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)
In millions, except shares September 30, December 31,
1998 1997
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
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)
In millions, except per
common share amounts Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
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
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)
Quarter Nine Months
In millions Ended Ended
September 30, September 30,
1998 1997 1998 1997
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
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)
Nine Months Ended
In millions September 30,
1998 1997
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
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
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
(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)
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
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
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:
In millions 1998 1997
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
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.
In millions, except shares
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
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
9
4. Investment Securities
The amortized cost and fair value of investment securities at September 30,
1998 were:
In millions Gross Gross
Amort- Unrea- Unrea-
tized lized lized Fair
Cost Gains Losses Value
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
Interest income on investment securities for the quarters and nine months ended
September 30 was:
Quarter Nine Months
In millions 1998 1997 1998 1997
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
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:
In millions September 30, December 31,
1998 1997
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
Changes in the allowance for credit losses for the quarters and nine months
ended September 30 were:
Quarter Nine Months
In millions 1998 1997 1998 1997
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
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.
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
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
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:
Amorti-
zation
&
In millions December 31, Add- Matur- Termin- September 30,
1997 itions ities ations 1998
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
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:
Dollars in millions
Maturity
There-
September 30, 1998 1998 1999 2000 2001 2002 after Total
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
(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:
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
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
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:
In millions, except share amounts Common
Cash Shares Method of
Date Assets Paid Issued Accounting
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
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
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
(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)
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<
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
32
Wells Fargo & Company and Subsidiaries
formerly known as Norwest Corporation and Subsidiaries
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
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
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
(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)
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 >
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
* 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