-----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, S/9hFoVYyqSpqDRdLyMPzGvD6aEFL//lF1FmZXh2rLbKsUYd7QxAovvrThODrYC+ Ucfe67hQa8rhk2jTHhyADw== 0001047469-98-042027.txt : 19981124 0001047469-98-042027.hdr.sgml : 19981124 ACCESSION NUMBER: 0001047469-98-042027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 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: 98757588 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 8004114932 MAIL ADDRESS: STREET 1: 343 SANSOME ST 3RD FL STREET 2: WELLS FARGO BANK CITY: SAN FRANCISCO STATE: CA ZIP: 94163 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 Commission file number 1-6214 ------------------------ WFC HOLDINGS CORPORATION (SUCCESSOR TO WELLS FARGO & COMPANY) (Exact name of Registrant as specified in its charter) Delaware 41-1921346 (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 October 31, 1998 ------------------ Common stock, $5 par value 87,794,370
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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Financial Data........................................... 7 Overview......................................................... 8 Merger with Norwest Corporation.................................. 10 Earnings Performance............................................. 11 Net Interest Income............................................ 11 Noninterest Income............................................. 14 Noninterest Expense............................................ 16 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI ...... 19 Balance Sheet Analysis........................................... 20 Investment Securities.......................................... 20 Loan Portfolio................................................. 22 Commercial real estate...................................... 22 Nonaccrual and Restructured Loans and Other Assets............. 23 Loans 90 days past due and still accruing................... 26 Allowance for Loan Losses...................................... 27 Other Assets................................................... 29 Deposits....................................................... 30 Capital Adequacy/Ratios........................................ 30 Derivative Financial Instruments............................... 32 Liquidity Management........................................... 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 33 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................. 35 SIGNATURE.................................................................. 36
- ------------------------------------------------------------------------------- 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. WFC Holdings Corporation (the Company) cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, customer disintermediation, technology changes (including the Year 2000 issue) and economic conditions and competition in the geographic and business areas in which the Company conducts its operations. The interim financial information should be read in conjunction with the Company's 1997 Annual Report on Form 10-K. 1 PART I - FINANCIAL INFORMATION WFC HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------ Quarter Nine months ended September 30, ended September 30, ------------------------ ------------------------ (in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Federal funds sold and securities purchased under resale agreements $ 16 $ 3 $ 32 $ 15 Investment securities 128 175 403 573 Loans 1,497 1,513 4,524 4,570 Other 26 16 69 39 ------ ------ ------ ------ Total interest income 1,667 1,707 5,028 5,197 ------ ------ ------ ------ INTEREST EXPENSE Deposits 407 430 1,219 1,280 Federal funds purchased and securities sold under repurchase agreements 16 44 76 109 Commercial paper and other short-term borrowings 4 5 14 12 Senior and subordinated debt 68 75 217 234 Guaranteed preferred beneficial interests in Company's subordinated debentures 25 25 76 75 ------ ------ ------ ------ Total interest expense 520 579 1,602 1,710 ------ ------ ------ ------ NET INTEREST INCOME 1,147 1,128 3,426 3,487 Provision for loan losses 160 175 510 420 ------ ------ ------ ------ Net interest income after provision for loan losses 987 953 2,916 3,067 ------ ------ ------ ------ NONINTEREST INCOME Fees and commissions 274 246 801 694 Service charges on deposit accounts 235 214 665 649 Trust and investment services income 115 117 343 338 Investment securities gains (losses) 18 (1) 41 6 Other 95 101 347 309 ------ ------ ------ ------ Total noninterest income 737 677 2,197 1,996 ------ ------ ------ ------ NONINTEREST EXPENSE Salaries 299 308 907 964 Incentive compensation 61 54 175 143 Employee benefits 73 80 244 256 Equipment 96 97 294 289 Net occupancy 96 96 295 292 Goodwill 80 81 242 245 Core deposit intangible 55 64 172 193 Operating losses 23 40 79 262 Other 305 267 869 806 ------ ------ ------ ------ Total noninterest expense 1,088 1,087 3,277 3,450 ------ ------ ------ ------ INCOME BEFORE INCOME TAX EXPENSE 636 543 1,836 1,613 Income tax expense 289 253 837 756 ------ ------ ------ ------ NET INCOME $ 347 $ 290 $ 999 $ 857 ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCK $ 343 $ 285 $ 986 $ 836 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS PER COMMON SHARE $ 4.03 $ 3.26 $11.55 $ 9.38 ------ ------ ------ ------ ------ ------ ------ ------ DILUTED EARNINGS PER COMMON SHARE $ 3.99 $ 3.23 $11.44 $ 9.28 ------ ------ ------ ------ ------ ------ ------ ------ DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.30 $ 3.90 $ 3.90 ------ ------ ------ ------ ------ ------ ------ ------ Average common shares outstanding 85.2 87.5 85.4 89.1 ------ ------ ------ ------ ------ ------ ------ ------ Diluted average common shares outstanding 85.9 88.4 86.2 90.1 ------ ------ ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------------
2 WFC HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, (in millions) 1998 1997 1997 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 6,538 $ 8,169 $ 7,823 Federal funds sold and securities purchased under resale agreements 1,080 82 188 Securities available for sale 8,242 9,888 10,737 Loans 64,374 65,734 65,104 Allowance for loan losses 1,833 1,828 1,823 ------- ------- ------- Net loans 62,541 63,906 63,281 ------- ------- ------- Due from customers on acceptances 103 98 104 Accrued interest receivable 502 507 537 Premises and equipment, net 1,913 2,117 2,173 Core deposit intangible 1,537 1,709 1,771 Goodwill 6,757 7,031 7,149 Other assets 3,602 3,949 3,892 ------- ------- ------- Total assets $92,815 $97,456 $97,655 ------- ------- ------- ------- ------- ------- LIABILITIES Noninterest-bearing deposits $22,542 $23,953 $23,005 Interest-bearing deposits 47,227 48,246 47,917 ------- ------- ------- Total deposits 69,769 72,199 70,922 Federal funds purchased and securities sold under repurchase agreements 1,419 3,576 4,268 Commercial paper and other short-term borrowings 451 249 458 Acceptances outstanding 103 98 104 Accrued interest payable 241 175 245 Other liabilities 2,519 2,403 2,574 Senior debt 1,284 1,983 2,280 Subordinated debt 2,530 2,585 2,585 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 1,299 1,299 STOCKHOLDERS' EQUITY Preferred stock 275 275 275 Common stock - $5 par value, authorized 150,000,000 shares; issued and outstanding 85,237,292 shares, 86,152,779 shares and 86,780,522 shares 426 431 434 Additional paid-in capital 8,375 8,712 8,925 Retained earnings 4,069 3,416 3,235 Cumulative other comprehensive income 55 55 51 ------- ------- ------- Total stockholders' equity 13,200 12,889 12,920 ------- ------- ------- Total liabilities and stockholders' equity $92,815 $97,456 $97,655 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------
3 WFC HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, -------------------------------------------------------- 1998 1997 ---------------------- --------------------- STOCK- COMPRE- Stock- Compre- HOLDERS' HENSIVE holders' hensive (in millions) EQUITY INCOME equity income - ----------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of period $ 275 $ 600 Preferred stock redeemed -- (325) ------- ------- Balance, end of period 275 275 ------- ------- COMMON STOCK Balance, beginning of period 431 457 Common stock issued under employee benefit and dividend reinvestment plans 2 3 Common stock repurchased (7) (26) ------- ------- Balance, end of period 426 434 ------- ------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 8,712 10,287 Common stock issued under employee benefit and dividend reinvestment plans 85 64 Common stock repurchased (422) (1,426) ------- ------- Balance, end of period 8,375 8,925 ------- ------- RETAINED EARNINGS Balance, beginning of period 3,416 2,749 Net income 999 $999 857 $857 Preferred stock dividends (13) (21) Common stock dividends (333) (350) ------- ------- Balance, end of period 4,069 3,235 ------- ------- CUMULATIVE OTHER COMPREHENSIVE INCOME Balance, beginning of period 55 19 Unrealized gains on investment securities arising during the period, net of tax of $16 million and $19 million 24 24 32 32 Reclassification adjustment for investment securities gains included in net income, net of tax of $17 million and $2 million (24) (24) (4) (4) Foreign currency translation adjustments, net of tax of ($4) million -- -- 4 4 ------- ---- ------- ---- Balance, end of period 55 51 ------- ------- COMPREHENSIVE INCOME $999 $889 ---- ---- ---- ---- Total stockholders' equity $13,200 $12,920 ------- ------- ------- ------- - -----------------------------------------------------------------------------------------------------------------------------------
4 WFC HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------ Nine months ended September 30, ------------------------------ (in millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 999 $ 857 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 510 420 Depreciation and amortization 683 683 Investment securities gains (41) (6) Gains on sales of loans (67) (41) Gains from dispositions of operations (89) (7) Net decrease in accrued interest receivable 5 128 Net increase in accrued interest payable 66 74 Net decrease (increase) in loans originated for sale 174 (75) Other, net (117) 1,227 ------- -------- Net cash provided by operating activities 2,123 3,260 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 558 275 Proceeds from prepayments and maturities 4,038 3,270 Purchases (2,868) (726) Net (increase) decrease in loans resulting from originations and collections (463) 1,755 Proceeds from sales (including participations) of loans 1,237 158 Purchases (including participations) of loans (97) (210) Proceeds from dispositions of operations 473 8 Proceeds from sales of foreclosed assets 115 116 Net increase in federal funds sold and securities purchased under resale agreements (998) (1) Other, net (151) 54 ------- -------- Net cash provided by investing activities 1,844 4,699 ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (2,430) (10,899) Net increase (decrease) in short-term borrowings (1,955) 2,296 Proceeds from issuance of senior debt -- 700 Repayment of senior debt (693) (525) Proceeds from issuance of subordinated debt 250 -- Repayment of subordinated debt (300) (351) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures -- 149 Proceeds from issuance of common stock 87 67 Redemption of preferred stock -- (325) Repurchase of common stock (429) (1,452) Payment of cash dividends on preferred stock (13) (21) Payment of cash dividends on common stock (333) (350) Other, net 218 (1,161) ------- -------- Net cash used by financing activities (5,598) (11,872) ------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (1,631) (3,913) Cash and cash equivalents at beginning of period 8,169 11,736 ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,538 $ 7,823 ------- -------- ------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,536 $ 1,636 Income taxes $ 645 $ 558 Noncash investing activities: Transfers from loans to foreclosed assets $ 73 $ 76 - ------------------------------------------------------------------------------------------------------------------------
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FINANCIAL REVIEW SUMMARY FINANCIAL DATA - ----------------------------------------------------------------------------------------------------------------------------------- % Change Quarter ended Sept. 30, 1998 from Nine months ended ------------------------------ ------------------- ------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions) 1998 1998 1997 1998 1997 1998 1997 Change - ----------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income $ 347 $ 337 $ 290 3% 20% $ 999 $ 857 17% Net income applicable to common stock 343 333 285 3 20 986 836 18 Earnings per common share $ 4.03 $ 3.91 $ 3.26 3 24 $ 11.55 $ 9.38 23 Diluted earnings per common share 3.99 3.87 3.23 3 24 11.44 9.28 23 Dividends declared per common share 1.30 1.30 1.30 -- -- 3.90 3.90 -- Average common shares outstanding 85.2 85.2 87.5 -- (3) 85.4 89.1 (4) Diluted average common shares outstanding 85.9 86.1 88.4 -- (3) 86.2 90.1 (4) Profitability ratios (annualized) Net income to average total assets (ROA) 1.49% 1.45% 1.18% 3 26 1.43% 1.14% 25 Net income applicable to common stock to average common stockholders' equity (ROE) 10.70 10.66 8.94 -- 20 10.48 8.62 22 Efficiency ratio (1) 57.8% 58.2% 60.2% (1) (4) 58.3% 62.9% (7) Average loans $63,638 $64,397 $63,865 (1) -- $64,362 $ 64,653 -- Average assets 92,335 93,148 97,032 (1) (5) 93,570 100,703 (7) Average core deposits 69,608 69,807 70,744 -- (2) 69,756 73,937 (6) Net interest margin 6.18% 6.22% 5.94% (1) 4 6.14% 6.00% 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 $ 452 $ 444 $ 400 2 13 $ 1,319 $ 1,181 12 Earnings per common share 5.31 5.21 4.57 2 16 15.44 13.25 17 Diluted earnings per common share 5.26 5.15 4.52 2 16 15.30 13.11 17 ROA 2.14% 2.11% 1.81% 1 18 2.08% 1.74% 20 ROE 35.64 37.78 35.44 (6) 1 36.92 33.83 9 Efficiency ratio 50.9 51.2 52.6 (1) (3) 51.3 55.4 (7) AT PERIOD END Securities available for sale $ 8,242 $ 8,449 $10,737 (2) (23) $ 8,242 $ 10,737 (23) Loans 64,374 64,320 65,104 -- (1) 64,374 65,104 (1) Allowance for loan losses 1,833 1,835 1,823 -- 1 1,833 1,823 1 Goodwill 6,757 6,837 7,149 (1) (5) 6,757 7,149 (5) Assets 92,815 93,200 97,655 -- (5) 92,815 97,655 (5) Core deposits 69,491 70,209 70,580 (1) (2) 69,491 70,580 (2) Common stockholders' equity 12,925 12,675 12,645 2 2 12,925 12,645 2 Stockholders' equity 13,200 12,950 12,920 2 2 13,200 12,920 2 Tier 1 capital (3) 6,802 6,425 6,005 6 13 6,802 6,005 13 Total capital (Tiers 1 and 2) (3) 9,844 9,491 9,153 4 8 9,844 9,153 8 Capital ratios Common stockholders' equity to assets 13.93% 13.60% 12.95% 2 8 13.93% 12.95% 8 Stockholders' equity to assets 14.22 13.90 13.23 2 7 14.22 13.23 7 Risk-based capital (3) Tier 1 capital 8.47 8.08 7.53 5 12 8.47 7.53 12 Total capital 12.26 11.94 11.47 3 7 12.26 11.47 7 Leverage (3) 8.04 7.53 6.76 7 19 8.04 6.76 19 Book value per common share $151.63 $148.96 $145.72 2 4 $151.63 $ 145.72 4 Staff (active, full-time equivalent) 31,600 31,620 32,663 -- (3) 31,600 32,663 (3) COMMON STOCK PRICE High $392.94 $387.25 $279.88 1 40 $392.94 $ 319.25 23 Low 281.88 329.13 250.13 (14) 13 281.88 246.00 15 Period end 355.00 369.00 275.00 (4) 29 355.00 275.00 29 - -----------------------------------------------------------------------------------------------------------------------------------
(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 $29 million and $884 million, respectively, for the quarter ended September 30, 1998 and $90 million and $913 million, respectively, for the nine months ended September 30, 1998. Goodwill amortization and average balance (which are not tax effected) were $80 million and $6,797 million, respectively, for the quarter ended September 30, 1998 and $242 million and $6,896 million, respectively, for the nine months ended September 30, 1998. (3) See the Capital Adequacy/Ratios section for additional information. 7 OVERVIEW On November 2, 1998, Wells Fargo & Company (the former Wells Fargo) merged (the Merger) with WFC Holdings Corporation, a wholly-owned subsidiary of Norwest Corporation (WFC Holdings), with WFC Holdings as the surviving corporation. In connection with the Merger, Norwest Corporation changed its name to "Wells Fargo & Company." WFC Holdings Corporation (Parent) is a bank holding company whose principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, WFC Holdings Corporation and its subsidiaries are referred to as the Company. Because the Merger occurred after September 30, 1998, this report does not give effect to the Merger. The results presented in this report represent the results of the former Wells Fargo & Company for all periods presented. Net income for the third quarter of 1998 was $347 million, compared with $290 million for the third quarter of 1997, an increase of 20%. Earnings per share for the third quarter of 1998 were $4.03, compared with $3.26 in the third quarter of 1997, an increase of 24%. Net income for the first nine months of 1998 was $999 million, or $11.55 per share, compared with $857 million, or $9.38 per share, for the first nine months of 1997. Return on average assets (ROA) was 1.49% and 1.43% in the third quarter and first nine months of 1998, respectively, compared with 1.18% and 1.14% in the same periods of 1997. Return on average common equity (ROE) was 10.70% and 10.48% in the third quarter and first nine months of 1998, respectively, compared with 8.94% and 8.62% in the same periods of 1997. Earnings before the amortization of goodwill and nonqualifying core deposit intangible ("cash" or "tangible" earnings) in the third quarter and first nine months of 1998 were $5.31 and $15.44 per share, respectively, compared with $4.57 and $13.25 per share in the same periods of 1997. On the same basis, ROA was 2.14% and 2.08% in the third quarter and first nine months of 1998, respectively, compared with 1.81% and 1.74% in the same periods of 1997; ROE was 35.64% and 36.92% in the third quarter and first nine months of 1998, respectively, compared with 35.44% and 33.83% in the same periods of 1997. Net interest income on a taxable-equivalent basis was $1,151 million and $3,435 million in the third quarter and first nine months of 1998, respectively, compared with $1,132 million and $3,497 million in the same periods of 1997. The Company's net interest margin was 6.18% for the third quarter of 1998, compared with 5.94% in the same quarter of 1997 and 6.22% in the second quarter of 1998. The increase in net interest margin for the third quarter of 1998 compared with the same period of 1997 was mostly due to an improvement in the funding mix. Noninterest income was $737 million and $2,197 million in the third quarter and first nine months of 1998, respectively, compared with $677 million and $1,996 million in the same periods of 1997. A significant portion of the increase from a year ago was due to service charges on deposit accounts and higher fees and commissions income. 8 Noninterest expense in the third quarter and first nine months of 1998 was $1,088 million and $3,277 million, respectively, compared with $1,087 million and $3,450 million for the same periods of 1997. The provision for loan losses in the third quarter and first nine months of 1998 was $160 million and $510 million, respectively, compared with $175 million and $420 million for the same periods in 1997. During the third quarter of 1998, net charge-offs totaled $162 million, or 1.01% of average loans (annualized). This compared with $165 million, or 1.02%, during the second quarter of 1998 and $202 million, or 1.25%, during the third quarter of 1997. The allowance for loan losses of $1,833 million was 2.85% of total loans at September 30, 1998 and June 30, 1998, compared with 2.80% at September 30, 1997. Total nonaccrual and restructured loans were $506 million, or .8% of total loans, at September 30, 1998, compared with $537 million, or .8% of total loans, at December 31, 1997 and $574 million, or .9% of total loans, at September 30, 1997. Foreclosed assets amounted to $130 million at September 30, 1998, $158 million at December 31, 1997 and $196 million at September 30, 1997. Common stockholders' equity to total assets was 13.93% at September 30, 1998, compared with 13.60% and 12.95% at June 30, 1998 and September 30, 1997, respectively. The Company's total risk-based capital ratio at September 30, 1998 was 12.26% and its Tier 1 risk-based capital ratio was 8.47%, 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 June 30, 1998, the risk-based capital ratios were 11.94% and 8.08%, respectively; at September 30, 1997, these ratios were 11.47% and 7.53%, respectively. The Company's leverage ratios were 8.04%, 7.53% and 6.76% at September 30, 1998, June 30, 1998 and September 30, 1997, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies and the "well capitalized" guideline of 5% for banks. The Company has bought in the past shares to offset common stock issued or expected to be issued under the Company's employee benefit and dividend reinvestment plans. In addition to these shares, the Board of Directors authorized in April 1996 the repurchase of up to 9.6 million shares of the Company's outstanding common stock under a repurchase program begun in 1994. In October 1997, the Board of Directors authorized the repurchase from time to time of up to an additional 8.6 million shares of the Company's outstanding stock under the same program. Under these programs, the Company has repurchased 7.7 million shares (net of shares issued) in 1996, 5.3 million shares (net of shares issued) in 1997 and 1.1 million shares (net of shares issued) in the first half of 1998. In connection with the Merger, the Company rescinded all of its share repurchase programs effective June 7, 1998. In addition, on October 12, 1998, the Company issued 2.5 million shares to cure a portion of previously repurchased "tainted" shares and, thus, allow the Merger to be accounted for as a pooling of interests. 9 MERGER WITH NORWEST CORPORATION On November 2, 1998, Wells Fargo & Company (the former Wells Fargo) merged with WFC Holdings, a wholly owned subsidiary of Norwest Corporation, with WFC Holdings as the surviving corporation. In connection with the Merger, Norwest Corporation changed its name to Wells Fargo & Company. The corporate headquarters for Wells Fargo & Company is in San Francisco. Minneapolis is the headquarters for the Midwest banking business. The Merger is accounted for as a pooling of interests. The combined Board of Directors consists of an equal number of representatives from each of the companies. Under the terms of the merger agreement, the former Wells Fargo & Company shareholders received a tax-free exchange of ten shares of Norwest common stock for each share of the former Wells Fargo & Company's common stock. At September 30, 1998, Norwest had assets of $104 billion and was the tenth largest bank holding company in the nation. Norwest had 3,961 financial services stores in all 50 states, Canada, the Caribbean, Latin America and elsewhere internationally. At September 30, 1998, the former Wells Fargo & Company had 1,865 physical distribution offices in ten western states. In order to comply with the Department of Justice merger guidelines, the company is required to sell deposits of approximately $1.2 billion. The divestitures are in various markets in Arizona and Nevada. Wells Fargo & Company expects to achieve approximately $650 million ($430 million after tax) in annual cost savings within three years of the merger date. The savings are expected to result from the conversion to one systems platform, the elimination of duplicate systems development and maintenance, the consolidation of operations and branches and the elimination of duplicate overhead functions. Wells Fargo & Company expects to incur approximately $950 million ($625 million after tax) in transition-related expenses. The estimated transition-related expenses consist primarily of employee-related expense and costs associated with systems integration and operations. The following discussions included in Earnings Performance and Balance Sheet Analysis sections of this report do not reflect the expected impact of the Merger. The foregoing paragraphs contain a number of forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Wells Fargo & Co., as well as certain information relating to the Merger, including, without limitation (i) statements relating to the cost savings estimated to result from the Merger, (ii) statements relating to the Merger and integration costs estimated to be incurred in connection with the Merger and (iii) statements preceded by, followed by or that include the words "expects," "estimates" or similar expressions. These forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements due to, among others, the following factors: (a) expected cost savings from the Merger 10 are not fully realized, realized within the expected time frame or additional or unexpected costs are incurred; (b) competitive pressures among financial services companies increase; (c) costs or difficulties related to the integration of the business of Norwest and Wells Fargo or other acquired businesses are greater than expected; (d) changes in the interest rate environment reduce interest margins; (e) general economic conditions, either internationally or nationally or in the states or countries in which the Company is doing business, are less favorable than expected; (f) legislative or regulatory changes adversely affect the businesses in which the Company is engaged; (g) personal or commercial customers' bankruptcies increase; and (h) technological changes (including "Year 2000" data systems compliance issues) are more difficult or expensive than anticipated. EARNINGS PERFORMANCE NET INTEREST INCOME Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 12 and 13. Net interest income on a taxable-equivalent basis was $1,151 million in the third quarter of 1998, compared with $1,132 million in the third quarter of 1997. The Company's net interest margin was 6.18% in the third quarter of 1998, compared with 5.94% in the third quarter of 1997 and 6.22% in the second quarter of 1998. Net interest income on a taxable-equivalent basis was $3,435 million in the first nine months of 1998, compared with $3,497 million in the first nine months of 1997. The Company's net interest margin was 6.14% in the first nine months of 1998, compared with 6.00% in the first nine months of 1997. Interest income included hedging income of $20 million in the third quarter of 1998, compared with $16 million in the third quarter of 1997. Interest expense included hedging expense of $3 million in the third quarter of 1998, compared with $4 million in the same quarter of 1997. Loans averaged $63.6 billion in the third quarter of 1998, compared with $63.9 billion in the third quarter of 1997, and $64.4 billion in the first nine months of 1998, compared with $64.7 billion in the first nine months of 1997. Securities available for sale averaged $8.1 billion during the third quarter of 1998, compared with $11.0 billion in the third quarter of 1997, and $8.5 billion in the first nine months of 1998, compared with $12.0 billion in the first nine months of 1997. The decrease was predominantly due to maturities. Average core deposits were $69.6 billion and $70.7 billion in the third quarter of 1998 and 1997, respectively, and funded 75% and 73% of the Company's average total assets in the third quarter of 1998 and 1997, respectively. For the first nine months of 1998 and 1997, average core deposits were $69.8 billion and $73.9 billion, respectively, and funded 75% and 73%, respectively, of the Company's average total assets. 11 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- ----------------------------------------------------------------------------------------------------------------------------- Quarter ended September 30, ------------------------------------------------------------- 1998 1997 -------------------------- ---------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ----------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,152 5.64% $ 16 $ 229 5.63% $ 3 Securities available for sale (3): U.S. Treasury securities 1,771 6.05 27 2,634 6.00 40 Securities of U.S. government agencies and corporations 2,928 6.60 48 5,303 6.42 85 Private collateralized mortgage obligations 2,832 6.62 47 2,737 6.68 46 Other securities 553 6.84 8 330 6.41 4 ------- ------ -------- ------ Total securities available for sale 8,084 6.50 130 11,004 6.38 175 Loans: Commercial 20,965 8.89 469 18,283 9.11 419 Real estate 1-4 family first mortgage 7,550 7.54 143 9,543 7.52 180 Other real estate mortgage 11,509 9.67 281 11,421 9.35 269 Real estate construction 2,534 9.43 60 2,304 10.90 63 Consumer: Real estate 1-4 family junior lien mortgage 5,368 9.07 123 5,946 9.35 140 Credit card 4,279 15.30 164 5,073 14.66 186 Other revolving credit and monthly payment 6,606 9.45 156 7,638 9.26 178 ------- ------ -------- ------ Total consumer 16,253 10.86 443 18,657 10.75 504 Lease financing 4,684 8.58 100 3,533 8.99 79 Foreign 143 7.37 3 124 6.88 2 ------- ------ -------- ------ Total loans (4) 63,638 9.37 1,499 63,865 9.45 1,516 Other 1,405 7.24 26 883 7.18 16 ------- ------ -------- ------ Total earning assets $74,279 8.96 1,671 $ 75,981 8.97 1,710 ------- ------ -------- ------ ------- -------- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,711 1.39 6 $ 1,736 1.45 6 Market rate and other savings 30,356 2.69 206 31,098 2.64 207 Savings certificates 15,082 5.05 192 15,602 5.17 203 Other time deposits 205 4.74 2 253 4.83 3 Deposits in foreign offices 55 3.95 1 731 5.48 10 ------- ------ -------- ------ Total interest-bearing deposits 47,409 3.40 407 49,420 3.45 429 Federal funds purchased and securities sold under repurchase agreements 1,186 5.33 16 3,211 5.48 44 Commercial paper and other short-term borrowings 261 5.41 4 343 5.82 5 Senior debt 1,487 6.17 23 1,770 6.47 29 Subordinated debt 2,593 6.99 45 2,604 7.12 46 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,299 7.81 25 1,299 7.81 25 ------- ------ -------- ------ Total interest-bearing liabilities 54,235 3.81 520 58,647 3.92 578 Portion of noninterest-bearing funding sources 20,044 -- -- 17,334 -- -- ------- ------ -------- ------ Total funding sources $74,279 2.78 520 $ 75,981 3.03 578 ------- ------ -------- ------ ------- -------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 6.18% $1,151 5.94% $1,132 ---- ------ ---- ------ ---- ------ ---- ------ NONINTEREST-EARNING ASSETS Cash and due from banks $ 6,384 $ 7,299 Goodwill 6,797 7,190 Other 4,875 6,562 ------- -------- Total noninterest-earning assets $18,056 $ 21,051 ------- -------- ------- -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $22,459 $ 22,308 Other liabilities 2,649 3,135 Preferred stockholders' equity 275 275 Common stockholders' equity 12,717 12,667 Noninterest-bearing funding sources used to fund earning assets (20,044) (17,334) ------- -------- Net noninterest-bearing funding sources $18,056 $ 21,051 ------- -------- ------- -------- TOTAL ASSETS $92,335 $ 97,032 ------- -------- ------- -------- - -----------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50% for the quarters ended September 30, 1998 and 1997 and 8.50% and 8.42% for the nine months ended September 30, 1998 and 1997, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.62% and 5.73% for the quarters ended September 30, 1998 and 1997, respectively, and 5.65% and 5.71% for the nine months ended September 30, 1998 and 1997, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. The average amortized cost balances for securities available for sale totaled $7,971 million and $10,931 million for the quarters ended September 30, 1998 and 1997, respectively, and $8,349 million and $11,973 million for the nine months ended September 30, 1998 and 1997, respectively. (4) Nonaccrual loans and related income are included in their respective loan categories. (5) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all periods presented. 12
- -------------------------------------------------------------- Nine months ended September 30, ------------------------------------------------------------ 1998 1997 -------------------------- --------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - -------------------------------------------------------------- $ 759 5.65% $ 32 $ 351 5.58% $ 15 2,105 6.09 95 2,745 6.03 124 3,413 6.60 167 5,972 6.43 287 2,422 6.65 120 2,935 6.63 147 511 7.07 25 340 6.42 15 -------- ------ -------- ------ 8,451 6.51 407 11,992 6.39 573 20,550 8.99 1,382 18,373 9.07 1,246 8,109 7.50 456 9,899 7.49 555 11,810 9.61 848 11,514 9.82 846 2,444 9.55 175 2,288 10.23 175 5,521 9.32 385 6,049 9.34 423 4,554 15.19 519 5,188 14.39 560 6,841 9.20 471 7,913 9.29 550 -------- ------ -------- ------ 16,916 10.85 1,375 19,150 10.69 1,533 4,408 8.64 286 3,295 8.83 218 125 7.68 7 134 6.91 7 -------- ------ -------- ------ 64,362 9.40 4,529 64,653 9.46 4,580 1,261 7.29 69 770 6.79 39 -------- ------ -------- ------ $ 74,833 9.00 5,037 $ 77,766 8.94 5,207 -------- ------ -------- ------ -------- -------- $ 1,735 1.41 18 $ 1,847 1.30 18 30,408 2.68 610 32,562 2.59 632 15,076 5.10 576 15,596 5.10 595 234 4.79 8 201 4.47 7 189 5.03 7 708 5.38 28 -------- ------ -------- ------ 47,642 3.42 1,219 50,914 3.36 1,280 1,895 5.40 76 2,712 5.37 109 323 5.89 14 264 5.96 12 1,709 6.26 80 1,840 6.33 87 2,619 6.96 137 2,808 6.99 147 1,299 7.80 76 1,283 7.82 75 -------- ------ -------- ------ 55,487 3.86 1,602 59,821 3.82 1,710 19,346 -- -- 17,945 -- -- -------- ------ -------- ------ $ 74,833 2.87 1,602 $ 77,766 2.94 1,710 -------- ------ -------- ------ -------- -------- 6.14% $3,435 6.00% $3,497 ---- ------ ---- ------ ---- ------ ---- ------ $ 6,547 $ 8,293 6,896 7,255 5,294 7,389 -------- -------- $ 18,737 $ 22,937 -------- -------- -------- -------- $ 22,537 $ 23,932 2,687 3,588 275 397 12,584 12,965 (19,346) (17,945) -------- -------- $ 18,737 $ 22,937 -------- -------- -------- -------- $ 93,570 $100,703 -------- -------- -------- -------- - --------------------------------------------------------------
13 NONINTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------- % --------------- % (in millions) 1998 1997 Change 1998 1997 Change - --------------------------------------------------------------------------------------------------------------------------- Fees and commissions: Credit card membership and other credit card fees $ 66 $ 62 6% $ 195 $ 162 20% ATM network fees 50 43 16 144 125 15 Charges and fees on loans 42 37 14 125 100 25 Debit and credit card merchant fees 27 25 8 74 72 3 Mutual fund and annuity sales fees 22 18 22 65 51 27 All other (1) 67 61 10 198 184 8 ---- ---- ------ ------ Total fees and commissions 274 246 11 801 694 15 Service charges on deposit accounts 235 214 10 665 649 2 Trust and investment services income: Asset management and custody fees 62 64 (3) 187 186 1 Mutual fund management fees 47 47 -- 137 131 5 All other 6 6 -- 19 21 (10) ---- ---- ------ ------ Total trust and investment services income 115 117 (2) 343 338 1 Investment securities gains (losses) 18 (1) -- 41 6 583 Income from equity investments accounted for by the: Cost method 32 18 78 116 109 6 Equity method 12 11 9 43 42 2 Check printing charges 22 17 29 60 53 13 Gains on sales of loans 14 28 (50) 67 41 63 Gains (losses) from dispositions of operations 18 (1) -- 89 7 -- Losses on dispositions of premises and equipment (7) (10) (30) (58) (45) 29 All other 4 38 (89) 30 102 (71) ---- ---- ------ ------ Total $737 $677 9% $2,197 $1,996 10% ---- ---- --- ------ ------ --- ---- ---- --- ------ ------ --- - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $1 million and $24 million for purchased mortgage servicing rights for the quarters ended September 30, 1998 and 1997, respectively, and $40 million and $73 million for the nine months ended September 30, 1998 and 1997, respectively. Also includes the related amortization expense of none and $16 million for the quarters ended September 30, 1998 and 1997, respectively, and $30 million and $51 million for the nine months ended September 30, 1998 and 1997, respectively. Fees and commissions increased $28 million, or 11%, from the third quarter of 1997 reflecting increased fees in all major business units. Service charges on deposit accounts increased $21 million, or 10%, from the third quarter of 1997 due to an increase in fees. The increase in gains on sales of investment securities was predominantly due to sales of U.S. Treasury securities. In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage Corporation. The resulting pre-tax gain of $58 million was included in gains from dispositions of operations in the second quarter and an additional $4 million was included in the third quarter. Pre-tax income from the mortgage servicing business was none and $7 million in the third quarter and first nine months of 1998, respectively, compared with $3 million and $10 million in the same periods of 1997. 14 At December 31, 1997, the Company had a liability of $48 million related to the disposition of premises and, to a lesser extent, severance and miscellaneous expenses associated with 65 branches not acquired as a result of the acquisition of First Interstate Bancorp (First Interstate) or with First Interstate branches that were identified in the fourth quarter of 1997 for closure in 1998. Of this amount, $21 million represented the balance of the fourth-quarter 1996 accrual related to 32 traditional branches in California and $27 million represented the fourth-quarter 1997 accrual for the disposition of 33 traditional branches located mostly outside of California. Of the total 65 branches, 31 branches were closed in the first nine months of 1998, including 3 in the third quarter of 1998. In the second and third quarters of 1998, the Company evaluated the remaining 34 scheduled branch closures and decided to retain 32 branches, which resulted in reducing the liability by $18 million. The decision was made based on numerous factors, including the need to maintain customer service levels, particularly given the earlier unstable operating environment associated with integrating First Interstate, as well as the review of profitability analyses demonstrating increased customer usage and improved profitability for these 32 branches. These developments were not anticipated or foreseen at the time these accruals were originally recorded. The remaining balance of $1 million at September 30, 1998 is for the expected closure of 2 branches by year-end 1998. The decrease in "All Other" was predominantly due to losses on trading of commercial mortgage-backed securities. At September 30, 1998, the Company had 842 traditional branches, 582 in-store branches, 365 banking centers and 34 business centers. Motor banking facilities ("motorbanks") were available at 42 of the traditional branches. 15 NONINTEREST EXPENSE
- ---------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, --------------------- % --------------------- % (in millions) 1998 1997 Change 1998 1997 Change - ---------------------------------------------------------------------------------------------------------------------- Salaries $ 299 $ 308 (3)% $ 907 $ 964 (6)% Incentive compensation 61 54 13 175 143 22 Employee benefits 73 80 (9) 244 256 (5) Equipment 96 97 (1) 294 289 2 Net occupancy 96 96 -- 295 292 1 Goodwill 80 81 (1) 242 245 (1) Core deposit intangible: Nonqualifying (1) 49 56 (13) 152 169 (10) Qualifying 6 8 (25) 20 24 (17) Operating losses 23 40 (43) 79 262 (70) Contract services 73 56 30 206 172 20 Telecommunications 34 35 (3) 98 108 (9) Security 22 22 -- 63 66 (5) Postage 17 19 (11) 55 64 (14) Outside professional services 24 20 20 72 56 29 Advertising and promotion 30 19 58 84 53 58 Stationery and supplies 14 19 (26) 40 56 (29) Travel and entertainment 18 15 20 51 44 16 Check printing 12 12 -- 36 42 (14) Outside data processing 21 11 91 51 37 38 Foreclosed assets (1) 1 -- (1) (2) (50) All other 41 38 8 114 110 4 ------ ------ ------ ------ Total $1,088 $1,087 -- % $3,277 $3,450 (5)% ------ ------ --- ------ ------ --- ------ ------ --- ------ ------ --- - ----------------------------------------------------------------------------------------------------------------------
(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 $9 million and $57 million in the third quarter and first nine months of 1998, respectively, due to reduced staff levels. The Company's active full-time equivalent (FTE) staff, including hourly employees, was 31,600 at September 30, 1998, compared with 32,663 at September 30, 1997. Goodwill and CDI amortization resulting from the acquisition of First Interstate on April 1, 1996 were $72 million and $49 million, respectively, for the quarter ended September 30, 1998, compared with $73 million and $56 million, respectively, for the quarter ended September 30, 1997. The core deposit intangible is amortized on an accelerated basis based on an estimated useful life of 15 years. The impact on noninterest expense from the amortization of the nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be $199 million, $178 million and $162 million, respectively. The related impact on income tax expense is expected to be a benefit of $81 million, $72 million and $66 million in 1998, 1999 and 2000, respectively. The Company, following an initial awareness phase, utilizes a four-phase plan for achieving Year 2000 readiness. The Assessment Phase is intended to determine which computers, operating systems, applications and facilities require remediation and prioritizing those remediation efforts. The Assessment Phase has been completed except for the on-going 16 assessment of new systems. The Renovation Phase addressed the correction or replacement of any non-compliant hardware, software or facilities and has been substantially completed. All renovated software, both in-house applications and vendor software was placed back into production before commencement of the Validation Phase. The Validation Phase, which involves testing of in-house systems, vendor software and service providers, is in process. Testing of internal mission-critical systems is anticipated to be substantially completed by December 31, 1998, and testing of mission-critical service providers is anticipated to be substantially completed by March 31, 1999. During the fourth phase, the Implementation Phase, remediated and validated code will be tested in interfaces with customers, business partners, government institutions and others. It is anticipated that the Implementation Phase will be substantially completed by June 30, 1999. The Company may be impacted by the Year 2000 compliance issues of governmental agencies, businesses and other entities who provide data to, or receive data from, the Company, and by entities, such as borrowers, vendors, customers and business partners, whose financial condition or operational capability is significant to the Company. The Company's Year 2000 project also includes assessing the Year 2000 readiness of certain customers, borrowers, vendors, business partners, counterparties and governmental entities. In addition to assessing the readiness of these external parties, the Company is developing contingency plans which will include plans to recover operations and alternatives to mitigate the effects of counterparties whose own failure to properly address Year 2000 issues may adversely impact the Company's ability to perform certain functions. These contingency plans are currently being developed and are expected to be substantially completed by June 30, 1999. The Company currently estimates that its total cost for the Year 2000 project will approximate $141 million. To date, the Company has incurred charges of $77 million related to its Year 2000 project, and $24 million and $67 million total expenditures were incurred in the quarter and nine months ended September 30, 1998, respectively. Charges include the cost of external consulting costs and costs of accelerated replacement of hardware and software, but do not include the cost of internal staff redeployed to the Year 2000 project. The Company does not believe that the redeployment of internal staff will have a material impact on its financial condition or results of operations. The foregoing paragraphs contain a number of forward-looking statements. These statements reflect management's best current estimates, which were based on numerous assumptions about future events, including the continued availability of certain resources, representations received from third party service providers and other third parties, and additional factors. There can be no guarantee that these estimates, including Year 2000 costs, will be achieved, and actual results could differ materially from those estimates. A number of important factors could cause management's estimates and the impact of the Year 2000 issue to differ materially from what is described in the forward-looking statements contained in the above paragraphs. Those factors include, but are not limited to, uncertainties in the cost of hardware and software, the availability and cost of programmers and other systems personnel, inaccurate or incomplete execution of the phases, ineffective remediation of computer code, and whether the 17 Company's customers, vendors, competitors and counterparties effectively address the Year 2000 issue. If Year 2000 issues are not adequately addressed by the Company and significant third parties, the Company's business, results of operations and financial position could be materially adversely affected. Failure of certain vendors to be Year 2000 compliant could result in disruption of important services upon which the Company depends, including, but not limited to, such services as telecommunications, electrical power and data processing. Failure of the Company's loan customers to properly prepare for the Year 2000 could also result in increases in problem loans and credit losses in future years. Notwithstanding the Company's efforts, there can be no assurance that the Company or significant third party vendors or other significant third parties will adequately address their Year 2000 issues. The Company is continuing to assess the Year 2000 readiness of third parties but does not know at this time whether the failure of third parties to be Year 2000 compliant will have a material effect on the Company's results of operations, liquidity and financial condition. The forward-looking statements made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 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. 18 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 September 30, 1998:
- ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions) September 30, 1998 - ------------------------------------------------------------------------------------------------------------------- Amortization ------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense $ 636 $ 80 $ 49 $ 765 Income tax expense 289 -- 20 309 ----- ---- ---- ----- Net income 347 80 29 456 Preferred stock dividends 4 -- -- 4 ----- ---- ---- ----- Net income applicable to common stock $ 343 $ 80 $ 29 $ 452 ----- ---- ---- ----- ----- ---- ---- ----- Earnings per common share $4.03 $.94 $.34 $5.31 ----- ---- ---- ----- ----- ---- ---- ----- Diluted earnings per common share $3.99 $.93 $.34 $5.26 ----- ---- ---- ----- ----- ---- ---- ----- - -------------------------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the quarter ended September 30, 1998 were calculated as follows:
- ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions) September 30, 1998 - ------------------------------------------------------------------------------------------------------------------- ROA: A*/ (C-E) = 2.14% ROE: B*/ (D-E) = 35.64% Efficiency: (F-G) / H = 50.89% Net income $ 456 (A) Net income applicable to common stock 452 (B) Average total assets 92,335 (C) Average common stockholders' equity 12,717 (D) Average goodwill ($6,797) and after-tax nonqualifying core deposit intangible ($884) 7,681 (E) Noninterest expense 1,088 (F) Amortization expense for goodwill and nonqualifying core deposit intangible 129 (G) Net interest income plus noninterest income 1,884 (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. 19 BALANCE SHEET ANALYSIS INVESTMENT SECURITIES The following table provides the cost and fair value for the major components of securities available for sale (there were no securities held to maturity at the end of the periods presented):
- ------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 1998 1997 1997 ------------------ ----------------- ------------------ ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $1,206 $1,215 $2,535 $2,549 $ 2,638 $ 2,652 Securities of U.S. government agencies and corporations (1) 3,181 3,224 4,390 4,425 5,050 5,088 Private collateralized mortgage obligations (2) 3,040 3,073 2,390 2,396 2,656 2,656 Other 634 654 441 453 283 283 ------ ------ ------ ------ ------- ------- Total debt securities 8,061 8,166 9,756 9,823 10,627 10,679 Marketable equity securities 58 76 40 65 24 58 ------ ------ ------ ------ ------- ------- Total $8,119 $8,242 $9,796 $9,888 $10,651 $10,737 ------ ------ ------ ------ ------- ------- ------ ------ ------ ------ ------- ------- - -------------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are mortgage-backed securities. (2) Substantially all private collateralized mortgage obligations (CMOs) are AAA rated bonds collateralized by 1-4 family residential first mortgages. The securities available for sale portfolio includes both debt and marketable equity securities. At September 30, 1998, the securities available for sale portfolio had an unrealized net gain of $123 million, or less than 2% of the cost of the portfolio, comprised of unrealized gross gains of $135 million and unrealized gross losses of $12 million. At December 31, 1997, the securities available for sale portfolio had an unrealized net gain of $92 million, comprised of unrealized gross gains of $112 million and unrealized gross losses of $20 million. At September 30, 1997, the securities available for sale portfolio had an unrealized net gain of $86 million, comprised of unrealized gross gains of $110 million and unrealized gross losses of $24 million. The unrealized net gain or loss on securities available for sale is included as a separate component of cumulative other comprehensive income in stockholders' equity. At September 30, 1998, the amount included in cumulative other comprehensive income on a net of tax basis was an unrealized net gain of $55 million, compared with $55 million at December 31, 1997 and $51 million at September 30, 1997. The unrealized net gain in the securities available for sale portfolio at September 30, 1998 was primarily due to investments in mortgage-backed securities. This unrealized net gain reflected current interest rates that were lower than those at the time the investments were purchased. The Company may decide to sell certain of the securities available for sale to manage the level of earning assets (for example, to offset loan growth that may exceed expected maturities and prepayments of securities). 20 Realized gross gains resulting from the sale of securities available for sale were $41 million and $8 million in the first nine months of 1998 and 1997, respectively. Realized gross losses were none and $2 million in the first nine months of 1998 and 1997, respectively. At September 30, 1998, mortgage-backed securities included in securities of U.S. government agencies and corporations primarily consisted of pass-through securities and collateralized mortgage obligations (CMOs) and all were issued or backed by federal agencies. These securities, along with the private CMOs, represented $6,297 million, or 76%, of the Company's securities available for sale portfolio at September 30, 1998. The CMO securities held by the Company (including the private issues) are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. As an indication of interest rate risk, the Company has estimated the impact of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on this rate scenario, mortgage-backed securities would decrease in fair value from $6,297 million to $6,094 million and the expected remaining maturity of these securities would increase from 2 years and 1 month to 3 years and 5 months. In October 1998, the FASB issued FAS 134, Accounting for Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold investments. FAS 134 will be implemented at the beginning of 1999 and is not expected to have a material effect on the Company's financial statements. 21 LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------ % Change Sept. 30, 1998 from ------------------------ SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ Commercial (1)(2) $21,705 $20,144 $19,512 8% 11% Real estate 1-4 family first mortgage 7,384 8,869 9,311 (17) (21) Other real estate mortgage (3) 11,715 12,186 11,614 (4) 1 Real estate construction 2,475 2,320 2,351 7 5 Consumer: Real estate 1-4 family junior lien mortgage 5,375 5,865 5,931 (8) (9) Credit card (4) 4,049 5,039 5,020 (20) (19) Other revolving credit and monthly payment 6,610 7,185 7,513 (8) (12) ------- ------- ------- Total consumer 16,034 18,089 18,464 (11) (13) Lease financing 4,919 4,047 3,754 22 31 Foreign 142 79 98 80 45 ------- ------- ------- Total loans (net of unearned income, including net deferred loan fees, of $897, $832 and $781) $64,374 $65,734 $65,104 (2)% (1)% ------- ------- ------- --- --- ------- ------- ------- --- --- - ------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real estate investment trusts (REITs) of $1,944 million, $1,772 million and $1,397 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. (2) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $1,582 million, $1,599 million and $1,464 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. (3) Includes agricultural loans that are secured by real estate of $375 million, $343 million and $326 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. (4) As a result of reevaluating its credit card lending strategies, the Company has decided to make available for sale certain accounts within the credit card portfolio. Accordingly, approximately $375 million of primarily out-of-franchise territory accounts were considered available for sale as of September 30, 1998. If sold, it is anticipated that a loss (charge-off) would result due to the credit quality of this portion, which has been provided for in the allocation of the allowance for loan losses. The Company intends to hold the remaining credit card portfolio for the foreseeable future. The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------------------------ % Change Sept. 30, 1998 from ------------------------ SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ Commercial loans to real estate developers and REITs (1) $ 1,944 $ 1,772 $ 1,397 10% 39% Other real estate mortgage 11,715 12,186 11,614 (4) 1 Real estate construction 2,475 2,320 2,351 7 5 ------- ------- ------- Total $16,134 $16,278 $15,362 (1)% 5% -- --- -- --- Nonaccrual loans $ 236 $ 252 $ 277 (6)% (15)% ------- ------- ------- -- --- ------- ------- ------- -- --- Nonaccrual loans as a % of total 1.5% 1.5% 1.8% ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans. 22 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------------------------------------ SEPT. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial (2)(3) $180 $155 $172 Real estate 1-4 family first mortgage 73 104 100 Other real estate mortgage (4) 205 228 258 Real estate construction 30 23 18 Consumer: Real estate 1-4 family junior lien mortgage 15 17 16 Other revolving credit and monthly payment 3 1 1 ---- ---- ---- Total nonaccrual loans (5) 506 528 565 Restructured loans (6) -- 9 9 ---- ---- ---- Nonaccrual and restructured loans 506 537 574 As a percentage of total loans .8% .8% .9% Foreclosed assets 130 158 196 Real estate investments (7) 2 4 4 ---- ---- ---- Total nonaccrual and restructured loans and other assets $638 $699 $774 ---- ---- ---- ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes loans (primarily unsecured) to real estate developers and REITs of $1 million for the periods presented. (3) Includes agricultural loans of $10 million, $13 million and $16 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. (4) Includes agricultural loans secured by real estate of $10 million, $13 million and $15 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. (5) Of the total nonaccrual loans, $338 million, $321 million and $356 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively, were considered impaired under FAS 114 (Accounting by Creditors for Impairment of a Loan). (6) In addition to originated loans that were subsequently restructured, there were loans of $23 million for the periods presented 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 were considered impaired under FAS 114 for the periods presented. (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 $133 million, $172 million and $170 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. 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 23 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 $357 million and $350 million during the third quarter and first nine months of 1998, respectively, and $394 million and $435 million during the third quarter and first nine months of 1997, respectively. Total interest income recognized on impaired loans was $2 million and $7 million during the third quarter and first nine months of 1998, respectively, and $2 million and $11 million during the third quarter and first nine months of 1997, respectively. The interest income for all periods was recorded using the cash method. 24 The table below shows the recorded investment in impaired loans by loan category.
- ------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------- Commercial $129 $103 $110 Real estate 1-4 family first mortgage 2 2 1 Other real estate mortgage (1) 200 216 249 Real estate construction 27 22 17 Other 3 1 2 ---- ---- ---- Total (2) $361 $344 $379 ---- ---- ---- ---- ---- ---- Impairment measurement based on: Collateral value method $246 $256 $298 Discounted cash flow method 97 61 60 Historical loss factors 18 27 21 ---- ---- ---- $361 $344 $379 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------------------------
(1) Includes accruing loans of $23 million purchased at a steep discount for the periods presented 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 $18 million, $27 million and $26 million of impaired loans with a related FAS 114 allowance of $1 million, $2 million and $4 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. 25 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. 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.
- ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------- Commercial $ 16 $ 8 $ 14 Real estate 1-4 family first mortgage 20 35 42 Other real estate mortgage 12 5 11 Real estate construction 1 1 1 Consumer: Real estate 1-4 family junior lien mortgage 38 42 37 Credit card 108 133 123 Other revolving credit and monthly payment 8 19 13 ---- ---- ---- Total consumer 154 194 173 ---- ---- ---- Total $203 $243 $241 ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------------------------------------------
26 ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ------------------- -------------------- (in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,835 $1,850 $1,828 $2,018 Provision for loan losses 160 175 510 420 Loan charge-offs: Commercial (1) (50) (69) (145) (198) Real estate 1-4 family first mortgage (3) (5) (11) (15) Other real estate mortgage (18) (2) (29) (13) Real estate construction -- -- (2) (3) Consumer: Real estate 1-4 family junior lien mortgage (2) (6) (8) (18) Credit card (105) (124) (340) (372) Other revolving credit and monthly payment (45) (55) (147) (168) ------ ------ ------ ------ Total consumer (152) (185) (495) (558) Lease financing (9) (10) (31) (29) ------ ------ ------ ------ Total loan charge-offs (232) (271) (713) (816) ------ ------ ------ ------ Loan recoveries: Commercial (2) 12 21 44 53 Real estate 1-4 family first mortgage 2 1 5 3 Other real estate mortgage 26 13 62 42 Real estate construction -- 1 2 3 Consumer: Real estate 1-4 family junior lien mortgage 1 2 4 6 Credit card 11 12 34 34 Other revolving credit and monthly payment 15 17 48 51 ------ ------ ------ ------ Total consumer 27 31 86 91 Lease financing 3 2 9 9 ------ ------ ------ ------ Total loan recoveries 70 69 208 201 ------ ------ ------ ------ Total net loan charge-offs (162) (202) (505) (615) BALANCE, END OF PERIOD $1,833 $1,823 $1,833 $1,823 ------ ------ ------ ------ ------ ------ ------ ------ Total net loan charge-offs as a percentage of average loans (annualized) 1.01% 1.25% 1.05% 1.27% ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans 2.85% 2.80% 2.85% 2.80% ------ ------ ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate developers and REITs for the periods presented. (2) Includes recoveries from loans (primarily unsecured) to real estate developers and REITs of none and $1 million for the quarters ended September 30, 1998 and 1997, respectively, and $1 million and $2 million for the nine months ended September 30, 1998 and 1997, respectively. 27 The table below presents net charge-offs by loan category.
- ----------------------------------------------------------------------------------------------------------------------------------- Quarter ended September 30, Nine months ended September 30, -------------------------------------- ----------------------------------------- 1998 1997 1998 1997 -------------------------------------- ----------------------------------------- % OF % of % OF % of AVERAGE average AVERAGE average (in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1) - ----------------------------------------------------------------------------------------------------------------------------------- Commercial $ 38 .71% $ 48 1.03% $101 .66% $145 1.04% Real estate 1-4 family first mortgage 1 .05 4 .16 6 .09 12 .16 Other real estate mortgage (8) (.27) (11) (.36) (33) (.38) (29) (.34) Real estate construction -- -- (1) (.21) -- .04 -- -- Consumer: Real estate 1-4 family junior lien mortgage 1 .06 4 .25 4 .09 12 .27 Credit card 94 8.78 112 8.77 306 9.00 338 8.71 Other revolving credit and monthly payment 30 1.81 38 1.99 99 1.93 117 1.98 ---- ---- ---- ---- Total consumer 125 3.07 154 3.28 409 3.23 467 3.26 Lease financing 6 .55 8 .82 22 .69 20 .83 ---- ---- ---- ---- Total net loan charge-offs $162 1.01% $202 1.25% $505 1.05% $615 1.27% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - -----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis. The commercial loan category includes net charge-offs for the commercial loan component of small business loans of $25 million (or 2.30% of average small business loans in this category) in the third quarter of 1998, compared with $26 million (or 2.45%) in the second quarter of 1998 and $33 million (or 3.38%) in the third 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 third quarter of 1998 and 1997 was credit card loans, comprising 58% and 55%, respectively, of total net charge-offs. During the third quarter of 1998, credit card gross charge-offs due to bankruptcies were $40 million, or 38%, of total credit card gross charge-offs, compared with $47 million, or 40%, in the second quarter of 1998 and $54 million, or 43%, in the third quarter of 1997. In addition, credit card loans 30 to 89 days past due and still accruing totaled $154 million at September 30, 1998, compared with $133 million at June 30, 1998 and $180 million at September 30, 1997. The Company considers the allowance for loan losses of $1,833 million adequate to cover losses inherent in loans, commitments to extend credit and standby letters of credit at September 30, 1998. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general (particularly California) economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company made a $160 million provision in the third quarter of 1998. 28 OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------- Nonmarketable equity investments $1,146 $1,113 $1,114 Trading assets 922 815 541 Net deferred tax asset 57 209 347 Certain identifiable intangible assets 160 479 491 Foreclosed assets 130 158 196 Other 1,187 1,175 1,203 ------ ------ ------ Total other assets $3,602 $3,949 $3,892 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------------------
Income from nonmarketable equity investments accounted for using the cost method was $32 million and $18 million in the third quarter of 1998 and 1997, respectively, and $116 million and $109 million in the nine months ended September 30, 1998 and 1997, respectively. Trading assets consist largely of securities, including corporate debt and U.S. government agency obligations. Gains (losses) from trading assets were $(8) million and $21 million in the third quarter of 1998 and 1997, respectively, and $30 million and $59 million in the nine months ended September 30, 1998 and 1997, respectively. The Company estimates that approximately $52 million of the $57 million net deferred tax asset at September 30, 1998 could be realized by the recovery of previously paid federal taxes; however, the Company expects to actually realize the federal net deferred tax asset by claiming deductions against future taxable income. The balance of approximately $5 million primarily relates to net deductions that are expected to reduce future state taxable income. The Company believes that it is more likely than not that it will have sufficient future state taxable income to fully utilize these deductions. The amount of the total deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward periods are reduced. Included in certain identifiable intangible assets were purchased mortgage servicing rights of none, $292 million and $301 million at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage Corporation. (See page 14 for additional information.) 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 September 30, 1998 and 1997, respectively. 29 DEPOSITS
- ------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $22,542 $23,953 $23,005 Interest-bearing checking 1,799 2,155 2,209 Market rate and other savings 29,954 29,940 29,906 Savings certificates 15,196 15,349 15,460 ------- ------- ------- Core deposits 69,491 71,397 70,580 Other time deposits 208 205 288 Deposits in foreign offices 70 597 54 ------- ------- ------- Total deposits $69,769 $72,199 $70,922 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB) establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet and market risk exposures. The Company's Tier 1 and Tier 2 capital components are presented on the following page. The guidelines require a minimum total RBC ratio of 8%, with at least half of the total capital in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB established a minimum leverage ratio guideline of 3% of Tier 1 capital to average total assets. The increase in the Company's ratios at September 30, 1998 compared with December 31, 1997 was due to an increase in common stockholders' equity (predominantly retained earnings). 30 The table below presents the Company's risk-based capital and leverage ratios.
- ------------------------------------------------------------------------------------------------------ SEPT. 30, Dec. 31, Sept. 30, (in billions) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------ Tier 1: Common stockholders' equity $12.9 $12.6 $12.6 Preferred stock .3 .3 .3 Guaranteed preferred beneficial interests in Company's subordinated debentures 1.3 1.3 1.3 Goodwill and other deductions (1) (7.7) (8.1) (8.2) ----- ----- ----- Total Tier 1 capital 6.8 6.1 6.0 ----- ----- ----- Tier 2: Mandatory convertible debt -- .1 .2 Subordinated debt and unsecured senior debt 2.0 2.0 2.0 Allowance for loan losses allowable in Tier 2 1.0 1.0 1.0 ----- ----- ----- Total Tier 2 capital 3.0 3.1 3.2 ----- ----- ----- Total risk-based capital $ 9.8 $ 9.2 $ 9.2 ----- ----- ----- ----- ----- ----- Risk-weighted balance sheet assets $75.6 $77.6 $77.1 Risk-weighted off-balance sheet items: Commitments to make or purchase loans 9.2 9.4 9.4 Standby letters of credit 1.6 1.6 1.7 Other 1.4 .7 .6 ----- ----- ----- Total risk-weighted off-balance sheet items 12.2 11.7 11.7 ----- ----- ----- Market risk equivalent assets (2) 1.0 -- -- Goodwill and other deductions (1) (7.7) (8.1) (8.2) Allowance for loan losses not included in Tier 2 (.8) (.8) (.8) ----- ----- ----- Total risk-weighted assets $80.3 $80.4 $79.8 ----- ----- ----- ----- ----- ----- Risk-based capital ratios: Tier 1 capital (4% minimum requirement) 8.47% 7.61% 7.53% Total capital (8% minimum requirement) 12.26 11.49 11.47 Leverage ratio (3% minimum requirement) (3) 8.04% 6.95% 6.76% - ------------------------------------------------------------------------------------------------------
(1) Other deductions include CDI acquired after February 1992 (nonqualifying CDI) and the unrealized net gain (loss) on securities available for sale. (2) As the Company met at September 30, 1998 certain trading thresholds as defined by the FRB, its risk-based capital ratios now include a regulatory measurement for market risk, which represents the risk of loss in trading activities that result from movements in market prices. (3) Tier 1 capital divided by quarterly average total assets (excluding goodwill, nonqualifying CDI and other items which were deducted to arrive at Tier 1 capital). Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At September 30, 1998, the Bank had a Tier 1 RBC ratio of 7.88%, a combined Tier 1 and Tier 2 ratio of 11.01 % and a leverage ratio of 7.07%. 31 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 September 30, 1998 and December 31, 1997.
- ------------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1998 December 31, 1997 --------------------------------------- --------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK FAIR contractual risk fair (in millions) AMOUNT AMOUNT(2) VALUE amount amount(2) value - ------------------------------------------------------------------------------------------------------------------------------ ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $20,008 $ 642 $ 635 $16,301 $ 233 $ 174 Futures 6,645 -- -- 6,259 -- -- Floors purchased (1) 17,721 168 168 20,727 63 63 Caps purchased (1) 186 -- -- 240 1 1 Options purchased -- -- -- 42 -- -- Foreign exchange contracts: Forwards (1) 129 -- (1) 57 1 1 CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 6,259 102 28 3,158 13 4 Futures 6,647 -- -- 2,387 -- -- Floors purchased (1) 1,327 34 34 1,141 13 13 Caps purchased (1) 2,970 3 3 2,836 8 8 Floors written 1,312 -- (33) 1,122 -- (13) Caps written 2,948 -- (3) 2,871 -- (9) Options purchased (1) -- -- -- 37 -- -- Options written (1) -- -- -- 27 -- -- Forwards (1) 1,072 44 7 59 2 2 Foreign exchange contracts: Forwards and spots (1) 2,527 37 2 1,853 29 3 Options purchased (1) 135 2 2 110 -- -- Options written 123 -- (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. 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. 32 The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts (except futures contracts and floor, cap and option contracts written for which credit risk is DE MINIMUS) through credit approvals, limits and monitoring procedures. Credit risk related to derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. As the Company generally enters into transactions only with high quality counterparties, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. In June 1998, the FASB issued FAS 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective for the Company's financial statements for periods beginning January 1, 2000. The new standard requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company has not yet determined when it will implement the Statement nor has it completed the complex analysis required to determine the impact on the financial statements. LIQUIDITY MANAGEMENT Liquidity for the Parent Company and its subsidiaries is generated through its ability to raise funds in a variety of domestic and international money and capital markets, and through dividends from subsidiaries and lines of credit. In 1996, the Company filed a shelf registration with the Securities and Exchange Commission (SEC) that allows for the issuance of $3.5 billion of senior or subordinated debt or preferred stock. This shelf registration was amended on October 12, 1998 to include 2.5 million shares of common stock. In October 1998, the Company issued $759 million of common stock under this shelf registration to cure a portion of previously repurchased "tainted" shares and, thus, allow the Merger to be accounted for as a pooling of interests. The proceeds from the sale of any securities will be used for general corporate purposes. As of September 30, 1998, the Company had issued $.2 billion of preferred stock and $.7 billion of medium-term notes under this shelf registration. As of November 16, 1998, this shelf registration is no longer effective. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk;" it is the Company's main source of interest rate risk and is significantly more difficult to quantify and manage than term structure risk. 33 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 September 30, 1998, the simulation showed a decline in the net interest margin of 9 basis points (.09%, or $67 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. The Company considers the fair values and the potential near term losses to future earnings related to its customer accommodation derivative financial instruments to be immaterial. 34 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders A special meeting of shareholders was held on October 20, 1998, to consider a proposal to adopt the Agreement and Plan of Merger, dated as of June 7, 1998, and amended and restated as of September 10, 1998 (the "Agreement"), by and among Wells Fargo & Company, Norwest Corporation and WFC Holdings Corporation. The Agreement was adopted by the following vote: For 57,428,537 Against 500,572 Abstain 266,623 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2 Agreement and Plan of Merger, dated as of June 7, 1998, and amended and restated as of September 10, 1998, by and among Wells Fargo & Company, Norwest Corporation and WFC Holdings Corporation, filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Norwest Corporation, File No. 333-63247, filed September 11, 1998, and incorporated herein by reference. 3(a) Certificate of Incorporation (b) By-Laws 4 The Company hereby agrees to furnish to the Commission upon request a copy of each instrument defining the rights of holders of securities of the Company. 10(a) Employment Agreement, dated as of June 7, 1998, by and between Norwest Corporation and Paul Hazen, filed as Exhibit 10.1 to the Registration Statement on Form S-4 of Norwest Corporation, File No. 333-63247, filed September 11, 1998, and incorporated herein by reference. 10(b) Employment Agreement, dated as of June 7, 1998, by and between Norwest Corporation and Rodney L. Jacobs, filed as Exhibit 10.2 to the Registration Statement on Form S-4 of Norwest Corporation, File No. 333-63247, filed September 11, 1998, and incorporated herein by reference. 10(c) Wells Fargo & Company Change of Control Severance Plan, adopted October 20, 1998. 11 Computation of Earnings Per Common Share 27 Financial Data Schedule 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.15 and 1.89 for the quarters ended September 30, 1998 and 1997, respectively, and 2.08 and 1.89 for the nine months ended September 30, 1998 and 1997, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.42 and 4.02 for the quarters ended September 30, 1998 and 1997, respectively, and 4.84 and 4.07 for the nine months ended September 30, 1998 and 1997, respectively. 35 99(b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.13 and 1.86 for the quarters ended September 30, 1998 and 1997, respectively, and 2.05 and 1.85 for the nine months ended September 30, 1998 and 1997, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 5.17 and 3.83 for the quarters ended September 30, 1998 and 1997, respectively, and 4.61 and 3.78 for the nine months ended September 30, 1998 and 1997, respectively.
(b) The Company filed the following reports on Form 8-K during the third quarter of 1998 and through the date hereof: (1) July 21, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended June 30, 1998 (2) July 24, 1998 under Item 5, containing the abridged analyst presentation materials dated June 8, 1998 regarding the proposed merger between the Company and Norwest Corporation (3) September 15, 1998 under Item 7, containing the unaudited pro forma combined financial information of the Company and Norwest Corporation for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995 (4) October 15, 1998 under Item 5, containing the Underwriting Agreement between the Company and Goldman, Sachs & Co., dated October 12, 1998 in connection with the sale of 2.5 million shares of the Company's common stock, $5 par value per share, pursuant to the Company's Prospectus Supplement dated October 12, 1998 to the Prospectus dated September 16, 1998 (5) October 20, 1998 under Item 5, containing the Press Release that announced the Company's financial results for the quarter ended September 30, 1998 (6) November 16, 1998 under Items 2 and 7, describing the consummation of the Merger by and among Former Wells Fargo & Company, Norwest Corporation and WFC Holdings Corporation pursuant to an Agreement and Plan of Merger dated as of June 7, 1998 and amended and restated as of September 10, 1998 and containing the Press Release dated November 2, 1998 issued by Norwest Corporation announcing the completion of the Merger 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 November 23, 1998. WFC HOLDINGS CORPORATION By: LES L. QUOCK ------------------------------------- Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) 36 EX-3.A 2 EXHIBIT 3.(A) CERTIFICATE OF INCORPORATION OF WFC HOLDINGS CORPORATION I, the undersigned, for the purpose of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do hereby execute this Certificate of Incorporation and do hereby certify as follows: ARTICLE I The name of the corporation (which is hereinafter referred to as the "Corporation") is: WFC Holdings Corporation. ARTICLE II The address of the Corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware. ARTICLE IV SECTION 4.1. The Corporation shall be authorized to issue 1,000 shares of capital stock, of which 1,000 shares shall be shares of Common Stock, $.01 par value ("Common Stock"). SECTION 4.2. Except as otherwise provided by law the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. Each share of Common Stock shall have one vote, and the Common Stock shall vote together as a single class. ARTICLE V Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. ARTICLE VI In furtherance and not in limitation of the powers conferred by law, the Board of Directors of the Corporation (the "Board") is expressly authorized and empowered to make, alter and repeal the By-Laws of the Corporation by a majority vote at any regular or special meeting of the Board or by written consent, subject to the power of the stockholders of the Corporation to alter or repeal any By-Laws made by the Board. ARTICLE VII The Corporation reserves the right at any time from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article. ARTICLE VIII SECTION 8.1. ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. SECTION 8.2. INDEMNIFICATION AND INSURANCE. (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, to the fullest extent permitted by law, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, amounts paid or to be paid in settlement, and excise taxes or penalties arising under the Employee Retirement Income Security Act of 1974) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; PROVIDED, HOWEVER, that, if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of the Board, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-law, agreement, vote of stockholders or disinterested directors or otherwise. (d) INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. ARTICLE IX The name and mailing address of the incorporator is Lawrence S. Makow, Esq., c/o Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019. IN WITNESS WHEREOF, I, the undersigned, being the incorporator hereinbefore named, do hereby further certify that the facts hereinabove stated are truly set forth and, accordingly, I have hereunto set my hand this 9th day of September, 1998. /s/ LAWRENCE S. MAKOW ------------------------------ Lawrence S. Makow Incorporator EX-3.B 3 EXHIBIT 3.(B) BY-LAWS OF WFC HOLDINGS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE * * * ARTICLE I OFFICES SECTION 1.1. REGISTERED OFFICE. The registered office of WFC Holdings Corporation (the "Corporation") shall be established and maintained at the office of The Corporation Trust Company at The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, State of Delaware, and said Corporation Trust Company shall be the registered agent of the Corporation in charge thereof. SECTION 1.2. OTHER OFFICES. The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time select or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.1. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors, and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. If the Board of Directors fails so to determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the registered office of the Corporation on the first Tuesday in April. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2.2. SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes may be called by the President or the Secretary, or by resolution of the Board of Directors. SECTION 2.3. VOTING. Each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation of the Corporation and these By-Laws may vote in person or by proxy, but no proxy shall be voted after one year from its date unless such proxy provides for a longer period. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is entitled to be present. SECTION 2.4. QUORUM. Except as otherwise required by law, by the Certificate of Incorporation of the Corporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding shares constituting a majority of the voting power of the Corporation shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 2.5. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat, at his or her address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat. SECTION 2.6. ACTION WITHOUT MEETING. Unless otherwise provided by the Certificate of Incorporation of the Corporation, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS SECTION 3.1. NUMBER AND TERM. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors which shall consist of one or more persons. The exact number of directors shall initially be 3 and may thereafter be fixed from time to time by the Board of Directors. Directors shall be elected at the annual meeting of stockholders and each director shall be elected to serve until his or her successor shall be elected and shall qualify. A director need not be a stockholder. SECTION 3.2. RESIGNATIONS. Any director may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or the Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3.3. VACANCIES. If the office of any director becomes vacant, the remaining directors in the office, though less than a quorum, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his or her successor shall be duly chosen. If the office of any director becomes vacant and there are no remaining directors, the stockholders, by the affirmative vote of the holders of shares constituting a majority of the voting power of the Corporation, at a special meeting called for such purpose, may appoint any qualified person to fill such vacancy. SECTION 3.4. REMOVAL. Except as hereinafter provided, any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of the voting power entitled to vote for the election of directors, at an annual meeting or a special meeting called for the purpose, and the vacancy thus created may be filled, at such meeting, by the affirmative vote of holders of shares constituting a majority of the voting power of the Corporation. SECTION 3.5. COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-Laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. SECTION 3.6. MEETINGS. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent of all the Directors. Regular meetings of the Board of Directors may be held without notice at such places and times as shall be determined from time to time by resolution of the Board of Directors. Special meetings of the Board of Directors may be called by the President, or by the Secretary on the written request of any director, on at least four hour's notice to each director (except that notice to any director may be waived in writing by such director) and shall be held at such place or places as may be determined by the Board of Directors, or as shall be stated in the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation of the Corporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in any meeting of the Board of Directors or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 3.7. QUORUM. A majority of the Directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. The vote of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the Certificate of Incorporation of the Corporation or these By-Laws shall require the vote of a greater number. SECTION 3.8. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the Board of Directors a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 3.9. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. ARTICLE IV OFFICERS SECTION 4.1. OFFICERS. The officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer and a Secretary, all of whom shall be elected by the Board of Directors and shall hold office until their successors are duly elected and qualified. In addition, the Board of Directors may elect such Assistant Secretaries and Assistant Treasurers as they may deem proper. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 4.2. PRESIDENT. The President shall be the Chief Executive and Operating Officer of the Corporation. He or she shall have the general powers and duties of supervision and management usually vested in the office of President of a corporation. The President shall have the power to execute bonds, mortgages and other contracts on behalf of the Corporation, and to cause the seal to be affixed to any instrument requiring it, and when so affixed the seal shall be attested to by the signature of the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer. SECTION 4.3. VICE PRESIDENTS. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him or her by the Board of Directors. SECTION 4.4. TREASURER. The Treasurer shall be the Chief Financial Officer of the Corporation. He or she shall have the custody of the Corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He or she shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors or the President, taking proper vouchers for such disbursements. He or she shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he or she shall give the Corporation a bond for the faithful discharge of his or her duties in such amount and with such surety as the Board of Directors shall prescribe. SECTION 4.5. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and of the Board of Directors and all other notices required by law or by these By-Laws, and in case of his or her absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President or by the Board of Directors, upon whose request the meeting is called as provided in these By-Laws. He or she shall record all the proceedings of the meetings of the Board of Directors, any committees thereof and the stockholders of the Corporation in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him or her by the Board of Directors or the President. He or she shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors or the President, and attest to the same. SECTION 4.6. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the Board of Directors. ARTICLE V MISCELLANEOUS SECTION 5.1. CERTIFICATES OF STOCK. A certificate of stock shall be issued to each stockholder certifying the number of shares owned by such stockholder in the Corporation. Certificates of stock of the Corporation shall be of such form and device as the Board of Directors may from time to time determine. SECTION 5.2. LOST CERTIFICATES. A new certificate of stock may be issued in the place of any certificate theretofore issued by the Corporation, alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate, or such owner's legal representatives, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. SECTION 5.3. TRANSFER OF SHARES. The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the Board of Directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 5.4. STOCKHOLDERS RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law, shall be the first day on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 5.5. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation of the Corporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon stock of the Corporation as and when they deem appropriate. Before declaring any dividend there may be set apart out of any funds of the Corporation available for dividends, such sum or sums as the Board of Directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation. SECTION 5.6. SEAL. The corporate seal of the Corporation shall be in such form as shall be determined by resolution of the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise imprinted upon the subject document or paper. SECTION 5.7. FISCAL YEAR. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. SECTION 5.8. CHECKS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, or agent or agents, of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 5.9. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required to be given under these By-Laws, personal notice is not required unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his or her address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by law. Whenever any notice is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or of these By-Laws, a waiver thereof, in writing and signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to such required notice. ARTICLE VI AMENDMENTS These By-Laws may be altered, amended or repealed at any annual meeting of the stockholders (or at any special meeting thereof if notice of such proposed alteration, amendment or repeal to be considered is contained in the notice of such special meeting) by the affirmative vote of the holders of shares constituting a majority of the voting power of the Corporation. Except as otherwise provided in the Certificate of Incorporation of the Corporation, the Board of Directors may by majority vote of those present at any meeting at which a quorum is present alter, amend or repeal these By-Laws, or enact such other By-Laws as in their judgment may be advisable for the regulation and conduct of the affairs of the Corporation. EX-10.C 4 EXHIBIT 10-C THE WELLS FARGO & COMPANY CHANGE OF CONTROL SEVERANCE PLAN AS ADOPTED BY THE BOARD OF DIRECTORS OF WELLS FARGO & COMPANY AT ITS OCTOBER 20, 1998 MEETING INTRODUCTION The Board of Directors of Wells Fargo & Company recognizes that, from time to time, the Company may explore potential transactions that could result in a Change of Control of the Company. This possibility and the uncertainty it creates may result in the loss or distraction of employees of the Company to the detriment of the Company and its shareholders. The Board considers the avoidance of such loss and distraction to be essential to protecting and enhancing the best interests of the Company and its shareholders. The Board also believes that when a Change in Control is perceived as imminent, or is occurring, the Board should be able to receive and rely on disinterested service from employees regarding the best interests of the Company and its shareholders without concern that employees might be distracted or concerned by the personal uncertainties and risks created by the perception of an imminent or occurring Change in Control. In addition, the Board believes that it is consistent with the Company's employment practices and policies and in the best interests of the Company and its shareholders to treat fairly its employees whose employment terminates in connection with or following a Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to assure the Company of the continued employment and attention and dedication to duty of its employees and to seek to ensure the availability of their continued service, notwithstanding the possibility or occurrence of a Change of Control. Therefore, in order to fulfill the above purpose, the following Change of Control Severance Plan has been developed and is hereby adopted. This Plan shall supercede any previous plans, policies or agreements providing Change of Control severance benefits to Participants. ARTICLE I ESTABLISHMENT OF PLAN As of the Effective Date, the Company hereby adopts the Wells Fargo & Company Change of Control Severance Plan as set forth in this document. ARTICLE II DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings (unless the context clearly indicates otherwise): (a) ANNUAL BASE SALARY. The amount of a Participant's base salary or wages on an annualized basis, which shall be at least equal to twelve times the highest monthly base salary or wages paid or payable, including any base salary or wages which have been earned but deferred, to the Participant by an Employer in respect to the twelve-month period immediately preceding the month in which the Change of Control occurs, and excluding all bonus, overtime, expense or relocation reimbursements and incentive compensation. (b) BOARD. The Board of Directors of Wells Fargo & Company. (c) CAUSE. As defined in Section 4.2(b)(iii). (d) CHANGE OF CONTROL. The first to occur of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934. as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13-d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock) or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); PROVIDED, HOWEVER, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition pursuant to a transaction which complies with clauses (A), (B), or (C) of subsection (iii) of this Section 2(d); or (ii) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority -2- of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, immediately following such Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, or the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or indirectly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial Plan, or the action of the Board, providing for such Corporate Transaction; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) CODE. The Internal Revenue Code of 1986, as amended from time to time. -3- (f) COMMITTEE. The Management Development and Compensation Committee of the Board. (g) COMPANY. Wells Fargo & Company and any successor thereto. (h) TERMINATION OF ACTIVE EMPLOYMENT. (i) If the Participant's employment is terminated by the Company for Cause or by the Participant for Good Reason, the date of receipt of the Notice of Termination (as described in Section 4.2(c)) or any later date specified therein, as the case may be, (ii) if the Participant's employment is terminated by the Company other than for Cause or Disability, the Termination of Active Employment shall be the date on which the Company notifies the Participant of such termination or any later date specified by the Company in the Participant's written Notice of Termination and (iii) if the Participant's employment is deemed terminated by reason of Disability, the Termination of Active Employment shall be the Participant's Disability Effective Date. (i) DISABILITY. As defined in Section 4.2(b)(i). (j) DISABILITY EFFECTIVE DATE. As defined in Section 4.2(b)(i). (k) EFFECTIVE DATE. Such date as the Board shall designate in its resolution approving the Plan. (l) EMPLOYEE. Any regular, full-time or part-time employee of the Employer. (m) EMPLOYER. The Company or any of its subsidiaries or affiliates. (n) GOOD REASON. As defined in Section 4.2(a). (o) HIGHEST ANNUAL BONUS. The amount of a Participant's annual bonus, which shall be equal to the higher of (i) the highest bonus paid or payable to the Participant under the Company's or an Employer's annual bonus and incentive plans, for the last three full fiscal years prior to the Change of Control, and (ii) the annual bonus paid or payable to the Participant for the most recently completed fiscal year prior to the Termination of Active Employment (in the case of clauses (i) and (ii), including any bonus or portion thereof which has been earned but deferred and, in the event that the Participant was not employed by an Employer for the whole of such fiscal year, annualized). (p) LEVEL I. The Separation Benefit calculated in accordance with Section 4.3(a)(i). (q) LEVEL II. The Separation Benefit calculated in accordance with Section 4.3(a)(ii). -4- (r) LEVEL OF PARTICIPATION. The level of a Participant's participation in the Plan, which shall be either Level I or Level II, as designated by the Committee pursuant to Section 3.1. (s) MULTIPLE. For purposes of determining a Participant's Separation Benefits and Separation Period, the Multiple is either two or three, as designated by the Committee pursuant to Section 3.1 with respect to a Level I Participant; and with respect to a Level II Participant, the Multiple is one and one-half. (t) PARTICIPANT. An Employee who meets the eligibility requirements of Section 3.1. (u) PLAN. The Wells Fargo & Company Change of Control Severance Plan, as adopted by the Board of Directors at its October 20, 1998 meeting. (v) SEPARATION BENEFITS. The amounts and benefits payable or required to be provided in accordance with Section 4.3. (w) SEPARATION PERIOD. The salary continuation leave of absence period beginning on the date of Termination of Active Employment that is equal to either (i) the number of years equal to the applicable Multiple in the case of a Level I Participant or (ii) the Multiple of one and one-half years in the case of a Level II Participant. ARTICLE III ELIGIBILITY 3.1 PARTICIPATION. The Committee shall designate which Employees are Participants in the Plan and the applicable Level of Participation and in the case of Level I Participants, the Multiple. Such designations shall be binding and conclusive. Notwithstanding the foregoing, the Committee may cause any Employee to cease to be a Participant or change a Participant's Level of Participation and in the case of a Level I Participant, the Multiple, at any time prior to the effective time of a Change of Control, provided that no such action shall be taken at the request of a third party in anticipation of a Change of Control. 3.2 DURATION OF PARTICIPATION. A Participant shall cease to be a Participant in the Plan if (i) he or she, under circumstances not entitling him or her to Separation Benefits hereunder ceases to be an Employee of an Employer or (ii) he or she ceases to be a Participant pursuant to the action of the Committee in accordance with Section 3.1. Notwithstanding the foregoing, a Participant who is entitled, as a result of ceasing to be an Employee of an Employer, to Separation Benefits under the Plan shall remain a -5- Participant in the Plan until the Separation Benefits and any other amounts or benefits under the Plan have been paid or provided in full to the Participant. ARTICLE IV SEPARATION BENEFITS 4.1 RIGHT TO SEPARATION BENEFIT. A Participant shall be entitled to receive from the Company or an Employer, the Separation Benefits provided in Section 4.3 if (i) a Change of Control has occurred and the Participant's active employment is terminated by an Employer for any reason specified in Section 4.2(a), and not one of the exceptions of Section 4.2(b), whether the termination is voluntary or involuntary, (ii) such Termination of Active Employment occurs after such Change of Control and on or before the second anniversary thereof and (iii) the Participant executes a general release agreement in accordance with Section 4.4. 4.2 TERMINATION OF ACTIVE EMPLOYMENT. (a) TERMINATIONS OF ACTIVE EMPLOYMENT WHICH GIVE RISE TO SEPARATION BENEFITS UNDER THIS PLAN. Except as set forth in subsection (b) below and subject to Section 4.4, any termination of active employment with an Employer by action of an Employer within the two-year period following a Change of Control or a termination of active employment by a Participant for Good Reason within the two-year period following a Change of Control shall entitle a Participant to the Separation Benefits provided in Section 4.3. For purposes of this Plan, "Good Reason" shall mean (i) a decrease in the Participant's Annual Base Salary, other than as the result of an isolated, insubstantial and inadvertent error not occurring in bad faith and which is remedied by the Company or the Employer promptly after receipt of notice thereof given by the Participant or (ii) the Company's or the Employer's requiring the Participant to be based at any office or location more than 35 miles from the office or location where the Participant was based and performed services immediately prior to the Change of Control, provided such change in office location results in an increase in the distance between the Participant's place of residence and the new office location. (b) TERMINATIONS WHICH DO NOT GIVE RISE TO SEPARATION BENEFITS UNDER THIS PLAN. If a Participant's active employment is terminated for Cause or Disability (as those terms are defined below) or as a result of the Participant's death, or the Participant terminates active employment other than for Good Reason, the Participant shall not be entitled to Separation Benefits under the Plan, regardless of the occurrence of a Change of Control. (i) A termination for "Disability" shall be deemed to have occurred where a Participant is absent from the Participant's duties with the Company or the Employer on a full-time basis for 180-consecutive -6- business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent in a medical certification statement prepared by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative. In such event, the Participant's employment with the Company or the Employer shall be deemed to have terminated for purposes of this Plan, effective the 30th day after receipt of such notice by the Participant (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Participant shall not have returned to active employment. (ii) A termination for "Cause" shall have occurred where a Participant is terminated because of: (A) the continued failure of the Participant to perform substantially the Participant's duties with the Company or the Employer (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for performance is delivered to the Participant by an officer of the Company or the Employer which identifies the manner in which the officer believes that the Participant has not performed the Participant's duties, or (B) the engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or the Employer. (c) NOTICE OF TERMINATION. A Notice of Termination shall communicate any termination by the Company for Cause, or by the Participant for Good Reason, to the other party. For purposes of this Plan, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Plan relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated and (iii) if the Termination of Active Employment is other than the date of receipt of such notice, specifies the applicable date (which date shall not be more than 60 days after the giving of such notice). The failure by the Participant or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Participant or the Company, respectively, from asserting such fact or circumstance in enforcing the Participant's or the Company's rights hereunder. 4.3 SEPARATION BENEFITS. If a Participant's active employment is terminated under the circumstances set forth in Section 4.2(a) entitling him or her to Separation Benefits, the Company shall pay or provide, as the case may be, to the Participant the amounts and -7- benefits set forth in items (a) through (c) below (the "Separation Benefits"), subject to Section 4.4. (a) Subject to the provisions of Section 4.4, the Company shall pay, or begin to pay, to the Participant as soon as administratively possible, a Separation Benefit computed in accordance with the Participant's designated Level of Participation (as set forth below in clauses (i) and (ii). The Participant's Annual Base Salary shall be paid in the form of salary continuation during the Participant's Separation Period (as determined by the Multiple applicable to such Participant) and the Participant's Highest Annual Bonus (multiplied by the Multiple applicable to such Participant) shall be paid in a lump sum. (i) LEVEL I. The Separation Benefit payable to a Participant with a Level of Participation designated by Level I shall equal the product of (A) the Multiple (either two or three, as determined in accordance with Section 3.1) and (B) the sum of (x) the Participant's Annual Base Salary and (y) the Highest Annual Bonus. (ii) LEVEL II. The Separation Benefit payable to a Participant with a Level of Participation designated as Level II shall equal the product of (A) the Multiple (one and one-half) and (B) the sum of (x) the Participant's Annual Base Salary and (y) the Highest Annual Bonus. (b) For the Separation Period, the Company shall continue welfare benefits to the Participant and/or the Participant's eligible dependents at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs), as in effect immediately prior to the Change of Control, or, if more favorable to the Participant, as in effect immediately prior to the date of Termination of Active Employment; PROVIDED, HOWEVER, that if the Participant becomes reemployed with another employer and is eligible to receive medical and other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Participant for retiree benefits pursuant to such plans, practices, programs and policies, the Participant shall be considered to have remained employed until the end of the Separation Period. (c) The Company shall timely pay or provide to the Participant any other amounts or benefits due or payable or which the Participant is eligible to receive under any plan, program, policy or practice or contract or agreement of, or with, the Company and its affiliated companies, as if the -8- Participant remained an Employee on a paid leave of absence during the Separation Period. 4.4 GENERAL RELEASE AGREEMENT. As set forth in Section 4.1, Separation Benefits under this Plan are contingent upon the Participant's execution of a general release agreement in such form as determined by the Plan's administrator. Upon the execution of the general release agreement, Participant has seven days in which to revoke such agreement. As soon as administratively possible following this seven-day revocation period, the Company shall pay, or begin to pay, Separation Benefits to the Participant. However, in no event shall Separation Benefits begin prior to the Participant's Termination of Active Employment, the timely execution of the general release agreement and the expiration of the rescission period. 4.5 EXCESS PARACHUTE PAYMENTS. Anything in this Plan to the contrary notwithstanding, the Committee shall in its sole and absolute discretion determine whether a Participant, with respect to the Separation Benefits provided under the Plan or otherwise, shall receive a Gross-Up Payment pursuant to the terms of Schedule I hereof, a Modified Reduced Amount pursuant to the terms of Schedule II hereof, or a Reduced Amount pursuant to the terms of Schedule III hereof. The determination of the Committee with respect to the application of the provisions of Schedule I, II or III to the Separation Benefits of an individual Participant shall be made at the time an Employee is designated as a Participant and shall be binding and conclusive. 4.6. PAYMENT OBLIGATIONS ABSOLUTE. Upon a Change of Control, subject to Section 4.5, the obligations of the Company to pay or provide the Separation Benefits described in Section 4.3 shall be absolute and unconditional, subject to compliance with Sections 4.3 and 4.4, and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company, the Employer or any of their affiliates may have against any Participant. In no event shall a Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to a Participant under any of the provisions of this Plan, nor shall the amount of any payment or value of any benefits thereunder be reduced by any compensation or benefits earned by a Participant as a result of employment by another employer, except as provided under Section 4.3(c). Nothing in this Plan shall prevent or limit the Participant's continuing or future participation in any plan, program, policy or practice provided by the Company, the Employer or any of their affiliated companies and for which the Participant may qualify, nor, subject to Section 7.2, shall anything herein limit or otherwise affect such rights as the Participant may have under any contract or agreement with the Company or any of its subsidiaries or affiliated companies. Amounts or benefits which the Participant is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Plan. However, benefits under the Wells Fargo & Company Change of Control Severance Plan, as adopted by the Board -9- of Directors of Wells Fargo at its October 20, 1998 meeting, are in lieu of any other severance benefits that would otherwise be payable to the Participant. ARTICLE V SUCCESSOR TO COMPANY This Plan shall bind any successor of the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by the Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term "Company," as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan. ARTICLE VI DURATION, AMENDMENT AND TERMINATION 6.1 DURATION. If a Change of Control has not occurred, this Plan shall expire five years from the Effective Date, unless sooner terminated as provided in Section 6.2, or unless extended for an additional period or periods by resolution adopted by the Board. If a Change of Control occurs, this Plan shall continue in full force and effect and shall not terminate or expire until after all Participants who become entitled to any payments hereunder shall have received such payments in full. 6.2 AMENDMENT AND TERMINATION. The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board, unless a Change of Control has previously occurred. However, after the Board has knowledge of a transaction or event that if consummated would constitute a Change of Control, this Plan may not be terminated or amended in any manner which would adversely affect the rights or potential rights of Participants, unless and until the Board has determined that the transactions or events that, if consummated, would constitute a Change of Control have been abandoned and will not be consummated, and, provided that, the Board does not have knowledge of other transactions or events that, if consummated, would constitute a Change of Control. If a Change of Control occurs, the Plan shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect which adversely affects the rights of Participants. -10- ARTICLE VII MISCELLANEOUS 7.1 INDEMNIFICATION. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Participant may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Participant or others of the validity or enforceability of, or liability under, any provision of this Plan or any guarantee of performance thereof (including as a result of any contest by the Participant about the amount of any payment pursuant to this Plan), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 7.2 EMPLOYMENT STATUS. This Plan does not constitute a contract of employment or impose on the Participant, the Company or the Participant's Employer any obligation to retain the Participant as an employee, to change the status of the Participant's employment, or to change the Company's or the Employer's policies or those of their affiliates regarding termination of employment. 7.3 TAX WITHHOLDING. The Company may withhold from any amounts payable under this Plan such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 7.4 VALIDITY AND SEVERABILITY. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability or any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.5 GOVERNING LAW. The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of California, without reference to principles of conflict of law. 7.6 CLAIM PROCEDURE. If a Participant makes a written request alleging a right to receive Separation Benefits under the Plan or alleging a right to receive an adjustment in benefits being paid under the Plan, the Company shall treat it as a claim for benefits. All claims for Separation Benefits under the Plan shall be sent to the Human Resources Department of the Company and must be received within 30 days after the Termination of Active Employment. If the Company determines that any individual who has claimed a right to receive Separation Benefits under the Plan is not entitled to receive all or a part of the benefits claimed, it will inform the claimant in writing of its determination and the reasons therefor in terms calculated to be understood by the claimant. The notice will be sent within 90 days of the written request, unless the Company determines additional time, not exceeding 90 days, is needed. The notice shall make specific reference to the pertinent Plan provisions on which the denial is based, and described any additional material or information that is necessary. Such notice shall, in addition, inform the claimant what procedure the claimant should follow to take advantage of the 11 review procedures set forth below in the event the claimant desires to contest the denial of the claim. The claimant may within 90 days thereafter submit in writing to the Company, a notice that the claimant contests the denial of his or her claim by the Company and desires a further review. The Company shall within 60 days thereafter review the claim and authorize the claimant to appear personally and review the pertinent documents and submit issues and comments relating to the claim to the persons responsible for making the determination on behalf of the Company. The Company will render its final decision with specific reasons therefor in writing and will transmit it to the claimant within 60 days of the written request for review, unless the Company determines additional time, not exceeding 60 days, is needed, and so notifies the Participant. If the Company fails to respond to a claim filed in accordance with the foregoing within 60 days or any such extended period, the Company shall be deemed to have denied the claim. 7.7 UNFUNDED PLAN STATUS. This Plan is intended to be an unfunded plan. All payments pursuant to the Plan shall be made from the general funds of the Company and no special or separate fund shall be established or other segregation of assets made to assure payment. No Participant or other person shall have under any circumstances any interest in any particular property or assets of the Company as a result of participating in the Plan. Notwithstanding the foregoing, the Company may (but shall not be obligated to) create one or more grantor trusts, the assets of which are subject to the claims of the Company's creditors, to assist it in accumulating funds to pay its obligations under the Plan. -12- SCHEDULE I GROSS-UP PAYMENT. (a) Anything in the Plan to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Participant (whether paid or payable or distributed or distributable pursuant to the terms of the Plan or otherwise, but determined without regard to any additional payments required under this Schedule I) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of the Section (a) of Schedule I, if it shall be determined that the Participant is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Participant such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Participant and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section (c) of Schedule I, all determinations required to be made under Schedule I, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick or such other certified public accounting firm as may be designated by the Participant (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Participant within 15 business days of the receipt of notice from the Participant that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Participant may use the nationally recognized accounting firm of Ernst & Young LLP or appoint another nationally recognized accounting firm to make determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Schedule I, shall be paid by the Company to the Participant within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Participant. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies -13- pursuant to Section (c) of Schedule I and the Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. (c) The Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Participant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date than any payment of taxes with respect to such claim is due). If the Company notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings related to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of the Section (c) of Schedule I, the Company shall control all proceedings taken in connection with such contest and, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs Participant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Participant, on an interest-free basis and shall indemnify and hold the Participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or -14- penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Participant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section (c) of Schedule I, the Participant becomes entitled to receive any refund with respect to such claim, the Participant shall (subject to the Company's complying with the requirements of Section (c) of Schedule I) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after receipt by the Participant of an amount advanced by the Company pursuant to Section (c) of Schedule I, a determination is made that the Participant shall not be entitled to any refund with respect to such claim and the Company does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. -15- SCHEDULE II MODIFIED REDUCED AMOUNT. (a) For purposes of this Schedule II: (i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of the Participant, whether paid or payable pursuant to the Plan or otherwise; (ii) "Plan of Payment" shall mean a Payment paid or payable pursuant to the Plan (disregarding this Schedule II); (iii) "Net After Tax Receipt" shall mean the Present Value of a Payment net of all federal, state and local taxes imposed on the Participant with respect thereto (including without limitation under Section 4999 of the Code), determined by applying the highest marginal rates of such taxes that applied to the Participant's taxable income for the immediately preceding taxable year, or such other rate(s) as the Participant shall in his or her sole discretion certify as likely to apply to the Participant in the relevant tax year(s); (iv) "Present Value" shall mean such value determined in accordance with Section 280G(d)(4) of the Code; and (v) "Modified Reduced Amount" shall mean the smallest aggregate amount of Plan Payments which (A) is less than the sum of all Plan Payments and (B) results in aggregate Net After Tax Receipts which are equal to or greater than the Net After Tax Receipts which would result if the aggregate Plan Payments were any other amount less than the sum of all Plan Payments. Anything in the Plan to the contrary notwithstanding, in the event KPMG Peat Marwick LLP or such other nationally recognized certified public accounting firm as may be designated by the Participant (the "Accounting Firm") shall determine that receipt of all Payments would subject the Participant to tax under Section 4999 of the Code, it shall determine whether some amount of Plan Payments would meet the definition of a "Reduced Amount." If said firm determines that there is a Modified Reduced Amount, the aggregate Plan Payments shall be reduced to such Modified Reduced Amount. (b) If the Accounting Firm determines that aggregate Plan Payments should be reduced to the Modified Reduced Amount, the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof, and the Participant may then elect, in his or her sole discretion, which and how much of the Plan Payments shall be eliminated or reduced (as long as after such election the present value of the aggregate Plan Payments equals the Modified Reduced Amount), and shall advise the Company in writing of his or her election within ten days of his or her receipt of notice. If no such election is made by the Participant within such ten-day period, the Company may elect which of such Plan Payments shall be eliminated or reduced (as long as after such election the present value of the aggregate Plan Payments equals the Modified Reduced Amount) and shall notify the Participant promptly of such election. All determinations made by the Accounting Firm under this Schedule II shall be binding upon the Company and the Participant and shall be made within 60 days of a termination of employment of the Participant. As promptly as practicable following such determination, the Company shall pay to or distribute for the benefit of the Participant such Plan Payments as are then due to the Participant under the Plan and shall promptly pay to or distribute for the benefit of the Participant in the future such Plan Payments as become due to the Participant under the Plan. -16- (c) While it is the intention of the Company and the Participant to reduce the amounts payable or distributable to the Participant hereunder only if the aggregate Net After Tax Receipts to the Participant would thereby be increased, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of the Participant pursuant to the Plan which should not have been paid or so distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of the Participant pursuant to the Plan could have been so paid or distributed ("Underpayment"), in each case, consistent with the calculation of the Modified Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Participant shall be treated for all purposes as a loan to the Participant which the Participant shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; PROVIDED, HOWEVER, that no such loan shall be deemed to have been made and no amount shall be payable by the Participant to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Participant is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant together with interest as the applicable federal rate provided for in Section 7872(f)(2) of the Code. (d) All fees and expenses of the Accounting Firm in implementing the provisions of this Schedule II shall be borne by the Company. -17- SCHEDULE III REDUCED AMOUNT. (a) For purposes of this Schedule III: (i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of a Participant, whether paid or payable pursuant to the Plan or otherwise; (ii) "Separation Benefits" shall mean a Payment paid or payable pursuant to the Plan (disregarding this Schedule III); "(iii) "Present Value" shall mean such value determined in accordance with Section 280G(d)(4) of the Internal Revenue Code; and (iv) "Reduced Amount" shall mean an amount expressed in Present Value that maximizes the aggregate Present Value of Separation Benefits without causing any Payment to be nondeductible by the Company or Employer because of Section 280G of the Code. Anything in the Plan to the contrary notwithstanding, in the event KPMG Peat Marwick LLP (the "Accounting Firm") shall determine that receipt of all Payments would subject the Participant to tax under Section 4999 of the Code, the aggregate Separation Benefits shall be reduced (but not below zero) to meet the definition of Reduced Amount. (b) If the Accounting Firm determines that aggregate Separation Benefits should be reduced to the Reduced Amount, the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof, and the Participant may then elect, in his or her sole discretion, which and how much of the Separation Benefits shall be eliminated or reduced (as long as after such election the present value of the aggregate Separation Benefits equals the Reduced Amount), and shall advise the Company in writing of his or her election within ten days of his or her receipt of notice. If no such election is made by the Participant within such ten-day period, the Company may elect which of such Separation Benefits shall be eliminated or reduced (as long as after such election the present value of the aggregate Separation Benefits equals the Reduced Amount) and shall notify the Participant promptly of such election. All determinations made by the Accounting Firm under this Schedule III shall be binding upon the Company and the Participant and shall be made within 60 days of a termination of employment by the Participant. As promptly as practicable following such determination, the Company shall pay to or distribute for the benefit of the Participant such Separation Benefits as are then due to the Participant under the Plan and shall promptly pay to or distribute for the benefit of the Participant in the future such Separation Benefits as become due to the Participant under the Plan. (c) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of a Participant pursuant to the Plan which should not have been so paid or distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of a Participant pursuant to the Plan could have been so paid or distributed ("Underpayment"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such -18- Overpayment paid or distributed by the Company to or for the benefit of a Participant shall be treated for all purposes as a loan to the Participant which the Participant shall repay to the Company together with interest as the applicable federal rate provided for in Section 7872(f)(2) of the Code; PROVIDED, HOWEVER, that no such loan shall be deemed to have made and no amount shall be payable by a Participant to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Participant is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. (d) All fees and expenses of the Accounting Firm in implementing provisions of this Schedule III shall be borne by the Company. -19- EX-11 5 EXHIBIT 11 EXHIBIT 11 WFC HOLDINGS CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------- --------------- (in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Net income $ 347 $ 290 $ 999 $ 857 Less preferred dividends 4 5 13 21 ----- ----- ------ ----- Net income for calculating earnings per common share $ 343 $ 285 $ 986 $ 836 ----- ----- ------ ----- ----- ----- ------ ----- Average common shares outstanding 85.2 87.5 85.4 89.1 ----- ----- ------ ----- ----- ----- ------ ----- EARNINGS PER COMMON SHARE $4.03 $3.26 $11.55 $9.38 ----- ----- ------ ----- ----- ----- ------ ----- DILUTED EARNINGS PER COMMON SHARE Net income $ 347 $ 290 $ 999 $ 857 Less preferred dividends 4 5 13 21 ----- ----- ------ ----- Net income for calculating diluted earnings per common share $ 343 $ 285 $ 986 $ 836 ----- ----- ------ ----- ----- ----- ------ ----- Average common shares outstanding 85.2 87.5 85.4 89.1 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 .7 .9 .8 1.0 ----- ----- ------ ----- Diluted average common shares outstanding 85.9 88.4 86.2 90.1 ----- ----- ------ ----- ----- ----- ------ ----- DILUTED EARNINGS PER COMMON SHARE $3.99 $3.23 $11.44 $9.28 ----- ----- ------ ----- ----- ----- ------ ----- - --------------------------------------------------------------------------------------------------
EX-27 6 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q DATED NOVEMBER 23, 1998 FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 6,538 0 1,080 922 8,242 0 0 64,374 1,833 92,815 69,769 1,870 2,760 5,113 0 275 426 12,499 92,815 4,524 403 101 5,028 1,219 1,602 3,426 510 41 3,277 1,836 999 0 0 999 11.55 11.44 6.14 506 203 0 0 1,828 713 208 1,833 0 0 0 Amount represents basic earnings per common share pursuant to FAS 128.
EX-99.A 7 EXHIBIT 99(A) EXHIBIT 99(a) WFC HOLDINGS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ---------------- ---------------- (in millions) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 636 $ 543 $1,836 $1,613 Fixed charges 551 610 1,697 1,805 ------ ------ ------ ------ $1,187 $1,153 $3,533 $3,418 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges (1): Interest expense $ 520 $ 579 $1,602 $1,710 Estimated interest component of net rental expense 31 31 95 95 ------ ------ ------ ------ $ 551 $ 610 $1,697 $1,805 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 2.15 1.89 2.08 1.89 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 636 $ 543 $1,836 $1,613 Fixed charges 144 180 478 525 ------ ------ ------ ------ $ 780 $ 723 $2,314 $2,138 ------ ------ ------ ------ ------ ------ ------ ------ Fixed charges: Interest expense $ 520 $ 579 $1,602 $1,710 Estimated interest component of net rental expense 31 31 95 95 Less interest on deposits 407 430 1,219 1,280 ------ ------ ------ ------ $ 144 $ 180 $ 478 $ 525 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges (2) 5.42 4.02 4.84 4.07 ------ ------ ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------
(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 8 EXHIBIT 99(B) EXHIBIT 99(b) WFC HOLDINGS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- --------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ---------------- ---------------- (in millions) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 636 $ 543 $1,836 $1,613 Fixed charges 551 610 1,697 1,805 ------ ------ ------ ------ $1,187 $1,153 $3,533 $3,418 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividend requirement $ 4 $ 5 $ 13 $ 21 Ratio of income before income tax expense to net income 1.83 1.87 1.84 1.88 ------ ------ ------ ------ Preferred dividends (2) $ 7 $ 9 $ 24 $ 40 ------ ------ ------ ------ Fixed charges (1): Interest expense 520 579 1,602 1,710 Estimated interest component of net rental expense 31 31 95 95 ------ ------ ------ ------ 551 610 1,697 1,805 ------ ------ ------ ------ Fixed charges and preferred dividends $ 558 $ 619 $1,721 $1,845 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 2.13 1.86 2.05 1.85 ------ ------ ------ ------ ------ ------ ------ ------ EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 636 $ 543 $1,836 $1,613 Fixed charges 144 180 478 525 ------ ------ ------ ------ $ 780 $ 723 $2,314 $2,138 ------ ------ ------ ------ ------ ------ ------ ------ Preferred dividends (2) $ 7 $ 9 $ 24 $ 40 ------ ------ ------ ------ Fixed charges: Interest expense 520 579 1,602 1,710 Estimated interest component of net rental expense 31 31 95 95 Less interest on deposits 407 430 1,219 1,280 ------ ------ ------ ------ 144 180 478 525 ------ ------ ------ ------ Fixed charges and preferred dividends $ 151 $ 189 $ 502 $ 565 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges and preferred dividends (3) 5.17 3.83 4.61 3.78 ------ ------ ------ ------ ------ ------ ------ ------ - ---------------------------------------------------------------------------------------------------------
(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-----