TABLE OF CONTENTS
FINANCIAL REVIEW
Overview..............................................................................................34
Factors that May Affect Future Results................................................................35
Operating Segment Results.............................................................................38
Earnings Performance..................................................................................39
Net Interest Income................................................................................39
Noninterest Income.................................................................................39
Noninterest Expense................................................................................42
Earnings/Ratios Excluding Goodwill and Nonqualifying Core Deposit Intangible.......................43
Balance Sheet Analysis................................................................................44
Securities Available for Sale......................................................................44
(table on page 63)
Loan Portfolio.....................................................................................45
(table on page 64)
Nonaccrual and Restructured Loans and Other Assets.................................................45
Allowance for Loan Losses..........................................................................47
(table on page 66)
Deposits...........................................................................................47
Market Risk........................................................................................48
Derivative Financial Instruments...................................................................49
Liquidity and Capital Management...................................................................49
Comparison of 1998 to 1997............................................................................51
Additional Information................................................................................51
FINANCIAL STATEMENTS
Consolidated Statement of Income......................................................................52
Consolidated Balance Sheet............................................................................53
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income....................54
Consolidated Statement of Cash Flows..................................................................55
Notes to Financial Statements.........................................................................56
(index on page 100)
INDEPENDENT AUDITORS' REPORT...................................................................................97
QUARTERLY FINANCIAL DATA.......................................................................................98
INDEX.........................................................................................................100
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33
FINANCIAL REVIEW
OVERVIEW
Wells Fargo & Company is a $218 billion diversified financial services company
providing banking, mortgage and consumer finance through about 5,300 stores, the
Internet and other distribution channels throughout North America, including all
50 states, and elsewhere internationally. It ranks seventh in assets at December
31, 1999 among U.S. bank holding companies. In this Annual Report, Wells Fargo &
Company together with its subsidiaries is referred to as the Company and Wells
Fargo & Company alone is referred to as the Parent.
On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo &
Company (the Merger) was completed. Norwest Corporation changed its name to
"Wells Fargo & Company" and the former Wells Fargo & Company (the former Wells
Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest
Corporation as it was before the Merger is referred to as the former Norwest.
The Merger was accounted for as a pooling of interests and, accordingly, the
information included in the financial review presents the combined results as if
the Merger had been in effect for all periods presented.
Certain amounts in the financial review for prior years have been reclassified
to conform with the current financial statement presentation.
Net income in 1999 was $3,747 million, compared with $1,950 million in 1998, an
increase of 92%. Diluted earnings per common share were $2.23, compared with
$1.17 in 1998, an increase of 91%.
Return on average assets (ROA) was 1.85% and return on average common equity
(ROE) was 17.66% in 1999, compared with 1.04% and 9.86%, respectively, in 1998.
Diluted earnings before the amortization of goodwill and nonqualifying core
deposit intangible (CDI) ("cash" earnings) were $2.56 per share in 1999,
compared with $1.50 per share in 1998. On the same basis, ROA was 2.22% and ROE
was 34.08% in 1999, compared with 1.39% and 23.15%, respectively, in 1998.
Net interest income on a taxable-equivalent basis was $9,419 million in 1999,
compared with $9,049 million a year ago. The Company's net interest margin was
5.66% for 1999, compared with 5.79% in 1998.
Noninterest income increased to $7,420 million in 1999 from $6,427 million in
1998, an increase of 15%. The increase was primarily due to higher net venture
capital gains, partly offset by a loss on the sale of investment securities.
Noninterest expense totaled $9,782 million in 1999, compared with $10,579
million in 1998. The decrease was primarily due to fourth quarter 1998
Merger-related and other charges.
The provision for loan losses was $1,045 million in 1999, compared with $1,545
million in 1998. During 1999, net charge-offs were $1,049 million, or .94% of
average total loans, compared with $1,617 million, or 1.52%, during 1998. The
allowance for loan losses was $3,170 million, or 2.65% of total loans, at
December 31, 1999, compared with $3,134 million, or 2.90%, at December 31, 1998.
At December 31, 1999, total nonaccrual and restructured loans were $669 million,
or .6% of total loans, compared with $710 million, or .7%, at December 31, 1998.
Foreclosed assets were $153 million at December 31, 1999, compared with $148
million at December 31, 1998.
The ratio of common stockholders' equity to total assets was 10.02% at both
December 31, 1999 and 1998. The Company's total risk-based capital (RBC) ratio
at December 31, 1999 was 10.50% and its Tier 1 RBC ratio was 8.07%, exceeding
the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding
companies. The Company's RBC ratios at December 31, 1998 were 10.90% and 8.08%,
respectively. The Company's leverage ratios were 6.77% and 6.58% at December 31,
1999 and 1998, respectively, exceeding the minimum regulatory guideline of 3%
for bank holding companies.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (FAS 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. In July 1999, the FASB issued Statement No.
137, DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, that deferred the
effective date of FAS 133 to no later than January 1, 2001 for the Company's
financial statements. FAS 133 requires companies to record derivatives on the
balance sheet at fair value. Changes in the fair values of those derivatives
would be reported in earnings or other comprehensive income depending on the use
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value of assets or liabilities
or cash flows from forecasted transactions. The Company does not expect to
implement FAS 133 before January 1, 2001 and has not completed the complex
analysis required to determine the impact on the financial statements.
34
Table 1
RATIOS AND PER COMMON SHARE DATA
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------
($ in millions, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
Net income to average total assets (ROA) 1.85% 1.04% 1.37%
Net income applicable to common stock
to average common stockholders' equity (ROE) 17.66 9.86 12.81
Net income to average stockholders' equity 17.45 9.81 12.67
EFFICIENCY RATIO (1) 58.3% 68.5% 62.8%
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE (CDI) AMORTIZATION AND BALANCES
("CASH") (2)
Net income applicable to common stock $4,269 $2,465 $3,031
Earnings per common share 2.59 1.52 1.85
Diluted earnings per common share 2.56 1.50 1.83
ROA 2.22% 1.39% 1.78%
ROE 34.08 23.15 30.49
Efficiency ratio 54.6 64.3 57.8
CAPITAL RATIOS
At year end:
Common stockholders' equity to assets 10.02% 10.02% 10.40%
Stockholders' equity to assets 10.15 10.25 10.65
Risk-based capital (3)
Tier 1 capital 8.07 8.08 8.16
Total capital 10.50 10.90 11.20
Leverage (3) 6.77 6.58 6.72
Average balances:
Common stockholders' equity to assets 10.37 10.31 10.52
Stockholders' equity to assets 10.60 10.56 10.82
PER COMMON SHARE DATA
Dividend payout (4) 35% 59% 41%
Book value $13.44 $12.35 $11.92
Market prices (5):
High $49.94 $43.88 $39.50
Low 32.13 27.50 21.38
Year end 40.44 39.94 38.75
- ----------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income and noninterest income).
(2) Nonqualifying core deposit intangible (acquired after regulatory rule
changes in 1992) amortization and average balance excluded from these
calculations are, with the exception of the efficiency and ROA ratios, net
of applicable taxes. The pretax amount for the average balance of
nonqualifying CDI was $1,323 million for the year ended December 31, 1999.
The after-tax amounts for the amortization and average balance of
nonqualifying CDI were $111 million and $820 million, respectively, for the
year ended December 31, 1999. Goodwill amortization and average balance
(which are not tax effected) were $447 million and $7,666 million,
respectively, for the year ended December 31, 1999. See page 43 for
additional information.
(3) See Note 22 to Financial Statements for additional information.
(4) Dividends declared per common share as a percentage of earnings per common
share.
(5) Based on daily prices reported on the New York Stock Exchange Composite
Transaction Reporting System.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This document and other documents filed by the Company with the Securities and
Exchange Commission (SEC) have forward-looking statements. In addition, the
Company's senior management may make forward-looking statements orally to
analysts, investors, the media and others. Those forward-looking statements
might include one or more of the following:
- - Projections of revenues, income, earnings per share, capital expenditures,
dividends, capital structure or other financial items;
- - Descriptions of plans or objectives of management for future operations,
products or services;
- - Forecasts of future economic performance; and
- - Descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," or words of
similar meaning, or future or conditional verbs such as "will," "would,"
"should," "could" or "may."
Forward-looking statements give the Company's expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. There are a number of factors--many of which are beyond the
Company's control--that could cause actual conditions, events or results to
differ significantly from those described in the forward-looking statements.
Some of these factors are described below. Other factors, such as credit,
market, operational, liquidity, interest rate, Year 2000 and other risks, are
described elsewhere in this report. Factors relating to the regulation and
supervision of the Company are also described or incorporated in the Company's
Annual Report on Form 10-K filed with the SEC. There are other factors besides
those described or incorporated in this report or in the Form 10-K that could
cause actual conditions, events or results to differ from those in the
forward-looking statements.
Forward-looking statements speak only as of the date they are made. The Company
does not undertake to update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements are made.
35
Table 2
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
% Change Five-year
(in millions, 1999/ compound
except per share amounts) 1999 1998 1997 1996 1995 1994 1998 growth rate
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 9,355 $ 8,990 $ 8,648 $ 8,222 $ 5,923 $ 5,414 4% 12%
Provision for loan losses 1,045 1,545 1,140 500 312 365 (32) 23
Noninterest income 7,420 6,427 5,675 4,769 3,179 2,813 15 21
Noninterest expense 9,782 10,579 8,990 8,724 5,589 5,225 (8) 13
Net income 3,747 1,950 2,499 2,228 1,988 1,642 92 18
Earnings per common share $ 2.26 $ 1.18 $ 1.50 $ 1.38 $ 1.66 $ 1.40 92 10
Diluted earnings
per common share 2.23 1.17 1.48 1.36 1.62 1.36 91 10
Dividends declared
per common share .785 .70 .615 .525 .45 .383 12 15
BALANCE SHEET
(at year end)
Securities available for sale $ 38,518 $ 31,997 $ 27,872 $ 29,752 $ 24,163 $ 25,949 20% 8%
Loans 119,464 107,994 106,311 105,760 70,780 66,575 11 12
Allowance for loan losses 3,170 3,134 3,062 3,059 2,711 2,872 1 2
Goodwill 7,702 7,664 8,062 8,200 1,212 574 -- 68
Assets 218,102 202,475 185,685 188,633 122,200 112,674 8 14
Core deposits 126,198 132,289 122,327 128,178 77,355 72,738 (5) 12
Long-term debt 23,375 19,709 17,335 18,142 16,726 12,039 19 14
Guaranteed preferred beneficial
interests in Company's
subordinated debentures 785 785 1,299 1,150 -- -- -- --
Common stockholders' equity 21,860 20,296 19,315 19,262 8,448 6,628 8 27
Stockholders' equity 22,131 20,759 19,778 20,051 9,239 7,629 7 24
- ------------------------------------------------------------------------------------------------------------------------------
BUSINESS AND ECONOMIC CONDITIONS. The Company's business and earnings are
sensitive to general business and economic conditions in the United States and
abroad. These conditions include short-term and long-term interest rates,
inflation, monetary supply, fluctuations in both debt and equity capital
markets, and the strength of the U.S. economy, in general, and the local
economies in which the Company conducts business. Should any of these conditions
worsen in the United States or abroad, the Company's business and earnings could
be adversely affected. For example, an economic downturn or higher interest
rates could decrease the demand for loans and other products and services
offered by the Company and/or increase the number of customers and
counterparties who become delinquent or who default on their loans or other
obligations to the Company. An increase in the number of delinquencies or
defaults would result in a higher level of charge-offs and a higher level of
loan loss provision, which could adversely affect the Company's earnings. Higher
interest rates would also increase the Company's cost to borrow funds and may
increase the rate paid on deposits, which could more than offset, in the net
interest margin, the increase in rates earned by the Company on new or floating
rate loans or short-term investments. See "Market Risk" for more information on
interest rate risk.
COMPETITION. The Company operates in a highly competitive environment both in
terms of the products and services the Company offers and the geographic markets
in which the Company conducts business. The Company expects this environment to
become even more competitive in the future as a result of legislative,
regulatory and technological changes and the continued trend of consolidation in
the financial services industry. Technological advances, for example, have
lowered barriers to entry and made it possible for non-depository institutions
to offer products and services that traditionally have been provided by banks,
such as automatic transfer and automatic payment systems. Also, investment banks
and insurance companies are competing in an increasing number of traditional
banking businesses such as syndicated lending and consumer banking. Many of the
Company's competitors enjoy the benefits of advanced technology, fewer
regulatory constraints and lower cost structures.
The financial services industry is likely to become even more competitive as
technological advances enable more companies to provide financial services. The
Company expects that the consolidation of the financial services industry will
result in larger, better capitalized companies offering a wide array of
financial services and products. Furthermore, recent legislative changes (see
"Legislation" below) will increase competition in the financial services
industry.
36
FISCAL AND MONETARY POLICIES. The Company's business and earnings are affected
significantly by the fiscal and monetary policies of the federal government and
its agencies. The Company is particularly affected by the policies of the
Federal Reserve Board, which regulates the supply of money and credit in the
United States. The Federal Reserve Board's policies directly and indirectly
influence the rate of interest that commercial banks pay on their
interest-bearing deposits and can also affect the value of financial instruments
held by the Company. Those policies also determine to a significant extent the
cost to the Company of funds for lending and investing. Changes in those
policies are beyond the Company's control and hard to predict. Federal Reserve
Board policies can also affect the Company's customers and counterparties,
potentially increasing the risk that such customers and counterparties may
become delinquent or default on their obligations to the Company.
DISINTERMEDIATION. "Disintermediation" is the process of eliminating the role of
the mediator (or middleman) in completing a transaction. For the financial
services industry, this means eliminating or significantly reducing the role of
banks and other depository institutions in completing transactions that have
traditionally involved banks at one end or both ends of the transaction. For
example, technological advances now allow parties to pay bills and transfer
funds directly without the involvement of banks. Important consequences of this
disintermediation include the loss of customer deposits (and the income
generated from those deposits) and decreases in transactions that generate fee
income.
LEGISLATION. The Gramm-Leach-Bliley Act (the Act) permits, effective March 2000,
affiliation among banks, securities firms and insurance companies by creating a
new type of financial services company called a "financial holding company".
Financial holding companies may offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Under the Act, securities firms and
insurance companies that elect to become a financial holding company may acquire
banks and other financial institutions. The Act significantly changes the
competitive environment in which the Company conducts business.
MERGER INVOLVING THE FORMER NORWEST AND THE FORMER WELLS FARGO. One or more
factors relating to the Merger could adversely impact the Company's business and
earnings and in particular reduce the expected benefits of the Merger to the
Company. These factors include the following:
- - expected cost savings and/or potential revenue enhancements from the Merger
might not be fully realized or realized within the expected time frame;
- - deposit attrition (run-off), customer loss and/or revenue loss following
the Merger might be greater than expected; and
- - costs or difficulties related to the integration of the businesses of the
two companies might be greater than expected.
OTHER MERGERS AND ACQUISITIONS. The Company expands its business in part by
acquiring banks and other companies engaged in financial services. The Company
continues to explore opportunities to acquire banking institutions and other
companies. Discussions are continually being carried on related to such
acquisitions. Generally, management of the Company does not comment on such
discussions or possible acquisitions until a definitive agreement has been
signed. A number of factors related to past and future acquisitions could
adversely affect the Company's business and earnings, including those described
above for the Norwest/Wells Fargo merger. In addition, the Company's
acquisitions generally are subject to approval by federal and, in some cases,
state regulatory agencies. The failure to receive required regulatory approvals
within the time frame or on the conditions expected by management could also
adversely affect the Company's business and earnings.
37
OPERATING SEGMENT RESULTS
COMMUNITY BANKING'S net income was $2,864 million in 1999, compared with $1,376
million in 1998, an increase of 108%. This increase resulted from Merger-related
charges in 1998, as well as significant growth in noninterest income in 1999,
reflecting increased fee-based revenue and venture capital gains. Growth in
consumer checking accounts also contributed to the increase in noninterest
income. Net interest income increased by $361 million, or 6%, compared with
1998. A significant portion of the increase was due to growth in business and
construction loans to small businesses. The provision for loan losses decreased
by $105 million from 1998. Noninterest expense decreased by $971 million from
1998, primarily due to the 1998 Merger-related charges, including irrevocable
commitments to the Company's Foundation in connection with the Merger.
WHOLESALE BANKING'S net income was $850 million in 1999, compared with $780
million in 1998, an increase of 9%. Net interest income increased $84 million,
or 6%, from 1998, due to growth in loan volumes. Commercial loan balances
increased $2,185 million, or 7%, from 1998. Noninterest income increased by $157
million, or 15%, compared with 1998, predominantly due to increased
institutional trust and investment fees, foreign exchange and other fees.
Noninterest expense increased by $116 million, or 11%, from 1998, partially due
to contract services and professional fee expenses from Merger-related
integration activities.
NORWEST MORTGAGE earned $277 million in 1999, a 28% increase over the $217
million earned in 1998. Mortgage originations were $82 billion in 1999, compared
with $109 billion in 1998. The percentage of originations attributed to mortgage
loan refinancings was approximately 37% in 1999, compared with 52% in 1998. The
servicing portfolio increased to $280 billion at December 31, 1999 from $245
billion at December 31, 1998. The weighted average coupon of loans in the
servicing portfolio was 7.33% at December 31, 1999, compared with 7.42% a year
earlier. Total capitalized mortgage servicing rights amounted to $4.5 billion,
or 1.6%, of the servicing portfolio at December 31, 1999. Amortization of
capitalized mortgage servicing rights was $683 million in 1999, compared with
$786 million in 1998. Combined gains on sales of mortgages and servicing rights
were $186 million in 1999, compared with $303 million in 1998.
NORWEST FINANCIAL reported net income of $247 million in 1999, compared with a
$19 million net loss in 1998. Results in 1998 included a $351 million charge to
the provision for loan losses that included losses at Island Finance reflecting
a review of the loan portfolio and realignment of charge-off policies in other
operating units. Net interest income increased by $11 million from 1998, due to
growth in average loans, substantially offset by a decrease in the net interest
margin.
38
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the difference between interest income (which includes
yield-related loan fees) and interest expense. Net interest income on a
taxable-equivalent basis was $9,419 million in 1999, compared with $9,049
million in 1998. The increase in net interest income for 1999 compared with 1998
was primarily due to an increase in earning assets.
Net interest income on a taxable-equivalent basis expressed as a percentage of
average total earning assets is referred to as the net interest margin, which
represents the average net effective yield on earning assets. For 1999, the net
interest margin was 5.66%, compared with 5.79% in 1998. The decrease in the net
interest margin for 1999 compared with 1998 was primarily due to higher balances
of lower yielding investment securities and lower yields on consumer loans.
During the fourth quarter of 1999, the Company restructured its debt securities
available for sale portfolio by selling a portion of the portfolio and
subsequently purchasing debt securities with comparatively higher yields. The
Company expects that the positive effect on the net interest margin of that
restructuring will begin to be realized in the first quarter of 2000.
Table 4 presents the individual components of net interest income and the net
interest margin.
Interest income included hedging income of $169 million in 1999, compared with
$93 million in 1998. Interest expense was offset by hedging income of $105
million in 1999, compared with an offset of $94 million in 1998.
NONINTEREST INCOME
Table 3 shows the major components of noninterest income.
Table 3
NONINTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------
% Change
Year ended December 31, -----------------
------------------------------------- 1999/ 1998/
(in millions) 1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $1,492 $1,357 $1,244 10% 9%
Trust and investment fees:
Asset management and custody fees 749 676 603 11 12
Mutual fund and annuity sales fees 415 300 273 38 10
All other 92 92 78 -- 18
------ ------ ------
Total trust and investment fees 1,256 1,068 954 18 12
Credit card fees 538 520 448 3 16
Other fees:
Cash network fees 275 229 176 20 30
Charges and fees on loans 313 290 254 8 14
All other 442 427 396 4 8
------ ------ ------
Total other fees 1,030 946 826 9 15
Mortgage banking:
Origination and other closing fees 380 530 314 (28) 69
Servicing fees, net of amortization 410 19 324 -- (94)
Net gains (losses) on sales
of mortgage servicing rights -- 16 (8) (100) --
Net gains on sales of mortgages 221 296 120 (25) 147
All other 228 245 177 (7) 38
------ ------ ------
Total mortgage banking 1,239 1,106 927 12 19
Insurance 383 348 336 10 4
Net venture capital gains 1,008 113 191 792 (41)
Net (losses) gains on
securities available for sale (241) 169 99 -- 71
Income from equity investments
accounted for by the:
Cost method 138 151 157 (9) (4)
Equity method 86 47 57 83 (18)
Net gains on sales of loans 32 61 30 (48) 103
Net gains on dispositions of operations 107 100 15 7 567
All other 352 441 391 (20) 13
------ ------ ------
Total $7,420 $6,427 $5,675 15% 13%
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
39
Table 4
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Interest Interest
Average Yields/ income/ Average Yields/ income/
(in millions) balance rates expense balance rates expense
- -------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 1,390 5.01% $ 70 $ 1,652 5.58% $ 92
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies 5,611 5.45 316 4,868 5.94 287
Securities of U.S. states and political subdivisions 1,796 8.33 145 1,528 8.50 124
Mortgage-backed securities:
Federal agencies 19,961 6.83 1,366 17,194 7.05 1,187
Private collateralized mortgage obligations 3,048 6.85 211 2,841 6.74 190
-------- ------ -------- ------
Total mortgage-backed securities 23,009 6.84 1,577 20,035 7.01 1,377
Other securities 3,653 6.59 192 1,783 5.06 103
-------- ------ -------- ------
Total securities available for sale 34,069 6.65 2,230 28,214 6.80 1,891
Securities held to maturity -- -- -- -- -- --
-------- ------ -------- ------
Total securities 34,069 6.65 2,230 28,214 6.80 1,891
Loans held for sale (3) 5,080 7.33 372 4,804 7.71 371
Mortgages held for sale (3) 12,088 7.00 853 12,978 6.92 898
Loans:
Commercial 36,023 8.75 3,153 33,271 8.93 2,971
Real estate 1-4 family first mortgage 12,203 7.66 934 12,932 7.75 1,003
Other real estate mortgage 17,297 8.76 1,515 16,257 9.37 1,523
Real estate construction 4,189 9.29 389 3,601 9.39 338
Consumer:
Real estate 1-4 family junior lien mortgage 11,646 9.95 1,159 10,703 10.42 1,115
Credit card 5,373 13.71 737 6,012 14.96 900
Other revolving credit and monthly payment 16,131 12.51 2,018 16,497 12.78 2,109
-------- ------ -------- ------
Total consumer 33,150 11.81 3,914 33,212 12.42 4,124
Lease financing 6,997 7.80 546 5,608 8.22 461
Foreign 1,515 21.02 318 1,324 20.96 277
-------- ------ -------- ------
Total loans (4)(5) 111,374 9.67 10,769 106,205 10.07 10,697
Other 2,958 4.90 145 2,853 5.82 166
-------- ------ -------- ------
Total earning assets $166,959 8.67 14,439 $156,706 9.03 14,115
======== ------ ======== ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 2,754 .95 26 $ 2,699 1.31 35
Market rate and other savings 56,123 2.27 1,274 52,431 2.61 1,367
Savings certificates 25,693 4.76 1,222 27,749 5.22 1,448
Other time deposits 3,473 4.98 173 4,040 5.49 222
Deposits in foreign offices 1,326 4.68 62 801 4.82 39
-------- ------ -------- ------
Total interest-bearing deposits 89,369 3.09 2,757 87,720 3.55 3,111
Short-term borrowings 18,356 5.04 924 14,454 5.37 777
Long-term debt 21,718 5.89 1,279 17,411 6.30 1,097
Guaranteed preferred beneficial interests
in Company's subordinated debentures 785 7.58 60 1,010 8.06 81
-------- ------ -------- ------
Total interest-bearing liabilities 130,228 3.85 5,020 120,595 4.20 5,066
Portion of noninterest-bearing funding sources 36,731 -- -- 36,111 -- --
-------- ------ -------- ------
Total funding sources $166,959 3.01 5,020 $156,706 3.24 5,066
======== ------ ======== ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (6) 5.66% $9,419 5.79% $9,049
===== ====== ===== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 11,435 $ 10,669
Goodwill 7,666 7,865
Other 16,563 13,115
-------- --------
Total noninterest-earning assets $ 35,664 $ 31,649
======== ========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 42,661 $ 40,922
Other liabilities 8,260 6,958
Preferred stockholders' equity 461 463
Common stockholders' equity 21,013 19,417
Noninterest-bearing funding sources used to
fund earning assets (36,731) (36,111)
-------- --------
Net noninterest-bearing funding sources $ 35,664 $ 31,649
======== ========
TOTAL ASSETS $202,623 $188,355
======== ========
- -----------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 8.00%, 8.35%, 8.44%, 8.27% and
8.83% for 1999, 1998, 1997, 1996 and 1995, respectively. The average
three-month London Interbank Offered Rate (LIBOR) was 5.42%, 5.56%, 5.74%,
5.51% and 6.04% for the same years, respectively.
(2) Interest rates and amounts include the effects of hedge and risk management
activities associated with the respective asset and liability categories.
(3) Yields are based on amortized cost balances.
40
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------ ---------------------------------
Interest Interest
Average Yields/ income/ Average Yields/ income/
balance rates expense balance rates expense
- --------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 1,131 5.39% $ 61 $ 1,596 5.46% $ 87
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies 5,078 6.16 312 3,730 5.95 221
Securities of U.S. states and political subdivisions 1,352 8.49 112 907 8.89 79
Mortgage-backed securities:
Federal agencies 19,844 7.13 1,403 20,199 6.98 1,410
Private collateralized mortgage obligations 3,024 6.81 206 2,852 6.51 187
-------- ------- -------- -------
Total mortgage-backed securities 22,868 7.09 1,609 23,051 6.92 1,597
Other securities 1,373 4.72 67 1,567 5.03 77
-------- ------- -------- -------
Total securities available for sale 30,671 6.88 2,100 29,255 6.76 1,974
Securities held to maturity -- -- -- -- -- --
-------- ------- -------- -------
Total securities 30,671 6.88 2,100 29,255 6.76 1,974
Loans held for sale (3) 3,849 8.11 312 3,560 9.22 328
Mortgages held for sale (3) 6,741 7.27 490 6,889 7.68 529
Loans:
Commercial 29,951 9.18 2,748 27,547 9.15 2,520
Real estate 1-4 family first mortgage 15,866 8.75 1,341 15,522 8.64 1,301
Other real estate mortgage 16,205 9.58 1,552 15,612 9.21 1,438
Real estate construction 3,298 9.92 327 2,940 10.25 301
Consumer:
Real estate 1-4 family junior lien mortgage 9,880 9.39 949 8,995 9.11 844
Credit card 6,663 14.53 968 6,505 15.03 979
Other revolving credit and monthly payment 16,947 12.42 2,105 16,505 12.25 2,022
-------- ------- -------- -------
Total consumer 33,490 12.28 4,022 32,005 12.24 3,845
Lease financing 4,285 8.38 359 3,347 8.15 272
Foreign 1,042 20.31 212 950 20.52 195
-------- ------- -------- -------
Total loans (4)(5) 104,137 10.14 10,561 97,923 10.08 9,872
Other 2,273 5.93 134 1,696 5.51 94
-------- ------- -------- -------
Total earning assets $148,802 9.19 13,658 $140,919 9.15 12,884
======== ------- ======== -------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,016 1.66 50 $ 6,749 1.38 93
Market rate and other savings 51,182 2.58 1,322 45,049 2.68 1,207
Savings certificates 28,581 5.27 1,506 26,853 5.17 1,390
Other time deposits 3,708 5.64 209 3,245 5.77 187
Deposits in foreign offices 1,287 4.85 62 719 4.76 34
-------- ------- -------- -------
Total interest-bearing deposits 87,774 3.59 3,149 82,615 3.52 2,911
Short-term borrowings 11,362 5.37 610 10,692 5.25 562
Long-term debt 17,149 6.38 1,093 18,283 6.24 1,140
Guaranteed preferred beneficial interests
in Company's subordinated debentures 1,287 7.82 101 82 7.81 6
-------- ------- -------- -------
Total interest-bearing liabilities 117,572 4.21 4,953 111,672 4.14 4,619
Portion of noninterest-bearing funding sources 31,230 -- -- 29,247 -- --
-------- ------- -------- -------
Total funding sources $148,802 3.33 4,953 $140,919 3.28 4,619
======== ------- ======== -------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (6) 5.86% $ 8,705 5.87% $ 8,265
====== ======= ====== =======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 11,609 $ 11,442
Goodwill 8,186 6,477
Other 13,653 11,051
-------- --------
Total noninterest-earning assets $ 33,448 $ 28,970
======== --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 37,710 $ 34,952
Other liabilities 7,243 5,466
Preferred stockholders' equity 554 968
Common stockholders' equity 19,171 16,831
Noninterest-bearing funding sources used to
fund earning assets (31,230) (29,247)
-------- --------
Net noninterest-bearing funding sources $ 33,448 $ 28,970
======== ========
TOTAL ASSETS $182,250 $169,889
======== ========
- --------------------------------------------------------------------------------------------------------------------------------
1995
------------------------------
Interest
Average Yields/ income/
Balance rates expense
- -----------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 645 5.83% $ 38
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies 1,604 6.60 105
Securities of U.S. states and political subdivisions 124 20.80 9
Mortgage-backed securities:
Federal agencies 13,897 7.27 1,017
Private collateralized mortgage obligations 1,252 6.39 82
-------- ------
Total mortgage-backed securities 15,149 7.19 1,099
Other securities 750 12.06 50
-------- ------
Total securities available for sale 17,627 7.48 1,263
Securities held to maturity 7,666 5.40 477
-------- ------
Total securities 25,293 5.40 1,740
Loans held for sale (3) 2,557 8.88 227
Mortgages held for sale (3) 4,996 7.86 393
Loans:
Commercial 17,773 9.67 1,718
Real estate 1-4 family first mortgage 11,883 8.51 976
Other real estate mortgage 11,742 9.40 1,104
Real estate construction 1,833 10.06 184
Consumer:
Real estate 1-4 family junior lien mortgage 7,512 8.64 678
Credit card 5,939 15.54 923
Other revolving credit and monthly payment 10,887 13.26 1,444
-------- ------
Total consumer 24,338 13.16 3,045
Lease financing 2,284 8.51 194
Foreign 704 23.01 162
-------- ------
Total loans (4)(5) 70,557 10.47 7,383
Other 940 5.87 55
-------- ------
Total earning assets $104,988 9.36 9,836
======== ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 6,423 1.24 80
Market rate and other savings 28,622 2.78 796
Savings certificates 18,889 5.33 1,007
Other time deposits 2,244 5.81 131
Deposits in foreign offices 2,381 5.86 139
-------- ------
Total interest-bearing deposits 58,559 3.68 2,153
Short-term borrowings 12,682 5.88 746
Long-term debt 14,996 6.53 980
Guaranteed preferred beneficial interests
in Company's subordinated debentures -- -- --
-------- ------
Total interest-bearing liabilities 86,237 4.50 3,879
Portion of noninterest-bearing funding sources 18,751 -- --
-------- ------
Total funding sources $104,988 3.69 3,879
======== ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (6) 5.67% $5,957
==== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 5,858
Goodwill 895
Other 5,273
--------
Total noninterest-earning assets $ 12,026
========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 19,070
Other liabilities 3,246
Preferred stockholders' equity 942
Common stockholders' equity 7,519
Noninterest-bearing funding sources used to
fund earning assets (18,751)
--------
Net noninterest-bearing funding sources $ 12,026
========
TOTAL ASSETS $117,014
========
- -------------------------------------------------------------------
(4) Interest income includes loan fees, net of deferred costs, of approximately
$177 million, $120 million, $103 million, $86 million and $40 million in
1999, 1998, 1997, 1996 and 1995, respectively.
(5) Nonaccrual loans and related income are included in their respective loan
categories.
(6) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal and applicable
state income taxes. The federal statutory tax rate was 35% for all years
presented.
41
The increase in mortgage banking was due to higher servicing revenue, including
lower amortization of mortgage servicing rights, partially offset by a decrease
in loan origination and closing fees. The decrease in amortization was largely
due to rising interest rates, which decreased the prepayment speeds in the
servicing portfolio.
A major portion of the increase in trust and investment fees for 1999 was due to
an overall increase in mutual fund management fees, reflecting the growth in
mutual fund assets and an increase in transaction fees associated with mutual
funds and annuity sales. The Company managed mutual funds with $60.0 billion of
assets at December 31, 1999, compared with $51.4 billion at December 31, 1998.
The Company also managed or maintained personal trust, employee benefit trust
and agency assets of approximately $427.7 billion and $366.9 billion at December
31, 1999 and 1998, respectively.
The increase in net venture capital gains was primarily due to a gain of about
$560 million that was recognized on the Company's venture capital investment in
Cerent Corporation. Gains on sales of venture capital securities are generally
dependent on the timing of holdings becoming publicly traded and subsequent
market conditions, causing venture capital gains to be unpredictable in nature.
The net losses on securities available for sale in 1999 were due to the
restructuring of the securities available for sale investment portfolio in the
fourth quarter of 1999.
Net gains on dispositions of operations in 1999 were due to required
divestitures of stores in Arizona and Nevada.
NONINTEREST EXPENSE
Table 5 shows the major components of noninterest expense.
Table 5
NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------
% Change
Year ended December 31, ---------------
------------------------------------- 1999/ 1998/
(in millions) 1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Salaries $3,053 $ 3,103 $2,712 (2)% 14%
Incentive compensation 522 572 400 (9) 43
Employee benefits 821 741 699 11 6
Equipment 840 900 739 (7) 22
Net occupancy 764 764 719 -- 6
Goodwill 447 421 433 6 (3)
Core deposit intangible:
Nonqualifying (1) 179 217 240 (18) (10)
Qualifying 20 26 33 (23) (21)
Net (gains) losses on dispositions of
premises and equipment (16) 325 76 -- 328
Contract services 465 342 271 36 26
Outside professional services 372 391 262 (5) 49
Outside data processing 279 250 217 12 15
Telecommunications 261 252 241 4 5
Travel and entertainment 249 212 188 17 13
Advertising and promotion 238 237 202 -- 17
Postage 223 228 210 (2) 9
Stationery and supplies 171 178 182 (4) (2)
Insurance 151 132 122 14 8
Operating losses 140 152 374 (8) (59)
Security 88 84 87 5 (3)
All other 515 1,052 583 (51) 80
------ ------- ------
Total $9,782 $10,579 $8,990 (8)% 18%
====== ======= ====== === ===
- ------------------------------------------------------------------------------------------------------------------
(1) Represents amortization of core deposit intangible acquired after February
1992 that is subtracted from stockholders' equity in computing regulatory
capital for bank holding companies.
The net losses on dispositions of premises and equipment in 1998 were mostly due
to Merger-related costs from the 1998 restructuring charge for the disposition
of owned and leased premises.
A significant portion of the increase in contract services was due to expenses
related to various Merger-related projects.
A significant portion of the decrease in the "All other" category of noninterest
expense was due to the 1998 accrual of $208 million of irrevocable commitments
to the Company's Foundation in connection with the Merger.
42
During 1999, the Company completed its enterprise-wide project to prepare and
maintain the Company's systems for Year 2000 compliance. The Year 2000
compliance issue pertains to computer systems that use two digits rather than
four to define the applicable year and whether such systems would properly
process information when the year changed to 2000. In addition, since the year
2000 is a leap year, some programs may not recognize and properly process
"February 29, 2000". "Systems" include hardware, networks, in-house and
commercial "off the shelf" software, and embedded technology such as date
impacted processors in automated systems such as elevators, telephone systems,
security systems, vault systems, heating and cooling systems and others.
The Company incurred approximately $320 million in total costs for the Year 2000
project, including approximately $118 million in 1999. The Company does not
expect to incur additional significant charges for the Year 2000 project.
The Company experienced no significant Year 2000 issues as of January 18, 2000,
and does not anticipate that significant Year 2000 issues will arise in the
future associated with the year change or with the February 29, 2000 leap year
event. However, it is too early to conclude that there will be no significant
issues associated with the Year 2000, and that all of the Company's customers,
vendors, counterparties and other third parties have effectively addressed their
Year 2000 issues.
Year 2000 issues, if they do arise, could expose the Company to a number of
risks, including the possibility that, to the extent certain third parties fail
to adequately address Year 2000 issues, they may not be able to meet their
contractual obligations to the Company. The forward-looking statements made in
the foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. The forward-looking statements in the foregoing Year 2000 discussion
should be read with the cautionary statements included in the section, "Factors
That May Affect Future Results".
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE
Table 6 reconciles reported earnings to net income excluding goodwill and
nonqualifying core deposit intangible amortization ("cash" earnings) for the
year ended December 31, 1999. Table 7 presents the calculation of the ROA, ROE
and efficiency ratios excluding goodwill and nonqualifying core deposit
intangible amortization and balances for the year ended December 31, 1999. These
calculations were specifically formulated by the Company and may not be
comparable to similarly titled measures reported by other companies. Also,
"cash" earnings are not entirely available for use by management. See the
Consolidated Statement of Cash Flows and Note 3 to Financial Statements for
other information regarding funds available for use by management.
Table 6
EARNINGS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- -------------------------------------------------------------------------------------------------------------------
Year ended
(in millions, except per share amounts) December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
Amortization
-------------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense $5,948 $447 $179 $6,574
Income tax expense 2,201 -- 69 2,270
------ ---- ---- ------
Net income 3,747 447 110 4,304
Preferred stock dividends 35 -- -- 35
------ ---- ---- ------
Net income applicable to common stock $3,712 $447 $110 $4,269
====== ==== ==== ======
Earnings per common share $ 2.26 $.27 $.06 $ 2.59
====== ==== ==== ======
Diluted earnings per common share $ 2.23 $.27 $.06 $ 2.56
====== ==== ==== ======
- -------------------------------------------------------------------------------------------------------------------
Table 7
RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- -----------------------------------------------------------------------------------------------------------------
Year ended
(in millions) December 31, 1999
- -----------------------------------------------------------------------------------------------------------------
ROA: A / (C-E-F) = 2.22%
ROE: B / (D-E-G) = 34.08%
Efficiency: (H-I) / J = 54.6%
Net income $ 4,304 (A)
Net income applicable to common stock 4,269 (B)
Average total assets 202,623 (C)
Average common stockholders' equity 21,013 (D)
Average goodwill 7,666 (E)
Average pretax nonqualifying core deposit intangible 1,323 (F)
Average after-tax nonqualifying core deposit intangible 820 (G)
Noninterest expense 9,782 (H)
Amortization expense for goodwill and nonqualifying core deposit intangible 626 (I)
Net interest income plus noninterest income 16,775 (J)
- -----------------------------------------------------------------------------------------------------------------
43
BALANCE SHEET ANALYSIS
A comparison between the year-end 1999 and 1998 balance sheets is presented
below.
SECURITIES AVAILABLE FOR SALE
Total securities available for sale averaged $34.1 billion in 1999, a 21%
increase from $28.2 billion in 1998. Total securities available for sale were
$38.5 billion at December 31, 1999, a 20% increase from $32.0 billion at
December 31, 1998. The increase from 1998 was due to additional holdings of
securities of U.S. Treasury and Federal agencies and marketable equity
securities.
Table 8 provides the components of the estimated unrealized net gain on
securities available for sale.
Table 8
ESTIMATED UNREALIZED GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------
December 31,
-----------------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------
Estimated unrealized gross gains $2,174 $919
Estimated unrealized gross losses (885) (89)
------ ----
Estimated unrealized net gain $1,289 $830
====== ====
- ------------------------------------------------------------------------------------------
The unrealized net loss of $668 million in the debt securities portion of the
securities available for sale portfolio at December 31, 1999 was attributable to
an increase in market interest rates in 1999. The unrealized net gain of $1,957
million in the marketable equity securities portion of the securities available
for sale portfolio at December 31, 1999 was due to equity securities held within
the Company's venture capital portfolio that benefited from favorable market
conditions. The Company may decide to sell certain of the securities available
for sale to manage the level of earning assets (for example, to offset loan
growth that exceeds expected maturities and prepayments of securities). (See
Note 4 to Financial Statements for securities available for sale by security
type.)
The unrealized net gain on securities available for sale is reported on an
after-tax basis as a component of cumulative other comprehensive income. At
December 31, 1999, the unrealized net after-tax gain was $902 million, compared
with an unrealized net after-tax gain of $477 million at December 31, 1998.
At December 31, 1999, mortgage-backed securities, including collateralized
mortgage obligations (CMOs), were $25.4 billion, or 66% of the Company's
securities available for sale portfolio. As an indication of interest rate risk,
the Company has estimated the effect of a 200 basis point increase in interest
rates on the value of the mortgage-backed securities and the corresponding
expected remaining maturities. Based on that rate scenario, mortgage-backed
securities would decrease in fair value from $25.4 billion to $22.9 billion and
the expected remaining maturity of these securities would increase from 7 years
and 9 months to 9 years and 2 months.
44
LOAN PORTFOLIO
A comparative schedule of average loan balances is presented in Table 4;
year-end balances are presented in Note 5 to Financial Statements.
Loans averaged $111.4 billion in 1999, compared with $106.2 billion in 1998, an
increase of 5%. Total loans at December 31, 1999 were $119.5 billion, compared
with $108.0 billion at year-end 1998, an increase of 11%. The Company's total
unfunded loan commitments increased to $74.6 billion at December 31, 1999, from
$71.5 billion at December 31, 1998.
Real estate 1-4 family junior lien mortgage loans grew 16% to $12.9 billion at
December 31, 1999, from $11.1 billion at December 31, 1998.
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
Table 9, below, presents comparative data for nonaccrual and restructured loans
and other assets. Management's classification of a loan as nonaccrual or
restructured does not necessarily indicate that the principal of the loan is
uncollectible in whole or in part. Table 9 excludes loans that are contractually
past due 90 days or more as to interest or principal, but are both well-secured
and in the process of collection or are real estate 1-4 family first mortgage
loans or consumer loans that are exempt under regulatory rules from being
classified as nonaccrual. This information is presented in Table 10.
Notwithstanding, real estate 1-4 family loans (first and junior liens) are
placed on nonaccrual within 120 days of becoming past due and are shown in Table
9. (Note 1 to Financial Statements describes the Company's accounting policy
relating to nonaccrual and restructured loans.)
Table 9
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------
(in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (1) $344 $282 $209 $ 280 $179
Real estate 1-4 family first mortgage 127 124 164 142 110
Other real estate mortgage (2) 112 199 259 381 342
Real estate construction 7 17 27 30 48
Consumer:
Real estate 1-4 family junior lien mortgage 17 17 17 15 8
Other revolving credit and monthly payment 27 41 18 5 6
---- ---- ---- ------ ----
Total consumer 44 58 35 20 14
Lease financing 22 12 12 18 12
Foreign 9 17 -- -- --
---- ---- ---- ------ ----
Total nonaccrual loans (3) 665 709 706 871 705
Restructured loans (4) 4 1 9 10 16
---- ---- ---- ------ ----
Nonaccrual and restructured loans 669 710 715 881 721
As a percentage of total loans .6% .7% .7% .8% 1.0%
Foreclosed assets 153 148 208 262 223
Real estate investments (5) 33 1 4 4 12
---- ---- ---- ------ ----
Total nonaccrual and restructured
loans and other assets $855 $859 $927 $1,147 $956
==== ==== ==== ====== ====
- -----------------------------------------------------------------------------------------------------------------
(1) Includes commercial agricultural loans of $40 million, $32 million, $24
million, $25 million and $13 million at December 31, 1999, 1998, 1997, 1996
and 1995, respectively.
(2) Includes agricultural loans secured by real estate of $16 million, $12
million, $18 million, $13 million and $5 million at December 31, 1999,
1998, 1997, 1996 and 1995, respectively.
(3) Of the total nonaccrual loans, $358 million, $388 million, $411 million,
$587 million and $508 million at December 31, 1999, 1998, 1997, 1996 and
1995, respectively, were considered impaired under FAS 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN.
(4) In addition to originated loans that were subsequently restructured, there
were loans of $50 million at December 31, 1995 that were purchased at a
steep discount whose contractual terms were modified after acquisition.
Those loans were restructured to yield a rate that was equal to or greater
than the rate charged for new loans with comparable risk and thus were not
required to be reported as impaired in the year following the
restructuring. Those loans were not impaired based on the terms specified
by the restructuring agreement.
(5) Represents the amount of real estate investments (contingent interest loans
accounted for as investments) that would be classified as nonaccrual if
such assets were recorded as loans. Real estate investments totaled $89
million, $128 million, $172 million, $154 million and $96 million at
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
45
The Company anticipates changes in the amount of nonaccrual loans that result
from increases in lending activity or from resolutions of loans in the
nonaccrual portfolio. The performance of any individual loan can be affected by
external factors, such as the interest rate environment or factors particular to
a borrower such as actions taken by a borrower's management. In addition, from
time to time, the Company purchases loans from other financial institutions that
may be classified as nonaccrual based on the Company's policies.
The Company generally identifies loans to be evaluated for impairment under FASB
Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, when such
loans are on nonaccrual or have been restructured. However, not all nonaccrual
loans are impaired. Generally, a loan is placed on nonaccrual status upon
becoming 90 days past due as to interest or principal (unless both well-secured
and in the process of collection), when the full timely collection of interest
or principal becomes uncertain or when a portion of the principal balance has
been charged off. Real estate 1-4 family loans (both first liens and junior
liens) are placed on nonaccrual status within 120 days of becoming past due as
to interest or principal, regardless of security. In contrast, under FAS 114,
loans are considered impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, rather than the
contractual terms specified by the restructuring agreement. Consequently, not
all impaired loans are necessarily placed on nonaccrual status. That is, loans
performing under restructured terms beyond a specified performance period are
classified as accruing but may still be deemed impaired under FAS 114.
For loans covered under FAS 114, the Company makes an assessment for impairment
when and while such loans are on nonaccrual, or when the loan has been
restructured. When a loan with unique risk characteristics has been identified
as being impaired, the Company will estimate the amount of impairment using
discounted cash flows, except when the sole (remaining) source of repayment for
the loan is the operation or liquidation of the underlying collateral. In such
cases, the current fair value of the collateral, reduced by costs to sell, will
be used in place of discounted cash flows. Additionally, some impaired loans
with commitments of less than $1 million are aggregated for the purpose of
estimating impairment using historical loss factors as a means of measurement.
If the measurement of the impaired loan results in a value that is less than the
recorded investment in the loan (including accrued interest, net deferred loan
fees or costs and unamortized premium or discount), an impairment is recognized
by creating or adjusting an existing allocation of the allowance for loan
losses. FAS 114 does not change the timing of charge-offs of loans to reflect
the amount ultimately expected to be collected.
If interest that was due on the book balances of all nonaccrual and restructured
loans (including loans that were but are no longer on nonaccrual or were
restructured at year end) had been accrued under their original terms, $56
million of interest would have been recorded in 1999, compared with $17 million
actually recorded.
Foreclosed assets at December 31, 1999 were $153 million, compared with $148
million at December 31, 1998. Substantially all of the foreclosed assets at
December 31, 1999 have been in the portfolio three years or less.
46
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Table 10 shows loans that are contractually past due 90 days or more as to
interest or principal, but are not included in Table 9, Nonaccrual and
Restructured Loans and Other Assets.
Table 10
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $ 24 $ 29 $ 34 $ 83 $ 20
Real estate 1-4 family first mortgage 39 40 54 53 12
Other real estate mortgage 15 17 16 67 28
Real estate construction 4 6 13 10 3
Consumer: (1)
Real estate 1-4 family junior lien mortgage 35 64 74 55 30
Credit card 99 140 160 146 120
Other revolving credit and monthly payment 185 160 206 180 150
---- ---- ---- ---- ----
Total consumer 319 364 440 381 300
---- ---- ---- ---- ----
Total $401 $456 $557 $594 $363
==== ==== ==== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------
(1) Consumer loans at December 31, 1998, 1997, 1996 and 1995 have been revised
to include Norwest Financial loans of $114 million, $160 million, $150
million and $127 million, respectively.
ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan category, is presented in Note 5 to Financial
Statements. At December 31, 1999, the allowance for loan losses was $3,170
million, or 2.65% of total loans, compared with $3,134 million, or 2.90%, at
December 31, 1998 and $3,062 million, or 2.88%, at December 31, 1997. The
provision for loan losses totaled $1,045 million in 1999, $1,545 million in 1998
and $1,140 million in 1997. The provision for loan losses in 1999 approximated
net charge-offs, and the Company anticipates that it will continue to make a
provision in 2000 that will approximate the level of actual net charge-offs. Net
charge-offs in 1999 were $1,049 million, or .94% of average total loans,
compared with $1,617 million, or 1.52%, in 1998 and $1,305 million, or 1.25%, in
1997. Loan loss recoveries were $436 million in 1999, compared with $427 million
in 1998 and $426 million in 1997.
Any loan that is past due as to principal or interest and that is not both
well-secured and in the process of collection is generally charged off (to the
extent that it exceeds the fair value of any related collateral) after a
predetermined period of time that is based on loan category. Additionally, loans
are charged off when classified as a loss by either internal loan examiners or
regulatory examiners.
The Company considers the allowance for loan losses of $3,170 million adequate
to cover losses inherent in loans, commitments to extend credit and standby and
other letters of credit at December 31, 1999. However, no assurance can be given
that the Company will not, in any particular period, sustain loan losses that
are sizable in relation to the amount reserved, or that subsequent evaluations
of the loan portfolio, in light of the factors then prevailing, including
economic conditions and the ongoing examination process by the Company and its
regulators, will not require significant increases in the allowance for loan
losses. For discussion of the process by which the Company determines the
adequacy of the allowance for loan losses, see Note 5 to Financial Statements.
DEPOSITS
Comparative detail of average deposit balances is presented in Table 4. Average
core deposits funded 63% and 66% of the Company's average total assets in 1999
and 1998, respectively. Year-end deposit balances are presented in Table 11.
Table 11
DEPOSITS
- ---------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------- %
(in millions) 1999 1998 Change
- ---------------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 42,916 $ 46,732 (8)%
Interest-bearing checking 3,083 2,908 6
Market rate and other savings 55,791 55,152 1
Savings certificates 24,408 27,497 (11)
-------- --------
Core deposits 126,198 132,289 (5)
Other time deposits 3,255 3,753 (13)
Deposits in foreign offices 3,255 746 336
-------- --------
Total deposits $132,708 $136,788 (3)%
======== ======== ===
- ---------------------------------------------------------------------------------------------------------------
47
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
The majority of the Company's interest rate risk arises from the instruments,
positions and transactions entered into for purposes other than trading. They
include loans, securities available for sale, deposit liabilities, short-term
borrowings, long-term debt and derivative financial instruments used for
asset/liability management. Interest rate risk occurs when assets and
liabilities reprice at different times as market interest rates change. For
example, if fixed-rate assets are funded with floating-rate debt, the spread
between asset and liability rates will decline or turn negative if rates
increase. The Company refers to this type of risk as "term structure risk" .
There is, however, another source of interest rate risk which results from
changing spreads between asset and liability rates. The Company calls this
type of risk "basis risk"; it is a significant source of interest rate risk
for the Company and is more difficult to quantify and manage than term
structure risk. Two primary components of basis risk for the Company are (1)
the spread between prime-based loans and market rate account (MRA) savings
deposits and (2) the rate paid on savings and interest-bearing checking
accounts as compared to LIBOR-based loans.
Interest rate risk is managed within an overall asset/liability framework for
the Company. The principal objectives of asset/liability management are to
manage the sensitivity of net interest spreads and net income to potential
changes in interest rates and to enhance profitability in ways that promise
sufficient reward for understood and controlled risk. Funding positions are
kept within predetermined limits designed to ensure that risk-taking is not
excessive and that liquidity is properly managed. The Company employs a
sensitivity analysis in the form of a net interest income simulation to help
characterize the market risk arising from changes in interest rates in the
other-than-trading portfolio.
The Company's net interest income simulation includes all other-than-trading
financial assets, financial liabilities, derivative financial instruments and
leases where the Company is the lessor. It captures the dynamic nature of the
balance sheet by anticipating probable balance sheet and off-balance sheet
strategies and volumes under different interest rate scenarios over the
course of a one-year period. This simulation measures both the term structure
risk and the basis risk in the Company's positions. The simulation also
captures the option characteristics of products, such as caps and floors on
floating-rate loans, the right to prepay mortgage loans without penalty and
the ability of customers to withdraw deposits on demand. These options are
modeled directly in the simulation either through the use of option pricing
models, in the case of caps and floors on loans, or through statistical
analysis of historical customer behavior, in the case of mortgage loan
prepayments or non-maturity deposits.
The simulation model is used to measure the impact on net income, relative to
a base case scenario, of interest rates increasing or decreasing 100 basis
points over the next 12 months. The simulation showing the largest drop in
net income relative to the base case scenario over the next twelve months is
a 100 basis point increase in rates that will result in a decrease in net
income of $38 million. In the simulation that was run at December 31, 1998,
the largest drop in net income relative to the base case scenario over the
next twelve months was a 100 basis point increase in rates that was projected
to result in a decrease in net income of $26 million.
The Company uses interest rate derivative financial instruments as an
asset/liability management tool to hedge mismatches in interest rate
exposures indicated by the net income simulation described above. They are
used to reduce the Company's exposure to interest rate fluctuations and
provide more stable spreads between loan yields and the rates on their
funding sources. For example, the Company uses interest rate futures to
shorten the rate maturity of MRA savings deposits and better match the
maturity of prime-based loans. The Company also purchases interest rate
floors to protect against the loss in interest income on LIBOR-based loans
during a declining interest rate environment. Additionally, receive-fixed
rate swaps are used to convert floating-rate loans into fixed rates to better
match the liabilities that fund the loans. The Company also uses derivatives
including floors, futures contracts and options on futures contracts to hedge
the Company's mortgage servicing rights as well as forwards, futures and
options on futures and forwards to hedge the Company's 1-4 family real estate
first mortgage loan commitments and mortgage loans held for sale.
48
Looking toward managing interest rate risk in 2000, the Company will continue
to face term structure risk and basis risk and may be confronted with several
risk scenarios. If interest rates rise, net income may actually increase if
deposit rates lag increases in market rates (e.g., prime, LIBOR). The Company
could, however, experience downward pressure on net income in that scenario
if deposits are aggressively repriced as market rates increase.
A declining interest rate environment might result in a decrease in loan
rates, while deposit rates remain relatively stable, as they did between 1994
and 1996. This rate scenario could also create significant risk to net
income. The Company has partially hedged against that risk with interest rate
floors, receive-fixed rate swap contracts and fixed-rate mortgage backed
securities. As mentioned above, the Company has also partially hedged its
mortgage servicing rights against that rate scenario using primarily floors,
futures contracts and options on futures contracts. Based on its current and
projected balance sheet, the Company does not expect that a change in
interest rates would significantly affect its liquidity position.
The Company considers the fair values and the potential near term losses to
future earnings related to its customer accommodation derivative financial
instruments to be immaterial.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate derivative financial instruments as
asset/liability management tools to hedge the Company's exposure to interest
rate fluctuations. The Company also offers contracts to accommodate its
customers, but hedges such contracts by purchasing other financial contracts
or uses the contracts for asset/liability management. Table 12 reconciles the
beginning and ending notional or contractual amounts of derivative financial
instruments used for asset/liability management purposes for 1999 and shows
the expected remaining maturity at year-end 1999. For a further discussion of
derivative financial instruments, refer to Note 23 to Financial Statements.
Table 12
DERIVATIVE ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
-----------------------------------------------------------------------------------------
Weighted
average
expected
Amortization remaining
Beginning and Ending maturity (in
(in millions) balance Additions maturities Terminations balance yrs.-mos.)
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate contracts:
Swaps $24,429 $ 13,594 $ 5,087 $ 1,366 $31,570 2-10
Futures 62,348 98,611 23,119 87,115 50,725 3-6
Floors and caps 33,598 18,554 9,010 2,000 41,142 3-0
Options 25,822 155,380 58,287 110,975 11,940 0-11
Forwards 41,283 485,677 -- 504,432 22,528 0-1
Foreign exchange contracts:
Forwards 168 552 582 -- 138 0-3
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred losses related to interest rate futures contracts were $310 million
at December 31, 1999, most of which will be fully amortized within seven years.
Net deferred losses on terminated derivative financial instruments were $210
million at December 31, 1999, compared with net deferred gains of $412 million
at December 31, 1998.
LIQUIDITY AND CAPITAL MANAGEMENT
The Company manages its liquidity and capital at both the parent and subsidiary
levels.
In addition to the immediately liquid resources of cash and due from banks and
federal funds sold and securities purchased under resale agreements, asset
liquidity is provided by the Company's securities available for sale portfolio.
The weighted average expected remaining maturity of the debt securities within
this portfolio was 8 years and 2 months at December 31, 1999. Of the $35.2
billion of debt securities in this portfolio at December 31, 1999, $4.7 billion,
or 13%, is expected to mature or be prepaid in 2000 and an additional $3.0
billion, or 9%, is expected to mature or be prepaid in 2001. Asset liquidity is
further enhanced by the Company's ability to securitize assets such as mortgage
loans.
Core deposits have historically provided the Company with a sizeable source of
relatively stable and low-cost funds. The Company's average core deposits and
stockholders' equity funded 73% and 76% of its average total assets in 1999 and
1998, respectively.
49
The remaining funding of average total assets was mostly provided by long-term
debt, deposits in foreign offices, short-term borrowings (federal funds
purchased and securities sold under repurchase agreements, commercial paper and
other short-term borrowings) and trust preferred securities. Short-term
borrowings averaged $18.4 billion and $14.4 billion in 1999 and 1998,
respectively. Long-term debt averaged $21.7 billion and $17.4 billion in 1999
and 1998, respectively. Trust preferred securities averaged $.8 billion and $1.0
billion in 1999 and 1998, respectively.
Liquidity for the Company is provided by interest income, deposit-raising
activities, potential disposition of readily marketable assets and through its
ability to raise funds in a variety of domestic and international money and
capital markets. The Company accesses the capital markets for long-term funding
through the issuance of registered debt.
In June 1999, the Parent filed a shelf registration statement with the SEC under
which the Company may issue up to $10 billion in debt and equity securities,
excluding common stock, except for common stock issuable upon the exercise or
conversion of debt and equity securities. That registration statement, together
with the $150 million issuance authority remaining on the Company's registration
statements filed in 1993 and 1995, permits the Company to issue an aggregate of
$10.15 billion in such debt and equity securities. Under those registration
statements, the Company had issued a total of $3 billion in debt securities as
of December 31, 1999 and had established a program to issue, from time to time,
additional debt securities in the form of Medium-Term Notes, Series A and
Subordinated Medium-Term Notes, Series B in the aggregate principal amount of up
to $7.15 billion. Proceeds from the issuance of the debt securities listed above
were, and with respect to any such securities issued in the future, are expected
to be used for general corporate purposes.
In April 1999, Norwest Financial, Inc. (NFI) filed a shelf registration
statement with the SEC, under which NFI may issue up to $2 billion in senior or
subordinated debt securities. As of December 31, 1999, NFI had issued a total of
$1.1 billion in debt securities under that registration statement. Also in 1999,
a subsidiary of NFI filed a shelf registration statement with the Canadian
provincial securities authorities for the issuance of up to $1 billion
(Canadian) in debt securities, and had issued $390 million (Canadian) in debt
securities from that registration statement as of December 31, 1999.
To accommodate future growth and current business needs, the Company has a
capital expenditure program. Capital expenditures for 2000 are estimated to be
approximately $500 million for equipment for stores, relocation and remodeling
of Company facilities and routine replacement of furniture and equipment. The
Company will fund these expenditures from various sources, including retained
earnings of the Company and borrowings of various maturities.
The Company and each of the subsidiary banks are subject to various regulatory
capital adequacy requirements administered by the Federal Reserve Board and the
Office of the Comptroller of the Currency. RBC guidelines establish a
risk-adjusted ratio relating capital to different categories of assets and
off-balance sheet exposures. (See Note 22 to Financial Statements for additional
information.)
The Company repurchases common shares in the open market under a systematic plan
to meet the common stock issuance requirements of the Company's benefit plans
and for other common stock issuance requirements, including acquisitions
accounted for as purchases. In February of 2000, the Board of Directors
authorized the repurchase of up to 81 million additional shares of the Company's
outstanding common stock. At the time of that authorization, approximately 35
million shares remained to be purchased under the September 1999 common stock
purchase authority, substantially all of which are expected to be acquired for
announced acquisitions.
50
COMPARISON OF 1998 TO 1997
Net interest income increased $342 million in 1998 compared to 1997. The
increase in net interest income was due to an increase in earning assets, which
included the effects of a significantly higher volume of mortgage origination
activity during 1998.
Net income in 1998 was $1,950 million, compared with $2,499 million in 1997, a
decrease of 22%. Diluted earnings per common share were $1.17 in 1998, compared
with $1.48 in 1997, a decrease of 21%. ROA was 1.04% and ROE was 9.86% in 1998,
compared with 1.37% and 12.81%, respectively, in 1997.
Diluted earnings before the amortization of goodwill and CDI ("cash" earnings)
were $1.50 per share in 1998, compared with $1.83 in 1997. On the same basis,
ROA was 1.39% and ROE was 23.15% in 1998, compared with 1.78% and 30.49%,
respectively, in 1997.
Net interest income on a taxable-equivalent basis was $9,049 million in 1998,
compared with $8,705 million in 1997. The Company's net interest margin was
5.79% for 1998, compared with 5.86% in 1997.
Noninterest income in 1998 was $6,427 million, compared with $5,675 million in
1997, an increase of 13%. The increase in noninterest income was primarily due
to higher fee-based revenues and increased earnings from mortgage banking
activities.
Noninterest expense in 1998 was $10,579 million, compared with $8,990 million in
1997. The increase was due to Merger-related charges recorded in the fourth
quarter of 1998.
The provision for loan losses was $1,545 million in 1998, compared with $1,140
million in 1997. Net charge-offs in 1998 were $1,617 million, or 1.52% of
average total loans, compared with $1,305 million, or 1.25%, in 1997. The
allowance for loan losses was 2.90% of total loans at December 31, 1998,
compared with 2.88% at December 31, 1997.
Total nonaccrual and restructured loans were $710 million, or .7% of total
loans, at December 31, 1998, compared with $715 million, or .7%, at December 31,
1997. Foreclosed assets were $148 million at December 31, 1998, compared with
$208 million at December 31, 1997.
ADDITIONAL INFORMATION
Common stock of the Company is traded on the New York Stock Exchange and the
Chicago Stock Exchange. The high, low and end-of-period annual and quarterly
prices of the Company's common stock as reported on the New York Stock Exchange
Composite Transaction Reporting System are presented in the graphs. The number
of holders of record of the Company's common stock was 90,277 as of January 31,
2000.
[Stock prices for bar graph]
- ---------------------------------------------------
1997 1998 1999
----------------------------
High $39.50 $43.88 $49.94
Low 21.38 27.50 32.13
End of period 38.75 39.94 40.44
- ---------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1998 1999
------------------------------------------ ------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
------------------------------------------ ------------------------------------------
High $43.88 $43.75 $39.75 $40.88 $40.44 $44.88 $45.31 $49.94
Low 34.75 34.00 27.50 30.19 32.13 34.38 36.44 38.38
End of period 41.56 37.50 36.00 39.94 35.06 42.75 39.63 40.44
- ------------------------------------------------------------------------------------------------------------
51
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------
(in millions, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Securities available for sale $ 2,176 $ 1,844 $ 2,063
Mortgages held for sale 853 898 490
Loans held for sale 372 371 312
Loans 10,761 10,685 10,539
Other interest income 213 257 198
-------- -------- --------
Total interest income 14,375 14,055 13,602
-------- -------- --------
INTEREST EXPENSE
Deposits 2,757 3,111 3,150
Short-term borrowings 924 777 610
Long-term debt 1,279 1,097 1,093
Guaranteed preferred beneficial interests in Company's
subordinated debentures 60 80 101
-------- -------- --------
Total interest expense 5,020 5,065 4,954
-------- -------- --------
NET INTEREST INCOME 9,355 8,990 8,648
Provision for loan losses 1,045 1,545 1,140
-------- -------- --------
Net interest income after provision for loan losses 8,310 7,445 7,508
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts 1,492 1,357 1,244
Trust and investment fees 1,256 1,068 954
Credit card fees 538 520 448
Other fees 1,030 946 826
Mortgage banking 1,239 1,106 927
Insurance 383 348 336
Net venture capital gains 1,008 113 191
Net (losses) gains on securities available for sale (241) 169 99
Other 715 800 650
-------- -------- --------
Total noninterest income 7,420 6,427 5,675
-------- -------- --------
NONINTEREST EXPENSE
Salaries 3,053 3,103 2,712
Incentive compensation 522 572 400
Employee benefits 821 741 699
Equipment 840 900 739
Net occupancy 764 764 719
Goodwill 447 421 433
Core deposit intangible 199 243 273
Net (gains) losses on dispositions of premises and equipment (16) 325 76
Other 3,152 3,510 2,939
-------- -------- --------
Total noninterest expense 9,782 10,579 8,990
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 5,948 3,293 4,193
Income tax expense 2,201 1,343 1,694
-------- -------- --------
NET INCOME $ 3,747 $ 1,950 $ 2,499
======== ======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 3,712 $ 1,915 $ 2,456
======== ======== ========
EARNINGS PER COMMON SHARE $ 2.26 $ 1.18 $ 1.50
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 2.23 $ 1.17 $ 1.48
======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE $ .785 $ .70 $ .615
======== ======== ========
Average common shares outstanding 1,645.6 1,621.5 1,634.6
======== ======== ========
Diluted average common shares outstanding 1,665.2 1,641.8 1,657.8
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
52
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------
(in millions, except shares) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 13,250 $ 12,731
Federal funds sold and securities purchased
under resale agreements 1,554 1,517
Securities available for sale 38,518 31,997
Mortgages held for sale 11,707 19,770
Loans held for sale 4,975 5,322
Loans 119,464 107,994
Allowance for loan losses 3,170 3,134
-------- --------
Net loans 116,294 104,860
-------- --------
Mortgage servicing rights 4,483 3,080
Premises and equipment, net 2,985 3,130
Core deposit intangible 1,286 1,510
Goodwill 7,702 7,664
Interest receivable and other assets 15,348 10,894
-------- --------
Total assets $218,102 $202,475
======== ========
LIABILITIES
Noninterest-bearing deposits $ 42,916 $ 46,732
Interest-bearing deposits 89,792 90,056
-------- --------
Total deposits 132,708 136,788
Short-term borrowings 27,995 15,897
Accrued expenses and other liabilities 11,108 8,537
Long-term debt 23,375 19,709
Guaranteed preferred beneficial interests in Company's
subordinated debentures 785 785
STOCKHOLDERS' EQUITY
Preferred stock 344 547
Unearned ESOP shares (73) (84)
-------- --------
Total preferred stock 271 463
Common stock - $1 2/3 par value, authorized
4,000,000,000 shares; issued 1,666,095,265 shares
and 1,661,392,590 shares 2,777 2,769
Additional paid-in capital 8,786 8,673
Retained earnings 11,196 9,045
Cumulative other comprehensive income 892 463
Notes receivable from ESOP (1) (3)
Treasury stock - 39,245,724 shares and 17,334,787 shares (1,790) (651)
-------- --------
Total stockholders' equity 22,131 20,759
-------- --------
Total liabilities and stockholders' equity $218,102 $202,475
======== ========
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
53
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------
Unearned Additional
Number of Preferred ESOP Common paid-in
(in millions, except shares) shares stock shares stock capital
- ----------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $850 $(61) $2,149 $10,170
---- ---- ------ -------
Comprehensive income
Net income-1997
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized gains (losses) on securities
available for sale arising during the year
Reclassification of net (gains) losses on
securities available for sale included
in net income
Total comprehensive income
Common stock issued 18,793,327 10 155
Common stock issued for acquisitions 23,835,535 21 20
Preferred stock repurchased 1,100,000 (325)
Common stock repurchased 74,627,681 (97) (1,591)
Preferred stock issued to ESOP 51,700 52 (54) 2
Preferred stock released to ESOP 35 (1)
Preferred stock (34,074) converted to common
shares 1,212,871 (34) 6
Preferred stock dividends
Common stock dividends
Cash payments received on
notes receivable from ESOP
Stock split 635 (635)
---- ---- ------ -------
Net change (307) (19) 569 (2,044)
---- ---- ------ -------
BALANCE DECEMBER 31, 1997 543 (80) 2,718 8,126
---- ---- ------ -------
Comprehensive income
Net income-1998
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized gains (losses) on securities
available for sale arising during the year
Reclassification of net (gains) losses on
securities available for sale included
in net income
Total comprehensive income
Common stock issued 39,048,384 49 910
Common stock issued for acquisitions 16,743,233 24 38
Common stock repurchased 32,676,277 (22) (407)
Preferred stock issued to ESOP 35 (37) 2
Preferred stock released to ESOP 33 (1)
Preferred stock (31,043) converted to common
shares 799,216 (31) 3
Preferred stock dividends
Common stock dividends
Cash payments received on
notes receivable from ESOP 2
Increase in Rabbi trust assets (classified as
treasury stock) ---- ---- ----- -------
Net change 4 (4) 51 547
---- ---- ------ -------
BALANCE DECEMBER 31, 1998 547 (84) 2,769 8,673
---- ---- ------ -------
Comprehensive income
Net income-1999
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized gains (losses) on securities
available for sale arising during the year
Reclassification of net (gains) losses on
securities available for sale included
in net income
Total comprehensive income
Common stock issued 21,279,905 101
Common stock issued for acquisitions 8,040,491 8 12
Common stock repurchased 48,720,466
Preferred stock redeemed (191)
Preferred stock issued to ESOP 75 (80) 5
Preferred stock released to ESOP 91 (5)
Preferred stock (86,141) converted to common
shares 2,191,808 (87)
Preferred stock dividends
Common stock dividends
Cash payments received on
notes receivable from ESOP
Increase in Rabbi trust assets (classified as
treasury stock)
---- ---- ------ -------
Net change (203) 11 8 113
---- ---- ------ -------
BALANCE DECEMBER 31, 1999 $344 $(73) $2,777 $ 8,786
==== ==== ====== =======
- ----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Notes Cumulative
receivable other Total
Retained from Treasury comprehensive stockholders'
(in millions, except shares) earnings ESOP stock Income equity
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ 6,871 $(11) $ (233) $ 316 $20,051
Comprehensive income ------ ------- ------- ------- -------
Net income-1997 2,499 2,499
Other comprehensive income, net of tax:
Translation adjustments 1 1
Net unrealized gains (losses) on securities
available for sale arising during the year 206 206
Reclassification of net (gains) losses on
securities available for sale included
in net income (59) (59)
-------
Total comprehensive income 2,647
Common stock issued (151) 282 296
Common stock issued for acquisitions 41 131 213
Preferred stock repurchased (325)
Common stock repurchased (483) (2,171)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 34
Preferred stock (34,074) converted to common
shares 28 --
Preferred stock dividends (43) (43)
Common stock dividends (925) (925)
Cash payments received on
notes receivable from ESOP 1 1
Stock split --
------- ---- ------- ----- -------
Net change 1,421 1 (42) 148 (273)
------- ---- ------- ----- -------
BALANCE DECEMBER 31, 1997 8,292 (10) (275) 464 19,778
------- ---- ------- ----- -------
Comprehensive income
Net income-1998 1,950 1,950
Other comprehensive income, net of tax:
Translation adjustments (4) (4)
Net unrealized gains (losses) on securities
available for sale arising during the year 104 104
Reclassification of net (gains) losses on
securities available for sale included
in net income (101) (101)
-------
Total comprehensive income 1,949
Common stock issued (191) 319 1,087
Common stock issued for acquisitions 11 84 157
Common stock repurchased (741) (1,170)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 32
Preferred stock (31,043) converted to common
shares 28 --
Preferred stock dividends (35) (35)
Common stock dividends (982) (982)
Cash payments received on
notes receivable from ESOP 7 9
Increase in Rabbi trust assets (classified as
treasury stock) (66) (66)
------- ---- ------- ----- -------
Net change 753 7 (376) (1) 981
------- ---- ------- ----- -------
BALANCE DECEMBER 31, 1998 9,045 (3) (651) 463 20,759
------- ---- ------- ----- -------
Comprehensive income
Net income-1999 3,747 3,747
Other comprehensive income, net of tax:
Translation adjustments 4 4
Net unrealized gains (losses) on securities
available for sale arising during the year 276 276
Reclassification of net (gains) losses on
securities available for sale included
in net income 149 149
-------
Total comprehensive income 4,176
Common stock issued (270) 781 612
Common stock issued for acquisitions 2 133 155
Common stock repurchased (2,122) (2,122)
Preferred stock redeemed (191)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 86
Preferred stock (86,141) converted to common
shares 87 --
Preferred stock dividends (35) (35)
Common stock dividends (1,293) (1,293)
Cash payments received on
notes receivable from ESOP 2 2
Increase in Rabbi trust assets (classified as
treasury stock) (18) (18)
------- ---- ------- ----- -------
Net change 2,151 2 (1,139) 429 1,372
------- ---- ------- ----- -------
BALANCE DECEMBER 31, 1999 $11,196 $ (1) $(1,790) $ 892 $22,131
======= ==== ======= ===== =======
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
54
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,747 $ 1,950 $ 2,499
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,045 1,545 1,140
Depreciation and amortization 1,893 2,168 1,734
Securities available for sale losses (gains) 241 (169) (99)
Gains on sales of mortgages held for sale (221) (296) (120)
Gains on sales of loans (32) (61) (30)
Gains on disposition of operations (107) (100) (15)
Release of preferred shares to ESOP 86 32 34
Net (increase) decrease in trading assets (775) 542 (711)
Deferred income tax expense (benefit) 1,506 (129) 173
Net (increase) decrease in accrued interest receivable (107) (5) 96
Net (decrease) increase in accrued interest payable (35) (9) 43
Originations of mortgages held for sale (82,846) (111,262) (56,297)
Proceeds from sales of mortgages held for sale 91,146 101,371 53,252
Net increase in loans held for sale (874) (822) (846)
Other assets, net (2,531) 424 1,746
Other accrued expenses and liabilities, net 1,314 624 (120)
------- --------- --------
Net cash provided (used) by operating activities 13,450 (4,197) 2,479
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 14,033 11,073 9,798
Proceeds from prepayments and maturities 7,464 10,354 6,998
Purchases (26,547) (24,650) (13,140)
Net cash paid for acquisitions (95) (286) (67)
Net (increase) decrease in banking subsidiaries' loans
resulting from originations and collections (6,707) (1,383) 843
Proceeds from sales (including participations) of banking
subsidiaries' loans 1,908 1,648 437
Purchases (including participations) of banking subsidiaries' loans (1,246) (135) (314)
Principal collected on nonbank subsidiaries' loans 4,844 7,788 8,456
Nonbank subsidiaries' loans originated (9,002) (8,962) (8,748)
Cash (paid for) proceeds from dispositions of operations (731) 484 16
Proceeds from sales of foreclosed assets 234 279 278
Net (increase) decrease in federal funds sold and securities
purchased under resale agreements (37) (468) 415
Net increase in mortgage servicing rights (2,094) (913) (627)
Other, net (2,274) (2,826) (221)
-------- --------- --------
Net cash (used) provided by investing activities (20,250) (7,997) 4,124
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (5,124) 6,749 (7,273)
Net increase in short-term borrowings 11,952 2,414 2,838
Proceeds from issuance of long-term debt 11,957 7,970 4,003
Repayment of long-term debt (8,309) (5,642) (5,394)
Proceeds from issuance of guaranteed preferred beneficial
interests in Company's subordinated debentures -- -- 149
Proceeds from issuance of common stock 517 1,087 238
Redemption of preferred stock (191) -- (325)
Repurchases of common stock (2,122) (1,170) (2,171)
Net decrease in notes receivable from ESOP 2 9 1
Payment of cash dividends on preferred and common stock (1,328) (1,017) (968)
Other, net (35) 1,444 (1,213)
-------- --------- --------
Net cash provided (used) by financing activities 7,319 11,844 (10,115)
-------- --------- --------
NET CHANGE IN CASH AND DUE FROM BANKS 519 (350) (3,512)
Cash and due from banks at beginning of year 12,731 13,081 16,593
-------- --------- --------
CASH AND DUE FROM BANKS AT END OF YEAR $ 13,250 $ 12,731 $ 13,081
======== ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,055 $ 5,074 $ 4,911
Income taxes $ 1,005 $ 1,289 $ 1,238
Noncash investing and financing activities:
Transfers from loans to foreclosed assets $ 220 $ 223 $ 162
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
55
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company (Parent) is a bank holding company. Wells Fargo & Company
and Subsidiaries (Company) is a diversified financial services company providing
banking, mortgage and consumer finance through about 5,300 stores, the Internet
and other distribution channels throughout North America, including all 50
states, and elsewhere internationally.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles (GAAP) and prevailing practices within the
financial services industry. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and income and expenses during the reporting period. Actual
results could differ from those estimates. Certain amounts in the financial
statements for prior years have been reclassified to conform with the current
financial statement presentation.
On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo &
Company (the Merger) was completed. Norwest Corporation changed its name to
"Wells Fargo & Company" and the former Wells Fargo & Company (the former Wells
Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest
Corporation as it was before the Merger is referred to as the former Norwest.
The Merger was accounted for as a pooling of interests and, accordingly, the
information included in the financial statements presents the combined results
as if the Merger had been in effect for all periods presented. The following is
a description of the significant accounting policies of the Company.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of the
Parent, and its majority-owned subsidiaries, which are consolidated on a
line-by-line basis. Significant intercompany accounts and transactions are
eliminated in consolidation. Other subsidiaries and affiliates in which there is
at least 20% ownership are generally accounted for by the equity method; those
in which there is less than 20% ownership are generally carried at cost.
Investments that are accounted for by either the equity or cost method are
included in other assets.
SECURITIES
Securities are accounted for according to their purpose and holding period.
SECURITIES AVAILABLE FOR SALE Debt securities that may not be held until
maturity and marketable equity securities are classified as securities available
for sale and are reported at fair value, with unrealized gains and losses, after
applicable taxes, reported as a component of cumulative other comprehensive
income. The estimated fair value of a security is determined based on current
quotations, where available. Where current quotations are not available, the
estimated fair value is determined based primarily on the present value of
future cash flows, adjusted for the quality rating of the securities, prepayment
assumptions and other factors. Declines in the value of debt securities and
marketable equity securities that are considered other than temporary are
recorded in noninterest income as a loss on securities available for sale.
Realized gains and losses are recorded in noninterest income using the
identified certificate method. For certain debt securities (for example,
Government National Mortgage Association securities), the Company anticipates
prepayments of principal in the calculation of the effective yield.
TRADING SECURITIES Securities acquired for short-term appreciation or other
trading purposes are recorded in a trading portfolio and are carried at fair
value, with unrealized gains and losses recorded in noninterest income.
NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities include the
venture capital equity securities that are not publicly traded and securities
acquired for various purposes, such as troubled debt restructurings and as a
regulatory requirement (for example, Federal Reserve Bank stock). These
securities are generally accounted for at cost. The asset value is reduced when
declines in value are considered to be other than temporary and the estimated
loss is recorded in noninterest income as a loss from equity investments along
with income recognized on these assets.
MORTGAGES HELD FOR SALE
Mortgages held for sale are stated at the lower of aggregate cost or market
value. The determination of market value includes consideration of all open
positions, outstanding commitments from investors, related fees paid and related
hedging gains and losses. Gains and losses on sales of mortgages are recognized
at settlement dates and are determined by the difference between sales proceeds
and the carrying value of the mortgages. Gains and losses are recorded in
noninterest income.
56
LOANS HELD FOR SALE
Loans held for sale include those student loans which are classified as held for
sale because the Company does not intend to hold these loans until maturity or
sales of the loans are pending. Such loans are carried at the lower of aggregate
cost or market value. Gains and losses are recorded in noninterest income, based
on the difference between sales proceeds and carrying value.
LOANS
Loans are reported at the principal amount outstanding, net of unearned income.
Unearned income, which includes deferred fees net of deferred direct incremental
loan origination costs, is amortized to interest income generally over the
contractual life of the loan using an interest method or the straight-line
method if it is not materially different.
NONACCRUAL LOANS Generally, loans are placed on nonaccrual status upon becoming
90 days past due as to interest or principal (unless both well-secured and in
the process of collection), when the full timely collection of interest or
principal becomes uncertain or when a portion of the principal balance has been
charged off. Real estate 1-4 family loans (both first liens and junior liens)
are placed on nonaccrual status within 120 days of becoming past due as to
interest or principal, regardless of security. Generally, consumer loans not
secured by real estate are placed on nonaccrual status only when a portion of
the principal has been charged off. Such loans are entirely charged off when
deemed uncollectible or when they reach a predetermined number of days past due
depending upon loan product, industry practice, country, terms and other
factors.
When a loan is placed on nonaccrual status, the accrued and unpaid interest
receivable is reversed and the loan is accounted for on the cash or cost
recovery method thereafter, until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when all delinquent interest
and principal become current in accordance with the terms of the loan agreement
or when the loan is both well-secured and in the process of collection and
collectibility is no longer doubtful.
IMPAIRED LOANS Loans, other than those included in large groups of
smaller-balance homogeneous loans, are considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the contractual
terms specified by the restructuring agreement.
This assessment for impairment occurs when and while such loans are on
nonaccrual, or the loan has been restructured. When a loan with unique risk
characteristics has been identified as being impaired, the amount of impairment
will be measured by the Company using discounted cash flows, except when it is
determined that the sole (remaining) source of repayment for the loan is the
operation or liquidation of the underlying collateral. In such cases, the
current fair value of the collateral, reduced by costs to sell, will be used in
place of discounted cash flows. Additionally, some impaired loans with
commitments of less than $1 million are aggregated for the purpose of measuring
impairment using historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses.
RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties
and the Company makes certain concessionary modifications to contractual terms,
the loan is classified as a restructured (accruing) loan. Loans restructured at
a rate equal to or greater than that of a new loan with comparable risk at the
time the contract is modified may be excluded from the impairment assessment and
may cease to be considered impaired loans in the calendar years subsequent to
the restructuring if they are not impaired based on the modified terms.
Generally, a nonaccrual loan that is restructured remains on nonaccrual for a
period of six months to demonstrate that the borrower can meet the restructured
terms. However, performance prior to the restructuring, or significant events
that coincide with the restructuring, are included in assessing whether the
borrower can meet the new terms and may result in the loan being returned to
accrual at the time of restructuring or after a shorter performance period. If
the borrower's ability to meet the revised payment schedule is uncertain, the
loan remains classified as a nonaccrual loan.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation allowance
for probable losses inherent in the portfolio as of the balance sheet date. The
Company's determination of the level of the allowance for loan losses rests upon
various judgments and assumptions, including general economic conditions, loan
portfolio composition, prior loan loss experience, evaluation of credit risk
related to certain individual borrowers and the Company's ongoing examination
process and that of its regulators. The Company considers the allowance for loan
losses adequate to cover losses inherent in loans, loan commitments and standby
and other letters of credit.
57
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
A transfer of financial assets is accounted for as a sale when control is
surrendered over the assets transferred. Servicing rights and other retained
interests in the assets sold are recorded by allocating the previous recorded
investment between the asset sold and the interest retained based on their
relative fair values, if practicable to determine, at the date of transfer.
The Company recognizes as assets the rights to service mortgage loans for
others, whether the servicing rights are acquired through purchases or retained
upon sales of loan originations. For purposes of evaluating and measuring
impairment of mortgage servicing rights, the Company stratifies its portfolio on
the basis of certain risk characteristics including loan type and note rate.
Based upon current fair values and considering derivative financial instruments
used as hedges, mortgage servicing rights are periodically assessed for
impairment. Impairment is recognized during the period in which impairment
occurs. Mortgage servicing rights are amortized over the period of estimated net
servicing income and take into account appropriate prepayment assumptions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Capital leases are included in premises and equipment at the
capitalized amount less accumulated amortization.
Depreciation and amortization are computed primarily using the straight-line
method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years
for furniture and equipment, and up to the lease term for leasehold
improvements. Capitalized leased assets are amortized on a straight-line basis
over the lives of the respective leases, which generally range from 20 to 35
years.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, results from purchase acquisitions made by the Company.
Substantially all of the Company's goodwill is being amortized using the
straight-line method over 25 years. Core deposit intangibles are amortized on an
accelerated basis based on an estimated useful life of 10 to 15 years. Certain
identifiable intangible assets that are included in other assets are generally
amortized using an accelerated method over an original life of 10 to 15 years.
The Company reviews its intangible assets periodically for other-than-temporary
impairment. If such impairment is indicated, recoverability of the asset is
assessed based on expected undiscounted net cash flows.
INCOME TAXES
The Company files a consolidated federal income tax return. Federal income tax
is generally allocated to individual subsidiaries as if each had filed a
separate return. Combined state tax returns are filed in certain states. State
taxes are also allocated to individual subsidiaries.
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws. Foreign taxes paid are
applied as credits to reduce federal income taxes payable.
EARNINGS PER COMMON SHARE
Earnings per common share are presented under two formats: earnings per common
share and diluted earnings per common share. Earnings per common share are
computed by dividing net income (after deducting dividends on preferred stock)
by the average number of common shares outstanding during the year. Diluted
earnings per common share are computed by dividing net income (after deducting
dividends on preferred stock) by the average number of common shares outstanding
during the year, plus the impact of those common stock equivalents (i.e., stock
options, restricted share rights and convertible subordinated debentures) that
are dilutive.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE DERIVATIVES The Company uses interest rate derivative financial
instruments (futures contracts, forward contracts, swaps, caps, floors and
options) primarily to hedge mismatches in the rate maturity of loans and their
funding sources and the price risk of interest-rate sensitive assets. These
instruments serve to reduce rather than increase the Company's exposure to
movements in interest rates. At the inception of the hedge, the Company
identifies an individual asset or liability, or an identifiable group of
essentially similar assets or liabilities, that expose the Company to interest
rate risk at the consolidated or enterprise level. Interest rate derivatives are
accounted for by the deferral or accrual method only if they are designated as
hedges and are expected to be and are effective in substantially reducing the
risk arising from the asset or liability identified as exposing the Company to
risk. Futures contracts must meet specific high correlation tests. For caps,
floors and swaps that are used to hedge mismatches between interest-bearing
assets and liabilities, their notional amount, interest rate index and life must
closely match the related terms of the hedged asset or liability. Floors, swaps
and options that hedge mortgage servicing rights must correlate based on certain
duration and convexity parameters. For futures contracts, if the underlying
financial instrument differs from the hedged asset or liability, there must
58
be a clear economic relationship between the prices of the two financial
instruments. If periodic assessment indicates that the derivatives no longer
provide an effective hedge, hedge accounting is discontinued; previously
unrecognized hedge results and the net settlement upon close-out or
termination that offset changes in value of the hedged asset or liability are
deferred and amortized over the life of the asset or liability with excess
amounts recognized in noninterest income or noninterest expense.
Gains and losses on futures contracts, which result from the daily settlement of
their open positions, and on forward contracts are deferred and classified on
the balance sheet consistent with the hedge strategy. They are recognized in
income along with and when the effects of the related changes of the hedged
asset or liability are recognized. Amounts payable or receivable for swaps, caps
and floors are accrued with the passage of time, the effect of which is included
in income along with and when the effects of the related changes of the hedged
asset or liability are recognized. Gains and losses on options are recognized as
a component of the income reported on the hedged asset or liability. Fees
associated with these financial contracts are included on the balance sheet at
the time that the fee is paid and are classified consistent with the hedge
strategy. These fees are fully recognized by the end of their contractual life.
If a hedged asset or liability settles before maturity of the hedging interest
rate derivatives, the derivatives are closed out or settled, or are redesignated
as hedges of other assets or liabilities. For those contracts that are closed
out or settled, previously unrecognized hedge results and the net settlement
upon close-out or termination are accounted for as part of the gains and losses
on the hedged asset or liability. If interest rate derivatives used in an
effective hedge are closed out or terminated before the hedged item settles,
previously unrecognized hedge results and the net settlement upon close-out or
termination are deferred and amortized over the life of the hedged asset or
liability. Cash flows resulting from interest rate derivatives (including any
related fees) that are accounted for as hedges of assets and liabilities are
classified in the cash flow statement in the same category as the cash flows
from the items being hedged and are reflected in that statement when the cash
receipts or payments due under the terms of the instruments are collected, paid
or settled.
Interest rate derivatives entered into as an accommodation to customers,
interest rate derivatives used to offset the interest rate risk of those
contracts and positions taken based on the Company's market expectations or to
benefit from price differentials between financial instruments and markets are
carried at fair value with unrealized gains and losses recorded in noninterest
income. Losses are recognized currently on put options written when the fair
value of the underlying security falls below the contractual price at which the
security may be put to the Company plus the premium received. Premiums received
on covered call options written are deferred until the option terminates. If the
fair value of the underlying asset is greater than the contractual price at
which the Company must sell the asset, the option should be exercised, at which
time the premium will be recorded as an adjustment of the gain or loss
recognized on the underlying asset. If the option expires, the premium is
recognized in other noninterest income. The fair value of interest rate
derivative financial instruments with an unrealized gain is included in trading
assets (i.e., within other assets) while the fair value of instruments with an
unrealized loss is included in other liabilities. Cash flows resulting from
instruments carried at fair value are classified in the cash flow statement as
operating cash flows and are reflected in that statement when the cash receipts
or payments due under the terms of the instruments are collected, paid or
settled.
Credit risk related to interest rate derivative financial instruments is
considered and, if material, provided for separately from the allowance for loan
losses.
FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange derivative
financial instruments (forward and spot contracts and options) primarily as an
accommodation to customers and offsets the related foreign exchange risk with
other foreign exchange derivatives. Those contracts are carried at fair value,
with unrealized gains and losses recorded in noninterest income. Cash flows
resulting from foreign exchange derivatives are classified in the cash flow
statement as operating cash flows and are reflected in that statement when the
cash receipts or payments due under the terms of the foreign exchange
derivatives are collected, paid or settled.
The Company also uses forward foreign exchange contracts to hedge uncertainties
in funding costs related to specific liabilities denominated in foreign
currencies. Gains and losses on those contracts are recognized in income and
classified on the balance sheet consistent with the hedged item. Cash flows
resulting from these foreign exchange derivatives (including any related fees)
are classified in the cash flow statement in the same category as the cash flows
from the item being hedged and are reflected in that statement when the cash
receipts or payments due under the terms of the instruments are collected, paid
or settled.
Credit risk related to all foreign exchange derivatives is considered and, if
material, provided for separately from the allowance for loan losses.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign consumer finance subsidiaries are measured
using local currency as the functional currency. Assets and liabilities are
translated into United States dollars at period-end exchange rates, and income
and expense accounts are translated at average monthly exchange rates. Net
exchange gains or losses resulting from such translation are excluded from net
income and included as a component of cumulative other comprehensive income.
59
2.
BUSINESS COMBINATIONS
The Company regularly explores opportunities to acquire financial institutions
and related businesses. Generally, management of the Company does not make a
public announcement about an acquisition opportunity until a definitive
agreement is signed.
Excluding the Merger involving Norwest Corporation and Wells Fargo & Company,
the table below includes transactions completed in the years ended December 31,
1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------------
Date Assets Method of
accounting
(in millions)
- ------------------------------------------------------------------------------------------------------------------
1999
Mid-Penn Consumer Discount Company, Philadelphia, Pennsylvania January 21 $ 11 Purchase
Century Business Credit Corporation, New York, New York February 1 342 Purchase
Metropolitan Bancshares, Inc., Aurora, Colorado February 23 64 Purchase
Mercantile Financial Enterprises, Inc., Brownsville, Texas February 26 779 Pooling of interests*
Riverton State Bank Holding Company, Riverton, Wyoming March 12 81 Purchase
Greater Midwest Leasing Company, Minneapolis, Minnesota June 3 24 Purchase
Mustang Financial Corporation, Rio Vista, Texas June 25 254 Purchase
Eastern Heights Bank, St. Paul, Minnesota July 1 453 Purchase
Goodson Insurance Agency, Denver, Colorado August 1 -- Purchase
SB Insurance Company, Marshall, Minnesota October 15 -- Purchase
Allied Leasing Company, Burnsville, Minnesota November 1 17 Purchase
Eastdil Realty Company, L.L.C., New York, New York November 16 9 Purchase
Texas Bancshares, Inc., San Antonio, Texas December 16 370 Purchase
------
$2,404
======
1998
Finvercon S.A. Compania, Financiera, Argentina January 8 $ 57 Purchase
Fidelity Bancshares, Inc., Fort Worth, Texas January 13 111 Purchase
Heritage Trust Company, Grand Junction, Colorado February 20 2 Purchase
Founders Trust Company, Dallas, Texas March 2 2 Purchase
The T. Eaton Acceptance Company Limited and National Retail
Credit Services Limited, Don Mills, Ontario, Canada April 21 370 Purchase
WMC Mortgage Corporation, Woodland Hills, California April 30 5 Purchase
First Bank, Katy, Texas May 22 310 Pooling of interests*
First Bank of Grants, Grants, New Mexico May 28 45 Purchase
Spring Mountain Escrow Corporation, Irvine, California May 29 1 Purchase
Emjay Corporation, Milwaukee, Wisconsin June 15 6 Purchase
Six affiliated bank holding companies and related entities, located in
Minnesota, Wisconsin, New Mexico,
Arizona and Colorado, including MidAmerica July 2,23 1,317 Pooling of interests*
First Bancshares of Valley City, Inc., Valley City, North Dakota July 31 96 Purchase
Peoples Insurance Agency, Inc., Valley City, North Dakota July 31 -- Purchase
Star Bancshares, Inc., Austin, Texas August 31 582 Pooling of interests*
Freedom Trailer Leasing, Inc., Chesterfield, Missouri August 31 5 Purchase
Little Mountain Bancshares, Inc., Monticello, Minnesota September 8 82 Purchase
First National Bank of Missouri City, Missouri City, Texas October 30 91 Purchase
Franklin Bancshares, Inc., Franklin, Texas December 1 72 Purchase
------
$3,154
======
60
- ------------------------------------------------------------------------------------------------------------------
Date Assets Method of
accounting
(in millions)
- ------------------------------------------------------------------------------------------------------------------
1997
Franklin Federal Bancorp., F.S.B., Austin, Texas January 1 $ 621 Purchase of assets
Central Bancorporation, Inc., Fort Worth, Texas January 28 1,105 Pooling of interests*
Reliable Financial Services, Inc., San Juan, Puerto Rico February 21 39 Pooling of interests*
Statewide Mortgage Company, Birmingham, Alabama February 26 28 Purchase
The United Group, Inc., Charlotte, North Carolina March 21 41 Purchase
Farmers National Bancorp, Inc., Geneseo, Illinois March 24 198 Purchase
The First National Bankshares, Inc.,
Tucumcari, New Mexico June 17 90 Purchase
Tennessee Credit Corporation, Nashville, Tennessee July 18 13 Purchase
Western National Trust Company, National
Association, Odessa, Texas July 31 -- Purchase
Fidelity Acceptance Corporation, St. Louis, Missouri August 31 1,135 Purchase
The Bank of the Southwest, National Association,
Pagosa Springs, Colorado September 2 85 Purchase
International Bancorporation, Inc.,
Golden Valley, Minnesota October 21 483 Pooling of interests*
Subsidiaries of Cityside Holding L.L.C.,
Eden Prairie, Minnesota October 30 104 Purchase
J.L.J. Financial Services Corporation,
Montvale, New Jersey October 31 26 Purchase
Myers Bancshares Inc., Dallas, Texas November 14 135 Purchase
Packers Management Company, Inc.,
Omaha, Nebraska November 25 162 Purchase
First Valley Bank Group, Inc., Los Fresnos, Texas December 1 519 Pooling of interests*
------
$4,784
======
- ------------------------------------------------------------------------------------------------------------------
* Pooling of interests transaction was not material to the Company's
consolidated financial statements; accordingly, previously reported results
were not restated.
In connection with the foregoing transactions, the Company paid cash in the
aggregate amount of $541 million, $330 million and $486 million in 1999, 1998
and 1997, respectively, and issued aggregate common shares of 8.0 million, 16.7
million and 23.8 million in 1999, 1998 and 1997, respectively. At December 31,
1999, the Company had announced 7 pending transactions with total assets of
approximately $6.9 billion and anticipated that approximately 48 million common
shares will be issued upon consummation of these transactions. These pending
acquisitions, subject to approval by regulatory agencies, are expected to be
completed by mid-2000.
MERGER INVOLVING NORWEST AND WELLS FARGO
On November 2, 1998, the Merger involving Norwest Corporation and Wells Fargo &
Company was completed. Under the terms of the Merger agreement, stockholders of
the former Wells Fargo received 10 shares of common stock of the Company for
each share of common stock owned. Each share of former Wells Fargo preferred
stock was converted into one share of the Company's preferred stock. These
shares rank on parity with the Company's preferred stock as to dividends and
upon liquidation. Each outstanding and unexercised option granted by the former
Wells Fargo was converted into an option to purchase common stock of the Company
based on the agreed-upon exchange ratio.
As a condition to the Merger, the Company was required by regulatory agencies to
divest stores in Arizona and Nevada having aggregate deposits of approximately
$1 billion. As a result of these sales, which were completed in 1999, $104
million of pretax gains were included in noninterest income as net gains on
dispositions of operations.
In connection with the Merger, the Company recorded approximately $600 million
of restructuring charges in the fourth quarter of 1998. The restructuring plans
are evaluated on a regular basis during the integration process. The charges
included a severance-related reserve of $280 million associated with the
elimination into 2000 of about 5% of the Company's positions. This reserve was
determined based on the Company's existing severance plans for involuntary
terminations. The charges also included approximately $250 million related to
dispositions of owned and leased premises held for sale or remarketing, which is
expected to be used by mid-2000, and $70 million of other costs associated with
exiting activities due to the Merger. The following table presents the 1999
activity in these restructuring reserves:
- ------------------------------------------------------------------------------------------------------------
Severance-
related
(in millions) costs Premises Other Total
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $280 (1) $ 250 (2) $ 70 $ 600
Utilization (95) (131) (64) (290)
Changes in estimates -- (31) -- (31)
---- ----- ---- -----
Balance, December 31, 1999 $185 $ 88 (3) $ 6 $ 279
==== ===== ==== =====
- ------------------------------------------------------------------------------------------------------------
(1) The 1998 charges recorded for severance-related costs were classified on
the income statement as salaries.
(2) The 1998 charges recorded for premises were classified on the income
statement as net losses on dispositions of premises and equipment.
(3) Includes $38 million of owned premises.
61
Total utilization included approximately $97 million of cash payments, $68
million of legal obligations as of December 31, 1999 and $125 million of
write-downs. Approximately 1,730 employees had entered the severance process
through December 31, 1999.
A majority of the changes in estimates resulted from a reassessment of the
economics and space requirements at a leased Colorado office building complex.
The reassessment indicated that the complex could be reconfigured to meet the
Company's needs. The changes in estimates were recorded on the income statement
as an adjustment to net (gains) losses on dispositions of premises and
equipment. The suspension of depreciation on assets held for disposition reduced
net occupancy and equipment expense by a total of $15 million in 1999.
3.
CASH, LOAN AND DIVIDEND RESTRICTIONS
Federal Reserve Board (FRB) regulations require reserve balances on deposits to
be maintained by each of the banking subsidiaries with the Federal Reserve
Banks. The average required reserve balance was $2.0 billion and $2.2 billion in
1999 and 1998, respectively.
Federal law prevents the Company and its nonbank subsidiaries from borrowing
from its subsidiary banks unless the loans are secured by specified collateral.
Such secured loans by any subsidiary bank are generally limited to 10% of the
subsidiary bank's capital and surplus (as defined, which for this purpose
represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital
guidelines, plus the balance of the allowance for loan losses excluded from Tier
2 capital) and aggregate loans to the Company and its nonbank subsidiaries are
limited to 20% of the subsidiary bank's capital and surplus. (For further
discussion of risk-based capital, see Note 22 to Financial Statements.)
The payment of dividends to the Parent by subsidiary banks is subject to
various federal and state regulatory limitations. Dividends payable by a
national bank to the Parent without the express approval of the Office of the
Comptroller of the Currency (OCC) are limited to that bank's retained net
profits for the preceding two calendar years plus retained net profits up to
the date of any dividend declaration in the current calendar year. Retained
net profits are defined by the OCC as net income, less dividends declared
during the period, both of which are based on regulatory accounting
principles. The Company also has state-chartered subsidiary banks that are
subject to state regulations that limit dividends. Under these provisions and
except for Wells Fargo Bank, N.A. (WFB, N.A.), the Company's national and
state-chartered subsidiary banks could have declared dividends of $1,061
million and $687 million in 1999 and 1998, respectively, without obtaining
prior regulatory approval. With the express approval of the OCC, WFB, N.A.
declared dividends in 1999 and 1998 of $500 million in excess of its net
income of $1,876 million for those years. (The total dividends declared by
WFB, N.A. in 1999, 1998 and 1997 were $900 million, $1,476 million and $2,019
million, respectively.) Therefore, before it can declare dividends in 2000
without the approval of the OCC, WFB, N.A. must have net income of $500
million plus an amount greater than the dividends declared in 2000. Since it
is not expected to have net income of $500 million plus an amount greater
than the dividends expected to be declared in 2000, WFB, N.A. will again need
to obtain the approval of the OCC before any dividends are declared in 2000.
In addition, the Company's non-bank subsidiaries could have declared
dividends of $1,195 million and $1,205 million at December 31, 1999 and 1998,
respectively.
62
4.
SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major components of
securities available for sale carried at fair value. There were no securities
classified as held to maturity at the end of 1999 or 1998.
- -----------------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -------------------------------------------
Estimated Estimated Estimated Estimated
unrealized unrealized Estimated unrealized unrealized Estimated
gross gross fair gross gross fair
(in millions) Cost gains losses value Cost gains losses value
- ----------------------------------------------------------------------------- -------------------------------------------
Securities of U.S. Treasury and
federal agencies $ 5,956 $ 13 $338 $ 5,631 $ 3,260 $ 45 $18 $ 3,287
Securities of U.S. states and
political subdivisions 2,041 48 28 2,061 1,683 115 4 1,794
Mortgage-backed securities:
Federal agencies 22,774 109 336 22,547 20,539 293 28 20,804
Private collateralized
mortgage obligations (1) 2,855 12 63 2,804 3,420 29 9 3,440
------- ------ ---- ------- ------- ---- --- -------
Total mortgage-backed
securities 25,629 121 399 25,351 23,959 322 37 24,244
Other 2,289 8 93 2,204 1,879 41 21 1,899
------- ------ ---- ------- ------- ---- --- -------
Total debt securities 35,915 190 858 35,247 30,781 523 80 31,224
Marketable equity securities 1,314 1,984 27 3,271 386 396 9 773
------- ------ ---- ------- ------- ---- --- -------
Total $37,229 $2,174 $885 $38,518 $31,167 $919 $89 $31,997
======= ====== ==== ======= ======= ==== === =======
- -----------------------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated
bonds collateralized by 1-4 family residential first mortgages.
At December 31, 1999, the Company held no securities of any single issuer
(excluding the U.S. Treasury and federal agencies) with a book value that
exceeded 10% of stockholders' equity.
Securities pledged primarily to secure trust and public deposits and for other
purposes as required or permitted by law were $15.5 billion and $11.2 billion at
December 31, 1999 and 1998, respectively.
The table on the right provides the components of the realized net (loss) gain
on securities from the securities available for sale portfolio. (Realized gains
on marketable equity securities from venture capital investments are reported as
net venture capital gains.)
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Realized gross gains $ 76 $209 $168
Realized gross losses (317) (40) (69)
----- ---- ----
Realized net (loss) gain $(241) $169 $ 99
===== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------
The table below provides the remaining contractual principal maturities and
yields (taxable-equivalent basis) of debt securities available for sale. The
remaining contractual principal maturities for mortgage-backed securities were
allocated assuming no prepayments. Expected remaining maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
- -------------------------------------------------------------------------------------------------------------
December 31, 1999
-----------------------------------------------------------------
Weighted
Total average
amount yield Remaining contractual principal maturity
-----------------------------------------------------------------
After one year
Within one year through five years
------------------ --------------------
(in millions) Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------
Securities of U.S. Treasury and
federal agencies $ 5,631 5.71% $ 626 6.38% $1,123 6.39%
Securities of U.S. states and
political subdivisions 2,061 8.28 104 7.97 338 7.88
Mortgage-backed securities:
Federal agencies 22,547 7.11 650 6.55 1,837 7.01
Private collateralized
mortgage obligations 2,804 6.51 76 6.32 317 6.40
------- ------ ------
Total mortgage-backed securities 25,351 7.04 726 6.52 2,154 6.92
Other 2,204 5.28 80 5.03 538 3.98
------- ------ ------
ESTIMATED FAIR VALUE
OF DEBT SECURITIES (1) $35,247 6.79% $1,536 6.48% $4,153 6.47%
======= ==== ====== ==== ====== ====
TOTAL COST OF DEBT SECURITIES $35,915 $1,581 $4,259
======= ====== ======
- -------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
December 31, 1999
----------------------------------------
Remaining contractual principal maturity
----------------------------------------
After five years
through ten years After ten years
-------------------- --------------------
(in millions) Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------
Securities of U.S. Treasury and
federal agencies $3,065 5.33% $ 817 5.72%
Securities of U.S. states and
political subdivisions 187 7.35 1,432 8.52
Mortgage-backed securities:
Federal agencies 2,453 7.18 17,607 7.13
Private collateralized
mortgage obligations 446 6.46 1,965 6.55
------ -------
Total mortgage-backed securities 2,899 7.07 19,572 7.07
Other 989 5.75 597 5.70
------ -------
ESTIMATED FAIR VALUE
OF DEBT SECURITIES (1) $7,140 6.14% $22,418 7.08%
====== ==== ======= ====
TOTAL COST OF DEBT SECURITIES $7,388 $22,687
====== =======
- ---------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of debt
securities available for sale.
63
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the major categories of loans outstanding and related unfunded
commitments is shown in the following table. Unfunded commitments are defined as
all legally binding agreements to extend credit, net of all funds lent, and all
standby and commercial letters of credit issued under the terms of those
commitments. At December 31, 1999 and 1998, the commercial loan category and
related unfunded commitments did not have an industry concentration that
exceeded 10% of total loans and unfunded commitments. At December 31, 1999 and
1998, the real estate 1-4 family first mortgage and junior lien mortgage
categories and related unfunded commitments did not have a concentration in any
state that exceeded 10% of total loans and unfunded commitments.
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
--------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
COMMITMENTS Commitments
TO EXTEND to extend
OUTSTANDING CREDIT Outstanding credit
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 38,688 $39,793 $ 35,450 $34,892
Real estate 1-4 family first mortgage 12,398 1,425 11,496 1,311
Other real estate mortgage 19,178 1,438 16,668 1,302
Real estate construction 4,711 2,710 3,790 3,007
Consumer:
Real estate 1-4 family junior lien mortgage 12,938 5,432 11,128 5,792
Credit card 5,472 19,023 5,795 18,874
Other revolving credit and monthly payment 16,656 4,646 15,809 6,236
-------- ------- -------- -------
Total consumer 35,066 29,101 32,732 30,902
Lease financing 7,850 -- 6,380 --
Foreign 1,573 115 1,478 53
-------- ------- -------- -------
Total loans (1) $119,464 $74,582 $107,994 $71,467
======== ======= ======== =======
- -------------------------------------------------------------------------------------------------------------------
(1) Outstanding loan balances at December 31, 1999 and 1998 are net of
unearned income, including net deferred loan fees, of $3,200 million and
$2,967 million, respectively.
In the course of evaluating the credit risk presented by a customer and the
pricing that will adequately compensate the Company for assuming that risk,
management may require a certain amount of collateral support. The type of
collateral held varies, but may include accounts receivable, inventory, land,
buildings, equipment, income-producing commercial properties and residential
real estate. The Company has the same collateral policy for loans whether they
are funded immediately or on a delayed basis (commitment).
A commitment to extend credit is a legally binding agreement to lend funds
to a customer usually at a stated interest rate and for a specified purpose.
Such commitments have fixed expiration dates and generally require a fee. The
extension of a commitment gives rise to credit risk. The actual liquidity needs
or the credit risk that the Company will experience will be lower than the
contractual amount of commitments to extend credit shown in the table above
because a significant portion of those commitments are expected to expire
without being drawn upon. Certain commitments are subject to loan agreements
containing covenants regarding the financial performance of the customer that
must be met before the Company is required to fund the commitment. The Company
uses the same credit policies in making commitments to extend credit as it does
in making loans.
In addition, the Company manages the potential credit risk in commitments
to extend credit by limiting the total amount of arrangements, both by
individual customer and in the aggregate; by monitoring the size and maturity
structure of these portfolios; and by applying the same credit standards
maintained for all of its related credit activities. The credit risk associated
with these commitments is considered in management's determination of the
allowance for loan losses.
Standby letters of credit totaled $4,355 million and $3,332 million at
December 31, 1999 and 1998, respectively. Standby letters of credit are issued
on behalf of customers in connection with contracts between the customers and
third parties. Under standby letters of credit, the Company assures that the
third parties will receive specified funds if customers fail to meet their
contractual obligations. The liquidity risk to the Company arises from its
obligation to make payment in the event of a customer's contractual default. The
credit risk involved in issuing standby letters of credit and the Company's
management of that credit risk is considered in management's determination of
the allowance for loan losses. Standby letters of credit are net of
participations sold to other institutions of $1,256 million in 1999 and $837
million in 1998.
64
Included in standby letters of credit are those that back financial
instruments (financial guarantees). The Company had issued or purchased
participations in financial guarantees of approximately $2,607 million and
$2,188 million at December 31, 1999 and 1998, respectively. The Company also had
commitments for commercial and similar letters of credit of $745 million and
$691 million at December 31, 1999 and 1998, respectively. Substantially all fees
received from the issuance of financial guarantees are deferred and amortized on
a straight-line basis over the term of the guarantee.
The Company has an established process to determine the adequacy of the
allowance for loan losses which assesses the risk and losses inherent in its
portfolio. This process provides an allowance consisting of two components,
allocated and unallocated. To arrive at the allocated component of the
allowance, the Company combines estimates of the allowances needed for loans
analyzed individually (including impaired loans subject to Statement of
Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis.
The determination of allocated reserves for portfolios of larger commercial
and commercial real estate loans involves a review of individual higher-risk
transactions, focusing on the accuracy of loan grading, assessments of specific
loss content, and, in some cases, strategies for resolving problem credits.
These considerations supplement the application of loss factors delineated by
individual loan grade to the existing distribution of risk exposures, thus
framing an assessment of inherent losses across the entire wholesale lending
portfolio segment which is responsive to shifts in portfolio risk content. The
loss factors used for this analysis have been derived from migration models
which track actual portfolio movements from problem asset loan grades to loss
over a 5 to 10 year period. In the case of pass loan grades, the loss factors
are derived from analogous loss experience in public debt markets, calibrated to
the long-term average loss experience of the Company's portfolios. The loan loss
reserve allocations arrived at through this factor methodology are adjusted by
management's judgment concerning the effect of recent economic events on
portfolio performance.
In the case of more homogeneous portfolios, such as consumer loans and
leases, residential mortgage loans, and some segments of small business lending,
the determination of allocated reserves is conducted at a more aggregate, or
pooled, level. For portfolios of this nature, the risk assessment process
emphasizes the development of rigorous forecasting models, which focus on recent
delinquency and loss trends in different portfolio segments to project relevant
risk metrics over an intermediate-term horizon. Such analyses are updated
frequently to capture the most recent behavioral characteristics of the subject
portfolios, as well as any changes in management's loss mitigation or customer
solicitation strategies, in order to reduce the differences between estimated
and observed losses. A reserve which approximates one year of projected net
losses is provided as the baseline allocation for most homogeneous portfolios,
to which management will add certain adjustments to ensure that a prudent amount
of conservatism is present in the specific assumptions underlying that forecast.
While coverage of one year's losses is often adequate (particularly for
homogeneous pools of loans and leases), the time period covered by the allowance
may vary by portfolio, based on the Company's best estimate of the inherent
losses in the entire portfolio as of the evaluation date. To mitigate the
imprecision inherent in most estimates of expected credit losses, the allocated
component of the allowance is supplemented by an unallocated component. The
unallocated component includes management's judgmental determination of the
amounts necessary for concentrations, economic uncertainties and other
subjective factors; correspondingly, the relationship of the unallocated
component to the total allowance for loan losses may fluctuate from period to
period. At December 31, 1999, the unallocated portion amounted to 44% of the
total allowance, compared with 37% at December 31, 1998. Although management has
allocated a portion of the allowance to specific loan categories, the adequacy
of the allowance must be considered in its entirety.
The Company's determination of the level of the allowance and,
correspondingly, the provision for loan losses rests upon various judgments
and assumptions, including general economic conditions, loan portfolio
composition, prior loan loss experience and the Company's ongoing examination
process and that of its regulators. The Company has an internal risk analysis
and review staff that continuously reviews loan quality and reports the
results of its examinations to executive management and the Board of
Directors. Such reviews also assist management in establishing the level of
the allowance. Like all national banks, subsidiary national banks continue to
be subject to examination by their primary regulator, the Office of the
Comptroller of the Currency (OCC), and some have OCC examiners in residence.
These examinations occur throughout the year and target various activities of
the subsidiary national banks, including specific segments of the loan
portfolio (for example, commercial real estate and shared national credits).
In addition to the subsidiary national banks being examined by the OCC, the
Parent and its nonbank subsidiaries are examined by the FRB.
The Company considers the allowance for loan losses of $3,170 million
adequate to cover losses inherent in loans, loan commitments and standby and
other letters of credit at December 31, 1999.
65
Changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
-------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 3,134 $ 3,062 $ 3,059
Allowances related to
business combinations, net 40 144 168
Provision for loan losses 1,045 1,545 1,140
Loan charge-offs:
Commercial (382) (261) (357)
Real estate 1-4 family first mortgage (12) (26) (26)
Other real estate mortgage (28) (54) (26)
Real estate construction (2) (3) (5)
Consumer:
Real estate 1-4 family junior lien mortgage (33) (31) (37)
Credit card (388) (535) (579)
Other revolving credit and monthly payment (512) (1,002) (618)
------- ------- ------
Total consumer (933) (1,568) (1,234)
Lease financing (38) (48) (46)
Foreign (90) (84) (37)
------- ------- ------
Total loan charge-offs (1,485) (2,044) (1,731)
------- ------- ------
Loan recoveries:
Commercial 86 82 105
Real estate 1-4 family first mortgage 6 11 9
Other real estate mortgage 37 78 62
Real estate construction 5 4 12
Consumer:
Real estate 1-4 family junior lien mortgage 15 7 10
Credit card 46 56 61
Other revolving credit and monthly payment 214 163 144
------- ------- ------
Total consumer 275 226 215
Lease financing 12 12 13
Foreign 15 14 10
------- ------- ------
Total loan recoveries 436 427 426
------- ------- ------
Total net loan charge-offs (1,049) (1,617) (1,305)
------- ------- ------
BALANCE, END OF YEAR $ 3,170 $ 3,134 $ 3,062
======= ======= =======
Total net loan charge-offs as a percentage of
average total loans .94% 1.52% 1.25%
======= ======= =======
Allowance as a percentage of total loans 2.65% 2.90% 2.88%
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
In accordance with FAS 114, the table below shows the recorded investment
in impaired loans by methodology used to measure impairment at December 31, 1999
and 1998:
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
---------------------------
1999 1998
Impairment measurement based on:
Collateral value method $174 $229
Discounted cash flow method 74 70
Historical loss factors 114 89
---- ----
Total (1) $362 $388
==== ====
- -------------------------------------------------------------------------------------------------------------------
(1) Includes $196 million and $155 million of impaired loans with a related
FAS 114 allowance of $43 million and $37 million at December 31, 1999 and
1998, respectively.
The average recorded investment in impaired loans during 1999, 1998 and
1997 was $371 million, $456 million and $513 million, respectively. Total
interest income recognized on impaired loans during 1999, 1998 and 1997 was $7
million, $13 million and $15 million, respectively, which was primarily recorded
using the cash method.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on nonaccrual. Under the cash method,
contractual interest is credited to interest income when received. This method
is used when the ultimate collectibility of the total principal is not in doubt.
Under the cost recovery method, all payments received are applied to principal.
This method is used when the ultimate collectibility of the total principal is
in doubt. Loans on the cost recovery method may be changed to the cash method
when the application of the cash payments has reduced the principal balance to a
level where collection of the remaining recorded investment is no longer in
doubt.
66
6. PREMISES, EQUIPMENT, LEASE COMMITMENTS, INTEREST RECEIVABLE AND OTHER ASSETS
The following table presents comparative data for premises and equipment:
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
-------------------------------
1999 1998
Land $ 358 $ 357
Buildings 2,242 2,135
Furniture and equipment 2,480 2,688
Leasehold improvements 719 732
Premises leased under capital leases 76 80
------ ------
Total 5,875 5,992
Less accumulated depreciation and amortization 2,890 2,862
------ ------
Net book value $2,985 $3,130
====== ======
- -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense was $484 million, $491 million and
$457 million in 1999, 1998 and 1997, respectively.
The Company is obligated under a number of noncancelable operating leases
for premises (including vacant premises) and equipment with terms, including
renewal options, up to 100 years, many of which provide for periodic adjustment
of rentals based on changes in various economic indicators. The following table
shows future minimum payments under noncancelable operating leases and capital
leases, net of sublease rentals, with terms in excess of one year as of December
31, 1999:
- --------------------------------------------------------------------------------------------------------------
(in millions) Operating leases Capital leases
- --------------------------------------------------------------------------------------------------------------
Year ended December 31,
2000 $ 402 $ 6
2001 334 5
2002 269 4
2003 197 3
2004 162 2
Thereafter 848 17
------ ---
Total minimum lease payments $2,212 37
======
Executory costs (2)
Amounts representing interest (5)
---
Present value of net minimum lease payments $30
===
- --------------------------------------------------------------------------------------------------------------
Rental expense, net of rental income, for all operating leases was $377
million, $473 million and $441 million in 1999, 1998 and 1997, respectively.
The components of interest receivable and other assets at December 31, 1999
and 1998 were as follows:
- -------------------------------------------------------------------------------------------------------------
(in millions) December 31,
- -------------------------------------------------------------------------------------------------------------
1999 1998
Nonmarketable equity investments $ 3,347 $ 2,392
Trading assets 2,667 760
Government National Mortgage Association
(GNMA) pool buy outs 1,516 1,624
Interest receivable 1,169 1,062
Certain identifiable intangible assets 230 212
Interest-earning deposits 196 113
Foreclosed assets 153 148
Due from customers on acceptances 103 128
Other 5,967 4,455
------- -------
Total interest receivable and other assets $15,348 $10,894
======= =======
- -------------------------------------------------------------------------------------------------------------
Noninterest income from nonmarketable equity investments accounted for
using the cost method was $138 million, $151 million and $157 million in 1999,
1998 and 1997, respectively.
GNMA pool buy outs are advances made to GNMA mortgage pools that are
guaranteed by the Federal Housing Administration or by the Department of
Veterans Affairs (collectively, "the guarantors"). These advances are made to
buy out government agency-guaranteed delinquent loans, pursuant to the Company's
servicing agreements. The Company, on behalf of the guarantors, undertakes the
collection and foreclosure process. After the foreclosure process is complete,
the Company is reimbursed for substantially all costs incurred, including the
advances, by the guarantors.
Trading assets consist predominantly of securities, including corporate
debt and U.S. government agency obligations. A major portion of the increase at
December 31, 1999, compared with December 31, 1998 was due to an increase in
U.S. Treasury securities. Interest income from trading assets was $70 million,
$99 million and $76 million in 1999, 1998 and 1997, respectively. Noninterest
income from trading assets was $103 million, $206 million and $151 million in
1999, 1998 and 1997, respectively.
Amortization expense for certain identifiable intangible assets included in
other assets was $46 million, $79 million and $74 million in 1999, 1998 and
1997, respectively.
67
7. DEPOSITS
The aggregate amount of time certificates of deposit and other time deposits
issued by domestic offices was $27,670 million and $31,252 million at December
31, 1999 and 1998, respectively. Substantially all of those deposits were
interest bearing. The contractual maturities of those deposits are shown in the
following table.
- -------------------------------------------------------------------------------------
(in millions) December 31, 1999
2000 $22,249
2001 3,400
2002 1,100
2003 396
2004 287
Thereafter 238
-------
Total $27,670
=======
- -------------------------------------------------------------------------------------
Of the total above, the amount of time deposits with a denomination of
$100,000 or more was $7,970 million and $8,053 million at December 31, 1999 and
1998, respectively. The contractual maturities of these deposits are shown in
the following table.
- ------------------------------------------------------------------------------------
(in millions) December 31, 1999
Three months or less $2,977
After three months through six months 2,129
After six months through twelve months 1,924
After twelve months 940
------
Total $7,970
======
- ------------------------------------------------------------------------------------
Time certificates of deposit and other time deposits issued by foreign
offices with a denomination of $100,000 or more represent substantially all of
the foreign deposit liabilities of $3,255 million and $746 million at December
31, 1999 and 1998, respectively.
Demand deposit overdrafts that have been reclassified as loan balances were
$868 million and $678 million at December 31, 1999 and 1998, respectively.
8. SHORT-TERM BORROWINGS
The table below shows selected information for short-term borrowings. These
borrowings generally mature in less than 30 days.
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
(in millions) ----------------- ----------------- ------------------
AMOUNT RATE Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
Commercial paper and other short-term borrowings $17,211 6.06% $ 9,553 5.26% $ 6,456 5.73%
Federal funds purchased and securities sold under
agreements to repurchase 10,784 4.51 6,344 4.18 6,925 5.59
------- ------- -------
Total $27,995 5.46 $15,897 4.83 $13,381 5.65
======= ======= =======
YEAR ENDED DECEMBER 31,
AVERAGE DAILY BALANCE
Commercial paper and other short-term borrowings $10,242 5.40% $ 7,676 5.60% $ 5,473 5.59%
Federal funds purchased and securities sold under
agreements to repurchase 8,114 4.57 6,778 5.11 5,889 5.17
------- ------- -------
Total $18,356 5.04 $14,454 5.37 $11,362 5.37
======= ======= =======
MAXIMUM MONTH-END BALANCE
Commercial paper and other short-term borrowings (1) $17,211 NA $10,236 NA $ 6,456 NA
Federal funds purchased and securities sold under
agreements to repurchase (2) 10,784 NA 10,364 NA 8,722 NA
NA-Not applicable.
- ---------------------------------------------------------------------------------------------------------------
(1) Highest month-end balance in each of the last three years appeared in
December 1999, October 1998 and December 1997, respectively.
(2) Highest month-end balance in each of the last three years appeared in
December 1999, April 1998 and June 1997, respectively.
At December 31, 1999, the Company had available lines of credit totaling
$4.0 billion, of which $2.2 billion was obtained by a subsidiary, Norwest
Financial. The remaining $1.8 billion was in the form of a revolving credit
facility. A portion of these financing arrangements require the maintenance of
compensating balances or payment of fees, which are not material.
68
9. LONG-TERM DEBT
The following is a summary of long-term debt (reflecting unamortized debt
discounts and premiums, where applicable) owed by the Parent and its
subsidiaries:
- ----------------------------------------------------------------------------------------------------------------------
Maturity Interest
(in millions) date rate(s) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
WELLS FARGO & COMPANY (PARENT ONLY)
SENIOR
Global Notes (1) 2002 - 2004 6.5% - 6.625% $ 2,243 $ --
Global Notes 2001 Various 747 --
Medium-Term Notes (1) 2000 - 2006 5.225% - 8.15% 3,993 3,275
Medium-Term Notes 2000 - 2027 6.75% - 7.75% 820 1,125
Floating-Rate Medium-Term Notes 2000 Various 2,100 700
Floating-Rate Euro Medium-Term Notes 2001 Various 300 300
Notes (1) 2004 6.00% 1 2
Notes (1) 2000 6.00% 200 202
ESOP Notes 1999 8.52% -- 4
------- -------
Total senior debt - Parent 10,404 5,608
------- -------
SUBORDINATED
Notes 2003 6.625% 199 200
Debentures 2023 6.65% 198 200
Other notes (1) 2000 - 2003 6.58% - 6.75% 3 2
------- -------
Total subordinated debt - Parent 400 402
------- -------
Total long-term debt - Parent 10,804 6,010
------- -------
WFC HOLDINGS CORPORATION
SENIOR
Floating-Rate Medium-Term Notes 1999 Various -- 150
Medium-Term Notes (1)(2) 2001 - 2002 6.875% - 10.83% 221 228
Medium-Term Notes 2001 - 2002 9.04% - 10.9% 15 15
Notes payable by subsidiaries 51 51
Other notes and debentures 2003 8.5% 4 4
Obligations of subsidiaries under capital leases (Note 6) 15 20
------- -------
Total senior debt - WFC Holdings 306 468
------- -------
SUBORDINATED
Floating-Rate Notes (3) 2000 Various 118 118
Capital Notes (4) 1999 8.625% -- 183
Notes 2002 8.75% 195 195
Notes 2002 8.375% 138 138
Notes 2003 6.875% 150 150
Notes 2003 6.125% 249 249
Notes (1)(2) 2004 9.125% 133 136
Notes (1)(2) 2004 9.0% -- 127
Notes (1) 2006 6.875% 499 499
Notes (1) 2006 7.125% 299 299
Notes 2008 6.25% 199 199
Medium-Term Notes (1) 2001 9.9% - 11.25% 127 127
Medium-Term Notes 2002 9.375% 30 30
Medium-Term Notes (1) 2013 6.50% - 6.63% 50 50
------- -------
Total subordinated debt - WFC Holdings 2,187 2,500
------- -------
Total long-term debt - WFC Holdings 2,493 2,968
------- -------
NORWEST FINANCIAL, INC. AND ITS SUBSIDIARIES (NFI)
SENIOR
Notes 2000 - 2009 5.125% - 8.65% 4,511 4,341
Floating-Rate Notes 2000 Various 550 --
Floating-Rate Medium-Term Notes 2001 Various 21 --
Medium-Term Notes 2000 - 2008 4.9% - 6.54% 832 932
------- -------
Total long-term debt - NFI 5,914 5,273
------- -------
OTHER CONSOLIDATED SUBSIDIARIES
SENIOR
Federal Home Loan Bank (FHLB) Notes and Advances (5) 2000 - 2027 3.15% - 8.38% 345 2,768
Floating-Rate FHLB Advances (5) 2000 - 2011 6.391% - 6.47% 3,775 2,655
Notes 2000 12.25% 1 1
Other notes and debentures 2000 - 2015 3.00% - 10.00% 28 18
Capital lease obligations (Note 6) 15 16
------- -------
Total long-term debt - other consolidated subsidiaries 4,164 5,458
------- -------
Total consolidated long-term debt $23,375 $19,709
======= =======
- ----------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially
all of these Notes, whereby the Company receives fixed-rate interest
payments approximately equal to interest on the Notes and makes interest
payments based on an average three-month or six-month LIBOR rate.
(2) The interest rate swap agreement for these Notes is callable by the
counterparty prior to the maturity of the Notes.
(3) Notes are currently redeemable in whole or in part, at par, or at any time
in the event withholding taxes are imposed by the United States.
(4) Mandatory Equity Notes.
(5) The maturities of the FHLB advances are determined quarterly, based on the
outstanding balance, the then current LIBOR rate, and the maximum life of
the advance. Advances maturing within the next year are expected to be
refinanced, extending the maturity of such borrowings beyond one year.
69
At December 31, 1999, the principal payments, including sinking fund
payments, on long-term debt are due as noted in the following table.
-------------------------------------------------
(in millions) Parent Company
-------------------------------------------------
2000 $ 4,400 $ 8,988
2001 1,550 2,595
2002 1,275 2,637
2003 390 1,819
2004 1,501 2,615
Thereafter 1,688 4,721
------- -------
Total $10,804 $23,375
======= =======
-------------------------------------------------
The interest rates on floating-rate notes are determined periodically by
formulas based on certain money market rates, subject, on certain notes, to
minimum or maximum interest rates.
Certain of the agreements under which debt has been issued contain provisions
that may limit the merger or sale of certain subsidiary banks and the
issuance of capital stock or convertible securities by certain subsidiary
banks. The Company was in compliance with the provisions of those borrowing
agreements at December 31, 1999.
10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED
DEBENTURES
The Company established special purpose trusts in 1996 and 1997 for the purpose
of issuing trust preferred securities. The proceeds from such issuances,
together with the proceeds of the related issuances of common securities of the
trusts, were invested in junior subordinated deferrable interest debentures
(debentures) of WFC Holdings Corporation (WFC Holdings). Concurrent with the
issuance of the preferred securities by the trusts, WFC Holdings issued
guarantees for the benefit of the security holders. These trust preferred
securities provide the Company with a more cost-effective means of obtaining
Tier 1 capital for regulatory purposes than if the Company itself were to issue
additional preferred stock because the Company is allowed to deduct, for income
tax purposes, distributions to the holders of the trust preferred securities.
The sole assets of these special purpose trusts are the debentures. WFC Holdings
owns all of the common securities of the five trusts. Those common securities
and debentures, along with the related income effects, are eliminated within the
consolidated financial statements. The preferred securities issued by the trusts
rank senior to the common securities. The obligations of WFC Holdings under the
debentures, the indentures, the relevant trust agreements and the guarantees, in
the aggregate, constitute a full and unconditional guarantee by WFC Holdings of
the obligations of the trusts under the trust preferred securities and rank
subordinate and junior in right of payment to all other liabilities of WFC
Holdings. The Parent guarantees the obligations of WFC Holdings.
The trust preferred securities are subject to mandatory redemption at the
stated maturity date of the debentures, upon repayment of the debentures, or
earlier, pursuant to the terms of the Trust Agreement. The table on the next
page summarizes the outstanding preferred securities issued by each special
purpose trust and the debentures issued by WFC Holdings to each trust as of
December 31, 1999:
70
- --------------------------------------------------------------------------------------------------------------------------------
(in millions) Trust preferred securities and debentures Interest
Trust preferred securities Principal ----------------------------------------- payable/
-------------------------- balance of Stated Annualized distribution
Trust name Issuance date Amount debentures maturity coupon rate dates (1)
- --------------------------------------------------------------------------------------------------------------------------------
Wells Fargo Capital A November 1996 $ 85 $ 94 December 1, 2026 8.13% Semi-annual -
June 1 and
December 1
Wells Fargo Capital B November 1996 153 159 December 1, 2026 7.95% Semi-annual -
June 1 and
December 1
Wells Fargo Capital C November 1996 186 194 December 1, 2026 7.73% Semi-annual -
June 1 and
December 1
Wells Fargo Capital I December 1996 212 224 December 15, 2026 7.96% Semi-annual -
June 15 and
December 15
Wells Fargo Capital II January 1997 149 (2) 155 January 30, 2027 LIBOR + .5% Quarterly -
---- January 30,
April 30,
July 30 and
October 30
Total $785
====
- ------------------------------------------------------------------------------------------------------------------------------------
(1) All distributions are cumulative.
(2) Net of discount of $1 million.
On or after December 2006 for Wells Fargo Capital A, Wells Fargo Capital B,
Wells Fargo Capital C and Wells Fargo Capital I and on or after January 2007
for Wells Fargo Capital II, each of the series of trust preferred securities
may be redeemed and the corresponding debentures may be prepaid at the option
of WFC Holdings, subject to FRB approval, at declining redemption prices.
Prior to December 2006 for Wells Fargo Capital A, Wells Fargo Capital B,
Wells Fargo Capital C and Wells Fargo Capital I and prior to January 2007 for
Wells Fargo Capital II, the securities may be redeemed at the option of WFC
Holdings on the occurrence of certain events that result in a negative tax
impact, negative regulatory impact on the trust preferred securities of WFC
Holdings or negative legal or regulatory impact on the appropriate special
purpose trust which would define it as an investment company. In addition,
WFC Holdings has the right to defer payment of interest on the debentures
and, therefore, distributions on the trust preferred securities for up to
five years.
71
11. PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock and
4,000,000 shares of preference stock, both without par value. All preferred
shares outstanding rank senior to common shares both as to dividends and
liquidation preference but have no general voting rights. No preference shares
have been issued under this authorization.
The following table is a summary of preferred stock:
- ----------------------------------------------------------------------------------------------------------------------------------
Shares issued Carrying amount Dividends declared
and outstanding (in millions) (in millions)
---------------------- ---------------- Adjustable ----------------------
December 31, December 31, dividend rate Year ended December 31,
---------------------- ---------------- ------------------ ----------------------
1999 1998 1999 1998 Minimum Maximum 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Cumulative, Series B
(Liquidation preference $50) 1,500,000 1,500,000 $ 75 $ 75 5.5% 10.5% $ 4 $ 4 $ 4
8-7/8% Cumulative, Series D -- -- -- -- -- -- -- 3
(Liquidation preference $500) (1)
9% Cumulative, Series G -- -- -- -- -- -- -- -- 5
(Liquidation preference $200) (2)
6.59%/Adjustable-Rate Noncumulative
Preferred Stock, Series H
(Liquidation preference $50) (3) 4,000,000 4,000,000 200 200 7.0 13.0 13 13 13
Cumulative Tracking (4)
(Liquidation preference $200) -- 980,000 -- 196 -- -- 18 18 18
1999 ESOP Cumulative Convertible
(Liquidation preference $1,000) 22,263 -- 22 -- 10.30 11.30 -- -- --
1998 ESOP Cumulative Convertible
(Liquidation preference $1,000) 8,386 8,740 8 9 10.75 11.75 -- -- --
1997 ESOP Cumulative Convertible
(Liquidation preference $1,000) 10,839 19,698 11 20 9.50 10.50 -- -- --
1996 ESOP Cumulative Convertible
(Liquidation preference $1,000) 12,011 22,068 12 22 8.50 9.50 -- -- --
1995 ESOP Cumulative Convertible
(Liquidation preference $1,000) 11,990 20,130 12 20 10.0 10.0 -- -- --
ESOP Cumulative Convertible
(Liquidation preference $1,000) 3,732 9,726 4 10 9.0 9.0 -- -- --
Unearned ESOP shares (5) -- -- (73) (84) -- -- -- -- --
Less: Cumulative Tracking
held by subsidiary
(Liquidation preference $200) -- 25,000 -- 5 -- -- -- -- --
--------- ---------- ---- ---- --- --- ---
Total 5,569,221 6,535,362 $271 $463 $35 $35 $43
========= ========== ==== ==== === === ===
- ------------------------------------------------------------------------------------------------------------------------------------
(1) In March 1997, the Company redeemed all $175 million (350,000 shares) of its
Series D preferred stock.
(2) In May 1997, the Company redeemed all $150 million (750,000 shares) of its
Series G preferred stock.
(3) Annualized dividend rate is 6.59% through October 1, 2001, after which the
rate will become adjustable, subject to the minimum and maximum rates
disclosed.
(4) In December 1999, the Company redeemed all $196 million (980,000 shares) of
its Cumulative Tracking preferred stock.
(5) In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK
OWNERSHIP PLANS, the Company recorded a corresponding charge to unearned
ESOP shares in connection with the issuance of the ESOP Preferred Stock. The
unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are
committed to be released. For information on dividends declared, see Note
12.
72
ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares are redeemable
at the option of the Company at $50 per share plus accrued and unpaid dividends.
Dividends are cumulative and payable quarterly on the 15th of February, May,
August and November. For each quarterly period, the dividend rate is 76% of the
highest of the three-month Treasury bill discount rate, 10-year constant
maturity Treasury security yield or 20-year constant maturity Treasury bond
yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The
average dividend rate was 5.5% during 1999, 1998 and 1997.
6.59%/ADJUSTABLE-RATE NONCUMULATIVE PREFERRED STOCK, SERIES H These shares are
redeemable at the option of the Company on or after October 1, 2001 at a price
of $50 per share plus accrued and unpaid dividends. Dividends are noncumulative
and payable on the first day of each calendar quarter at an annualized rate of
6.59% through October 1, 2001. The dividend rate after October 1, 2001 will be
equal to .44% plus the highest of the Treasury bill discount rate, the 10-year
constant maturity rate and the 30-year constant maturity rate, as determined in
advance of such dividend period, limited to a minimum of 7% and a maximum of
13%.
ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of the Company's 1999,
1998, 1997, 1996 and 1995 ESOP Cumulative Convertible Preferred Stock and ESOP
Cumulative Convertible Preferred Stock (collectively, ESOP Preferred Stock) were
issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan
(formerly known as the Norwest Corporation Savings Investment Plan). Dividends
on the ESOP Preferred Stock are cumulative from the date of initial issuance and
are payable quarterly at annual rates ranging from 8.50 percent to 11.75
percent, depending upon the year of issuance. Each share of ESOP Preferred Stock
released from the unallocated reserve of the Plan is converted into shares of
common stock of the Company based on the stated value of the ESOP Preferred
Stock and the then current market price of the Company's common stock. The ESOP
Preferred Stock is also convertible at the option of the holder at any time,
unless previously redeemed. The ESOP Preferred Stock may be redeemed at any
time, in whole or in part, at the option of the Company at a redemption price
per share equal to the higher of (a) $1,000 per share plus accrued and unpaid
dividends and (b) the fair market value, as defined in the Certificates of
Designation of the ESOP Preferred Stock.
73
12. COMMON STOCK AND STOCK PLANS
COMMON STOCK
The table below summarizes common stock reserved, issued and authorized as of
December 31, 1999:
- --------------------------------------------------------------------------------------------------
Number of shares
- --------------------------------------------------------------------------------------------------
Convertible subordinated debentures and warrants (1) 19,956,960
Dividend reinvestment and common stock purchased plans 1,903,252
Director plans 1,699,335
Employee stock plans 222,736,432
--------------
Total shares reserved 246,295,979
Shares issued 1,666,095,265
Shares not reserved 2,087,608,756
-------------
Total shares authorized 4,000,000,000
=============
- --------------------------------------------------------------------------------------------------
(1) Includes warrants issued by the Company to subsidiaries to purchase shares
of the Company's common stock as follows: 8,928,172 shares at $42.50 per
share in 1996 and 11,000,176 shares at $37.50 per share in 1995.
Each share of the Company's common stock includes one preferred share
purchase right. These rights will become exercisable only if a person or group
acquires or announces an offer to acquire 15 percent or more of the Company's
common stock. When exercisable, each right will entitle the holder to buy one
one-thousandth of a share of a new series of junior participating preferred
stock at a price of $160 for each one one-thousandth of a preferred share. In
addition, upon the occurrence of certain events, holders of the rights will be
entitled to purchase either the Company's common stock or shares in an
"acquiring entity" at one-half of the then current market value. The Company
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 Company has
reserved 1.7 million shares of preferred stock for issuance upon exercise of the
rights.
DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLANS
The Company's dividend reinvestment and common stock direct purchase plans
permit participants to purchase at fair market value shares of the Company's
common stock by reinvestment of dividends and/or optional cash payments, subject
to the terms of the plan.
DIRECTOR PLANS
Under the Company's director plans, non-employee directors receive stock as part
of their annual retainer. Another plan provides for annual grants of options to
purchase common stock to each non-employee director elected or re-elected at the
annual meeting of stockholders. Options granted become exercisable after six
months and may be exercised until the tenth anniversary of the date of grant.
Compensation expense for the options is measured as the quoted market price of
the stock at the date of grant less the exercise price and is accrued over the
vesting period.
EMPLOYEE STOCK PLANS
LONG-TERM INCENTIVE PLANS The Company's stock incentive plans provide for awards
of incentive and nonqualified stock options, stock appreciation rights,
restricted shares, restricted share rights, performance awards and stock awards
without restrictions. Employee stock options can be granted with exercise prices
at or above the fair market value (as defined in the plan) of the stock at the
date of grant and with terms of up to ten years. The options generally become
fully exercisable over three years from the date of grant. Except as otherwise
permitted under the plan, upon termination of employment for reasons other than
retirement, permanent disability or death, the option period is reduced or the
options are canceled. Options also may include the right to acquire a "reload"
stock option. If an option contains the reload
74
feature and if a participant pays all or part of the exercise price of the
option with shares of stock purchased in the market or held by the participant
for at least six months, upon exercise of the option, the participant is granted
a reload option to purchase, at the fair market value of the stock as of the
date of the reload, the number of shares of stock equal to the sum of the number
of shares used in payment of the exercise price and a number of shares with
respect to taxes. No compensation expense was recorded for the options granted
under the plans, as the exercise price was equal to the quoted market price of
the stock at the date of grant. The total number of shares of common stock
available for grant under the plans as of December 31, 1999 was 86,332,969.
Holders of restricted shares and restricted share rights are entitled at no
cost to the related shares of common stock generally over three to five years
after the restricted shares or restricted share rights were granted. Upon grant
of the restricted shares or restricted share rights, holders generally are
entitled to receive quarterly cash payments equal to the cash dividends that
would be paid on common stock equal to the number of restricted shares or
restricted share rights. Except in limited circumstances, restricted shares and
restricted share rights are canceled upon termination of employment. In 1999,
1998 and 1997, 204,868, 371,560 and 280,020 restricted shares and restricted
share rights were granted, respectively, with a weighted-average grant-date fair
value of $43.24, $37.72 and $30.89, respectively. As of December 31, 1999, 1998
and 1997, there were 2,423,999, 3,086,500 and 2,084,540 restricted shares and
restricted share rights outstanding, respectively. The compensation expense for
the restricted shares and restricted share rights equals the quoted market price
of the related stock at the date of grant and is accrued over the vesting
period. The total compensation expense recognized for the restricted shares and
restricted share rights was $21 million, $9 million and $11 million in 1999,
1998 and 1997, respectively.
In connection with various acquisitions and mergers since 1992, the Company
converted employee and director stock options of acquired or merged companies
into stock options to purchase the Company's common stock based on the original
stock option plan and the agreed-upon exchange ratio.
BROAD-BASED PLANS In 1996, the Company adopted the Best Practices
PARTNERSHARES-Registered Trademark- Plan, a broad-based employee stock option
plan covering full-and part-time employees who were not participants in the
long-term incentive plans described above. The total number of shares of
common stock issuable under the plan as of December 31, 1999, was 62,000,000,
including 23,410,400 shares available for grant. Options granted under the
PARTNERSHARES Plan have an exercise date that generally is the earlier of
five years after the date of grant or when the quoted market price of the
stock reaches a predetermined price. Those options generally expire ten years
after the date of grant. No compensation expense has been recorded for the
oustanding options, as the exercise prices were equal to or higher than the
quoted market price of the Company's common stock at the respective dates of
grant.
75
The following table summarizes the Company's stock option activity and
related information for the three years ended December 31, 1999:
- -------------------------------------------------------------------------------------------------------------------
Director Plans Long-Term Incentive Plans Broad-Based Plans (5)
------------------------- --------------------------- -------------------------
Number Weighted- Number Weighted- Number Weighted-
average average average
exercise exercise exercise
price price price
- -------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1996 444,620 $13.01 49,102,252 $12.59 10,774,060 $17.42
-------- ----------- ----------
1997:
Granted 103,890 (1) 23.49 29,985,212 (2)(3) 30.31 23,678,530 (4) 30.11
Canceled -- -- (1,356,735) 22.89 (3,935,110) 17.93
Exercised (29,230) 9.87 (14,801,394) 10.30 (5,275,570) 17.57
-------- ----------- ----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1997 519,280 15.28 62,929,335 21.34 25,241,910 29.21
-------- ----------- ----------
1998:
Granted 84,860 (1) 34.38 9,695,931 (2)(3) 36.25 21,295,860 (4) 37.29
Canceled -- -- (1,521,074) 27.08 (2,866,310) 31.22
Exercised (102,610) 11.72 (10,330,783) 15.50 (1,865,480) 21.40
-------- ----------- ----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1998 501,530 19.24 60,773,409 24.58 41,805,980 33.60
-------- ----------- ----------
1999:
Granted 38,253 (1) 42.60 16,817,089 (2)(3) 38.61 -- --
Canceled -- -- (2,158,873) 27.70 (7,836,842) 34.76
Exercised (75,390) 16.32 (12,360,988) 19.77 (1,454,838) 24.40
-------- ------------ ----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1999 464,393 $21.64 63,070,637 $29.15 32,514,300 $33.72
======== ====== =========== ====== ========== ======
Outstanding options
exercisable as of:
December 31, 1997 417,920 $13.23 33,930,575 $14.12 3,315,200 $ 16.90
December 31, 1998 434,020 17.29 35,990,530 19.57 3,255,200 22.05
DECEMBER 31, 1999 463,300 21.60 37,361,257 24.92 1,646,500 17.64
- -------------------------------------------------------------------------------------------------------------------
(1) The weighted-average per share fair value of options granted was $12.09,
$11.85 and $10.26 for 1999, 1998 and 1997, respectively.
(2) The weighted-average per share fair value of options granted was $9.50,
$7.40 and $5.08 for 1999, 1998 and 1997, respectively.
(3) Includes 2,285,910, 2,094,111 and 2,687,762 reload grants at December 31,
1999, 1998 and 1997, respectively.
(4) The weighted-average per share fair value of options granted was $5.42 and
$4.92 for 1998 and 1997, respectively.
(5) Activity for broad-based plans in 1999, 1998 and 1997 includes the options
related to the Employee Stock Purchase Plan, which was discontinued in 1999.
76
The following table is a summary of selected information for the Company's
stock option plans described on the preceding page:
- -----------------------------------------------------------------------------------------------------
December 31, 1999
------------------------------------------------------
Weighted-
average Weighted-
remaining average
contractual exercise
life (in yrs.) Number price
- -----------------------------------------------------------------------------------------------------
RANGE OF EXERCISE PRICES
DIRECTOR PLANS
$.10
Options outstanding/exercisable 2.9 19,910 $ .10
$4.46-$7.83
Options outstanding/exercisable 1.8 50,000 6.94
$7.84-$13.48
Options outstanding/exercisable 3.0 54,890 10.62
$13.49-$16.00
Options outstanding/exercisable 5.2 89,210 15.07
$16.01-$25.04
Options outstanding/exercisable 6.6 82,510 23.70
$25.05-$38.29
Options outstanding/exercisable 7.8 129,620 32.31
$38.30-$51.00
Options outstanding 9.3 38,253 42.60
Options exercisable 37,160 42.69
LONG-TERM INCENTIVE PLANS
$2.24-$3.36
Options outstanding/exercisable 1.5 73,330 2.49
$3.37-$5.06
Options outstanding/exercisable 6.5 117,564 4.36
$5.07-$7.60
Options outstanding 2.1 2,124,574 7.30
Options exercisable 2,115,774 7.30
$7.61-$11.41
Options outstanding/exercisable 2.9 1,895,482 10.61
$11.42-$17.13
Options outstanding 4.1 7,959,825 13.90
Options exercisable 7,791,391 13.86
$17.14-$25.71
Options outstanding 5.1 3,532,869 20.36
Options exercisable 3,510,439 20.34
$25.72-$38.58
Options outstanding 8.0 43,369,877 33.42
Options exercisable 18,949,401 31.30
$38.59-$57.89
Options outstanding 7.5 3,997,116 42.66
Options exercisable 2,907,876 42.09
BROAD-BASED PLANS
$16.56-$24.84
Options outstanding/exercisable 6.6 1,542,500 16.56
$24.85-$37.81
Options outstanding 8.3 30,971,800 34.58
Options excercisable 104,000 33.61
- -----------------------------------------------------------------------------------------------------
In accordance with FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to continue applying the provisions of Accounting Principles
Board Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for
the stock plans described above. Had compensation cost for those stock plans
been determined based on the (optional) fair value method established by FAS
123, the Company's net income and earnings per common share would have been
reduced to the pro forma amounts indicated below.
- -----------------------------------------------------------------------------
Year ended December 31,
(in millions, except per -------------------------------
common share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------
Net income
As reported $3,747 $1,950 $2,499
Pro forma (1) 3,650 1,867 2,448
Earnings per common share
As reported $ 2.26 $ 1.18 $ 1.50
Pro forma (1) 2.20 1.13 1.43
Diluted earnings per common share
As reported $ 2.23 $ 1.17 $ 1.48
Pro forma (1) 2.17 1.12 1.42
- -----------------------------------------------------------------------------
(1) The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options may be granted
each year and generally vest over three years, these pro forma amounts may
not reflect the full effect of applying the (optional) fair value method
established by FAS 123 that would be expected if all outstanding stock
option grants were accounted for under this method.
The fair value of each option grant is estimated based on the date of grant
using an option-pricing model. The following weighted-average assumptions were
used in 1999, 1998 and 1997: expected dividend yield ranging from 1.4% to 2.2%;
expected volatility ranging from 20.0% to 29.0%; risk-free interest rates
ranging from 5.3% to 7.8% and expected life ranging from 1 to 5.4 years.
77
EMPLOYEE STOCK OWNERSHIP PLAN The 401(k) Plan (formerly known as the Savings
Investment Plan (SIP)), is a defined contribution employee stock ownership plan
(ESOP) under which the 401(k) Plan may borrow money to purchase the Company's
common or preferred stock. Beginning in 1994, the Company has loaned money to
the 401(k) Plan which has been used to purchase shares of the Company's ESOP
Preferred Stock. As ESOP Preferred Stock is released and converted into common
shares, compensation expense is recorded equal to the current market price of
the common shares. Dividends on the common shares allocated as a result of the
release and conversion of the ESOP Preferred Stock are recorded as a reduction
of retained earnings and the shares are considered outstanding for purposes of
earnings per share computations. Dividends on the unallocated ESOP Preferred
Stock are not recorded as a reduction of retained earnings, and the shares are
not considered to be common stock equivalents for purposes of earnings per share
computations. Loan principal and interest payments are made from the Company's
contributions to the 401(k) Plan, along with dividends paid on the ESOP
Preferred Stock. With each principal and interest payment, a portion of the ESOP
Preferred Stock is released and, after conversion of the ESOP Preferred Stock
into common shares, allocated to the 401(k) Plan participants.
In 1989, the Company loaned money to the 401(k) Plan which was used to
purchase shares of the Company's common stock (the 1989 ESOP shares). The
Company accounts for the 1989 ESOP shares in accordance with AICPA Statement of
Position 76-3, ACCOUNTING PRACTICES FOR CERTAIN EMPLOYEE STOCK OWNERSHIP PLANS.
Accordingly, the Company's ESOP loan to the 401(k) Plan related to the purchase
of the 1989 ESOP shares was recorded as a reduction of stockholders' equity, and
compensation expense based on the cost of the shares was recorded as shares were
released and allocated to participants' accounts. The loan from the Company to
the 401(k) Plan was repaid in 1999. Interest income on all of these loans was
$.1 million in 1999 and $1 million in 1998 and 1997 and was recorded as a
reduction in employee benefits expense. The 1989 ESOP shares are considered
outstanding for purposes of earnings per share computations and dividends on the
shares are recorded as a reduction to retained earnings.
The Company issued Series A and B ESOP Notes in the market place in
connection with the purchase of common shares. Series B ESOP matured April 26,
1999 and Series A matured in 1996. Total interest expense on the Series B ESOP
Notes was $.1 million in 1999 and $1 million in 1998 and 1997. Total dividends
paid to the 401(k) Plan on ESOP shares were as follows:
- -------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------
1999 1998 1997
- -------------------------------------------------------------------
ESOP Preferred Stock:
Common dividends $ 7 $ 6 $ 4
Preferred dividends 11 9 4
1989 ESOP shares:
Common dividends 11 11 11
--- --- ---
Total $29 $26 $19
=== === ===
- ----------------------------------------------------------------------
The ESOP shares as of December 31, 1999, 1998 and 1997 were as follows:
- --------------------------------------------------------------------------------------
December 31,
-----------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
ESOP Preferred Stock:
Allocated shares (common) 10,784,773 8,592,898 7,793,681
Unreleased shares (preferred) 69,221 80,362 76,405
1989 ESOP shares:
Allocated shares 13,016,033 15,018,861 15,555,673
Unreleased shares 76,070 320,285 1,053,925
Fair value of unearned
ESOP shares (in millions) $ 69 $ 80 $ 76
- --------------------------------------------------------------------------------------
78
13. EMPLOYEE BENEFITS AND OTHER EXPENSES
EMPLOYEE BENEFITS
The Company provides a noncontributory defined benefit retirement cash balance
plan (the Cash Balance Plan) that covers eligible employees. On July 1, 1999,
the Norwest Corporation Pension Plan was converted to the Cash Balance Plan. At
the same time, the First Interstate Bancorp Retirement Plan was merged into the
Cash Balance Plan.
Under the Cash Balance Plan, eligible employees' Cash Balance Plan accounts
receive a compensation credit based on a certain percentage of their
certified compensation. The compensation credit percentage is based on age
and years of service. In addition, participants receive investment credits on
their accumulated balances. Employees become vested in their Cash Balance
Plan accounts after completion of five years of vesting service. Pension
benefits accrued prior to the conversion to the Cash Balance Plan are
guaranteed. In addition, certain employees are eligible for a special
transition benefit.
Effective July 1, 1999, the SIP was renamed the Wells Fargo & Company 401(k)
Plan (the 401(k) Plan) and the former Wells Fargo Tax Advantage and
Retirement Plan merged into the 401(k) Plan. Under the 401(k) Plan, eligible
employees who have completed one month of service are eligible to contribute
up to 18% of their pretax certified compensation, although a lower limit may
be applied to certain employees in order to maintain the qualified status of
the 401(k) Plan. Eligible employees who complete one year of service are
eligible for matching company contributions, which are generally a dollar for
dollar match up to 6% of an employee's certified compensation. The Company's
matching contributions are generally subject to a four-year vesting schedule.
As of June 30, 1999, eligible employees from the former Wells Fargo were 100%
vested in the matching contributions under the 401(k) Plan.
The Company provides health care and life insurance benefits for certain
retired employees and reserves the right to terminate or amend any of the
benefits described above at any time.
The following table shows the changes in the benefit obligation and the fair
value of plan assets during 1999 and 1998 and the amounts included in the
Company's Consolidated Balance Sheet as of December 31, 1999 and 1998 for the
Company's defined benefit pension and other postretirement benefit plans:
- -----------------------------------------------------------------------------------------------------------------
(in millions) December 31,
----------------------------------------------------
1999 1998
----------------------- ----------------------
PENSION OTHER Pension Other
BENEFITS BENEFITS benefits benefits
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $2,487 $ 536 $2,141 $ 457
Service cost 110 24 67 18
Interest cost 132 34 151 33
Plan participants' contributions -- 6 -- 5
Amendments 17 (3) 1 --
Plan mergers 7 -- -- --
Actuarial loss (297) (6) 231 58
Acquisitions -- -- 5 --
Benefits paid (105) (37) (109) (35)
------ ---- ------ -----
Benefit obligation at end of year $2,351 $ 554 $2,487 $ 536
====== ==== ====== =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $2,548 $ 218 $2,521 $ 140
Actual return on plan assets 224 5 115 12
Plan mergers 12 -- -- --
Acquisitions -- -- 4 --
Employer contribution 24 17 17 96
Plan participants' contributions -- 6 -- 5
Benefits paid (105) (37) (109) (35)
------ ----- ------ -----
Fair value of plan assets at end of year $2,703 $ 209 $2,548 $ 218
====== ===== ====== =====
Funded status $ 352 $(345) $ 61 $ (318)
Unrecognized net actuarial gain (382) -- (48) (5)
Unrecognized net transition asset (2) 1 (7) --
Unrecognized prior service cost 17 (2) 7 1
------ ----- ------ ------
Prepaid (accrued) benefit cost $ (15) $(346) $ 13 $ (322)
====== ===== ======= ======
- -----------------------------------------------------------------------------------------------------------------
79
The weighted-average assumptions used in calculating the amounts above were:
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -------------------------
PENSION OTHER Pension Other Pension Other
BENEFITS BENEFITS benefits benefits benefits benefits
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.5% 7.5% 6.5% 6.5% 7.0% 6.9 - 7.0%
Expected return
on plan assets 9.0% 9.0% 8.5 - 9.0% 9.0% 8.5 - 9.0% 5.4%
Rate of compensation
increase 5.0% --% 5.0% --% 5.0% --%
- -------------------------------------------------------------------------------------------------------------------
The following table sets forth the components of net periodic benefit cost
for 1999, 1998 and 1997:
- -------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
PENSION OTHER Pension Other Pension Other
BENEFITS BENEFITS benefits benefits benefits benefits
- -------------------------------------------------------------------------------------------------------------------
Service cost $ 110 $24 $ 67 $ 18 $ 49 $ 14
Interest cost 132 34 151 33 141 29
Expected return on plan assets (186) (6) (205) (11) (174) (10)
Recognized net actuarial (gain) loss (1) (3) (8) 21 (1) 13 (9)
Amortization of prior service cost 2 -- 1 -- 1 --
Amortization of unrecognized transition asset (2) -- (2) -- (2) --
----- --- ----- ---- ----- -----
Net periodic benefit cost $ 53 $44 $ 33 $ 39 $ 28 $ 24
===== === ===== ==== ===== =====
- -------------------------------------------------------------------------------------------------------------------
(1) Net actual (gain) loss is generally amortized over five years.
Accounting for the postretirement health care plans uses a health care cost
trend rate to recognize the effect of expected changes in future health care
costs due to medical inflation, utilization changes, technological changes,
regulatory requirements and Medicare cost shifting. Average annual increases
of 8.5% to 9.3% for HMOs and 8.5% for all other types of coverage in the per
capita cost of covered health care benefits were assumed for 2000. By 2006
and thereafter, rates were assumed at 5.5% for HMOs and for all other types
of coverage. Increasing the assumed health care trend by one percentage point
in each year would increase the benefit obligation as of December 31, 1999 by
$34.0 million and the aggregate of the interest cost and service cost
components of the net periodic benefit cost for 1999 by $2.6 million.
Decreasing the assumed health care trend by one percentage point in each year
would decrease the benefit obligation as of December 31, 1999 by $31.7
million and the aggregate of the interest cost and service cost components of
the net periodic benefit cost for 1999 by $2.4 million.
Expenses for defined contribution retirement plans were $150 million, $174
million and $174 million in 1999, 1998 and 1997, respectively.
OTHER EXPENSES
The table below shows expenses which exceeded 1% of total interest income and
noninterest income and which are not otherwise shown separately in the financial
statements or notes thereto.
- -------------------------------------------------------------------------------
(in millions) Year ended December 31,
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Contract services $465 $342 $271
Outside professional services 372 391 262
Outside data processing 279 250 217
Telecommunications 261 252 241
Travel and entertainment 249 212 188
Advertising and promotion 238 237 202
Postage 223 228 210
Donations 48 257 44
- -------------------------------------------------------------------------------
80
14. INCOME TAXES
The following is a summary of the components of income tax expense applicable to
income before income taxes:
- ----------------------------------------------------------------------
(in millions) Year ended December 31,
---------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $ 599 $1,201 $1,242
State and local 43 272 246
Foreign 53 (1) 33
------ ------ ------
695 1,472 1,521
------ ------ ------
Deferred:
Federal 1,324 (82) 147
State and local 182 (32) 37
Foreign -- (15) (11)
------ ------ ------
1,506 (129) 173
------ ------ ------
Total $2,201 $1,343 $1,694
====== ====== ======
- ----------------------------------------------------------------------
The Company's tax benefit related to the exercise of employee stock options
that were allocated to stockholders' equity was $79 million, $90 million and
$93 million for 1999, 1998 and 1997, respectively.
The Company had a net deferred tax liability of $1,943 million and $177
million at December 31, 1999 and 1998, respectively. The tax effects of
temporary differences that gave rise to significant portions of deferred tax
assets and liabilities at December 31, 1999 and 1998 are presented below:
- --------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------
1999 1998
- --------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for loan losses $ 1,311 $1,143
Net tax-deferred expenses 788 1,325
Other 126 271
------- ------
Total deferred tax assets 2,225 2,739
------- ------
DEFERRED TAX LIABILITIES
Core deposit intangible 428 498
Leasing 976 878
Mark to market 800 201
Mortgage servicing 1,237 871
FAS 115 adjustment 447 278
Other 280 190
------- ------
Total deferred tax liabilities 4,168 2,916
------- ------
NET DEFERRED TAX LIABILITY $(1,943) $ (177)
======= ======
- -------------------------------------------------------------------
The Company has determined that it is not required to establish a valuation
reserve for any of the deferred tax assets since it is more likely than not
that these assets will be realized principally through carryback to taxable
income in prior years, and future reversals of existing taxable temporary
differences, and, to a lesser extent, future taxable income and tax planning
strategies. The Company's conclusion that it is "more likely than not" that
the deferred tax assets will be realized is based on federal taxable income
in excess of $3.5 billion in the carryback period, substantial state taxable
income in the carryback period, as well as a history of growth in earnings
and the prospects for continued growth.
The deferred tax liability related to unrealized gains and losses on
securities available for sale had no impact on 1999, 1998 or 1997 income tax
expense as these gains and losses, net of taxes, were recorded in cumulative
other comprehensive income.
81
The following table is a reconciliation of the statutory federal income tax
expense and rate to the effective income tax expense and rate:
- ----------------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ------------------
AMOUNT % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax expense and rate $2,082 35.0% $1,153 35.0% $1,468 35.0%
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit 146 2.5 156 4.7 162 3.8
Amortization of goodwill not
deductible for tax return purposes 128 2.1 125 3.8 151 3.6
Tax exempt income (65) (1.1) (57) (1.7) (37) (.9)
Other (90) (1.5) (34) (1.0) (50) (1.1)
------ ---- ------ ---- ------ ----
Effective income tax expense and rate $2,201 37.0% $1,343 40.8% $1,694 40.4%
====== ==== ====== ==== ====== ====
- ----------------------------------------------------------------------------------------------------------------------------
The Company has not recognized a federal deferred tax liability of $36
million on $102 million of undistributed earnings of a foreign subsidiary
because such earnings are indefinitely reinvested in the subsidiary and are
not taxable under current law. A deferred tax liability would be recognized
to the extent the Company changed its intent to not indefinitely reinvest a
portion or all of such undistributed earnings. In addition, a current tax
liability would be recognized if the Company recovered those undistributed
earnings in a taxable manner, such as through the receipt of dividends or
sale of the entity, or if the tax law changed.
15. EARNINGS PER COMMON SHARE
The table below shows dual presentation of earnings per common share and diluted
earnings per common share and a reconciliation of the numerator and denominator
of both earnings per common share calculations.
- ------------------------------------------------------------------------------------------------------------------
(in millions, except per share amounts) Year ended December 31,
-------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Net income $ 3,747 $ 1,950 $ 2,499
Less: Preferred stock dividends 35 35 43
-------- -------- --------
Net income applicable to common stock $ 3,712 $ 1,915 $ 2,456
======== ======== ========
EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 3,712 $ 1,915 $ 2,456
======== ======== ========
Average common shares outstanding (denominator) 1,645.6 1,621.5 1,634.6
======== ======== ========
Per share $ 2.26 $ 1.18 $ 1.50
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 3,712 $ 1,915 $ 2,456
======== ======== ========
Average common shares outstanding 1,645.6 1,621.5 1,634.6
Add: Stock options 18.0 18.3 20.6
Restricted share rights 1.6 2.0 2.6
-------- -------- --------
Diluted average common shares outstanding
(denominator) 1,665.2 1,641.8 1,657.8
======== ======== ========
Per share $ 2.23 $ 1.17 $ 1.48
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
82
16. COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income and
the related tax effect allocated to each component:
- ------------------------------------------------------------------------------------------------------------------
(in millions) Before Tax Net of
tax effect tax
amount
- ------------------------------------------------------------------------------------------------------------------
1997:
Translation adjustments $ 1 $ -- $ 1
----- ---- ----
Net unrealized gains on securities available for sale
arising during the year 339 133 206
Reclassification of net losses (gains) on
securities available for sale included in net income (99) (40) (59)
----- ---- ----
Net unrealized gains arising during the year 240 93 147
----- ---- ----
Other comprehensive income $ 241 $ 93 $148
===== ==== ====
1998:
Translation adjustments $ (6) $ (2) $ (4)
----- ---- ----
Net unrealized gains on securities available for sale
arising during the year 172 68 104
Reclassification of net losses (gains) on
securities available for sale included in net income (169) (68) (101)
----- ---- ----
Net unrealized gains arising during the year 3 -- 3
----- ---- ----
Other comprehensive income $ (3) $ (2) $ (1)
===== ==== ====
1999:
Translation adjustments $ 6 $ 2 $ 4
----- ---- ----
Net unrealized gains on securities available for sale
arising during the year 445 169 276
Reclassification of net losses (gains) on
securities available for sale included in net income 241 92 149
----- ---- ----
Net unrealized gains arising during the year 686 261 425
----- ---- ----
Other comprehensive income $ 692 $263 $429
===== ==== ====
- ------------------------------------------------------------------------------------------------------------------
The following table presents cumulative other comprehensive income balances:
- ---------------------------------------------------------------------------------------
(in millions) Cumulative
Translation Net unrealized other
adjustments gains on comprehensive
securities income
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996 $(11) $327 $316
---- ---- ----
Net change 1 147 148
---- ---- ----
Balance, December 31, 1997 (10) 474 464
---- ---- ----
Net change (4) 3 (1)
---- ---- ----
Balance, December 31, 1998 (14) 477 463
---- ---- ----
NET CHANGE 4 425 429
---- ---- ----
BALANCE, DECEMBER 31, 1999 $(10) $902 $892
==== ==== ====
- ---------------------------------------------------------------------------------------
83
17. OPERATING SEGMENTS
The Company has identified four lines of business for the purposes of management
reporting: Community Banking, Wholesale Banking, Norwest Mortgage and Norwest
Financial. The results are determined based on the Company's management
accounting process, which assigns balance sheet and income statement items to
each responsible operating segment. This process is dynamic and somewhat
subjective. Unlike financial accounting, there is no comprehensive,
authoritative guidance for management accounting equivalent to generally
accepted accounting principles. The management accounting process measures the
performance of the operating segments based on the management structure of the
Company and is not necessarily comparable with similar information for any other
financial institution. The Company's operating segments are defined by product
type and customer segments. Changes in management structure and/or the
allocation process may result in changes in allocations, transfers and
assignments. In that case, results for prior periods would be (and have been)
restated to allow comparability.
THE COMMUNITY BANKING GROUP offers a complete line of diversified financial
products and services to individual consumers and small businesses with annual
sales up to $10 million in which the owner is also the principal financial
decision maker. Community Banking also offers investment management and other
services to retail customers and high net worth individuals, insurance and
securities brokerage through affiliates and venture capital financing. This
includes WELLS FARGO FUNDS-SM-, a family of mutual funds, as well as personal
trust, employee benefit trust and agency assets. Loan products include lines of
credit, equipment and transportation (auto, recreational vehicle, marine) loans
as well as equity lines and loans. Other credit products and financial services
available to small businesses and their owners include receivables and inventory
financing, equipment leases, real estate financing, Small Business
Administration financing, cash management, payroll services, retirement plans,
medical savings accounts and credit and debit card processing. Consumer and
business deposit products include checking accounts, savings deposits, market
rate accounts, Individual Retirement Accounts (IRAs) and time deposits.
Community Banking provides access to customers through a wide range of
channels, which encompass a network of traditional banking stores, banking
centers, in-store banking centers, business centers and ATMs. Additionally, 24-
hour telephone service is provided by PHONEBANK-SM- centers and the National
Business Banking Center. Online banking services include the Wells Fargo
Internet Services Group and BUSINESS GATEWAY-Registered Trademark-, a personal
computer banking service exclusively for the small business customer.
THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of
$10 million and maintains relationships with major corporations throughout the
United States. Wholesale Banking provides a complete line of commercial and
corporate banking services. These include traditional commercial loans and lines
of credit, letters of credit, asset-based lending, equipment leasing,
international trade facilities, foreign exchange services, cash management,
investment management and electronic products. Wholesale Banking includes the
majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides
trade financing, letters of credit and collection services and is sometimes
supported by the Export-Import Bank of the United States (a public agency of the
United States offering export finance support for American-made products).
Wholesale Banking also supports the commercial real estate market with products
and services such as construction loans for commercial and residential
development, land acquisition and development loans, secured and unsecured lines
of credit, interim financing arrangements for completed structures,
rehabilitation loans, affordable housing loans and letters of credit. Secondary
market services are provided through the Capital Markets Group. Its business
includes senior loan financing, mezzanine financing, financing for leveraged
transactions, purchasing distressed real estate loans and high yield debt,
origination of permanent loans for securitization, loan syndications, real
estate brokerage services and commercial real estate loan servicing.
NORWEST MORTGAGE'S activities include the origination and purchase of
residential mortgage loans for sale to various investors as well as providing
servicing of mortgage loans for others.
84
NORWEST FINANCIAL includes consumer finance and auto finance operations.
Consumer finance operations make direct loans to consumers and purchase sales
finance contracts from retail merchants from offices throughout the United
States and Canada and in the Caribbean and Latin America. Automobile finance
operations specialize in purchasing sales finance contracts directly from
automobile dealers and making loans secured by automobiles in the United States
and Puerto Rico. Credit cards are issued to consumer finance customers through
two credit card banks. Norwest Financial also provides lease and other
commercial financing and provides information services to the consumer finance
industry.
THE RECONCILIATION COLUMN includes goodwill and nonqualifying CDI, the net
impact of transfer pricing loan and deposit balances, the cost of external debt,
and any residual effects of unallocated systems and other support groups. It
also includes the impact of asset/liability strategies the Company has put in
place to manage interest rate sensitivity at the consolidated level.
- --------------------------------------------------------------------------------------------------------------------
(income/expense in millions, Community Wholesale Norwest Norwest Reconcilation Consolidated
average balances in billions) Banking Banking Mortgage Financial Column(4) Company
1999
NET INTEREST INCOME (1) $6,516 $1,429 $ 168 $1,314 $ (72) $9,355
PROVISION FOR LOAN LOSSES 651 103 4 288 (1) 1,045
NONINTEREST INCOME 4,587 1,172 1,240 311 110 7,420
NONINTEREST EXPENSE 6,120 1,142 958 947 615 9,782
------ ------ ------ ------ ----- ------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 4,332 1,356 446 390 (576) 5,948
INCOME TAX EXPENSE (BENEFIT) (2) 1,468 506 169 143 (85) 2,201
------ ------ ------ ------ ----- ------
NET INCOME (LOSS) $2,864 $ 850 $ 277 $ 247 $(491) $3,747
====== ====== ====== ====== ===== ======
1998
Net interest income (1) $6,155 $1,345 $ 254 $1,303 $ (67) $8,990
Provision for loan losses 756 33 4 752 -- 1,545
Noninterest income 3,883 1,015 1,078 303 148 6,427
Noninterest expense 7,091 1,026 986 878 598 10,579
------ ------ ------ ------ ----- ------
Income (loss) before income
tax expense (benefit) 2,191 1,301 342 (24) (517) 3,293
Income tax expense (benefit) (2) 815 521 125 (5) (113) 1,343
------ ------ ------ ------ ----- ------
Net income (loss) $1,376 $ 780 $ 217 $ (19) $(404) $1,950
====== ====== ====== ====== ===== ======
1997
Net interest income (1) $6,193 $1,281 $ 69 $1,167 $ (62) $8,648
Provision for loan losses 972 (6) 18 332 (176) 1,140
Noninterest income 3,135 1,086 961 303 190 5,675
Noninterest expense 5,792 1,055 774 758 611 8,990
------ ------ ------ ------ ----- ------
Income (loss) before income
tax expense (benefit) 2,564 1,318 238 380 (307) 4,193
Income tax expense (benefit) (2) 966 534 87 138 (31) 1,694
------ ------ ------ ------ ----- ------
Net income (loss) $1,598 $ 784 $ 151 $ 242 $(276) $2,499
====== ====== ====== ====== ===== ======
1999
AVERAGE LOANS $ 66 $ 34 $ 1 $ 10 $ -- $ 111
AVERAGE ASSETS 118 42 23 11 9 203
AVERAGE CORE DEPOSITS 114 9 5 -- (1) 127
RETURN ON EQUITY (3) 21% 24% 20% 15% -- % 18%
1998
Average loans $ 64 $ 32 $ 1 $ 9 $ -- $ 106
Average assets 107 38 23 11 9 188
Average core deposits 110 9 5 -- -- 124
Return on equity (3) 11% 23% 16% --% -- % 10%
- -------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the primary source of income for most of the
operating segments. Net interest income is the difference between actual
interest earned on assets (and interest paid on liabilities) owned by a
group and a funding charge (and credit) based on the Company's cost of
funds. Community Banking and Wholesale Banking are charged a cost to fund
any assets (e.g., loans) and are paid a funding credit for any funds
provided (e.g., deposits). The interest spread is the difference between the
interest rate earned on an asset or paid on a liability and the Company's
cost of funds rate. (Norwest Mortgage's net interest income was composed of
interest revenue of $902 million, $1,023 million and $549 million for 1999,
1998 and 1997, respectively, and interest expense of $734 million, $769
million and $480 million for 1999, 1998 and 1997, respectively.)
(2) Taxes vary by geographic concentration of revenue generation. Taxes as
presented are also higher than the consolidated Company's effective tax rate
as a result of taxable-equivalent adjustments that primarily relate to
income on certain loans and securities that is exempt from federal and
applicable state income taxes. The offsets for these adjustments are found
in the reconciliation column.
(3) Equity is allocated to the operating segments based on an assessment of the
inherent risk associated with each business so that the returns on allocated
equity are on a risk-adjusted basis and comparable across operating
segments.
(4) The material items in the reconciliation column related to revenue (i.e.,
net interest income plus noninterest income) and net income consist of
Treasury activities and unallocated items. Revenue includes Treasury
activities of $83 million, $125 million and $153 million; and unallocated
items of $(45) million, $(44) million, and $(25) million for 1999, 1998 and
1997, respectively. Net income includes Treasury activities of $50 million,
$72 million and $88 million; and unallocated items of $(541) million, $(476)
million and $(364) million for 1999, 1998 and 1997, respectively. The
material items in the reconciliation column related to noninterest expense
include goodwill and nonqualifying CDI amortization of $499 million, $522
million and $531 million for 1999, 1998 and 1997, respectively. The material
items in the reconciliation column related to average assets include
goodwill and nonqualifying CDI of $8 billion for both 1999 and 1998.
85
18. MORTGAGE BANKING ACTIVITIES
Mortgage banking activities include Norwest Mortgage and mortgage banking
activities in other operating segments. The following table presents the
components of mortgage banking noninterest income:
- ------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Origination and other closing fees $ 380 $ 530 $314
Servicing fees, net of amortization 410 19 324
Net gains (losses) on sales of servicing rights -- 16 (8)
Net gains on sales of mortgages 221 296 120
All other 228 245 177
------ ------ ---
Total mortgage banking noninterest
income $1,239 $1,106 $927
====== ====== ====
- ------------------------------------------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the Company's
Consolidated Balance Sheet. The outstanding balances of serviced loans were $290
billion, $250 billion and $230 billion at December 31, 1999, 1998 and 1997,
respectively.
The following table summarizes the changes in capitalized mortgage loan
servicing rights:
- ------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $3,144 $3,112 $2,957
Originations 889 756 361
Purchases 695 720 462
Sales -- (346) (34)
Amortization (691) (816) (513)
Other (principally hedge activity) 446 (282) (121)
------ ------ ------
4,483 3,144 3,112
Less valuation allowance -- 64 64
------ ------ ------
Balance, end of year $4,483 $3,080 $3,048
====== ====== ======
- ------------------------------------------------------------------------------------------------------------------
The fair value of capitalized mortgage servicing rights included in the
consolidated balance sheet at December 31, 1999 was approximately $5 billion,
calculated using discount rates ranging from 500 to 700 basis points over the
ten-year U.S. Treasury rate.
86
19. PARENT COMPANY
Condensed financial information of the Parent follows. For information regarding
the Parent's long-term debt, see Note 9.
CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
-------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries:
Bank $2,270 $1,354 $1,282
Nonbank 153 403 343
Interest income from subsidiaries 616 459 388
Service fees from subsidiaries 104 127 118
Noninterest income 95 21 152
------ ------ ------
Total income 3,238 2,364 2,283
------ ------ ------
EXPENSE
Interest on:
Short-term borrowings 350 275 153
Long-term debt 514 341 364
Noninterest expense 380 379 177
------ ------ ------
Total expense 1,244 995 694
------ ------ ------
Income before income tax benefit and
undistributed income of subsidiaries 1,994 1,369 1,589
Income tax (expense) benefit (161) 105 16
Equity in undistributed income of subsidiaries 1,914 476 894
------ ------ ------
NET INCOME $3,747 $1,950 $2,499
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
-----------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and noninterest-bearing balances due from:
Subsidiary banks $ 83 $ --
Non-affiliates 9 5
Interest-bearing balances due from
subsidiary banks 6,028 678
Securities available for sale 1,765 1,541
Loans and advances to subsidiaries:
Bank -- 10
Nonbank 8,114 9,431
Investment in subsidiaries (1):
Bank 19,969 19,642
Nonbank 4,922 1,862
Other assets 1,558 1,603
------- -------
Total assets $42,448 $34,772
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 7,274 $ 5,418
Other liabilities 1,737 1,279
Long-term debt 10,804 6,010
Indebtedness to subsidiaries 499 1,296
Stockholders' equity 22,134 20,769
------- -------
Total liabilities and stockholders' equity $42,448 $34,772
======= ========
- -------------------------------------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's
total equity investment in subsidiaries to its total stockholders' equity,
was 112% and 104% at December 31, 1999 and 1998, respectively.
87
CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
-------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,747 $ 1,950 $2,499
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (1,914) (476) (894)
Depreciation and amortization 26 10 19
Securities available for sale gains -- (3) (6)
Release of preferred shares to ESOP 86 33 34
Other assets, net 114 (401) (798)
Accrued expenses and other liabilities 536 618 304
------- ------- ------
Net cash provided by operating activities 2,595 1,731 1,158
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 348 185 164
Proceeds from prepayments and maturities 120 665 299
Purchases (872) (1,273) (326)
Net advances to non-bank subsidiaries 724 (1,210) (140)
Principal collected on notes/loans of subsidiaries 1,108 89 46
Capital notes and term loans made to subsidiaries (505) (1,158) (113)
Net increase in investment in subsidiaries (1,003) (295) (384)
------- ------- ------
Net cash used by investing activities (80) (2,997) (454)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings
and indebtedness to subsidiaries 1,059 2,773 1,709
Proceeds from issuance of long-term debt 6,574 500 403
Repayment of long-term debt (1,780) (295) (981)
Proceeds from issuance of common stock 517 171 150
Repurchases of common stock (2,122) (742) (483)
Net decrease in ESOP loans 2 9 1
Payment of cash dividends (1,328) (1,017) (968)
------- ------- ------
Net cash provided (used) by financing activities 2,922 1,399 (169)
------- ------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,437 133 535
Cash and cash equivalents at beginning of year 683 550 15
------- ------- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,120 $ 683 $ 550
======= ======= ======
- -------------------------------------------------------------------------------------------------------------------
88
20. WFC HOLDINGS CORPORATION
WFC Holdings is a wholly owned subsidiary of the Parent and is the sole
stockholder of Wells Fargo Bank, N.A. The Parent guarantees the debt obligations
of WFC Holdings. In view of this, the summarized assets, liabilities and results
of operations of WFC Holdings are presented below. Prior year amounts have been
restated due to certain legal reorganizations within the Company.
SUMMARIZED CONSOLIDATED INCOME STATEMENT
- -------------------------------------------------------------------------------------------------------------------
(in millions) Year ended December 31,
-------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Interest income $6,829 $7,085 $7,271
Interest expense 2,270 2,508 2,670
Provision for loan losses 655 728 624
Noninterest income 4,301 3,925 3,575
Noninterest expense 6,239 5,923 5,346
------ ------ ------
Income before income tax expense 1,966 1,851 2,206
Income tax expense 889 892 1,017
------ ------ ------
Net income $1,077 $ 959 $1,189
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
SUMMARIZED CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
-------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,899 $ 7,668
Securities available for sale 12,452 11,128
Mortgages held for sale 1,511 2,843
Loans, net 65,547 63,763
Mortgage servicing rights 4,492 3,222
Other assets 20,381 23,003
-------- --------
Total assets $112,282 $111,627
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term borrowings $ 4,306 $ 5,219
Long-term debt 4,148 5,691
Other liabilities 88,729 85,522
Guaranteed preferred beneficial interests in Company's
subordinated debentures 785 785
Stockholder's equity 14,314 14,410
-------- --------
Total liabilities and stockholder's equity $112,282 $111,627
======== ========
- -------------------------------------------------------------------------------------------------------------------
89
21. LEGAL ACTIONS
In the normal course of business, the Company is at all times subject to
numerous pending and threatened legal actions, some for which the relief or
damages sought are substantial. After reviewing pending and threatened actions
with counsel, management believes that the outcome of such actions will not have
a material adverse effect on stockholders' equity of the Company. The Company is
not able to predict whether the outcome of such actions may or may not have a
material adverse effect on results of operations in a particular future period
as the timing and amount of any resolution of such actions and its relationship
to the future results of operations are not known.
22. RISK-BASED CAPITAL
The Company and each of the subsidiary banks are subject to various regulatory
capital adequacy requirements administered by the FRB and the OCC, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required that the federal regulatory agencies adopt regulations defining five
capital tiers for banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that the Company and each of the subsidiary banks maintain
minimum ratios (set forth in the table on the following page) of capital to
risk-weighted assets. There are two categories of capital under the
guidelines. Tier 1 capital includes common stockholders' equity, qualifying
preferred stock and trust preferred securities, less goodwill and certain
other deductions (including the unrealized net gains and losses, after
applicable taxes, on securities available for sale carried at fair value).
Tier 2 capital includes preferred stock not qualifying as Tier 1 capital,
subordinated debt, the allowance for loan losses and net unrealized gains on
marketable equity securities, subject to limitations by the guidelines. Tier
2 capital is limited to the amount of Tier 1 capital (i.e., at least half of
the total capital must be in the form of Tier 1 capital).
Under the guidelines, capital is compared to the relative risk related to the
balance sheet. To derive the risk included in the balance sheet, one of four
risk weights (0%, 20%, 50% and 100%) is applied to the different balance
sheet and off-balance sheet assets, primarily based on the relative credit
risk of the counterparty. For example, claims guaranteed by the U.S.
government or one of its agencies are risk-weighted at 0%. Off-balance sheet
items, such as loan commitments and derivative financial instruments, are
also applied a risk weight after calculating balance sheet equivalent
amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is
assigned to loan commitments based on the likelihood of the off-balance sheet
item becoming an asset. For example, certain loan commitments are converted
at 50% and then risk-weighted at 100%. Derivative financial instruments are
converted to balance sheet equivalents based on notional values, replacement
costs and remaining contractual terms. (See Notes 5 and 23 for further
discussion of off-balance sheet items.) The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Management believes that, as of December 31, 1999, the Company and each of
the significant subsidiary banks met all capital adequacy requirements to
which they are subject.
90
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the OCC categorized each of the significant
subsidiary banks as well capitalized. To be categorized as well capitalized,
the institution must maintain a total risk-based capital ratio as set forth
in the following table and not be subject to a capital directive order. There
are no conditions or events since that notification that management believes
have changed the risk-based capital category of any of the significant
subsidiary banks.
- ---------------------------------------------------------------------------------------------------------------------------
(in billions) To be well
capitalized under
the FDICIA
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Total capital (to risk-weighted assets)
Wells Fargo & Company $17.6 10.50% > = $13.4 > = 8.00%
Norwest Bank Minnesota, N.A. 2.1 10.63 > = 1.6 > = 8.00 > = $2.0 > =10.00%
Wells Fargo Bank, N.A. 9.3 11.24 > = 6.6 > = 8.00 > = 8.2 > =10.00
Tier 1 capital (to risk-weighted assets)
Wells Fargo & Company $13.5 8.07% > = $ 6.7 > = 4.00%
Norwest Bank Minnesota, N.A. 1.9 9.61 > = .8 > = 4.00 > = $1.2 > =6.00%
Wells Fargo Bank, N.A. 6.4 7.82 > = 3.3 > = 4.00 > = 4.9 > =6.00
Tier 1 capital (to average assets)
(Leverage ratio)
Wells Fargo & Company $13.5 6.77% > = $ 8.0 > = 4.00% (1)
Norwest Bank Minnesota, N.A. 1.9 5.64 > = 1.4 > = 4.00 (1) > = $1.7 > =5.00%
Wells Fargo Bank, N.A. 6.4 7.23 > = 3.6 > = 4.00 (1) > = 4.5 > =5.00
- ---------------------------------------------------------------------------------------------------------------------------
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average
total assets, excluding goodwill and certain other items. The minimum
leverage ratio guideline is 3% for banking organizations that do not
anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective
management and monitoring of market risk and, in general, are considered
top-rated, strong banking organizations.
23. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into a variety of financial contracts, which include interest
rate futures and forward contracts, interest rate floors and caps, options and
interest rate swap agreements. The contract or notional amount of a derivative
is used to determine, along with the other terms of the derivative, the amounts
to be exchanged between the counterparties. Because the contract or notional
amount does not represent amounts exchanged by the parties, it is not a measure
of loss exposure related to the use of derivatives nor of exposure to liquidity
risk. The Company is primarily an end-user of these instruments. The Company
also offers such contracts to its customers but offsets such contracts by
purchasing other financial contracts or uses the contracts for asset/liability
management. To a lesser extent, the Company takes positions based on market
expectations or to benefit from price differentials between financial
instruments and markets.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. The Company controls the credit risk
of its financial contracts except for contracts for which credit risk is DE
MINIMUS through credit approvals, limits and monitoring procedures. Credit
risk related to derivative financial instruments is considered and, if
material, provided for separately from the allowance for loan losses. As the
Company generally enters into transactions only with high quality
counterparties, losses associated with counterparty nonperformance on
derivative financial instruments have been immaterial. Further, the Company
obtains collateral where appropriate and uses master netting arrangements in
accordance with FASB Interpretation No. 39, OFFSETTING OF AMOUNTS RELATED TO
CERTAIN CONTRACTS, as amended by FASB Interpretation No. 41, OFFSETTING OF
AMOUNTS RELATED TO CERTAIN REPURCHASE AND REVERSE REPURCHASE AGREEMENTS.
91
The following table summarizes the aggregate notional or contractual amounts,
credit risk amount and estimated net fair value for the Company's derivative
financial instruments at December 31, 1999 and 1998.
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
---------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated
CONTRACTUAL RISK NET FAIR contractual risk net fair
AMOUNT AMOUNT(3) VALUE amount amount(3) value
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
HEDGES
Interest rate contracts:
Swaps (1) $31,570 $ 93 $(243) $24,429 $735 $686
Futures 50,725 -- -- 62,348 -- --
Floors and caps (1) 41,142 110 110 33,598 504 504
Options (1) (2) 11,940 22 43 25,822 112 101
Forwards (1) 22,528 108 43 41,283 11 (58)
Foreign exchange contracts:
Forwards (1) 138 1 -- 168 -- (1)
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Swaps (1) 21,702 158 (10) 7,795 81 10
Futures 22,839 -- -- 8,440 -- --
Floors and caps purchased (1) 6,130 51 51 5,619 42 42
Floors and caps written 5,804 -- (53) 5,717 -- (42)
Options purchased (1) 741 30 30 -- -- --
Options written 1,101 -- (51) -- -- --
Forwards (1) 164 6 1 850 24 4
Commodity contracts:
Swaps (1) 116 10 -- 78 4 --
Floors and caps purchased (1) 30 2 2 4 -- --
Floors and caps written 30 -- (2) 4 -- --
Foreign exchange contracts:
Forwards (1) 4,234 62 28 3,524 37 2
Options purchased (1) 41 -- -- 44 2 2
Options written 42 -- (1) 43 -- (2)
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these contracts or the underlying financial instruments.
(2) At December 31, 1999, a majority of the purchased option contracts were
options on futures contracts, which are exchange traded for which the
exchange assumes counterparty risk.
(3) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
92
Interest rate futures and forward contracts are contracts in which the buyer
agrees to purchase and the seller agrees to make delivery of a specific
financial instrument at a predetermined price or yield. These contracts may
be settled either in cash or by delivery of the underlying financial
instrument. Futures contracts are standardized and are traded on exchanges.
Gains and losses on futures contracts are settled daily with the exchange
based on a notional principal value. The exchange assumes the risk that a
counterparty will not pay and generally requires margin payments to minimize
such risk. Market risks arise from movements in interest rates and security
values. The Company uses 90- to 120-day futures contracts on Eurodollar
deposits and U.S. Treasury notes to shorten the interest rate maturity of
deposits ($5 billion at December 31, 1999) and to reduce the price risk of
interest-sensitive assets ($46 billion at December 31, 1999), primarily
mortgage servicing rights. Initial margin requirements on futures contracts
are provided by investment securities pledged as collateral.
Interest rate floors and caps are interest rate protection instruments that
involve the payment from the seller to the buyer of an interest differential.
This differential represents the difference between a short-term rate (e.g.,
three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a
notional principal amount. By purchasing a floor, the Company will be paid
the differential by a counterparty, should the current short-term rate fall
below the strike level of the agreement. The Company generally receives cash
quarterly on purchased floors (when the current interest rate falls below the
strike rate) and purchased caps (when the current interest rate exceeds the
strike rate). The primary risk associated with purchased floors and caps is
the ability of the counterparties to meet the terms of the contract. Of the
total purchased floors and caps for asset/liability management of $41 billion
at December 31, 1999, the Company had $9 billion of floors to protect
variable-rate loans from a drop in interest rates. The Company also had
purchased floors of $13 billion at December 31, 1999 to hedge mortgage
servicing rights. Cash flows from the floors offset lost future servicing
revenue caused by increased levels of loan prepayments associated with lower
interest rates. The remaining purchased floors and caps of $19 billion at
December 31, 1999 were used to hedge interest rate risk of various other
specific assets and liabilities.
Interest rate swap contracts are entered into primarily as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate payments for
floating-rate payments, based on a notional principal amount. Payments
related to the Company's swap contracts are made either monthly, quarterly or
semi-annually by one of the parties depending on the specific terms of the
related contract. The primary risk associated with all swaps is the exposure
to movements in interest rates and the ability of the counterparties to meet
the terms of the contract. At December 31, 1999, the Company had $32 billion
of interest rate swaps outstanding for interest rate risk management purposes
on which the Company receives payments based on fixed interest rates and
makes payments based on variable rates (e.g., three-month LIBOR). Included in
this amount, $18 billion was used to convert floating-rate loans into
fixed-rate assets. The remaining swap contracts used for interest rate risk
management of $14 billion at December 31, 1999 were used to hedge interest
rate risk of various other specific assets and liabilities.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell the underlying
financial instrument at a set price during a period or at a specified date in
the future. The writer of the option is obligated to purchase or sell the
underlying financial instrument, if the purchaser chooses to exercise the
option. The writer of the option receives a premium when the option is
entered into and bears the risk of an unfavorable change in the price of the
underlying financial instrument. Of the total options for asset/liability
management of $12 billion at December 31, 1999, the Company had $6 billion of
options on futures contracts hedging mortgage servicing rights. The futures
exchange assumes the risk that a counterparty will not pay. Market risks
arise from movements in interest rates and/or security values. The remaining
options used for interest rate risk management of $6 billion at December 31,
1999 were used to hedge interest rate risk of various other specific assets.
The Company has entered into futures contracts and mandatory and standby
forward contracts, including options on futures and forward contracts, to
reduce interest rate risk on certain mortgage loans held for sale and other
commitments. For forward contracts, the primary risk is the exposure to
movements in interest rates and the ability of the counterparties to meet the
terms of the contracts. The net unrealized loss on these futures and forward
contracts at December 31, 1999 and 1998 was $109 million and $12 million,
respectively. These contracts mature within 180 days.
93
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires that
the Company disclose estimated fair values for its financial instruments. Fair
value estimates, methods and assumptions set forth below for the Company's
financial instruments are made solely to comply with the requirements of this
Statement and should be read in conjunction with the financial statements and
notes in this Annual Report. The carrying amounts in the table are recorded in
the Consolidated Balance Sheet under the indicated captions, except for the
derivative financial instruments, which are recorded in the specific asset or
liability balance being hedged or in other assets if the derivative financial
instrument is a customer accommodation.
Fair values are based on estimates or calculations using present value
techniques in instances where quoted market prices are not available. Because
broadly traded markets do not exist for most of the Company's financial
instruments, the fair value calculations attempt to incorporate the effect of
current market conditions at a specific time. Fair valuations are management's
estimates of the values, and they are often calculated based on current pricing
policy, the economic and competitive environment, the characteristics of the
financial instruments and other such factors. These calculations are subjective
in nature, involve uncertainties and matters of significant judgment and do not
include tax ramifications; therefore, the results cannot be determined with
precision, substantiated by comparison to independent markets and may not be
realized in an actual sale or immediate settlement of the instruments. There may
be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results. The Company has not included
certain material items in its disclosure, such as the value of the long-term
relationships with the Company's deposit, credit card and trust customers, since
these intangibles are not financial instruments. For all of these reasons, the
aggregation of the fair value calculations presented herein do not represent,
and should not be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial
instruments, as defined by FAS 107:
- -------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------
1999 1998
-------------------------- -----------------------
CARRYING ESTIMATED Carrying Estimated
(in millions) AMOUNT FAIR VALUE amount fair value
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Mortgages held for sale $ 11,707 $ 11,885 $ 19,770 $ 20,015
Loans, net (1) 116,147 113,695 104,714 105,253
Nonmarketable equity investments 3,347 3,676 2,392 2,719
FINANCIAL LIABILITIES
Deposits $132,708 $132,461 $136,788 $136,719
Long-term debt (2) 23,345 23,076 19,673 19,948
Guaranteed preferred beneficial interests in Company's
subordinated debentures 785 730 785 874
DERIVATIVE FINANCIAL INSTRUMENTS (3)
Interest rate contracts:
Floors and caps purchased $ 273 $ 161 $ 189 $ 546
Floors and caps written (64) (53) (42) (42)
Options purchased 83 76 154 161
Options written (55) (55) (62) (60)
Swaps (50) (253) (24) 696
Forwards 44 44 (54) (54)
Foreign exchange contracts 27 27 1 1
- -------------------------------------------------------------------------------------------------------------------
(1) Loans are net of deferred fees on loan commitments and standby letters of
credit of $147 million and $146 million at December 31, 1999 and 1998,
respectively.
(2) The carrying amount and fair value exclude obligations under capital leases
of $30 million and $36 million at December 31, 1999 and 1998, respectively.
(3) The carrying amounts include unamortized fees paid or received and gains or
losses on derivative financial instruments receiving mark-to-market
treatment.
94
FINANCIAL ASSETS
SHORT-TERM FINANCIAL ASSETS
Short-term financial assets include cash and due from banks, federal funds sold
and securities purchased under resale agreements and due from customers on
acceptances. The carrying amount is a reasonable estimate of fair value because
of the relatively short period of time between the origination of the instrument
and its expected realization.
SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1999 and 1998 are set forth in
Note 4.
LOANS
The fair valuation calculation process differentiates loans based on their
financial characteristics, such as product classification, loan category,
pricing features and remaining maturity. Prepayment estimates are evaluated by
product and loan rate.
The fair value of commercial loans, other real estate mortgage loans and
real estate construction loans is calculated by discounting contractual cash
flows using discount rates that reflect the Company's current pricing for loans
with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, fair value is
calculated by discounting contractual cash flows, adjusted for prepayment
estimates, using discount rates based on current industry pricing for loans of
similar size, type, remaining maturity and repricing characteristics.
For credit card loans, the portfolio's yield is equal to the Company's
current pricing and, therefore, the fair value is equal to book value.
For other consumer loans, the fair value is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, based on the current
rates offered by the Company for loans with similar characteristics.
For auto lease financing, the fair value is calculated by discounting the
contractual cash flows at the Company's current pricing for items with similar
remaining terms, not including tax benefits.
Commitments, standby letters of credit and commercial and similar letters of
credit not included in the previous table have contractual values of $74,582
million, $4,355 million and $745 million, respectively, at December 31, 1999,
and $71,467 million, $3,332 million and $691 million, respectively, at December
31, 1998. These instruments generate ongoing fees at the Company's current
pricing levels. Of the commitments at December 31, 1999, 60% mature within one
year.
NONMARKETABLE EQUITY INVESTMENTS
There are restrictions on the sale and/or liquidation of the Company's
nonmarketable equity investments, which are generally in the form of limited
partnerships; and the Company has no direct control over the investment
decisions of the limited partnerships. To estimate fair value, a significant
portion of the underlying limited partnerships' investments are valued based on
market quotes.
FINANCIAL LIABILITIES
DEPOSIT LIABILITIES
FAS 107 states that the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, interest-bearing checking and market rate
and other savings, is equal to the amount payable on demand at the measurement
date. Although the FASB's requirement for these categories is not consistent
with the market practice of using prevailing interest rates to value these
amounts, the amount included for these deposits in the previous table is their
carrying value at December 31, 1999 and 1998. The fair value of other time
deposits is calculated based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for like
deposits with similar remaining maturities.
SHORT-TERM FINANCIAL LIABILITIES
Short-term financial liabilities include federal funds purchased and securities
sold under repurchase agreements, commercial paper and other short-term
borrowings. The carrying amount is a reasonable estimate of fair value because
of the relatively short period of time between the origination of the instrument
and its expected realization.
95
LONG-TERM DEBT
The fair value of the Company's underwritten long-term debt is estimated based
on the quoted market prices of the instruments. The fair value of the
medium-term note programs, which are part of long-term debt, is calculated based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for new notes with similar remaining
maturities.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
SUBORDINATED DEBENTURES
The fair value of the Company's trust preferred securities is estimated based on
the quoted market prices of the instruments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivative financial instruments is based on the estimated
amounts that the Company would receive or pay to terminate the contracts at the
reporting date (i.e., mark-to-market value). Dealer quotes are available for
substantially all of the Company's derivative financial instruments.
LIMITATIONS
These fair value disclosures are made solely to comply with the requirements of
FAS 107. The calculations represent management's best estimates; however, due to
the lack of broad markets and the significant items excluded from this
disclosure, the calculations do not represent the underlying value of the
Company. The information presented is based on fair value calculations and
market quotes as of December 31, 1999 and 1998. These amounts have not been
updated since year end; therefore, the valuations may have changed significantly
since that point in time.
As discussed above, certain of the Company's asset and liability financial
instruments are short-term, and therefore, the carrying amounts in the
Consolidated Balance Sheet approximate fair value. Other significant assets and
liabilities, which are not considered financial assets or liabilities and for
which fair values have not been estimated, include premises and equipment,
goodwill and other intangibles, deferred taxes and other liabilities.
96
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Wells Fargo & Company:
We have audited the accompanying consolidated balance sheet of Wells Fargo &
Company and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wells Fargo
& Company and Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
San Francisco, California
January 18, 2000
97
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME -- QUARTERLY
- ------------------------------------------------------------------------------------------------------------------------------
(in millions, except 1999 1998
per share amounts) QUARTER ENDED Quarter ended
------------------------------------------ ------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30(1) June 30(1) Mar. 31(1)
INTEREST INCOME $ 3,749 $ 3,641 $ 3,496 $ 3,488 $ 3,598 $ 3,528 $ 3,490 $3,439
INTEREST EXPENSE 1,354 1,259 1,185 1,222 1,297 1,265 1,258 1,245
------- ------- ------- ------- ------- ------- ------- ------
NET INTEREST INCOME 2,395 2,382 2,311 2,266 2,301 2,263 2,232 2,194
Provision for loan losses 275 240 260 270 624 307 309 305
------- ------- ------- ------- ------- ------- ------- ------
Net interest income after
provision for loan losses 2,120 2,142 2,051 1,996 1,677 1,956 1,923 1,889
------- ------- ------- ------- ------- ------- ------- ------
NONINTEREST INCOME
Service charges on deposit accounts 396 385 367 344 364 356 332 305
Trust and investment fees 324 317 315 300 274 267 269 259
Credit card fees 142 138 126 132 136 136 128 121
Other fees 268 258 267 238 252 241 232 221
Mortgage banking 270 318 324 327 252 275 303 276
Insurance 84 95 119 85 70 73 111 95
Net venture capital gains (losses) 721 162 13 112 (4) 4 53 59
Net (losses) gains on securities
available for sale (260) (2) 23 (2) 8 76 66 19
Other 126 138 260 191 205 193 221 178
------- ------- ------- ------- ------- ------- ------- ------
Total noninterest income 2,071 1,809 1,814 1,727 1,557 1,621 1,715 1,533
------- ------- ------- ------- ------- ------- ------- ------
NONINTEREST EXPENSE
Salaries 802 776 750 725 971 730 717 684
Incentive compensation 129 124 135 134 123 164 150 135
Employee benefits 197 208 217 199 198 167 187 188
Equipment 274 193 182 191 328 192 196 184
Net occupancy 188 205 185 186 200 188 187 189
Goodwill 132 106 104 104 104 108 104 104
Core deposit intangible 48 49 50 52 60 58 61 63
Net (gains) losses on dispositions
of premises and equipment (10) 6 (13) 2 270 7 41 7
Other 897 751 754 749 1,228 733 809 742
------- ------- ------- ------- ------- ------- ------- ------
Total noninterest expense 2,657 2,418 2,364 2,342 3,482 2,347 2,452 2,296
------- ------- ------- ------- ------- ------- ------- ------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 1,534 1,533 1,501 1,381 (248) 1,230 1,186 1,126
Income tax expense (benefit) 564 571 570 497 (54) 488 467 442
------- ------- ------- ------- ------- ------- ------- ------
NET INCOME (LOSS) $ 970 $ 962 $ 931 $ 884 $ (194) $ 742 $ 719 $ 684
======= ======= ======= ======= ======= ======= ======= ======
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 961 $ 953 $ 922 $ 875 $ (203) $ 733 $ 710 $ 675
======= ======= ======= ======= ======= ======= ======= ======
EARNINGS (LOSS) PER COMMON SHARE $ .59 $ .58 $ .56 $ .53 $ (.12) $ .45 $ .44 $ .42
======= ======= ======= ======= ======= ======= ======= ======
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .58 $ .57 $ .55 $ .53 $ (.12) $ .45 $ .43 $ .41
======= ======= ======= ======= ======= ======= ======= ======
DIVIDENDS DECLARED PER
COMMON SHARE $ .20 $ .20 $ .20 $ .185 $ .185 $ .185 $ .165 $ .165
======= ======= ======= ======= ======= ======= ======= ======
Average common shares outstanding 1,635.6 1,648.6 1,651.4 1,647.1 1,642.4 1,617.3 1,610.3 1,615.7
======= ======= ======= ======= ======= ======= ======= ======
Diluted average common
shares outstanding 1,656.0 1,667.1 1,672.3 1,664.2 1,642.4 1,640.7 1,632.2 1,639.1
======= ======= ======= ======= ======= ======= ======= ======
- ----------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the pooling-of-interests accounting
treatment of the Merger. The restated amounts include adjustments to conform
the accounting policies of the former Norwest and the former Wells Fargo. In
noninterest expense, employee benefits decreased by $2 million in each of
the quarters that preceded the fourth quarter of 1998 to conform the
accounting treatment for the postretirement transition obligation identified
with the implementation of FAS 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS. Additionally, equipment expense increased $2
million for the quarter ended June 30, 1998.
98