UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-2979 WELLS FARGO & COMPANY formerly known as Norwest Corporation A Delaware Corporation-I.R.S. No. 41-0449260 420 Montgomery Street San Francisco, California 94163 Telephone (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. X Yes ___ No. Common Stock, par value $1 2/3 per share, outstanding at October 31, 1998 768,938,001 shares
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The following consolidated financial statements of Norwest Corporation and its subsidiaries are included herein: Page 1. Consolidated Balance Sheets - September 30, 1998 and December 31, 1997..................... 3 2. Consolidated Statements of Income - Quarters and Nine Months Ended September 30, 1998 and 1997... 4 3. Consolidated Statements of Comprehensive Income - Quarters and Nine Months Ended September 30, 1998 and 1997... 5 4. Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997................ 6 5. Consolidated Statements of Stockholders' Equity - Nine Months Ended September 30, 1998 and 1997................ 7 6. Notes to Unaudited Consolidated Financial Statements........... 9 The financial information for the interim periods is unaudited. In the opinion of management, all adjustments necessary (which are of a normal recurring nature) have been included for a fair presentation of the results of operations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for a full year or any other interim period. EXPLANATORY NOTE On November 2, 1998, Wells Fargo & Company (the "former Wells Fargo") merged 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." For purposes of this report, unless otherwise indicated, "corporation" refers to the former Norwest Corporation, now known as Wells Fargo & Company. Because the merger occurred after September 30, 1998, this report does not give effect to the merger and the resulting combination of the corporation and the former Wells Fargo unless otherwise indicated. 2
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> In millions, except shares September 30, December 31, 1998 1997 <C> <C> ASSETS Cash and due from banks ...................... $ 4,447.3 4,912.1 Interest-bearing deposits with banks ......... 56.9 46.6 Federal funds sold and resale agreements ..... 870.5 967.4 Total cash and cash equivalents .......... 5,374.7 5,926.1 Trading account securities ................... 356.9 486.9 Investment and mortgage-backed securities available for sale ......................... 24,585.2 17,983.9 Investment securities held to maturity (fair value $911.8 in 1998 and $762.8 in 1997) ... 901.3 747.2 Total investment securities .............. 25,486.5 18,731.1 Loans held for sale .......................... 3,873.0 3,407.0 Mortgages held for sale ...................... 14,720.6 8,848.0 Loans and leases, net of unearned discount ... 45,250.6 42,521.6 Allowance for credit losses .................. (1,336.7) (1,233.9) Net loans and leases ..................... 43,913.9 41,287.7 Premises and equipment, net .................. 1,469.9 1,295.5 Mortgage servicing rights, net ............... 2,724.7 2,774.9 Interest receivable and other assets ......... 5,806.8 5,783.0 Total assets ............................. $103,727.0 88,540.2 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing ........................ $ 18,409.1 16,253.3 Interest-bearing ........................... 41,772.9 39,203.8 Total deposits ........................... 60,182.0 55,457.1 Short-term borrowings ........................ 15,700.2 9,557.0 Accrued expenses and other liabilities ....... 5,684.9 3,737.2 Long-term debt ............................... 14,672.0 12,766.7 Total liabilities ........................ 96,239.1 81,518.0 Preferred stock .............................. 276.8 267.4 Unearned ESOP shares ......................... (89.7) (79.4) Total preferred stock .................... 187.1 188.0 Common stock, $1 2/3 par value - authorized 2,000,000,000 shares: Issued 783,448,890 and 769,113,149 shares in 1998 and 1997, respectively ............ 1,305.7 1,281.9 Surplus ...................................... 541.6 419.6 Retained earnings ............................ 5,613.1 5,007.7 Accumulated other comprehensive income ....... 405.6 409.9 Notes receivable from ESOP ................... (4.0) (10.1) Treasury stock - 15,309,106 and 10,493,685 common shares in 1998 and 1997, respectively (561.2) (274.8) Total common stockholders' equity ........ 7,300.8 6,834.2 Total stockholders' equity ............... 7,487.9 7,022.2 Total liabilities and stockholders' equity ................... $103,727.0 88,540.2 </TABLE> See notes to unaudited consolidated financial statements. 3
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> In millions, except per common share amounts Quarter Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 <C> <C> <C> <C> INTEREST INCOME ON Loans and leases ..................... $1,234.4 1,153.1 3,617.9 3,364.2 Investment and mortgage-backed securities available for sale ...... 305.1 326.1 936.4 1,016.4 Investment securities held to maturity ................... 6.9 6.9 20.0 21.0 Loans held for sale .................. 72.6 56.2 211.5 168.3 Mortgages held for sale .............. 221.1 128.5 573.9 324.0 Money market investments ............. 17.1 8.9 38.9 39.4 Trading account securities .......... 12.8 13.2 40.5 28.5 Total interest income ............ 1,870.0 1,692.9 5,439.1 4,961.8 INTEREST EXPENSE ON Deposits ............................. 381.6 360.7 1,120.8 1,075.4 Short-term borrowings ................ 175.3 112.0 466.8 327.1 Long-term debt ....................... 197.7 197.6 588.4 578.6 Total interest expense ........... 754.6 670.3 2,176.0 1,981.1 Net interest income ............ 1,115.4 1,022.6 3,263.1 2,980.7 PROVISION FOR CREDIT LOSSES .......... 146.8 146.7 410.7 378.5 Net interest income after provision for credit losses .. 968.6 875.9 2,852.4 2,602.2 NON-INTEREST INCOME Mortgage banking ..................... 284.7 224.7 824.8 623.8 Trust and investment fees and commissions .................... 130.1 112.2 386.1 321.0 Service charges and credit related fees ...................... 180.2 148.8 490.7 424.5 Credit card fee revenue .............. 43.7 32.4 116.5 88.2 Insurance ............................ 73.3 73.5 278.5 263.6 Data processing ...................... 19.6 18.3 52.8 54.7 Net investment securities held to maturity (losses).................... - (0.3) - - Net investment and mortgage-backed securities available for sale gains . 54.8 15.7 96.9 19.9 Net venture capital gains ............ 4.3 52.8 116.2 165.3 Trading .............................. 44.3 12.7 110.7 64.9 Other ................................ 54.5 62.6 176.8 168.5 Total non-interest income ........ 889.5 753.4 2,650.0 2,194.4 NON-INTEREST EXPENSES Salaries and benefits ................ 730.8 608.0 2,119.9 1,724.5 Net occupancy ........................ 90.2 82.0 264.6 241.6 Equipment rentals, depreciation and maintenance ................... 96.7 81.8 279.8 247.5 Business development ................. 67.1 63.3 199.1 185.4 Communication ........................ 82.6 73.4 241.6 216.2 Data processing ...................... 44.9 39.6 122.7 127.0 Intangible asset amortization ........ 40.1 42.5 126.1 125.9 Other ................................ 113.9 120.7 447.0 404.4 Total non-interest expenses ...... 1,266.3 1,111.3 3,800.8 3,272.5 INCOME BEFORE INCOME TAXES ........... 591.8 518.0 1,701.6 1,524.1 Income tax expense ................... 198.9 176.4 558.9 529.2 NET INCOME ........................... $ 392.9 341.6 1,142.7 994.9 PER COMMON SHARE Net Income Basic .............................. $ 0.51 0.45 1.49 1.31 Diluted ............................ 0.50 0.44 1.46 1.29 Dividends ........................... 0.185 0.150 0.515 0.450 </TABLE> See notes to unaudited consolidated financial statements. 4
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) <TABLE> Quarter Nine Months In millions Ended Ended September 30, September 30, 1998 1997 1998 1997 <C> <C> <C> <C> Net income ..................................... $ 392.9 341.6 1,142.7 994.9 Other comprehensive income, before income taxes: Change in net unrealized gains (losses) on securities available for sale: Unrealized gains arising during the period ... 109.9 244.1 212.4 401.7 Less: reclassification adjustment for gains included in net income ...................... 59.1 68.5 213.1 185.2 50.8 175.6 (0.7) 216.5 Foreign currency translation adjustment ....... (4.8) (0.2) (7.5) (1.7) Other comprehensive income, before income taxes .......................... 46.0 175.4 (8.2) 214.8 Income tax (expense) benefit related to components of other comprehensive income at an effective income tax rate of 35 percent........ (16.1)(61.4) 2.9 (75.2) Other comprehensive income, net of income taxes ........................... 29.9 114.0 (5.3) 139.6 Comprehensive income ........................... $ 422.8 455.6 1,137.4 1,134.5 </TABLE> See notes to unaudited consolidated financial statements. 5
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> Nine Months Ended In millions September 30, 1998 1997 <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income ..............................................$ 1,142.7 994.9 Adjustments to reconcile net income to net cash flows from operating activities: Provision for credit losses ......................... 410.7 378.5 Depreciation and amortization ....................... 994.4 613.9 Gains on sales of loans, securities and other assets, net ............................. (644.9) (279.9) Release of preferred shares to ESOP ................. 25.6 27.6 Purchases of trading account securities .............(106,926.5) (73,819.7) Proceeds from sales of trading account securities ... 107,528.1 73,690.0 Originations of mortgages held for sale ............. (74,846.5) (38,729.2) Proceeds from sales of mortgages held for sale ...... 69,258.5 37,603.2 Originations of loans held for sale ................. (1,038.8) (989.5) Proceeds from sales of loans held for sale .......... 588.6 648.8 Interest receivable ................................. (91.4) (64.2) Interest payable .................................... 31.2 23.9 Other assets, net ................................... (438.4) (853.7) Other accrued expenses and liabilities, net ......... 977.4 335.8 Net cash flows from operating activities .......... (3,029.3) (419.6) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and paydowns of investment securities held to maturity ......................... 4.8 0.5 Proceeds from maturities and paydowns of investment and mortgage-backed securities available for sale ... 3,228.2 1,928.2 Proceeds from sales and calls of investment securities held to maturity .................................... 52.8 82.4 Proceeds from sales and calls of investment and mortgage-backed securities available for sale ....... 7,546.5 7,822.3 Purchases of investment securities held to maturity ... (231.5) (120.8) Purchases of investment and mortgage-backed securities available for sale ........................ (16,034.6) (11,368.4) Net change in banking subsidiaries' loans and leases .. (411.0) (284.4) Non-bank subsidiaries' loans and leases originated .... (6,440.8) (7,218.5) Principal collected on non-bank subsidiaries' loans and leases .................................... 5,591.7 7,090.8 Purchases of premises and equipment ................... (343.8) (227.1) Proceeds from sales of premises, equipment & other real estate owned ............................. 166.5 82.5 Cash paid for acquisitions, net of cash and cash equivalents acquired ................................. 36.2 (229.9) Net cash flows used for investing activities ........ (6,835.0) (2,442.4) CASH FLOWS FROM FINANCING ACTIVITIES Deposits, net ......................................... 2,464.7 576.3 Short-term borrowings, net ............................ 5,866.4 1,354.0 Long-term debt borrowings ............................. 3,437.6 2,473.5 Repayments of long-term debt .......................... (1,644.6) (3,512.0) Issuances of common stock ............................. 100.5 111.3 Repurchases of common stock ........................... (514.3) (351.1) Net decrease in notes receivable from ESOP............. 7.9 1.0 Dividends paid ........................................ (405.3) (350.3) Net cash flows used for financing activities ........ 9,312.9 302.7 Net decrease in cash and cash equivalents ........... (551.4) (2,559.3) CASH AND CASH EQUIVALENTS Beginning of period ................................... 5,926.1 7,371.3 End of period .........................................$ 5,374.7 4,812.0 </TABLE> See notes to unaudited consolidated financial statements. 6
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) Accum- ulated Notes In Un- Re- Other Recei- millions, Pre- earned tained Compre- vable Trea- except ferred ESOP Commo Sur- Earn- hensive from sury for Stock Shares Stock plus ings Income ESOP Stock Total shares <TABLE> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1996....$ 249.8 (61.0) 625.9 948.6 4,248.2 297.1 (11.1) (233.3) 6,064.2 Comprehensive income: Net income.. - - - - 994.9 - - - 994.9 Other... - - - - - 139.6 - - 139.6 Stock split... - - 635.2 (635.2) - - - - - Dividends on Common stock.. - - - - (337.0) - - - (337.0) Preferred stock... - - - - (13.3) - - - (13.3) Conversion of 27,572 preferred shares to 1,044,696 common shares... (27.6) - - 3.9 - - - 23.7 - Cash payments received on notes receivable from ESOP.... - - - - - - 1.0 - 1.0 Issuance of 51,700 preferred shares to ESOP.... 51.7 (53.8) - 2.1 - - - - - Release of preferred shares to ESOP. - 28.7 - (1.1) - - - - 27.6 Issuance of 10,529,358 common shares.. - - - 61.5 (128.2) - - 226.5 159.8 Issuance of 15,157,890 common shares for acquis- itions.. - - 9.3 (1.9) 43.8 1.0 - 85.1 137.3 Repurchase of 13,042,510 common shares.. - - - 0.9 - - - (352.0) (351.1) Balance, September 30, 1997.... $ 73.9 (86.1) 1,270.4 378.8 4,808.4 437.7 (10.1) (250.0) 6,823.0 </TABLE> (Continued on page 8) 7
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Continued from page 7) <TABLE> Accum- ulated Notes In Un- Re- Other Receiv- millions, Pref- earned tained Compre- able except erred ESOP Common Sur- Earn- hensive from Treasury for Stock Shares Stock plus ings Income ESOP Stock Total shares <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1997.... $267.4 (79.4) 1,281.9 419.6 5,007.7 409.9 (10.1) (274.8) 7,022.2 Comprehensive income: Net income.. - - - - 1,142.7 - - - 1,142.7 Other... - - - - - (5.3) - - (5.3) Dividends on Common stock.. - - - - (392.0) - - - (392.0) Preferred stock.. - - - - (13.3) - - - (13.3) Conversion of 25,573 preferred shares to 661,993 common shares.. (25.6) - - 2.8 - - - 22.8 - Cash payments received on notes receivable from ESOP... - - - 1.8 - - 6.1 - 7.9 Issuance of 35,000 preferred shares to ESOP... 35.0 (37.7) - 2.7 - - - - - Release of preferred shares to ESOP.. - 27.4 - (1.8) - - - - 25.6 Issuance of 6,585,434 common shares.. - - - 61.8 (143.3) - - 210.2 128.7 Issuance of 16,002,900 common shares for acquis- itions. - - 23.8 55.0 11.3 1.0 - 58.5 149.6 Repurchase of 13,730,007 common shares. - - - (0.3) - - - (514.0) (514.3) Reclass- ification of common shares held in rabbi trusts . - - - - - - - (63.9) (63.9) Balance, September 30, 1998... $276.8 (89.7) 1,305.7 541.6 5,613.1 405.6 (4.0) (561.2) 7,487.9 </TABLE> See notes to unaudited consolidated financial statements. 8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in Accounting Policies Effective January 1, 1998, the corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"(FAS 130). FAS 130 requires disclosures of the components of comprehensive income and the accumulated balance of other comprehensive income within total stockholders' equity. The adoption of FAS 130 has not had a material effect on the corporation's financial statements. 2. Consolidated Statements of Cash Flows Supplemental disclosures of cash flow information for the nine months ended September 30 include: <TABLE> In millions 1998 1997 <C> <C> Interest...................................... $2,144.7 1,957.2 Income taxes.................................. 217.8 300.9 Transfer of loans to other real estate owned.. 105.0 35.9 </TABLE> See Notes 8 and 13 for certain non-cash common and preferred stock transactions. 3. Earnings Per Share Basic earnings per share, pursuant to Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (FAS 128) is determined using net income, adjusted for preferred stock dividends, divided by weighted average common shares outstanding. Diluted earnings per share, as defined by FAS 128, is computed based on the amount of income that would be available for each common share assuming all dilutive potential common shares were issued. Such dilutive potential common shares include stock options and the 6 3/4 percent convertible subordinated debentures. Amounts used in the determination of basic and diluted earnings per share for the quarters and nine months ended September 30, 1998 and 1997 are shown in the table below. <TABLE> In millions, except shares Quarter Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 <C> <C> <C> <C> Net income ............... $ 392.9 341.6 1,142.7 994.9 Less dividends accrued on preferred stock ........ 4.4 4.4 13.3 13.3 Income available to common stockholders ........... $ 388.5 337.2 1,129.4 981.6 Weighted average shares outstanding ............ 765,653,727 749,282,812 760,438,377 748,012,272 Adjustments for dilutive securities: Assumed exercise of stock options .......... 15,695,414 9,181,666 13,842,583 10,031,912 Assumed conversion of convertible subordinated debentures ........... 34,400 34,800 34,445 34,800 Diluted common shares .... 781,383,541 758,499,278 774,315,405 758,078,984 </TABLE> 9
4. Investment Securities The amortized cost and fair value of investment securities at September 30, 1998 were: <TABLE> In millions Gross Gross Amort- Unrea- Unrea- tized lized lized Fair Cost Gains Losses Value <C> <C> <C> <C> Available for sale: U.S. Treasury and federal agencies .. $ 2,118.8 54.0 (2.5) 2,170.3 State, municipal and housing - tax exempt ......................... 1,439.5 96.7 (0.6) 1,535.6 Other ............................... 1,845.0 146.2 (22.2) 1,969.0 Total investment securities available for sale .............. 5,403.3 296.9 (25.3) 5,674.9 Mortgage-backed securities: Federal agencies ................... 18,222.6 374.5 (7.9) 18,589.2 Collateralized mortgage obligations ....................... 314.5 7.4 (0.8) 321.1 Total mortgage-backed securities available for sale .............. 18,537.1 381.9 (8.7) 18,910.3 Total investment and mortgage-backed securities available for sale .................. $23,940.4 678.8 (34.0) 24,585.2 Investment securities held to maturity ........................... $ 901.3 12.5 (2.0) 911.8 Total investment securities .......... $24,841.7 691.3 (36.0) 25,497.0 </TABLE> Interest income on investment securities for the quarters and nine months ended September 30 was: <TABLE> Quarter Nine Months In millions 1998 1997 1998 1997 <C> <C> <C> <C> Available for sale: U.S. Treasury and federal agencies .. $ 40.8 32.4 137.9 128.9 State, municipal and housing - tax exempt ........................ 20.6 19.6 61.5 54.2 Other ............................... 21.7 11.7 45.4 35.9 Total investment securities available for sale .............. 83.1 63.7 244.8 219.0 Mortgage-backed securities: Federal agencies ................... 217.4 257.5 678.4 784.1 Collateralized mortgage obligations ....................... 4.6 4.9 13.2 13.3 Total mortgage-backed securities available for sale .............. 222.0 262.4 691.6 797.4 Total investment and mortgage-backed securities available for sale ...... $ 305.1 326.1 936.4 1,016.4 Investment securities held to maturity ........................... $ 6.9 6.9 20.0 21.0 Total investment securities .......... $ 312.0 333.0 956.4 1,037.4 </TABLE> Certain investment securities held to maturity with a total amortized cost of $18.0 million and $52.8 million for the quarter and nine months ended September 30, 1998, respectively, and $38.7 million and $82.4 million for the quarter and nine months ended September 30, 1997, respectively, were sold by the corporation due to significant deterioration in the creditworthiness of the related issuers or because such securities were called by the issuers prior to maturity. Sales and calls of investment securities resulted in no gain or loss for the quarter and nine months ended September 30, 1998 and a loss of $0.3 million for the quarter and no gain or loss for the nine months ended September 30, 1997. 10
5. Loans and Leases The carrying values of loans and leases at September 30, 1998 and December 31, 1997 were: <TABLE> In millions September 30, December 31, 1998 1997 <C> <C> Commercial, financial and industrial ..... $12,017.1 10,680.2 Agricultural ............................. 1,318.4 1,276.2 Real estate Secured by 1-4 family residential properties ........................... 11,393.6 10,746.6 Secured by development properties ...... 1,961.6 2,131.4 Secured by construction and land development .......................... 1,272.3 1,005.8 Secured by owner-occupied properties ... 3,311.2 2,866.1 Consumer ................................. 11,957.0 12,298.0 Credit card .............................. 1,637.0 1,632.2 Lease financing .......................... 1,075.2 921.2 Foreign Consumer ............................... 1,206.8 864.0 Commercial ............................. 187.4 212.4 Total loans and leases ............... 47,337.6 44,634.1 Unearned discount ........................ (2,087.0) (2,112.5) Total loans and leases, net of unearned discount .................... $45,250.6 42,521.6 </TABLE> Changes in the allowance for credit losses for the quarters and nine months ended September 30 were: <TABLE> Quarter Nine Months In millions 1998 1997 1998 1997 <C> <C> <C> <C> Balance at beginning of period ....... $1,262.1 1,071.1 1,233.9 1,040.8 Allowance related to assets acquired, net ..................... 82.8 104.1 118.1 129.4 Provision for credit losses ........ 146.8 146.7 410.7 378.5 Credit losses ...................... (189.5) (159.2) (540.3) (462.9) Recoveries ......................... 34.5 33.7 114.3 110.6 Net credit losses ................ (155.0) (125.5) (426.0) (352.3) Balance at end of period ............. $1,336.7 1,196.4 1,336.7 1,196.4 </TABLE> 6. Non-performing Assets and 90-day Past Due Loans and Leases Total non-performing assets and 90-day past due loans and leases at September 30, 1998 and 1997 and December 31, 1997 were: In millions September 30, December 31, 1998 1997 1997 Impaired loans Non-accrual ........................... $ 109.4 94.5 89.4 Restructured .......................... 0.6 0.1 0.1 Total impaired loans ................ 110.0 94.6 89.5 Other non-accrual loans and leases ...... 105.7 94.3 88.7 Total non-accrual and restructured loans and leases ........ 215.7 188.9 178.2 Other real estate owned ................. 46.1 40.8 50.3 Total non-performing assets ........... 261.8 229.7 228.5 Loans and leases past due 90 days or more* 175.6 121.0 153.8 Total non-performing assets and 90-day past due loans and leases ..... $ 437.4 350.7 382.3 * Excludes non-accrual and restructured loans and leases. 11
The average balances of impaired loans for the nine months ended September 30, 1998 and 1997 were $118.8 million and $107.2 million, respectively. The allowance for credit losses related to impaired loans at September 30, 1998 and December 31, 1997 was $34.2 million and $33.5 million, respectively. Impaired loans of $2.4 million and $1.8 million were not subject to a related allowance for credit losses at September 30, 1998 and December 31, 1997, respectively, because of the net realizable value of loan collateral, guarantees and other factors. The effect of non-accrual and restructured loans on interest income for the quarters and nine months ended September 30 was: In millions Quarter Nine Months 1998 1997 1998 1997 Interest As originally contracted ........... $ 8.4 3.8 18.3 15.1 As recognized ...................... (1.6) (1.3) (3.6) (2.7) Reduction of interest income ..... $ 6.8 2.5 14.7 12.4 7. Long-term Debt During the first nine months of 1998, the corporation issued $250 million in medium-term notes, bearing interest at a fixed rate of 5.55 percent, maturing in August 1999, and $250 million in medium-term notes, bearing interest at a rate of three-month LIBOR less 5 basis points, maturing in October 1999. Also, during the first nine months of 1998, certain subsidiaries of the corporation received $2,519.4 million of advances from the Federal Home Loan Bank. Advances of $44.4 million were issued bearing interest at fixed rates ranging from 5.34 percent to 6.19 percent, which mature between February 2000 and December 2027. Advances of $2,475 million were issued bearing interest at rates ranging from one-month LIBOR less 15 basis points to one-month LIBOR less 10 basis points, which mature between October 1998 and December 1999. Advances maturing within the next year are expected to be refinanced, extending the maturity of such borrowings beyond one year. Norwest Financial, Inc. and its subsidiaries issued $407.1 million in senior notes bearing interest at fixed rates ranging from 5.38 percent to 6.08 percent, which mature between September 2001 and March 2008. Norwest Financial, Inc. and its subsidiaries assumed $104.8 million in senior notes in connection with its acquisition of The T. Eaton Acceptance Company Limited, bearing interest at fixed rates ranging from 7.55 percent to 9.00 percent, which mature between December 1999 to December 2000. 12
8. Stockholders' Equity The table below is a summary of the corporation's preferred and preference stock at September 30, 1998 and December 31, 1997. A detailed description of the corporation's preferred and preference stock is provided in Note 10 to the audited consolidated financial statements included in the corporation's 1997 annual report on Form 10-K. <TABLE> In millions, except share amounts Annual Shares Dividend Outstanding Rate at Amount Outstanding September 30, December 31, September 30, September 30, December 31, 1998 1997 1998 1998 1997 <C> <C> <C> <C> <C> Cumulative Tracking, $200 stated value ...... 980,000 980,000 9.30% $ 196.0 196.0 1998 ESOP Cumulative Convertible, $1,000 stated value ....... 13,604 - 10.75% 13.6 - 1997 ESOP Cumulative Convertible, $1,000 stated value ....... 19,846 22,927 9.50% 19.8 23.0 1996 ESOP Cumulative Convertible, $1,000 stated value ....... 22,274 22,831 9.50% 22.3 22.8 1995 ESOP Cumulative Convertible, $1,000 stated value ....... 20,283 20,625 10.00% 20.3 20.6 ESOP Cumulative Convertible, $1,000 stated value ....... 9,825 10,022 9.00% 9.8 10.0 Less: Cumulative Tracking shares held by a subsidiary .. (25,000) (25,000) (5.0) (5.0) 1,040,832 1,031,405 276.8 267.4 Unearned ESOP shares . (89.7) (79.4) Total preferred stock .... $ 187.1 188.0 </TABLE> On February 24, 1998, the corporation issued 35,000 shares of 1998 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value per share ("1998 ESOP Preferred Stock"), in the stated amount of $35.0 million at a premium of $2.7 million; a corresponding charge of $37.7 million was recorded to unearned ESOP shares. On February 24, 1997, the corporation issued 51,700 shares of 1997 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value per share ("1997 ESOP Preferred Stock"), in the stated amount of $51.7 million at a premium of $2.1 million; a corresponding charge of $53.8 million was recorded to unearned ESOP shares. During the quarter and nine months ended September 30, 1998, 7,530 and 25,573 shares of ESOP Preferred Stock were converted into 209,325 and 661,993 shares of common stock of the corporation, respectively. During the quarter and nine months ended September 30, 1997, 8,327 and 27,572 shares of ESOP Preferred Stock were converted into 273,024 shares and 1,044,696 shares of common stock of the corporation, respectively. On September 22, 1998, the corporation's board of directors declared a dividend distribution of one preferred share purchase right on each outstanding share of the corporation's common stock. These rights will be distributed on November 23, 1998 to stockholders of record on that date, and are similar to the corporation's existing stockholder rights plan that expires the same day. The rights will become exercisable only if a person or group acquires or announces an offer to acquire 15 percent or more of the corporation's common stock. This triggering percentage may be reduced to no less than 10 percent by the board of directors prior to the time the rights become exercisable. When exercisable, each right will entitle the 13
holder to buy one one-thousandth of a share of a new series of junior participating preferred stock at a price of $160. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price, and the acquiring person will not be entitled to exercise these rights. Under certain circumstances, the corporation can exchange a share of the corporation's common stock for each outstanding right not held by the acquirer. The corporation will generally be entitled to redeem the rights at one cent per right at any time before they become exercisable. The rights will expire on November 23, 2008, unless extended, previously redeemed or exercised. The corporation has reserved shares of preferred stock for issuance upon exercise of the rights. Accumulated other comprehensive income at September 30, 1998 and December 31, 1997 is comprised of the following: September 30, December 31, 1998 1997 In millions Unrealized gains on securities available for sale ................... $ 420.0 419.4 Foreign currency translation ........... (14.4) (9.5) Accumulated other comprehensive income $ 405.6 409.9 9. Business Segments The corporation's operations include three primary business segments: banking, mortgage banking and consumer finance. See Note 16 to the audited consolidated financial statements included in the corporation's annual report on Form 10-K for the year ended December 31, 1997 for a detailed description of each business segment. Selected financial information by business segment for the quarters and nine months ended September 30 is included in the following summary: In millions Quarter Nine Months 1998 1997 1998 1997 Revenues:* Banking ................$ 1,652.7 1,555.4 4,938.3 4,655.2 Mortgage Banking ....... 569.4 400.9 1,549.9 1,092.4 Norwest Financial ...... 537.4 490.0 1,600.9 1,408.6 Total ................$ 2,759.5 2,446.3 8,089.1 7,156.2 Organizational earnings:* Banking ................$ 281.4 254.8 819.7 711.0 Mortgage Banking ....... 56.0 37.7 161.9 106.8 Norwest Financial ...... 55.5 49.1 161.1 177.1 Total ................$ 392.9 341.6 1,142.7 994.9 Total assets: Banking ................$ 67,919.8 61,283.5 Mortgage Banking ....... 24,665.8 13,737.8 Norwest Financial ...... 11,141.4 10,230.9 Total ................$103,727.0 85,252.2 * Revenues (interest income plus non-interest income), where applicable, and organizational earnings by business segment are impacted by intercompany revenues and expenses, such as interest on borrowings from the parent company, corporate service fees and allocation of federal income taxes. 14
10. Mortgage Banking Activities Additional information about mortgage banking non-interest income for the quarters and nine months ended September 30 is presented below: Quarter Nine Months In millions 1998 1997 1998 1997 Origination and other closing fees ............ $128.1 86.2 366.3 222.6 Servicing fees ............ (47.6) 79.5 (16.4) 220.3 Net gains (losses) on sales of servicing rights ..... (0.4) (2.4) 15.9 (4.8) Net gains on sales of mortgages ............... 152.4 15.6 287.7 61.6 Other ..................... 52.2 45.8 171.3 124.1 Total mortgage banking non-interest income ... $284.7 224.7 824.8 623.8 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The outstanding balances of serviced loans were $232.7 billion and $198.2 billion at September 30, 1998 and 1997, respectively, and $205.8 billion at December 31, 1997. Changes in capitalized mortgage servicing rights for the quarters and nine months ended September 30 were: In millions Quarter Nine Months 1998 1997 1998 1997 Mortgage servicing rights: Balance at beginning of period ............ $2,967.8 2,783.8 2,839.1 2,712.7 Originations ........... 180.9 93.7 491.7 253.5 Purchases and other additions ............ 183.3 127.8 491.0 236.4 Sales .................. - (17.0) (56.1) (34.4) Amortization ........... (241.9) (103.5) (570.2) (321.5) Other .................. (301.2) (70.3) (406.6) (32.2) 2,788.9 2,814.5 2,788.9 2,814.5 Less valuation allowance ............ (64.2) (64.2) (64.2) (64.2) Balance at end of period . $2,724.7 2,750.3 2,724.7 2,750.3 The fair value of capitalized mortgage servicing rights at September 30, 1998 was approximately $2.8 billion, calculated using discount rates ranging from 500 to 700 basis points over the ten-year U.S. Treasury rate. There were no changes in the valuation allowance for capitalized mortgage servicing rights during the quarters and nine months ended September 30, 1998 and 1997. 15
11. Trading Revenues For the quarters and nine months ended September 30, trading revenues were derived from the following activities: In millions Quarter Nine Months 1998 1997 1998 1997 Interest income: Securities .............................. $ 12.8 13.2 40.5 28.5 Non-interest income: Gains on securities sold ................ 41.7 13.3 90.4 44.9 Swaps and other interest rate contracts . 0.1 0.8 0.6 1.4 Foreign exchange trading ................ 3.4 3.3 9.9 10.9 Options ................................. (4.0) 1.1 (2.0) 4.9 Futures ................................. 3.1 (5.8) 11.8 2.8 Total non-interest income ............. 44.3 12.7 110.7 64.9 Total trading revenues .................... $ 57.1 25.9 151.2 93.4 12. Derivative Activities The corporation and its subsidiaries, as end-users, utilize various types of derivative products (principally interest rate swaps, interest rate caps and floors, futures and options on futures contracts) as part of an overall interest rate risk management strategy. See Note 15 to the audited consolidated financial statements included in the corporation's annual report on Form 10-K for the year ended December 31, 1997 for a detailed description of derivative products utilized in end-user activities. For the nine months ended September 30, 1998, end-user derivative activities increased interest income by $5.6 million and decreased interest expense by $67.8 million, for a total benefit to net interest income of $73.4 million. For the same period in 1997, the total benefit to net interest income was $60.3 million. Activity in the notional amounts of end-user derivatives for the nine months ended September 30, 1998 is summarized as follows: <TABLE> Amorti- zation & In millions December 31, Add- Matur- Termin- September 30, 1997 itions ities ations 1998 <C> <C> <C> <C> <C> Swaps: Generic receive fixed ..... $ 4,316 - (300) - 4,016 Amortizing receive fixed .. 3,185 - (283) - 2,902 Generic pay fixed ......... 221 749 (7) - 963 Basis ..................... 29 29 (29) - 29 Total swaps ............. 7,751 778 (619) - 7,910 Interest rate caps and floors ................ 14,377 - (527) - 13,850 Futures contracts ........... 4,690 30,615 6,984) (13,103) 15,218 Options on futures contracts 9,886 67,617 (31,624) (32,483) 13,396 Security options ............ 1,240 36,597 (15,922) (12,040) 9,875 Forward foreign exchange contracts ................. 491 289 (682) - 98 Total ....................... $ 38,435 135,896 (56,358) (57,626) 60,347 </TABLE> Deferred gains and losses on closed end-user derivatives were not material at September 30, 1998 and December 31, 1997. A key assumption in the information which follows is that rates remain constant at September 30, 1998 levels. To the extent that rates change, both the average notional and variable interest rate information may change. 16
The following table presents the maturities and weighted average rates for end-user derivatives by type: <TABLE> Dollars in millions Maturity There- September 30, 1998 1998 1999 2000 2001 2002 after Total <C> <C> <C> <C> <C> <C> <C> Swaps: Generic receive fixed- Notional value ........$ 450 766 400 500 400 1,500 4,016 Weighted avg. receive rate ........ 6.02% 7.28 6.17 6.35 6.59 6.53 6.56 Weighted avg. pay rate 5.69% 5.56 5.59 5.61 5.54 5.68 5.63 Amortizing receive fixed- Notional value ........$ - 1,707 1,195 - - - 2,902 Weighted avg. receive rate ........ -% 7.46 6.58 - - - 7.10 Weighted avg. pay rate -% 5.49 5.58 - - - 5.53 Generic pay fixed- Notional value ........$ - 603 4 110 101 145 963 Weighted avg. receive rate ........ -% 5.36 5.69 5.67 5.59 5.61 5.46 Weighted avg. pay rate -% 5.11 6.15 5.75 5.99 5.87 5.39 Basis- Notional value ........$ - - - - - 29 29 Weighted avg. receive rate ........ -% - - - - 5.11 5.11 Weighted avg. pay rate -% - - - - 2.11 2.11 Interest rate caps and floors (1): Notional value ........$ - 400 3,200 4,750 5,500 - 13,850 Futures contracts (1): Notional value ........$ 7,213 1,530 740 740 740 4,255 15,218 Options on futures contracts (1): Notional value ........$11,795 1,601 - - - - 13,396 Security options (1): Notional value ........$ 9,250 600 - 25 - - 9,875 Forward foreign exchange contracts (1): Notional value ........$ 98 - - - - - 98 Total notional value ....$28,806 7,207 5,539 6,125 6,741 5,929 60,347 Total weighted avg. rates on swaps: Receive rate ........ 6.02% 7.00 6.48 6.23 6.39 6.43 6.62 Pay rate ............ 5.69% 5.43 5.58 5.64 5.63 5.63 5.55 </TABLE> (1) Average rates are not meaningful for interest rate caps and floors, futures contracts, options or forward foreign exchange contracts. Note: Weighted average variable rates are based on the actual rates as of September 30, 1998. 17
The following table provides the gross gains and gross losses not yet recognized in the consolidated financial statements for open end-user derivatives applicable to certain hedged assets and liabilities: <TABLE> In millions Balance Sheet Category Mort- Invest- gage Short- ment Loans Serv- Interest term Long- Secur- and icing Bearing Borror- term September 30, 1998 ities Leases Rights Deposits ings Debt Total <C> <C> <C> <C> <C> <C> <C> Swaps: Pay variable Unrealized gains .... $ - - 52.9 74.9 - 175.6 303.4 Unrealized (losses).. - - - - - - - Pay variable net .... - - 52.9 74.9 - 175.6 303.4 Pay fixed Unrealized gains .... - - - - - - - Unrealized losses.... - (7.6) - (2.8) - - (10.4) Pay fixed net ....... - (7.6) - (2.8) - - (10.4) Basis Unrealized (losses).. (0.1) - - - - - (0.1) Total unrealized gains ............... - - 52.9 74.9 - 175.6 303.4 Total unrealized (losses) ............. (0.1) (7.6) - (2.8) - - (10.5) Total net ........... $ (0.1) (7.6) 52.9 72.1 - 175.6 292.9 Interest rate caps and floors: Unrealized gains .... $ - - 307.6 - - - 307.6 Unrealized (losses).. - - - - - - - Total net ......... $ - - 307.6 - - - 307.6 Futures contracts: Unrealized gains .... $ - 0.1 227.2 - - - 227.3 Unrealized (losses).. (11.9) (4.0) - - - - (15.9) Total net ......... $ (11.9) (3.9) 227.2 - - - 211.4 Options on futures contracts: Unrealized gains .... $ - 4.2 28.8 - - - 33.0 Unrealized (losses).. - (3.0) (63.1) - - - (66.1) Total net ......... $ - 1.2 (34.3) - - - (33.1) Security options: Unrealized gains .... $ - 49.2 - - - - 49.2 Unrealized (losses).. - (7.6) - - - - (7.6) Total net.......... $ - 41.6 - - - - 41.6 Forward foreign exchange contracts: Unrealized gains..... $ - - - - 1.9 - 1.9 Grand total unrealized gains .. $ - 53.5 616.5 74.9 1.9 175.6 922.4 Grand total unrealized (losses) (12.0) (22.2) (63.1) (2.8) - - (100.1) Grand total net ..... $ (12.0) 31.3 553.4 72.1 1.9 175.6 822.3 </TABLE> 18
As a result of interest rate fluctuations, off-balance sheet derivatives have unrealized appreciation or depreciation in market values as compared with their cost. As these derivatives hedge certain assets and liabilities of the corporation, as noted in the table above, there has been offsetting unrealized appreciation and depreciation in the assets and liabilities hedged. The corporation has entered into mandatory and standby forward contracts, including options on forward contracts, to reduce interest rate risk on certain mortgage loans held for sale and other commitments. The contracts provide for the delivery of securities at a specified future date, at a specified price or yield. At September 30, 1998, the corporation had forward contracts and options on forward contracts totaling $24.0 billion, all of which mature within 180 days. Gains and losses on forward contracts and options on forward contracts are included in the determination of market value of mortgages held for sale. At September 30, 1998, the corporation's trading account portfolio included options and futures of $106 million notional value, which are valued at market with any gains or losses recognized currently. 13. Business Combinations The corporation regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management of the corporation does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. At September 30, 1998, the corporation had five pending transactions with total assets of approximately $93.1 billion and anticipated that approximately 879.4 million common shares would be issued upon consummation of these transactions. The transactions pending at September 30, 1998 included the combination of the corporation and the former Wells Fargo, which was completed November 2, 1998. Other pending acquisitions, subject to approval by regulatory agencies, are expected to be completed by the first quarter of 1999. 19
Transactions completed in the nine months ended September 30, 1998 include: <TABLE> In millions, except share amounts Common Cash Shares Method of Date Assets Paid Issued Accounting <C> <C> <C> <C> <C> Finvercon S.A. Compania Financiera Argentina (F) ........ January 8 $ 57.4 $ 19.7 - Purchase Fidelity Bancshares, Inc. Fort Worth, Texas (B) ............ January 13 111.0 16.1 - Purchase Heritage Trust Company, Grand Junction, Colorado (B).......... February 20 1.6 - 136,950 Purchase Founders Trust Company Dallas, Texas (B) .... March 2 1.6 6.9 - Purchase The T. Eaton Acceptance Company Limited and National Retail Credit Services Limited, Don Mills, Ontario, Canada (F) .. April 21 370.0 247.6 - Purchase WMC Mortgage Corporation Woodland Hills, California (M)........ April 30 4.9 21.9 - Purchase First Bank Pooling of Katy, Texas (B) ...... May 22 309.7 - 1,999,980 Interests* First Bank of Grants Grants, New Mexico (B) ....... May 28 44.9 - 212,487 Purchase Spring Mountain Escrow Corporation Irvine, California (M) ....... May 29 1.3 1.7 - Purchase Emjay Corporation Milwaukee, Wisconsin (B) ........ June 15 5.8 - 297,979 Purchase Six affiliated bank holding companies and related entities, located in Minnesota, Wisconsin, New Mexico, Arizona and Colorado, including Pooling of MidAmerica. (B) ...... July 2,23 1,317.2 - 8,060,664 Interests* First Bancshares of Valley City, Inc. Valley City, North Dakota (B) ..... July 31 96.4 - 451,943 Purchase Peoples Insurance Agency, Inc. Valley City, North Dakota (B) ..... July 31 0.2 - 6,804 Purchase Star Bancshares, Inc. Pooling of Austin, Texas (B) .... August 31 581.7 - 4,275,077 Interests* Freedom Trailer Leasing, Inc. Chesterfield, Missouri (B) ......... August 31 4.8 4.2 - Purchase Little Mountain Bancshares, Inc. Monticello, Minnesota (B) ........ September 8 81.8 - 561,016 Purchase $ 2,990.3 $ 318.1 16,002,900 * Pooling of interests transaction was not material to the corporation's consolidated financial statements; accordingly, previously reported results have not been restated. (B) - Banking Group; (M) - Mortgage Banking; (F) - Norwest Financial 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis should be read together with the financial statements submitted under Item 1 of Part I and with the corporation's 1997 Annual Report on Form 10-K. EARNINGS PERFORMANCE The corporation reported net income of $392.9 million for the quarter ended September 30, 1998, a 15.0 percent increase over the $341.6 million earned in the third quarter of 1997. Diluted earnings per share were 50 cents, compared with 44 cents in the third quarter of 1997, an increase of 13.6 percent. Basic earnings per share increased 13.3 percent to 51 cents per common share in the third quarter of 1998 from 45 cents a year earlier. Return on realized common equity was 22.6 percent and return on assets was 1.64 percent for the third quarter of 1998, compared with 22.1 percent and 1.64 percent, respectively, in the third quarter of 1997. For the nine months ended September 30, 1998, net income was $1,142.7 million, or $1.46 per diluted common share, an increase of 14.9 percent and 13.2 percent, respectively, over the $994.9 million, or $1.29 per diluted common share, earned in the first nine months of 1997. Return on realized common equity was 22.9 percent and return on assets was 1.66 percent for the first nine months of 1998 compared with 22.3 percent and 1.63 percent, respectively, in the same period a year ago. ORGANIZATIONAL EARNINGS The organizational earnings of the corporation's primary business segments are included in Note 9 to the unaudited consolidated financial statements for the three and nine months ended September 30, 1998 and 1997 and are discussed in the following paragraphs. Banking Group The Banking Group reported third quarter 1998 earnings of $281.4 million, a 10.5 percent increase over the third quarter 1997 earnings of $254.8 million. For the nine months ended September 30, 1998, earnings increased 15.3 percent to $819.7 million compared with $711.0 million for the same period in 1997. Non-interest income rose $305.5 million, or 24.1 percent, to $1,573.4 million for the first nine months of 1998, due primarily to growth in trust and investment fees and commissions, service charges and fees and credit card fee revenue, partially offset by lower net venture capital gains due to overall market conditions. The Banking Group's provision for credit losses for the nine months ended September 30, 1998 decreased $12.5 million to $115.2 million from $127.7 million a year earlier, as average loans and leases rose $1,707.8 million, or 5.4 percent, and net charge-offs as a percent of average loans and leases decreased 5 basis points to 0.58 percent. Non-interest expenses of $2,397.7 million for the first nine months of 1998 were $242.1 million higher when compared with the first nine months of 1997, reflecting additional operating expenses from acquired companies and acquisition related one-time charges. 21
Mortgage Banking Mortgage Banking earned $56.0 million in the current quarter compared with $37.7 million in the third quarter of 1997. For the first nine months of 1998, Mortgage Banking earned $161.9 million compared with $106.8 million in the same period of 1997. See Note 10 to the unaudited consolidated financial statements for additional information about Mortgage Banking revenues for the three and nine months ended September 30, 1998 and 1997. The growth in Mortgage Banking earnings over the first nine months of 1997 primarily reflects a 64.5 percent increase in origination and other closing fees associated with the low mortgage interest rate environment. Mortgage loan originations amounted to $74.8 billion during the first nine months of 1998, compared with $38.7 billion in the first nine months of 1997. Combined gains on sales of mortgages and servicing rights amounted to $303.6 million in the first nine months of 1998, compared with $56.8 million in the same period of 1997. The growth in Mortgage Banking earnings is also due to higher tax-equivalent net interest income related to increases in the average balance of mortgage loans held for sale. The growth in origination and closing fees, gains on sales of mortgages and servicing rights, and net interest income was partially offset by lower servicing revenue, reflecting increased amortization of capitalized mortgage servicing rights due to a larger servicing portfolio and the increased assumed prepayments as a result of the low mortgage interest rate environment. Amortization of capitalized mortgage servicing rights was $570.2 million in the first nine months of 1998, compared with $321.5 million in the first nine months of 1997. The percentage of fundings attributed to mortgage loan refinancings was approximately 49 percent in the first nine months of 1998, compared with 21 percent for the same period of 1997. The unclosed pipeline of mortgage loans was $23.5 billion at September 30, 1998, compared with $10.6 billion at December 31, 1997. The servicing portfolio had a weighted average coupon of 7.54 percent and 7.75 percent at September 30, 1998 and December 31, 1997, respectively. Norwest Financial Norwest Financial (including Norwest Financial Services, Inc. and Island Finance) reported third quarter 1998 earnings of $55.5 million that were 12.8 percent higher than third quarter 1997 earnings of $49.1 million which included charges related to the acquisition of Fidelity Acceptance Corporation. For the first nine months of 1998, Norwest Financial's net income was $161.1 million, down 9.0 percent from the first nine months of 1997. The decrease primarily reflects higher consumer credit losses, partially offset by increased net interest income. Norwest Financial's net charge-offs in the first nine months of 1998 were $278.4 million, or 4.10 percent of average loans, compared with $199.0 million, or 3.48 percent of average loans, in the same period in 1997. The increase in net charge-offs was primarily attributable to the acquisition of Fidelity Acceptance Corporation in 1997 and the related inclusion of their charge-offs and to higher bankruptcy levels in Puerto Rico. Net charge-offs in Norwest Financial's domestic base business continued to decline in the third quarter. Non-interest expenses for the first nine months of 1998 increased 17.8 percent over the same period of 1997 primarily due to the acquisition of Fidelity Acceptance Corporation. Tax- equivalent net interest income for the first nine months of 1998 increased 14.3 percent over the same period of last year due to a 17.6 percent increase in average earning assets partially offset by a decrease of 25 basis points in net interest margin. 22
CONSOLIDATED INCOME STATEMENT ANALYSIS Net Interest Income Consolidated tax-equivalent net interest income was $1,127.3 million in the third quarter of 1998, compared with $1,034.2 million in the third quarter of 1997, an increase of 9.0 percent. For the first nine months of 1998, tax-equivalent net interest income increased 9.5 percent from the same period in 1997 to $3,299.0 million. Growth in tax-equivalent net interest income over the third quarter ended September 30, 1997 was primarily due to a 14.3 percent growth in average earning assets, partially offset by a 28 basis point decrease in net interest margin. Net interest margin, the ratio of annualized tax-equivalent net interest income to average earning assets, was 5.53 percent in the third quarter of 1998, compared with 5.81 percent in the third quarter of 1997. The decrease in net interest margin from third quarter of 1997 is principally due to a higher mix of mortgages held for sale which have lower yields than other interest-bearing assets. The following table summarizes changes in tax-equivalent net interest income between the quarters ended September 30 and June 30 and the nine months ended September 30. Changes in Tax-Equivalent Net Interest Income* In millions 3Q 98 3Q 98 9 Mos. 98 from from from 3Q 97 2Q 98 9 Mos. 97 Increase (decrease) due to: Change in earning asset volume ............ $148.7 32.8 344.0 Change in volume of interest-free funds ... 16.8 10.8 44.4 Change in net return from Interest-free funds ...................... 1.1 2.3 2.8 Interest-bearing funds ................... (50.2) (11.1) (88.0) Change in earning asset mix ............... (26.5) (2.9) (32.0) Change in funding mix ..................... 3.2 2.4 14.8 Change in tax-equivalent net interest income. $ 93.1 34.3 286.0 * Net interest income is presented on a tax-equivalent basis using a federal incremental tax rate of 35 percent in each period presented. Provision for Credit Losses The corporation provided $146.8 million for credit losses in the third quarter of 1998, compared with $146.7 million in the same period a year ago. Net credit losses totaled $155.0 million and $125.5 million for the three months ended September 30, 1998 and 1997, respectively. As a percentage of average loans and leases, net credit losses were 138 basis points in the third quarter of 1998, compared with 122 basis points in the same period a year ago. For the first nine months of 1998, the provision for credit losses totaled $410.7 million, compared with $378.5 million in the first nine months of 1997. Net credit losses were $426.0 million, or 1.32 percent of average loans and leases, for the nine months ended September 30, 1998, compared with $352.3 million, or 1.17 percent, for the same period in 1997. The increase in net credit losses over 1997 is principally due to higher levels of consumer credit charge-offs. 23
Non-interest Income Consolidated non-interest income was $889.5 million in the third quarter of 1998, an increase of $136.1 million, or 18.1 percent, from the third quarter of 1997. For the nine months ended September 30, 1998, non-interest income was up $455.6 million to $2,650.0 million, an increase of 20.8 percent over 1997. Contributing to the 1998 increase was continued growth in mortgage banking revenue, trust and investment fees and commissions, service charges and fees and credit card fee revenue, partially offset by lower net venture capital gains. The increase in mortgage banking revenue is attributed to increases in origination and other closing fees and gains on sales of mortgages and servicing rights, partially offset by increased amortization of capitalized mortgage servicing rights related to the low mortgage interest rate environment. Mortgage banking revenue derived from sales of servicing rights is largely dependent upon portfolio characteristics and prevailing market conditions. See Note 10 to the unaudited consolidated financial statements for additional information about mortgage banking revenues for the three and nine months ended September 30, 1998 and 1997. The increases in trust and investment fees and commissions, service charges and fees, and credit card fee revenue reflect overall increases in business activity due to acquisitions and marketing efforts. Net venture capital gains were $4.3 million for the three months and $116.2 million for the nine months ended September 30, 1998, compared with $52.8 million and $165.3 million, respectively, for the same periods in 1997. Sales of venture capital securities generally relate to timing of holdings becoming publicly traded and subsequent market conditions, causing venture capital gains to be unpredictable in nature. Net unrealized appreciation in the venture capital investment portfolio was $126.5 million at September 30, 1998. The corporation's trading revenue for the third quarter of 1998 was $44.3 million, compared with $12.7 million in the third quarter of 1997. Trading revenues amounted to $110.7 million in the first nine months of 1998, compared with $64.9 million in the same period of 1997. See Note 11 to the unaudited consolidated financial statements for a detailed analysis of trading revenues for the three and nine months ended September 30, 1998 and 1997. Non-interest Expense Consolidated non-interest expense was $1,266.3 million in the third quarter of 1998, an increase of 14.0 percent from the third quarter of 1997. For the first nine months of 1998, consolidated non-interest expense increased $528.3 million, or 16.1 percent, over the nine months ended September 30, 1997. The increase in non-interest expense reflects increased Mortgage Banking expenses associated with higher origination volume and additional operating expenses related to acquisitions. During 1998, the corporation has recorded non-recurring charges of $25.4 million related to completed acquisitions, of which $20.5 million was incurred during the third quarter. 24
CONSOLIDATED BALANCE SHEET ANALYSIS At September 30, 1998, earning assets were $90.6 billion, an increase of 20.8 percent from $75.0 billion at December 31, 1997. This increase was primarily due to a $6.8 million increase in total investment securities and a $5.9 billion increase in mortgages held for sale related to the increased mortgage origination activity during the first nine months of 1998. In conjunction with the merger with the former Wells Fargo and recent financial projections, the corporation is currently in the process of assessing goodwill and intangibles for impairment. At September 30, 1998, goodwill and other intangibles totaled $1.1 billion. At September 30, 1998, interest-bearing liabilities totaled $72.1 billion, a 17.3 percent increase from $61.5 billion at December 31, 1997. The increase was primarily due to a $6.1 billion increase in short-term borrowings to fund mortgage originations. Credit Quality The major categories of loans and leases are included in Note 5 to the unaudited consolidated financial statements for the quarter ended September 30, 1998. At September 30, 1998, the allowance for credit losses totaled $1,336.7 million, or 2.95 percent of loans and leases outstanding. Comparable amounts were $1,196.4 million, or 2.87 percent, at September 30, 1997, and $1,233.9 million, or 2.90 percent, at December 31, 1997. The ratio of the allowance for credit losses to total non-performing assets and 90-day past due loans and leases was 305.6 percent at September 30, 1998, compared with 341.1 percent at September 30, 1997 and 322.7 percent at December 31, 1997. Although it is impossible for any lender to predict future credit losses with complete accuracy, management monitors the allowance for credit losses with the intent to provide for all losses that can reasonably be anticipated based on current conditions. The corporation maintains the allowance for credit losses as a general allowance available to cover future credit losses within the entire loan and lease portfolio and other credit-related risks. However, management has prepared an allocation of the allowance based on its views of risk characteristics of the portfolio. This allocation of the allowance for credit losses does not represent the total amount available for actual future credit losses in any single category nor does it prohibit future credit losses from being absorbed by portions of the allowance allocated to other categories or by the unallocated portion. The allocation of the allowance for credit losses to major categories of loans at September 30, 1998 and December 31, 1997 was: September 30, December 31, in millions 1998 1997 Commercial .................... $ 230.2 207.7 Consumer ...................... 434.9 422.6 Real estate ................... 197.0 168.1 Foreign ....................... 72.9 42.0 Unallocated ................... 401.7 393.5 Total ...................... $1,336.7 1,233.9 Non-performing assets and 90-day past due loans and leases totaled $437.4 million, or 0.42 percent of total assets, at September 30, 1998, compared with $350.7 million, or 0.41 percent, at September 30, 1997, and $382.3 million, or 0.43 percent, at December 31, 1997. 25
The corporation manages exposure to credit risk through loan portfolio diversification by customer, product, industry and geography in order to minimize concentrations in any single sector. The corporation's Banking Group operates in 16 states, largely in the Midwest, Western/Rocky Mountain and Southwest regions of the country. Distribution of average loans by region during the first nine months of 1998 was approximately 51 percent in the Midwest, 27 percent in the Western/Rocky Mountain and 22 percent in the Southwest region. Norwest Mortgage, Norwest Financial and Norwest Card Services operate on a nationwide basis. Mortgage Banking includes the largest retail mortgage origination network and the largest servicing portfolio in the United States. The five states with the highest originations year to date in 1998 are: California $14,721.0 million; Minnesota $4,853.1 million; Illinois $3,910.5 million; Texas $3,834.7 million; and Washington $3,220.9 million. The originations in these five states comprise approximately 41 percent of total originations in 1998. The five largest states in the servicing portfolio include: California $43.9 billion; Minnesota $14.0 billion; Texas $12.5 billion; New York $10.7 billion; and New Jersey $10.4 billion. These five states comprise approximately 40 percent of the total servicing portfolio at September 30, 1998. Norwest Financial engages in consumer finance activities in 47 states, Guam, Saipan, all ten Canadian provinces, the Caribbean and Latin America. The five states with the largest consumer finance receivables are: California $636.6 million; Ohio $254.5 million; Texas $249.5 million; Florida $244.8 million; and Illinois $242.9 million. Consumer finance receivables in Puerto Rico and Canada totaled $1.4 billion and $872.1 million, respectively, at September 30, 1998. The consumer finance receivables of Puerto Rico, Canada, and the five largest states listed above comprise approximately 45 percent of total consumer finance receivables at September 30, 1998. With respect to credit card receivables, approximately 66 percent of the portfolio is within the corporation's 16-state banking region. Minnesota represents approximately 13 percent of the total outstanding credit card portfolio. No other state accounts for more than 10 percent of the portfolio. In general, the economy in regions of the U.S. where the corporation primarily conducts operations continues to reflect modest growth. Consumer past due delinquencies were as follows: September 30, December 31, September 30, 1998 1997 1997 Banking Group 30 days past due ....... 1.65% 2.02 1.84 Norwest Financial 60 days past due ... 3.85 3.58 3.63 Credit card 30 days past due ......... 3.44 3.92 3.98 26
Capital and Liquidity Management The corporation's regulatory capital and ratios are summarized as follows: September 30, December 31, Dollars in millions 1998 1997 Tier 1 capital......................... $ 5,764 5,525 Total capital.......................... 7,094 6,692 Total risk-adjusted assets............. 71,497 60,774 Tier 1 capital ratio................... 8.06% 9.09 Total capital to risk-adjusted assets.. 9.92% 11.01 Leverage ratio......................... 6.19% 6.63 The corporation's Tier 1 capital, total capital to risk-adjusted assets and leverage ratios exceed the regulatory minimums of 4.0 percent, 8.0 percent and 3.0 percent, respectively. The corporation's dividend payout ratio was 36.3 percent for the third quarter of 1998 compared with 33.3 percent for the third quarter of 1997. On September 22, 1998, the corporation's board of directors authorized the corporation to repurchase up to an additional five million shares of the corporation's common stock. The shares will be used to meet the common stock issuance requirements of the corporation including its Savings Investment Plan, stock option plans and other stock issuance requirements other than acquisitions accounted for as pooling of interests. The corporation's pending business combinations at September 30, 1998 included the combination of the corporation and the former Wells Fargo, which was completed November 2, 1998. In accordance with the transaction, common stockholders of the former Wells Fargo received ten shares of the corporation's common stock for each share exchanged. YEAR 2000 The business combination involving the corporation and the former Wells Fargo was completed on November 2, 1998 resulting in the "new" Wells Fargo & Company (the "combined company"). The following Year 2000 discussion includes information about the corporation and the former Wells Fargo because the combined company will be affected by the Year 2000 readiness of each of the former Wells Fargo and the corporation. During 1998, the corporation has continued with its company-wide project to prepare the corporation's systems for Year 2000 compliance. The Year 2000 issue relates to computer systems that use two digits rather than four to define the applicable year and whether such systems will properly process information when the year changes to 2000. "Systems" include all firmware, hardware, networks, system and application software, and commercial "off the shelf" software, and embedded technology such as properties/date impacted processors in automated systems such as elevators, telephone systems, security systems, vault systems, heating and cooling systems and others. Priority is given to "mission critical" systems. A system is considered "mission critical" if it is vital to the successful continuation of a core business activity. The corporation's Year 2000 readiness project is divided into four phases - Phase I: a comprehensive assessment and inventory of applicable software, system hardware devices, data and voice communication devices and embedded technology intended to determine Year 2000 vulnerability and risk; Phase II: date detection on systems intended to determine which systems must be 27
remediated and which systems are compliant and require testing only, determination of the resources and costs, and the development of schedules and high level testing plans for the repair, replacement and/or retirement of systems that are determined not to be compliant; Phase III: repair, replacement and/or retirement of systems that are determined not to be Year 2000 compliant, and planning the integration testing for those systems that have interfaces with other systems both internal and external to the corporation, such as customers and suppliers; and Phase IV: integration testing on applicable systems to validate that interfaces are Year 2000 compliant and contingency planning. The corporation has substantially completed Phases I and II of its Year 2000 project. It is anticipated that Phase III will be substantially completed by December 31, 1998. Phase IV is anticipated to be completed by June 30, 1999. The former Wells Fargo, 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 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 combined 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 combined company, and by entities, such as borrowers, vendors, customers and business partners, whose financial condition or operational capability is significant to the combined company. The combined 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 combined 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 combined 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 combined company currently estimates that its total cost for the Year 2000 project will approximate $300 million. The accounting policies of the corporation and the former Wells Fargo are in the process of being reviewed in detail to conform policies for the combined company. The estimate of the combined company's total costs for the Year 2000 project could change when such accounting policy determinations have been made. To date, the corporation has incurred charges of $74.0 million related to its Year 2000 project and $21.8 million and $58.1 million total expenditures were incurred in the quarter and nine months ended September 30, 1998, respectively. Charges include the cost of internal staff redeployed to the Year 2000 project, as well as external consulting costs and costs of accelerated replacement of hardware and software due to Year 2000 issues. To date, the former Wells Fargo has incurred charges of $77.0 million related to its Year 28
2000 project, and $24.0 million and $67.0 million total expenditures were incurred in the quarter and nine months ended September 30, 1998, respectively. Charges for the former Wells Fargo 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 combined company does not believe that the redeployment of internal staff will have a material impact on the financial condition or results of operations for the combined company. 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 combined company's customers, vendors, competitors and counterparties effectively address the Year 2000 issue. If Year 2000 issues are not adequately addressed by the combined company and significant third parties, the combined 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 combined company depends, including, but not limited to, such services as telecommunications, electrical power and data processing. Failure of the combined 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 combined company's efforts, there can be no assurance that the combined company or significant third party vendors or other significant third parties will adequately address their Year 2000 issues. The combined 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 combined 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 combined 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 requires disclosure of selected information about operating segments including segment income, revenues and asset data. Operating segments, as defined in FAS 131, would include those components for which financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and making resource allocation determinations for operating components such as those which exceed ten percent or more of combined revenue, income or assets. 29
In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132 standardizes disclosure requirements for pension and other postretirement plans, and requires certain additional information on changes in benefit obligations and fair values of plan assets. The corporation will be required to adopt the provisions of FAS 131 and FAS 132 at the end of 1998, and adoption is not expected to have a material impact on the corporation's consolidated financial statements. In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires capitalization of certain costs associated with software developed or obtained for internal use. The corporation will be required to adopt the provisions of SOP 98-1 in 1999. The adoption of SOP 98-1 is not expected to have a material effect on the corporation's consolidated financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 requires recognition of all derivative instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. A derivative may be designated as a hedge of an exposure to changes in the fair value of a recognized asset or liability, an exposure to variable cash flows of a forecasted transaction, or a foreign currency exposure. The accounting for gains and losses associated with changes in the fair value of a derivative and the impact on the corporation's consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in offsetting changes in the fair value or cash flows of the underlying hedged item. The corporation will be required to adopt the provisions of FAS 133 in the year 2000 and has currently not determined the impact of FAS 133 on its consolidated financial statements. In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (FAS 134). FAS 134 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 those investments. The corporation will be required to adopt the provisions of FAS 134 beginning in 1999, and adoption is not expected to have a material impact on the corporation's consolidated financial statements. 30
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES </TABLE> <TABLE> Quarter Ended September 30, In millions, except ratios 1998 1997 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Assets <C> <C> <C> <C> <C> <C> Money market investments ......... $ 1,106 $ 17.1 6.14% $ 619 $ 8.9 5.76% Trading account securities .......... 850 12.9 6.06 741 13.3 7.14 Investment securities available for sale: U.S. Treasury & federal agencies .. 2,723 40.8 6.07 2,262 32.4 5.76 State, municipal and housing tax-exempt ........ 1,519 30.9 8.60 1,454 29.3 8.43 Mortgage-backed ..... 12,605 222.0 7.22 14,295 262.4 7.48 Other ............... 1,560 21.7 6.28 976 11.8 6.39 Total investment securities available for sale ....... 18,407 315.4 7.09 18,987 335.9 7.30 Investment securities held to maturity .. 785 6.9 3.50 720 6.9 3.89 Total investment securities ..... 19,192 322.3 6.93 19,707 342.8 7.17 Loans held for sale ... 3,638 72.6 7.92 2,874 56.2 7.76 Mortgages held for sale ............ 12,626 221.1 7.00 6,980 128.5 7.36 Loans and leases (net of unearned discount) Commercial .......... 15,314 340.2 8.81 13,350 312.8 9.30 Real estate ......... 15,780 383.0 9.68 15,071 369.8 9.79 Consumer ............ 13,456 512.6 15.20 12,374 472.2 15.22 Total loans and leases ...... 44,550 1,235.8 11.05 40,795 1,154.8 11.27 Allowance for credit losses ..... (1,319) (1,118) Net loans and leases ...... 43,231 39,677 Total earning assets (before the allowance for credit losses) ... 81,962 1,881.8 9.22 71,716 1,704.5 9.55 Cash and due from banks .......... 3,997 3,553 Other assets .......... 10,359 8,584 Total assets ........ $94,999 $82,735 </TABLE> (Continued on page 32) 31
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 31) <TABLE> Quarter Ended September 30, In millions, except ratios 1998 1997 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* <C> <c< <C> <C> <C> <C> Liabilities and Stockholders' Equity Noninterest-bearing deposits.. .......... $18,406 $ - -% $14,351 $ - -% Interest-bearing deposits Savings and NOW accounts ....... 10,986 48.3 1.75 9,472 38.6 1.62 Money market accounts ........... 12,052 101.4 3.34 10,851 85.3 3.12 Savings certificates . 12,657 171.3 5.39 12,884 176.5 5.44 Certificates of deposit and other time ..... 3,749 52.3 5.54 3,424 50.0 5.78 Foreign time ......... 620 8.3 5.30 883 10.3 4.65 Total interest-bearing deposits ......... 40,064 381.6 3.78 37,514 360.7 3.81 Federal funds purchased repurchase agreements ........... 4,008 55.1 5.46 3,180 41.1 5.13 Short-term borrowings .. 8,364 120.1 5.69 4,962 70.9 5.66 Long-term debt ......... 12,633 197.7 6.26 12,510 197.6 6.32 Total interest-bearing liabilities ...... 65,069 754.5 4.61 58,166 670.3 4.58 Other liabilities ...... 4,166 3,626 Preferred stock ........ 187 187 Common stockholders' equity .............. 7,171 6,405 Total liabilities and stockholders' equity ........... $94,999 $82,735 Net interest income (tax-equivalent basis) ............ $ 1,127.3 $ 1,034.2 Yield spread ......... 4.61 4.97 Net interest margin .. 5.53 5.81 Interest-bearing liabilities to earning assets .... 79.39 81.11 </TABLE> 32
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES <TABLE> Nine Months Ended September 30, In millions, except ratios 1998 1997 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Assets <C> <C> <C> <C> <C> <C> Money market investments ........ $ 878 $ 38.8 5.90% $ 964 $ 39.4 5.47% Trading account securities ......... 896 40.9 6.10 536 29.1 7.24 Investment securities available for sale: U.S. Treasury & federal agencies .. 3,149 137.9 5.88 2,728 128.9 6.29 State, municipal and housing tax-exempt ........ 1,499 92.2 8.68 1,287 80.8 8.66 Mortgage-backed .... 12,960 691.6 7.30 14,395 797.4 7.44 Other .............. 1,182 45.4 6.22 1,057 35.9 6.17 Total investment securities available for sale ...... 18,790 967.1 7.11 19,467 1,043.0 7.31 Investment securities held to maturity ......... 758 20.0 3.51 726 21.0 3.87 Total investment securities .... 19,548 987.1 6.96 20,193 1,064.0 7.18 Loans held for sale .. 3,578 211.5 7.91 2,880 168.3 7.82 Mortgages held for sale ........... 10,996 573.9 6.96 5,957 324.0 7.25 Loans and leases (net of unearned discount) Commercial ......... 14,590 980.2 8.98 13,364 917.5 9.18 Real estate ........ 15,323 1,115.8 9.72 15,040 1,093.4 9.70 Consumer ........... 13,311 1,526.7 15.31 11,927 1,358.4 15.20 Total loans and leases ..... 43,224 3,622.7 11.19 40,331 3,369.3 11.16 Allowance for credit losses .... (1,272) (1,084) Net loans and leases ..... 41,952 39,247 Total earning assets (before the allowance for credit losses) .. 79,120 5,474.9 9.31 70,861 4,994.1 9.46 Cash and due from banks ......... 3,982 3,571 Other assets ......... 10,088 8,449 Total assets ....... $91,918 $81,797 </TABLE> (Continued on page 34) 33
Wells Fargo & Company and Subsidiaries formerly known as Norwest Corporation and Subsidiaries CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (Continued from page 33) <TABLE> Nine Months Ended September 30, In millions, except ratios 1998 1997 Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* Liabilities and Stockholders' Equity <C> <c > <C> <C> <C> <C> Noninterest-bearing deposits ............ $17,583 $ - -% $13,637 $ - -% Interest-bearing deposits Savings and NOW accounts ...... 10,617 131.0 1.65 9,490 116.7 1.64 Money market accounts .......... 11,795 295.8 3.35 10,647 258.7 3.25 Savings certificates ...... 12,691 514.8 5.42 13,054 529.7 5.43 Certificates of deposit and other time ........ 3,851 160.2 5.56 3,425 146.2 5.70 Foreign time ........ 509 19.0 4.99 728 24.1 4.43 Total interest-bearing deposits ........ 39,463 1,120.8 3.80 37,344 1,075.4 3.85 Federal funds purchased repurchase agreements .......... 4,597 178.7 5.20 3,161 117.5 4.97 Short-term borrowings .......... 6,754 288.0 5.70 5,092 209.6 5.50 Long-term debt ........ 12,500 588.4 6.28 12,395 578.6 6.22 Total interest-bearing liabilities ..... 63,314 2,175.9 4.59 57,992 1,981.1 4.56 Other liabilities ..... 3,844 3,839 Preferred stock ....... 186 188 Common stockholders' equity ............. 6,991 6,141 Total liabilities and stockholders' equity ......... $91,918 $81,797 Net interest income (tax-equivalent basis) .......... $3,299.0 $3,013.0 Yield spread ....... 4.72 4.90 Net interest margin ............ 5.61 5.71 Interest-bearing liabilities to earning assets ........... 80.02 81.84 </TABLE> * Interest income and yields are calculated on a tax-equivalent basis using a federal incremental tax rate of 35% in each period presented. Non-accrual loans and the related negative income effect have been included in the calculation of yields. 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in market risk exposures that affect the quantitative or qualitative disclosures presented in the corporation's annual report on Form 10-K for the year ended December 31, 1997. 35
PART II. OTHER INFORMATION Item 5. Other Information Deadline for Stockholder Proposals Submitted Other Than Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 Any proposal from a stockholder to be presented at the 1999 Annual Meeting of Stockholders of the corporation that is submitted outside the processes of Rule 14a-8 of the Securities Exchange Act of 1934 and therefore will not be included in proxy materials to be sent to stockholders by the corporation, must be received by the Secretary of the corporation, at Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479-1026, no earlier than February 26, 1999 and no later than March 28, 1999 in order to be considered timely received under the By-laws of the corporation. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed or incorporated by reference in response to Item 601 of Regulation S-K. Exhibit No. Exhibit 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 (incorporated by reference to Exhibit 2.1 of the corporation's Registration Statement on Form S-4 [No. 333-63247]). 3(a). Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3(b) to the corporation's Current Report on Form 8-K dated June 28, 1993, Exhibit 3 to the corporation's Current Report on Form 8-K dated July 3, 1995, Exhibit 3 to the corporation's Current Report on Form 8-K dated June 12, 1998, and Exhibits 3(b) and 3(c) filed herewith). 3(b). Certificate of Amendment of Certificate of Incorporation filed on November 2, 1998 with the Delaware Secretary of State. 3(c). Certificate of Amendment of Certificate of Incorporation filed on November 2, 1998 with the Delaware Secretary of State. 3(d). Certificate of Designations of Powers, Preferences and Rights of the corporation's ESOP Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 4 to the corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). 36
Exhibit No. Exhibit 3(e). Certificate of Designations of Powers, Preferences and Rights of the corporation's Cumulative Tracking Preferred Stock (incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated January 9, 1995). 3(f). Certificate of Designations of Powers, Preferences and Rights of the corporation's 1995 ESOP Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 4 to the corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 3(g). Certificate of Designations with respect to the 1996 ESOP Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated February 26, 1996). 3(h). Certificate of Designations with respect to the 1997 ESOP Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated April 14, 1997). 3(i). Certificate of Designations with respect to the 1998 ESOP Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3 to the corporation's Current Report on Form 8-K dated April 20, 1998). 3(j). Certificate of Designations for Adjustable Cumulative Preferred Stock, Series B. 3(k). Certificate of Designations for Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H. 3(l). By-Laws, as amended through November 2, 1998. 4(a). See 3(a) through 3(l) of this Item. 4(b). Rights Agreement dated as of November 22, 1988 between the corporation and Citibank, N.A., as Rights Agent (incorporated by reference to Exhibit 1 to the corporation's Form 8-A dated December 6, 1988). 4(c). Certificate of Adjustment, dated October 10, 1997, to Rights Agreement (incorporated by reference to Exhibit 5 to the corporation's Form 8-A/A dated October 14, 1997). 4(d). Amendment No. 1 to Rights Agreement, dated as of June 7, 1998, between the corporation and Citibank, N.A., as Rights Agent (incorporated by reference to Exhibit 4(b) to the corporation's Current Report on Form 8-K, dated June 7, 1998 and filed on June 18, 1998). 4(e). Rights Agreement, dated as of October 21, 1998, between the corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.1 to the corporation's Form 8-A dated October 21, 1998). 37
Exhibit No. Exhibit 4(f). Copies of instruments with respect to long-term debt will be furnished to the Commission upon request. 10(a). Long-Term Incentive Compensation Plan, as amended effective July 28, 1998. 10(b). Directors' Stock Deferral Plan, as amended effective July 1, 1998. 10(c). Employees' Stock Deferral Plan, as amended effective July 1, 1998. 11. Computation of Earnings Per Share. 12(a). Computation of Ratio of Earnings to Fixed Charges. 12(b). Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 27. Financial Data Schedule (filed electronically). Stockholders may obtain a copy of any Exhibit not contained herein, upon payment of a reasonable fee, by writing Wells Fargo & Company, Office of the Secretary, Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479- 1026. (b) Reports on Form 8-K. On July 22, 1998, the corporation filed a Current Report on Form 8-K, dated July 14, 1998, reporting consolidated operating results of the corporation for the quarter and six months ended June 30, 1998, and also placing on file a copy of abridged presentation materials concerning the proposed combination of the corporation with the former Wells Fargo that have been used in presentation to analysts. On August 5, 1998, the corporation filed a Current Report on Form 8-K, dated August 5, 1998, reporting consolidated pro forma combining financial information to reflect the corporation's pending combination with the former Wells Fargo. 38
SIGNATURES 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. WELLS FARGO & COMPANY November 13, 1998 By /s/ Richard M. Kovacevich President and Chief Executive Officer By /s/ Rodney L. Jacobs Vice Chairman and Chief Financial Officer (Principal Financial Officer) 39