nor more than 60 days prior to such meeting. Such notice shall state the place, date and hour of the meeting and shall also state (i) in the case of a special meeting, the general nature of the business to be transacted and that no other business may be transacted, (ii) in the case of an annual meeting, those matters which the Board of Directors intends at the time of the mailing of the notice to present for stockholder action and that any other proper matter may be presented for stockholder action to the meeting, and (iii) in the case of any meeting at which Directors are to be elected, the names of the nominees which the management intends at the time of the mailing of the notice to present for election. SECTION 4. QUORUM. Except as otherwise provided by law, the presence of the holders of a majority of the stock issued and outstanding present in person or represented by proxy and entitled to vote is requisite and shall constitute a quorum for the transaction of business at all meetings of the stockholders, and the vote of a majority of such stock present and voting at a duly held meeting at which there is a quorum present shall decide any question brought before such meeting. SECTION 5. VOTING. Unless otherwise provided in the Certificate of Incorporation, every stockholder shall be entitled to one vote for every share of stock standing in his name on the books of the corporation, and may vote either in person or by proxy. ARTICLE II DIRECTORS SECTION 1. NUMBER, TERM. The property, business and affairs of the corporation shall be managed and all corporate power shall be exercised by or under the direction of the Board of Directors as from time to time constituted. The number of Directors of this corporation shall be not less than 10 nor more than l7, the exact number within the limits so specified to be fixed from time to time by a By-Law adopted by the stockholders or by the Board of Directors. Until some other number is so fixed, the number of Directors shall be 14. The term of office of each Director shall be from the time of his election until the annual meeting next succeeding his election and until his successor shall have been duly elected, or until his death, resignation or lawful removal pursuant to the provisions of the General Corporation Law of Delaware. SECTION 2. POWERS. In addition to the powers expressly conferred by these By-Laws, the Board of Directors may exercise all corporate powers and do such lawful acts and things as are 2 not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or approved by the stockholders. SECTION 3. COMPENSATION. Directors and Advisory Directors (as provided in Section 12 of this Article) as such may receive such compensation, if any, as the Board of Directors by resolution may direct, including salary or a fixed sum plus expenses, if any, for attendance at meetings of the Board of Directors or of its committees. SECTION 4. ORGANIZATIONAL MEETING. An organizational meeting of the Board of Directors shall be held each year on the day of the annual meeting of stockholders of the corporation for the purpose of electing officers, the members of the Formal Committees provided in Section 11 of this Article and the Advisory Directors provided in Section 12 of this Article, and for the transaction of any other business. Said organizational meeting shall be held without any notice other than this By-Law. SECTION 5. PLACE OF MEETINGS. The Board of Directors shall hold its meetings at the main office of the corporation or at such other place as may from time to time be designated by the Board of Directors or by the chief executive officer. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors will be held on the third Tuesday of each month (except for the months of August and December) at the later of the following times: (i) 10:30 a.m. or (ii) immediately following the adjournment of any regular meeting of the Board of Directors of Wells Fargo Bank, National Association, held on the same day. If the day of any regular meeting shall fall upon a bank holiday, the meeting shall be held at the same hour on the first day following which is not a bank holiday. No call or notice of a regular meeting need be given unless the meeting is to be held at a place other than the main office of the corporation. SECTION 7. SPECIAL MEETINGS. Special meetings shall be held when called by the chief executive officer or at the written request of four Directors. SECTION 8. QUORUM; ADJOURNED MEETINGS. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. A majority of the Directors present, whether or not a quorum, may adjourn any meeting to another time and place, provided that, if the meeting is adjourned for more than 30 days, notice of the adjournment shall be given in accordance with these By-Laws. 3 SECTION 9. NOTICE, WAIVERS OF NOTICE. Notice of special meetings and notice of regular meetings held at a place other than the head office of the corporation shall be given to each Director, and notice of the adjournment of a meeting adjourned for more than 30 days shall be given prior to the adjourned meeting to all Directors not present at the time of the adjournment. No such notice need specify the purpose of the meeting. Such notice shall be given four days prior to the meeting if given by mail or on the day preceding the day of the meeting if delivered personally or by telephone, facsimile, telex or telegram. Such notice shall be addressed or delivered to each Director at such Director's address as shown upon the records of the corporation or as may have been given to the corporation by the Director for the purposes of notice. Notice need not be given to any Director who signs a waiver of notice (whether before or after the meeting) or who attends the meeting without protesting the lack of notice prior to its commencement. All such waivers shall be filed with and made a part of the minutes of the meeting. SECTION 10. TELEPHONIC MEETINGS. A meeting of the Board of Directors or of any Committee thereof may be held through the use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in such a meeting shall constitute presence at such meeting. SECTION 11. WRITTEN CONSENTS. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as the unanimous vote of the Directors. SECTION 12. RESIGNATIONS. Any Director may resign his position as such at any time by giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. Such resignation shall take effect as of the time such notice is given or as of any later time specified therein and the acceptance thereof shall not be necessary to make it effective. SECTION 13. VACANCIES. Vacancies in the membership of the Board of Directors shall be deemed to exist (i) in case of the death, resignation or removal of any Director, (ii) if the authorized number of Directors is increased, or (iii) if the stockholders fail, at a meeting of stockholders at which Directors are elected, to elect the full authorized number of 4 Directors to be elected at that meeting. Vacancies in the membership of the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The stockholders may elect a Director at any time to fill any vacancy not filled by the Directors. SECTION 14. COMMITTEES OF THE BOARD OF DIRECTORS. By resolution adopted by a majority of the authorized number of Directors, the Board of Directors may designate one or more Committees to act as or on behalf of the Board of Directors. Each such Committee shall consist of one or more Directors designated by the Board of Directors to serve on such Committee at the pleasure of the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any Committee, which alternate members may replace any absent member at any meeting of such Committee. In the absence or disqualification of a member of a Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any Committee, to the extent provided in the resolution of the Board of Directors, these By-Laws or the Certificate of Incorporation, may have all the authority of the Board of Directors, except with respect to: (i) amending the Certificate of Incorporation (except that a Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommending to the stockholders the sale, lease or exchange of all or substantialy all of the corporation's property and assets, (iv) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amending these By-Laws. 5 Included among the Committees shall be the following: (a) EXECUTIVE COMMITTEE. There shall be an Executive Committee consisting of the Chairman of the Board, presiding, and not less than seven additional Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. Subject to such limitations as may from time to time be imposed by the Board of Directors or as are imposed by these By-Laws, the Executive Committee shall have the fullest authority to act for and on behalf of the corporation, and it shall have all of the powers of the Board of Directors which, under the law, it is possible for a Board of Directors to delegate to such a committee, including the supervision of the general management, direction and superintendence of the business and affairs of the corporation and the power to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. (b) COMMITTEE ON EXAMINATIONS AND AUDITS. There shall be a Committee on Examinations and Audits consisting of not less than three Directors who are not officers of the corporation and who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of this Committee (i) to make, or cause to be made, in accordance with the procedures from time to time approved by the Board of Directors, internal examinations and audits of the affairs of the corporation and the affairs of any subsidiary which by resolution of its board of directors has authorized the Committee on Examinations and Audits to act hereunder, (ii) to make recommendations to the Board of Directors of the corporation and of each such subsidiary with respect to the selection of and scope of work for the independent auditors for the corporation and for each subsidiary, (iii) to review, or cause to be reviewed in accordance with procedures from time to time approved by the Board of Directors, all reports of internal examinations and audits, all audit-related reports made by the independent auditors for the corporation and each such subsidiary and all reports of examination of the corporation and of any subsidiary made by regulatory authorities, (iv) from time to time, to review and discuss with the management, and independently with the General Auditor, the Risk Control Officer and the independent auditors, the accounting and reporting principles, policies and practices employed by the corporation and its subsidiaries and the adequacy of their accounting, financial, operating and administrative controls, including the review and approval of any policy statements relating thereto, and (v) to perform such other duties as the Board of Directors may from time to time assign to it. The Committee on Examinations and Audits shall submit reports of its findings, 6 conclusions and recommendations, if any, to the Board of Directors. (c) MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE. There shall be a Management Development and Compensation Committee consisting of not less than six directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise and none of whom shall be eligible to participate in either the Wells Fargo & Company Stock Appreciation Rights Plan, the Wells Fargo & Company Stock Option Plan the Wells Fargo & Company Employee Stock Purchase Plan or any similar employee stock plan (or shall have been so eligible within the year next preceding the date of becoming a member of the Management Development and Compensation Committee). It shall be the duty of the Management Development and Compensation Committee, and it shall have authority, (i) to advise the Chief Executive Officer concerning the corporation's salary policies, (ii) to administer such compensation programs as from time to time are delegated to it by the Board of Directors, (iii) to accept or reject the recommendations of the Chief Executive Officer with respect to all salaries in excess of such dollar amount or of officers of such grade or grades as the Board of Directors may from time to time by resolution determine to be appropriate and (iv) upon the request of any subsidiary which by resolution of its board of directors has authorized the Management Development and Compensation Committee to act hereunder, to advise its chief executive officer concerning such subsidiary's salary policies and compensation programs. (d) NOMINATING COMMITTEE. There shall be a Nominating Committee consisting of not less than three Directors, who shall be elected by the Board of Directors at its organizational meeting or otherwise. It shall be the duty of the Nominating Committee, annually and in the event of vacancies on the Board of Directors, to nominate candidates for election to the Board of Directors. Each Committee member shall serve until the organizational meeting of the Board of Directors held on the day of the annual meeting of stockholders in the year next following his or her election and until his or her successor shall have been elected, but any such member may be removed at any time by the Board of Directors. Vacancies in any of said committees, however created, shall be filled by the Board of Directors. A majority of the members of any such committee shall be necessary to constitute a quorum and sufficient for the transaction of business, and any act of a majority present at a meeting of any such committee at which there is a quorum present shall be the act of such committee. Subject to these By-Laws and the authority of the Board of Directors, each committee shall have the power to 7 determine the form of its organization. The provisions of these By-Laws governing the calling, notice and place of special meetings of the Board of Directors shall apply to all meetings of any Committee unless such committee fixes a time and place for regular meetings, in which case notice for such meeting shall be unnecessary. The provisions of these By-Laws regarding actions taken by the Board of Directors, however called or noticed, shall apply to all meetings of any Committee. Each committee shall cause to be kept a full and complete record of its proceedings, which shall be available for inspection by any Director. There shall be presented at each meeting of the Board of Directors a summary of the minutes of all proceedings of each committee since the preceding meeting of the Board of Directors. ARTICLE III OFFICERS SECTION 1. ELECTION OF EXECUTIVE OFFICERS. The corporation shall have (i) a Chairman of the Board, (ii) a President, (iii) a Secretary and (iv) a Chief Financial Officer. The Corporation also may have a Vice Chairman of the Board, one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Controller, a Treasurer, one or more Assistant Vice Presidents, one or more Assistant Treasurers, one or more Assistant Secretaries, a General Auditor, a Risk Control Officer, and such other officers as the Board of Directors, or the Chief Executive Officer or any officer or committee whom he may authorize to perform this duty, may from time to time deem necessary or expedient for the proper conduct of business by the corporation. The Chairman of the Board, the Vice Chairman of the Board, if any, and the President shall be elected from among the members of the Board of Directors. The following offices shall be filled only pursuant to election by the Board of Directors: Chairman of the Board, Vice Chairman of the Board, President, Vice Chairman, Executive Vice President, Senior Vice President, Secretary, Controller, Treasurer, General Auditor and Risk Control Officer. Other officers may be appointed by the Chief Executive Officer or by any officer or committee whom he may authorize to perform this duty. All officers shall hold office at will, at the pleasure of the Board of Directors, the Chief Executive Officer, the officer or committee having the authority to appoint such officers, and the officer or committee authorized by the Chief Executive Officer to remove such officers, and may be removed at any time, with or without notice and with or without cause. No authorization by the Chief Executive Officer to perform such duty of appointment or removal shall be effective unless done in 8 writing and signed by the Chief Executive Officer. Two or more offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the Chief Executive Officer of the corporation. As Chief Executive Officer, he shall (i) exercise, and be responsible to the Board of Directors for, the general supervision of the property, affairs and business of the corporation, (ii) report at each meeting of the Board of Directors upon all matters within his knowledge which the interests of the corporation may require to be brought to its notice, (iii) prescribe, or to the extent he may deem appropriate designate an officer or committee to prescribe, the duties, authority and signing power of all other officers and employees of the corporation and (iv) exercise, subject to these By-Laws, such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall, subject to these By-Laws, exercise such powers and perform such duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board and the President, the Vice Chairman of the Board shall preside over the meetings of the stockholders and the Board of Directors. SECTION 4. PRESIDENT. The President shall, subject to these By-Laws, be the chief operating officer of the corporation and shall exercise such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. In the absence of the Chairman of the Board, the President shall preside over the meetings of the stockholders and the Board of Directors. SECTION 5. ABSENCE OR DISABILITY OF CHIEF EXECUTIVE OFFICER. In the absence or disability of the Chairman of the Board, the President shall act as Chief Executive Officer. In the absence or the disability of both the Chairman of the Board and the President, the Vice Chairman of the Board shall act as Chief Executive Officer. In the absence of the Chairman of the Board, the President and the Vice Chairman of the Board, the officer designated by the Board of Directors, or if there be no such designation the officer designated by the Chairman of the Board, shall act as Chief Executive Officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as Chief Executive Officer in his 9 absence or disability and in the absence or disability of the President and the Vice Chairman of the Board. SECTION 6. EXECUTIVE VICE PRESIDENTS; SENIOR VICE PRESIDENTS; VICE PRESIDENTS. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have all such powers and duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. SECTION 7. SECRETARY. The Secretary shall keep a full and accurate record of all meetings of the stockholders and of the Board of Directors, and shall have the custody of all books and papers belonging to the corporation which are located in its principal office. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or by these By-Laws. He shall be the custodian of the corporate seal or seals. In general, he shall perform all duties ordinarily incident to the office of a secretary of a corporation, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation, and shall deposit, or cause to be deposited, in the name of the corporation all moneys or other valuable effects in such banks, trust companies, or other depositories as shall from time to time be selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of the financial condition of the corporation. In general, he shall perform all duties ordinarily incident to the office of a chief financial officer of a corporation, and such other duties as may be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 9. GENERAL AUDITOR. The General Auditor shall be responsible to the Board of Directors for evaluating the ongoing operation, and the adequacy, effectiveness and efficiency, of the system of control within the corporation and of each subsidiary which has authorized the Committee on Examinations and Audits to act under Section 14(b) of Article II of these By-Laws. He shall make, or cause to be made, such internal audits and reports of the corporation and each such subsidiary as may be required by the Board of Directors or by the Committee on Examinations and Audits. He shall coordinate the auditing work performed for the corporation and its subsidiaries by public accounting firms and, in connection therewith, he shall determine whether the internal auditing functions being performed within the subsidiaries are adequate. He shall also perform such other duties as the Chief 10 Executive Officer may prescribe, and shall report to the Chief Executive Officer on all matters concerning the safety of the operations of the corporation and of any subsidiary which he deems advisable or which the Chief Executive Officer may request. Additionally, the General Auditor shall have the duty of reporting independently of all officers of the corporation to the Committee on Examinations and Audits at least quarterly on all matters concerning the safety of the operations of the corporation and its subsidiaries which should be brought in such manner through such committee to the attention of the Board of Directors. Should the General Auditor deem any matter to be of especial immediate importance, he shall report thereon forthwith through the Committee on Examinations and Audits to the Board of Directors. SECTION 10. RISK CONTROL OFFICER. The Risk Control Officer shall report to the Board of Directors through its Committee on Examinations and Audits. The Risk Control Officer shall be responsible for directing a number of control related activities principally affecting the Company's credit function and shall have such other duties and responsibilities as shall be prescribed from time to time by the chief executive officer and the Committee on Examinations and Audits. Should the Risk Control Officer deem any matter to be of special importance, the Risk Control Officer shall report thereon forthwith through the Committee to the Board of Directors. ARTICLE IV INDEMNIFICATION SECTION 1. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding or investigation, whether civil, criminal or administrative, and whether external or internal to the corporation (other than a judicial action or suit brought by or in the right of the corporation), by reason of the fact that he or she is or was an Agent (as hereinafter defined) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Agent in connection with such action, suit or proceeding, or any appeal therein, if the Agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding -- whether by judgment, order, settlement, conviction, or upon a 11 plea of nolo contendere or its equivalent -- shall not, of itself, create a presumption that the Agent did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, that the Agent had reasonable cause to believe that his or her conduct was unlawful. For purposes of this Article, an "Agent" shall be: (i) any director, officer or employee of the corporation; (ii) any person who, being or having been such a director, officer or employee, is or was serving on behalf of the corporation at the request of an authorized officer of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise; or (iii) any person who is or was serving on behalf of the corporation at the request of the Chairman of the Board or the President of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. SECTION 2. ACTION, ETC. BY OR IN THE RIGHT OF THE CORPORATION. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent (as defined above) against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense, settlement or appeal of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. DETERMINATION OF RIGHT OF INDEMNIFICATION OR CONTRIBUTION. Unless otherwise ordered by a court, any indemnification under Section 1 or 2, and any contribution under Section 6, of this Article shall be made by the corporation to an Agent unless a determination is reasonably and promptly made, either (i) by the Board of Directors acting by a majority vote of a quorum consisting of Directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or if obtainable and such quorum so directs, by 12 independent legal counsel in a written opinion, or (iii) by the stockholders, that such Agent acted in bad faith and in a manner that such Agent did not believe to be in or not opposed to the best interests of the corporation or, with respect to any criminal proceeding, that such Agent believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 4. ADVANCES OF EXPENSES. Except as limited by Section 5 of this Article, costs, charges and expenses (including attorneys' fees) incurred by an Agent in defense of any action, suit, proceeding or investigation of the nature referred to in Section 1 or 2 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter; provided, however, that if the General Corporation Law of Delaware then so requires, such payment shall be made only if the Agent shall undertake to reimburse the corporation for such payment in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. SECTION 5. RIGHT OF AGENT TO INDEMNIFICATION OR ADVANCE UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification under Section 1 or 2, or advance under Section 4, of this Article shall be made promptly and in any event within 90 days, upon the written request of the Agent, unless with respect to an application under said Sections 1 or 2 an adverse determination is reasonably and promptly made pursuant to Section 3 of this Article or unless with respect to an application under said Section 4 an adverse determination is made pursuant to said Section 4. The right to indemnification or advances as granted by this Article shall be enforceable by the Agent in any court of competent jurisdiction if the Board of Directors or independent legal counsel improperly denies the claim, in whole or in part, or if no disposition of such claim is made within 90 days. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any action, suit or proceeding in advance of its final disposition where any required undertaking has been tendered to the corporation) that the Agent has not met the standards of conduct which would require the corporation to indemnify or advance the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including the Board of Directors, independent legal counsel and the stockholders) to have made a determination prior to the commencement of such action that indemnification of the Agent is proper in the circumstances because he or she has met the applicable standard of conduct, nor an actual determination by the corporation (including the Board of Directors, independent legal counsel and the stockholders) that the Agent had not met such applicable standard of conduct, shall be a defense to the 13 action or create a presumption that the Agent had not met the applicable standard of conduct. The Agent's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation. SECTION 6. CONTRIBUTION. In the event that the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an Agent in whole or in part, then in respect of any threatened, pending or completed action, suit or proceeding in which the corporation is jointly liable with the Agent (or would be if joined in such action, suit or proceeding), to the extent permitted by the General Corporation Law of Delaware the corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by the Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the corporation on the one hand and the Agent on the other from the transaction from which such action, suit or proceeding arose and (ii) the relative fault of the corporation on the one hand and of the Agent on the other in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the corporation on the one hand and of the Agent on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. SECTION 7. OTHER RIGHTS AND REMEDIES. Indemnification under this Article shall be provided regardless of when the events alleged to underlie any action, suit or proceeding may have occurred, shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification and advancement of expenses under this Article shall be deemed to be provided by a contract between the corporation and the Agent who serves as such at any time while these By-Laws and other relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. SECTION 8. INSURANCE. Upon resolution passed by the Board of Directors, the corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would have the power 14 to indemnify such person against such liability under the provisions of this Article. The corporation may create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 9. CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the corporation" include all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer or employee of such a constituent corporation or who, being or having been such a director, officer or employee, is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would if he or she had served the resulting or surviving corporation in the same capacity. SECTION 10. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S REQUEST. For purposes of this Article, references to "other enterprise" in Sections 1 and 9 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service by an Agent as director, officer, employee, trustee or agent of the corporation which imposes duties on, or involves services by, such Agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the corporation" for purposes of this Article. SECTION 11. SAVINGS CLAUSE. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees, judgments, fines and amounts paid in settlement with respect to any action, suit, appeal, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by the applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 15 SECTION 12. ACTIONS INITIATED BY AGENT. Anything to the contrary in this Article notwithstanding, the corporation shall indemnify any Agent in connection with an action, suit or proceeding initiated by such Agent (other than actions, suits, or proceedings commenced pursuant to Section 5 of this Article) only if such action, suit or proceeding was authorized by the Board of Directors. SECTION 13. STATUTORY AND OTHER INDEMNIFICATION. Notwithstanding any other provision of this Article, the corporation shall indemnify any Agent and advance expenses incurred by such Agent in any action, suit or proceeding of the nature referred to in Section 1 or 2 of this Article to the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, except that no amount shall be paid pursuant to this Article: (i) in the event of an adverse determination pursuant to Section 3 of this Article; (ii) in respect of remuneration to the extent that it shall be determined to have been paid in violation of law; (iii) in respect of amounts owing under Section 16(b) of the Securities Exchange Act of 1934; or (iv) in contravention of any federal law or applicable regulation of any federal bank regulatory agency. The rights to indemnification and advancement of expenses provided by any provision of this Article, including without limitation those rights conferred by the preceding sentence, shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification or advancement of expenses may be entitled under any provision of any law, certificate of incorporation, by-law, agreement or by any vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while serving as an Agent. The corporation may also provide indemnification and advancement of expenses to other persons or entities to the extent deemed appropriate. ARTICLE V MISCELLANEOUS SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year. SECTION 2. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate representing the number of shares of the stock of the corporation owned by such stockholder and the class or series of such shares. Each certificate shall be signed in the name of the corporation by (i) the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and (ii) 16 the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. Any of the signatures on the certificate may be facsimile. Prior to due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner for any share of stock of the corporation shall be treated as the person exclusively entitled to vote, to receive notice, and to exercise all other rights and receive all other entitlements of a stockholder with respect to such share, except as may be provided otherwise by law. SECTION 3. EXECUTION OF WRITTEN INSTRUMENTS. All written instruments shall be binding upon the corporation if signed on its behalf by (i) any two of the following officers: the Chairman of the Board, the President, the Vice Chairman of the Board, the Vice Chairmen or the Executive Vice Presidents; or (ii) any one of the foregoing officers signing jointly with any Senior Vice President. Whenever any other officer or person shall be authorized to execute any agreement, document or instrument by resolution of the Board of Directors, or by the Chief Executive Officer, or by any two of the officers identified in the immediately preceding sentence, such execution by such other officer or person shall be equally binding upon the corporation. SECTION 4. SUBSIDIARY. As used in these By-Laws the term "subsidiary" or "subsidiaries" means any corporation 25 percent or more of whose voting shares is directly or indirectly owned or controlled by the corporation, or any other affiliate of the corporation designated in writing as a subsidiary of the corporation by the Chief Executive Officer of the corporation. All such written designations shall be filed with the Secretary of the corporation. SECTION 5. AMENDMENTS. These By-Laws may be altered, amended or repealed by a vote of the stockholders entitled to exercise a majority of the voting power of the corporation, by written consent of such stockholders or by the Board of Directors. SECTION 6. ANNUAL REPORT. The Board of Directors shall cause an annual report to be sent to the stockholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of stockholders to be held during the ensuing fiscal year. SECTION 7. CONSTRUCTION. Unless the context clearly requires it, nothing in these By-Laws shall be construed as a limitation on any powers or rights of the corporation, its Directors or its officers provided by the General Corporation Law of Delaware. Unless the context otherwise requires, the General 17 Corporation Law of Delaware shall govern the construction of these By-Laws. SECTION 8. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors or any committee thereof, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors or such committee shall approve, including, without limitation, a pledge of shares of stock of the corporation. This Section shall not be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. SECTION 9. NOTICES; WAIVERS. Whenever, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, such provision shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile, telex or telegram. A waiver in writing of any such required notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 18 EX-11 3 EXHIBIT 11 EXHIBIT 11 WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- ---------------------------------------------------------------------------- Quarter ended March 31, --------------- (in millions) 1998 1997 - ---------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Net income $ 315 $ 339 Less preferred dividends 4 10 ----- ----- Net income for calculating earnings per common share $ 311 $ 329 ----- ----- ----- ----- Average common shares outstanding 85.8 90.8 ----- ----- ----- ----- EARNINGS PER COMMON SHARE $3.62 $3.62 ----- ----- ----- ----- DILUTED EARNINGS PER COMMON SHARE Net income $ 315 $ 339 Less preferred dividends 4 10 ----- ----- Net income for calculating diluted earnings per common share $ 311 $ 329 ----- ----- ----- ----- Average common shares outstanding 85.8 90.8 Add exercise of options, warrants and share rights, reduced by the number of shares that could have been purchased with the proceeds from such exercise .8 1.1 ----- ----- Diluted average common shares outstanding 86.6 91.9 ----- ----- ----- ----- DILUTED EARNINGS PER COMMON SHARE $3.58 $3.58 ----- ----- ----- ----- - ----------------------------------------------------------------------------
EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q DATED MAY 14, 1998 FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 8,303 0 111 791 8,676 0 0 64,504 1,830 94,820 72,316 1,392 2,673 5,559 0 275 426 12,102 94,820 1,512 145 27 1,684 410 557 1,127 180 5 1,092 581 315 0 0 315 3.62 3.58 6.01 503 246 9 0 1,828 241 63 1,830 0 0 0 AMOUNT REPRESENTS BASIC EARNINGS PER COMMON SHARE PURSUANT TO FAS 128.
EX-99.(A) 5 EXHIBIT 99(A) EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- ----------------------------------------------------------------------------- Quarter ended March 31, ----------------- (in millions) 1998 1997 - ----------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 581 $ 630 Fixed charges 591 594 ------ ------ $1,172 $1,224 ------ ------ ------ ------ Fixed charges (1): Interest expense $ 557 $ 561 Estimated interest component of net rental expense 34 33 ------ ------ $ 591 $ 594 ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 1.98 2.06 ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 581 $ 630 Fixed charges 181 172 ------ ------ $ 762 $ 802 ------ ------ ------ ------ Fixed charges: Interest expense $ 557 $ 561 Estimated interest component of net rental expense 34 33 Less interest on deposits 410 422 ------ ------ $ 181 $ 172 ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 4.21 4.66 ------ ------ ------ ------ - -----------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-99.(B) 6 EXHIBIT 99(B) EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ----------------------------------------------------------------------------------- Quarter ended March 31, ----------------- (in millions) 1998 1997 - ----------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 581 $ 630 Fixed charges 591 594 ------ ------ $1,172 $1,224 ------ ------ ------ ------ Preferred dividend requirement $ 4 $ 10 Ratio of income before income tax expense to net income 1.84 1.86 ------ ------ Preferred dividends (2) $ 7 $ 19 ------ ------ Fixed charges (1): Interest expense 557 561 Estimated interest component of net rental expense 34 33 ------ ------ 591 594 ------ ------ Fixed charges and preferred dividends $ 598 $ 613 ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 1.96 2.00 ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 581 $ 630 Fixed charges 181 172 ------ ------ $ 762 $ 802 ------ ------ ------ ------ Preferred dividends (2) $ 7 $ 19 ------ ------ Fixed charges: Interest expense 557 561 Estimated interest component of net rental expense 34 33 Less interest on deposits 410 422 ------ ------ 181 172 ------ ------ Fixed charges and preferred dividends $ 188 $ 191 ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 4.05 4.20 ------ ------ ------ ------ - -----------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. -----END PRIVACY-ENHANCED MESSAGE-----