UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-2979
------------------------
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0449260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 1-800-411-4932
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
July 31, 2000
------------------
Common stock, $1-2/3 par value 1,646,347,474
FORM 10-Q
TABLE OF CONTENTS
Page
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income............................ 2
Consolidated Balance Sheet.................................. 3
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income.................................. 4
Consolidated Statement of Cash Flows........................ 5
Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)
Summary Financial Data...................................... 15
Overview.................................................... 16
Factors that May Affect Future Results...................... 18
Operating Segment Results................................... 21
Earnings Performance........................................ 22
Net Interest Income....................................... 22
Noninterest Income........................................ 26
Noninterest Expense....................................... 28
Income Taxes.............................................. 28
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI.. 29
Balance Sheet Analysis...................................... 30
Securities Available for Sale............................. 30
Loan Portfolio............................................ 32
Nonaccrual and Restructured Loans and Other Assets........ 32
Loans 90 Days Past Due and Still Accruing............... 35
Allowance for Loan Losses................................. 36
Interest Receivable and Other Assets...................... 37
Deposits.................................................. 38
Capital Adequacy/Ratios................................... 38
Derivative Financial Instruments.......................... 39
Liquidity and Capital Management.......................... 40
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 42
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 44
SIGNATURE............................................................. 46
1
PART I--FINANCIAL INFORMATION
-----------------------------
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------- -------------------
(in millions, except per share amounts) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
Securities available for sale $ 587 $ 517 $ 1,218 $ 1,027
Mortgages held for sale 172 215 342 473
Loans held for sale 120 101 227 200
Loans 3,148 2,609 6,131 5,188
Other interest income 80 54 153 96
------- ------- ------- -------
Total interest income 4,107 3,496 8,071 6,984
------- ------- ------- -------
INTEREST EXPENSE
Deposits 874 679 1,632 1,396
Short-term borrowings 353 201 723 408
Long-term debt 395 290 776 573
Guaranteed preferred beneficial interests in Company's
subordinated debentures 15 15 30 30
------- ------- ------- -------
Total interest expense 1,637 1,185 3,161 2,407
------- ------- ------- -------
NET INTEREST INCOME 2,470 2,311 4,910 4,577
Provision for loan losses 260 260 515 530
------- ------- ------- -------
Net interest income after provision for loan losses 2,210 2,051 4,395 4,047
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 406 367 788 711
Trust and investment fees 360 315 720 615
Credit card fees 126 126 249 258
Other fees 292 267 562 505
Mortgage banking 304 324 611 651
Insurance 114 119 206 204
Net venture capital gains 320 13 1,205 126
Net (losses) gains on securities available for sale (39) 23 (641) 21
Other 209 260 302 450
------- ------- ------- -------
Total noninterest income 2,092 1,814 4,002 3,541
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 838 750 1,656 1,475
Incentive compensation 156 135 289 269
Employee benefits 225 217 457 416
Equipment 189 182 382 373
Net occupancy 219 185 444 371
Goodwill 124 104 237 208
Core deposit intangible 45 50 91 102
Net gains on dispositions of premises and equipment (16) (13) (49) (11)
Other 846 754 1,596 1,503
------- ------- ------- -------
Total noninterest expense 2,626 2,364 5,103 4,706
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,676 1,501 3,294 2,882
Income tax expense 637 570 1,245 1,067
------- ------- ------- -------
NET INCOME $ 1,039 $ 931 $ 2,049 $ 1,815
======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 1,035 $ 922 $ 2,040 $ 1,798
======= ======= ======= =======
EARNINGS PER COMMON SHARE $ .64 $ .56 $ 1.26 $ 1.09
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ .63 $ .55 $ 1.25 $ 1.08
======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ .22 $ .20 $ .44 $ .385
======= ======= ======= =======
Average common shares outstanding 1,613.0 1,651.4 1,620.0 1,649.2
======= ======= ======= =======
Diluted average common shares outstanding 1,631.8 1,672.3 1,635.6 1,668.2
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------
2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
(in millions, except shares) 2000 1999 1999
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 14,168 $ 13,250 $ 12,633
Federal funds sold and securities purchased
under resale agreements 3,409 1,554 1,692
Securities available for sale 34,604 38,518 35,710
Mortgages held for sale 8,500 11,707 11,781
Loans held for sale 4,049 4,975 4,192
Loans 135,046 119,464 111,646
Allowance for loan losses 3,349 3,170 3,165
-------- -------- --------
Net loans 131,697 116,294 108,481
-------- -------- --------
Mortgage servicing rights 4,848 4,483 4,080
Premises and equipment, net 2,959 2,985 3,141
Core deposit intangible 1,214 1,286 1,381
Goodwill 8,526 7,702 7,598
Interest receivable and other assets 20,185 15,348 14,732
-------- -------- --------
Total assets $234,159 $218,102 $205,421
======== ======== ========
LIABILITIES
Noninterest-bearing deposits $ 47,979 $ 42,916 $ 43,708
Interest-bearing deposits 98,469 89,792 88,834
-------- -------- --------
Total deposits 146,448 132,708 132,542
Short-term borrowings 26,304 27,995 20,155
Accrued expenses and other liabilities 10,856 11,108 9,296
Long-term debt 26,639 23,375 21,268
Guaranteed preferred beneficial interests in
Company's subordinated debentures 785 785 785
STOCKHOLDERS' EQUITY
Preferred stock 441 344 590
Unearned ESOP shares (176) (73) (130)
-------- -------- --------
Total preferred stock 265 271 460
Common stock -- $1-2/3 par value, authorized
4,000,000,000 shares; issued 1,666,095,265 shares 2,777 2,777 2,777
Additional paid-in capital 8,863 8,786 8,764
Retained earnings 12,297 11,196 10,028
Cumulative other comprehensive income 961 892 (10)
Notes receivable from ESOP (1) (1) (1)
Treasury stock -- 46,953,959 shares, 39,245,724
shares and 15,465,932 shares (2,035) (1,790) (643)
-------- -------- --------
Total stockholders' equity 23,127 22,131 21,375
-------- -------- --------
Total liabilities and stockholders' equity $234,159 $218,102 $205,421
======== ======== ========
- -------------------------------------------------------------------------------------------------
3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Notes
Unearned Additional receivable
Number of Preferred ESOP Common paid-in Retained from Treasury
(in millions, except shares) Shares stock shares stock capital earnings ESOP stock
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $547 $ (84) $2,769 $8,673 $ 9,045 $(3) $ (651)
---- ----- ------ ------ ------- --- -------
Comprehensive income
Net income 1,815
Other comprehensive income, net
of tax:
Translation adjustments
Unrealized gains (losses) on
securities available for sale
arising during the year
Reclassification adjustment for
(gains) losses on securities
available for sale included
in net income
Total comprehensive income
Common stock issued 12,824,674 79 (174) 467
Common stock issued for
acquisitions 6,185,330 8 11 (6) 54
Common stock repurchased 13,275,022 (3) (544)
Preferred stock (75,000) issued to
ESOP 75 (80) 5
Preferred stock released to ESOP 34 (2)
Preferred stock (31,868) converted
to common shares 836,568 (32) 1 31
Preferred stock dividends (17)
Common stock dividends (635)
Cash payments received on notes
receivable from ESOP 2
---- ----- ------ ------ ------- --- -------
Net change 43 (46) 8 91 983 2 8
---- ----- ------ ------ ------- --- -------
BALANCE JUNE 30, 1999 $590 $(130) $2,777 $8,764 $10,028 $(1) $ (643)
==== ===== ====== ====== ======= === =======
BALANCE DECEMBER 31, 1999 $344 $ (73) $2,777 $8,786 $11,196 $(1) $(1,790)
---- ----- ------ ------ ------- --- -------
Comprehensive income
Net income 2,049
Other comprehensive income, net
of tax:
Translation adjustments
Unrealized gains (losses) on
securities
available for sale arising
during the year
Reclassification adjustment for
(gains) losses on securities
available for sale included
in net income .
Total comprehensive income
Common stock issued 8,409,474 125 (220) 347
Common stock issued for
acquisitions 41,687,819 (52) (8) 1,731
Common stock repurchased 59,641,436 (2,399)
Preferred stock (170,000) issued to
ESOP 170 (181) 11
Preferred stock released to ESOP 78 (5)
Preferred stock (73,131) converted
to common shares 1,835,908 (73) (2) 75
Preferred stock dividends (9)
Common stock dividends (711)
Increase in Rabbi trust assets
(classified as treasury stock) 1
---- ----- ------ ------ ------- --- -------
Net change 97 (103) -- 77 1,101 -- (245)
---- ----- ------ ------ ------- --- -------
BALANCE JUNE 30, 2000 $441 $(176) $2,777 $8,863 $12,297 $(1) $(2,035)
==== ===== ====== ====== ======= === =======
Cumulative
other Total
comprehensive stockholders'
(in millions, except shares) income equity
- ---------------------------- -------------- -------------
BALANCE DECEMBER 31, 1998 $ 463 $20,759
----- -------
Comprehensive income
Net income 1,815
Other comprehensive income, net
of tax:
Translation adjustments 3 3
Unrealized gains (losses) on
securities available for sale
arising during the year (463) (463)
Reclassification adjustment for
(gains) losses on securities
available for sale included
in net income (13) (13)
-------
Total comprehensive income 1,342
Common stock issued 372
Common stock issued for
acquisitions 67
Common stock repurchased (547)
Preferred stock (75,000) issued to
ESOP --
Preferred stock released to ESOP 32
Preferred stock (31,868) converted
to common shares --
Preferred stock dividends (17)
Common stock dividends (635)
Cash payments received on notes
receivable from ESOP 2
----- -------
Net change (473) 616
----- -------
BALANCE JUNE 30, 1999 $ (10) $21,375
===== =======
BALANCE DECEMBER 31, 1999 $ 892 $22,131
----- -------
Comprehensive income
Net income 2,049
Other comprehensive income, net
of tax:
Translation adjustments (1) (1)
Unrealized gains (losses) on
securities available for sale
arising during the year (48) (48)
Reclassification adjustment for
(gains) losses on securities
available for sale included
in net income 118 118
-------
Total comprehensive income 2,118
Common stock issued 252
Common stock issued for
acquisitions 1,671
Common stock repurchased (2,399)
Preferred stock (170,000) issued to
ESOP --
Preferred stock released to ESOP 73
Preferred stock (73,131) converted
to common shares --
Preferred stock dividends (9)
Common stock dividends (711)
Increase in Rabbi trust assets
(classified as treasury stock) 1
----- -------
Net change 69 996
----- -------
BALANCE JUNE 30, 2000 $ 961 $23,127
===== =======
- ----------------------------------------------------------------------------------------------------------------------------------
4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------
Six months
Ended June 30,
-------------------
(in millions) 2000 1999
- ---------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,049 $ 1,815
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 515 530
Depreciation and amortization 750 1,036
Securities available for sale (gains) losses 641 (21)
Net venture capital gains (1,205) (126)
Gains on sales of mortgages held for sale (40) (244)
Gains on dispositions of operations (6) (102)
Net (gains) losses on dispositions of premises and
equipment (49) (11)
Release of preferred shares to ESOP 73 32
Net increase in trading assets (2,309) (549)
Net increase in accrued interest receivable (62) (88)
Net (decrease) increase in accrued interest payable 40 (35)
Originations of mortgages held for sale (29,636) (50,553)
Proceeds from sales of mortgages held for sale 29,983 58,260
Net increase in loans held for sale (627) (88)
Other assets, net 2,323 493
Other accrued expenses and liabilities, net 361 873
-------- --------
Net cash provided by operating activities 2,801 11,222
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 13,423 6,378
Proceeds from prepayments and maturities 2,116 5,168
Purchases (9,362) (16,529)
Net cash acquired from (paid for) acquisitions 607 (129)
Net increase in banking subsidiaries' loans resulting from
originations and collections (9,882) (937)
Proceeds from sales (including participations) of banking
subsidiaries' loans 511 1,004
Purchases (including participations) of banking
subsidiaries' loans (116) (750)
Principal collected on nonbank subsidiaries' loans 2,186 2,683
Nonbank subsidiaries' loans originated (4,761) (4,278)
Proceeds from dispositions of operations 11 (721)
Proceeds from sales of foreclosed assets 129 143
Net increase in federal funds sold and
securities purchased under resale agreements (1,855) (175)
Net increase in mortgage servicing rights (583) (1,476)
Other, net (3,079) (1,980)
-------- --------
Net cash used by investing activities (10,655) (11,599)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 10,939 (4,553)
Net (decrease) increase in short-term borrowings (2,148) 4,114
Proceeds from issuance of long-term debt 9,422 6,985
Repayment of long-term debt (6,499) (5,406)
Proceeds from issuance of common stock 198 372
Repurchase of common stock (2,399) (547)
Payment of cash dividends on preferred and common stock (720) (652)
Other, net (21) (34)
-------- --------
Net cash provided by financing activities 8,772 279
-------- --------
NET CHANGE IN CASH AND DUE FROM BANKS 918 (98)
Cash and due from banks at beginning of period 13,250 12,731
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 14,168 $ 12,633
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 3,121 $ 2,420
Income taxes $ 283 $ 617
Noncash investing and financing activities:
Transfers from loans held for sale to loans 1,553 1,218
Transfers from loans to foreclosed assets $ 103 $ 62
- ---------------------------------------------------------------------------------
5
WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS COMBINATIONS
- -------------------------
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 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. Wells Fargo &
Company together with its subsidiaries are referred to as the Company.
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 reserve of $250 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.
Approximately 2,400 employees, totaling approximately $160 million in severance
benefits, had entered the severance process through June 30, 2000. The charges
also included approximately $250 million related to dispositions of leased and
owned premises held for remarketing or sale, and $100 million of other costs
associated with exiting activities due to the Merger. Most of the reserves for
both premises and other costs were utilized as of June 30, 2000 and the
remaining balances were not material.
The Company regularly explores opportunities for acquisitions of financial
institutions and related businesses. Generally, management of the Company does
not make a public announcement about an acquisition opportunity until a
definitive agreement has been signed.
Transactions completed in the six months ended June 30, 2000 include:
- ------------------------------------------------------------------------------------------------
Method of
(in millions) Date Assets Accounting
- ------------------------------------------------------------------------------------------------
First Place Financial Corporation January 18 $ 733 Purchase
North County Bancorp January 27 413 Purchase
Prime Bancshares, Inc January 28 1,366 Purchase
Ragen MacKenzie Group Incorporated March 16 901 Purchase
Napa National Bancorp March 17 188 Purchase
Servus Financial Corporation March 17 168 Purchase
Michigan Financial Corporation March 30 975 Purchase
Bryan, Pendleton, Swats & McAllister, LLC March 31 12 Purchase
1st Choice Financial Corp June 13 483 Purchase
First Commerce Bancshares, Inc June 16 2,868 Purchase
------
$8,107
======
- ------------------------------------------------------------------------------------------------
6
In connection with these transactions, the Company paid cash in the
aggregate amount of $11 million and issued aggregate common shares of 42
million.
The Company had four pending transactions as of June 30, 2000 with total assets
of approximately $27 billion, and anticipates that aggregate cash of
approximately $60 million and 100 million common shares will be issued upon
consummation of these transactions. Such transactions are subject to approval
by regulatory agencies and are expected to be completed by the end of 2000. The
pending transactions include First Security Corporation (FSCO), a $23 billion
bank holding company based in Salt Lake City, Utah. The Company expects to
account for its acquisition of FSCO as a pooling of interests business
combination. Accordingly, following the consummation of this transaction, the
Company's financial statements will be combined with those of FSCO as if the
acquisition had been in effect for all periods presented.
7
2. 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 table below is a summary of the Company's preferred stock at June 30,
2000, December 31, 1999 and June 30, 1999. A detailed description of the
Company's preferred stock is provided in Note 11 to the audited consolidated
financial statements included in the Company's 1999 Annual Report on Form 10-K.
- ---------------------------------------------------------------------------------------------------------------------------------
Shares issued and outstanding Carrying amount (in millions) Adjustable
--------------------------------- ------------------------------ dividends rate
JUNE 30, Dec. 31, June 30, JUNE 30, Dec. 31, June 30, ---------------------
2000 1999 1999 2000 1999 1999 Minimum Maximum
--------- --------- --------- -------- -------- -------- --------- ---------
Adjustable-Rate Cumulative, Series B
(Liquidation preference $50) 1,500,000 1,500,000 1,500,000 $ 75 $ 75 $ 75 5.5% 10.5%
6.59%/Adjustable-Rate Noncumulative
Preferred Stock, Series H
(Liquidation preference $50)(1) 4,000,000 4,000,000 4,000,000 200 200 200 7.0 13.0
Cumulative Tracking
(Liquidation preference $200)(2) -- -- 980,000 -- -- 196 -- --
2000 ESOP Cumulative Convertible
(Liquidation preference $1,000) 98,165 -- -- 98 -- -- 11.5 12.5
1999 ESOP Cumulative Convertible
(Liquidation preference $1,000) 21,726 22,263 45,508 22 22 45 10.30 11.30
1998 ESOP Cumulative Convertible
(Liquidation preference $1,000) 8,215 8,386 8,560 8 8 9 10.75 11.75
1997 ESOP Cumulative Convertible
(Liquidation preference $1,000) 10,640 10,839 18,639 10 11 19 9.50 10.50
1996 ESOP Cumulative Convertible
(Liquidation preference $1,000) 11,810 12,011 21,288 12 12 21 8.50 9.50
1995 ESOP Cumulative Convertible
(Liquidation preference $1,000) 11,853 11,990 19,903 12 12 20 10.00 10.00
ESOP Cumulative Convertible
(Liquidation preference $1,000) 3,681 3,732 9,596 4 4 10 9.0 9.0
Unearned ESOP shares(3) -- -- -- (176) (73) (130) -- --
Less Cumulative Tracking held by
subsidiary (Liquidation preference
$200) -- -- 25,000 -- -- 5 -- --
--------- --------- --------- ---- ---- -----
Total 5,666,090 5,569,221 6,578,494 $265 $271 $ 460
========= ========= ========= ==== ==== =====
- ---------------------------------------------------------------------------------------------------------------------------------
(1) 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.
(2) In December 1999, the Company redeemed all $196 million (980,000 shares) of
its Cumulative Tracking preferred stock.
(3) 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.
8
3. EARNINGS PER COMMON SHARE
-------------------------
The table below presents 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.
- -------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------- -------------------
(in millions, except per share amounts) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------
Net income $ 1,039 $ 931 $ 2,049 $ 1,815
Less: Preferred stock dividends 4 9 9 17
------- ------- ------- -------
Net income applicable to common stock $ 1,035 $ 922 $ 2,040 $ 1,798
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 1,035 $ 922 $ 2,040 $ 1,798
======= ======= ======= =======
Average common shares outstanding (denominator) 1,613.0 1,651.4 1,620.0 1,649.2
======= ======= ======= =======
Per share $ .64 $ .56 $ 1.26 $ 1.09
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 1,035 $ 922 $ 2,040 $ 1,798
======= ======= ======= =======
Average common shares outstanding 1,613.0 1,651.4 1,620.0 1,649.2
Add: Stock options 17.6 19.2 14.3 17.2
Restricted share rights 1.2 1.7 1.3 1.8
------- ------- ------- -------
Diluted average common shares outstanding (denominator) 1,631.8 1,672.3 1,635.6 1,668.2
======= ======= ======= =======
Per share $ .63 $ .55 $ 1.25 $ 1.08
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------
9
4. OPERATING SEGMENTS
The Company has identified four lines of business for the purposes of
management reporting: Community Banking, Wholesale Banking, Wells Fargo Home
Mortgage (formerly Norwest Mortgage) and Wells Fargo Financial (formerly 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 includes the Wells Fargo Internet
Services Group and services such as 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, treasury
10
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.
WELLS FARGO HOME MORTGAGE'S (formerly Norwest Mortgage) 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.
WELLS FARGO FINANCIAL (formerly 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. Wells Fargo 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.
11
The following table provides the results for the Company's four major
operating segments.
- ------------------------------------------------------------------------------------------------------------------------------
(income/expense in millions, average Community Wholesale Wells Fargo
balances in billions) Banking Banking Home Mortgage
--------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
QUARTER ENDED JUNE 30,
Net interest income(1) $1,708 $1,620 $414 $340 $ 20 $ 46
Provision for loan losses 153 151 47 40 -- 3
Noninterest income 1,399 1,114 282 269 301 326
Noninterest expense 1,747 1,514 326 274 223 262
------ ------ ---- ---- ---- ----
Income (loss) before income tax expense
(benefit) 1,207 1,069 323 295 98 107
Income tax expense (benefit)(2) 435 385 122 109 36 40
------ ------ ---- ---- ---- ----
Net income (loss) $ 772 $ 684 $201 $186 $ 62 $ 67
====== ====== ==== ==== ==== ====
Average loans $ 72 $ 65 $ 40 $ 34 $ 5 $ 1
Average assets 131 118 48 41 23 23
Average core deposits 117 114 10 9 4 5
SIX MONTHS ENDED JUNE 30,
Net interest income(1) $3,397 $3,180 $830 $678 $ 42 $114
Provision for loan losses 319 318 59 65 2 6
Noninterest income 2,577 2,127 588 576 605 642
Noninterest expense 3,336 2,994 633 542 440 538
------ ------ ---- ---- ---- ----
Income (loss) before income tax expense
(benefit) 2,319 1,995 726 647 205 212
Income tax expense (benefit)(2) 826 689 273 239 76 79
------ ------ ---- ---- ---- ----
Net income (loss) $1,493 $1,306 $453 $408 $129 $133
====== ====== ==== ==== ==== ====
Average loans $ 71 $ 64 $ 40 $ 34 $ 3 $ 1
Average assets 130 116 48 41 22 25
Average core deposits 116 114 9 9 4 5
- -------------------------------------------------------------------------------------------------------------------------------
(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. (Wells Fargo Home Mortgage's net interest income was
composed of interest revenue of $207 million and $209 million for the second
quarter of 2000 and 1999, respectively, and $391 million and $474 million
for the first half of 2000 and 1999, respectively, and interest expense of
$187 million and $163 million for the second quarter of 2000 and 1999,
respectively, and $349 million and $360 million for the first half of 2000
and 1999, 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.
12
- -----------------------------------------------------------------------------------------------------------------------------
(income/expense in millions, average Recon- Consoli-
balances in billions) Wells Fargo ciliation dated
Financial column(3) Company
----------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
QUARTER ENDED JUNE 30,
Net interest income(1) $350 $330 $ (22) $ (25) $2,470 $2,311
Provision for loan losses 60 66 -- -- 260 260
Noninterest income 68 74 42 31 2,092 1,814
Noninterest expense 247 234 83 80 2,626 2,364
---- ---- ----- ----- ------ ------
Income (loss) before income tax expense
(benefit) 111 104 (63) (74) 1,676 1,501
Income tax expense (benefit)(2) 42 39 2 (3) 637 570
---- ---- ----- ----- ------ ------
Net income (loss) $ 69 $ 65 $ (65) $ (71) $1,039 $ 931
==== ==== ===== ===== ====== ======
Average loans $ 10 $ 9 $ -- $ -- $ 127 $ 109
Average assets 12 11 7 7 221 200
Average core deposits -- -- -- -- 131 128
SIX MONTHS ENDED JUNE 30,
Net interest income(1) $692 $654 $ (51) $ (49) $4,910 $4,577
Provision for loan losses 135 141 -- -- 515 530
Noninterest income 141 147 91 49 4,002 3,541
Noninterest expense 497 472 197 160 5,103 4,706
---- ---- ----- ----- ------ ------
Income (loss) before income tax expense
(benefit) 201 188 (157) (160) 3,294 2,882
Income tax expense (benefit)(2) 76 69 (6) (9) 1,245 1,067
---- ---- ----- ----- ------ ------
Net income (loss) $125 $119 $(151) $(151) $2,049 $1,815
==== ==== ===== ===== ====== ======
Average loans $ 10 $ 9 $ -- $ -- $ 124 $ 108
Average assets 12 11 7 7 219 200
Average core deposits -- -- -- -- 129 128
- ------------------------------------------------------------------------------------------------------------------------------
(3) 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 $29 million and $27 million; and unallocated items of $(9)
million and $(21) million for the second quarter of 2000 and 1999,
respectively. Revenue includes Treasury activities of $48 million and $41
million; and unallocated items of $(8) million and $(41) million for the
first six months of 2000 and 1999, respectively. Net income includes
Treasury activities of $18 million and $17 million; and unallocated items of
$(83) million and $(88) million for the second quarter of 2000 and 1999,
respectively. Net income includes Treasury activities of $29 million and $25
million; and unallocated items of $(180) million and $(176) million for the
first six months of 2000 and 1999, respectively. The material items in the
reconciliation column related to noninterest expense include goodwill and
nonqualifying CDI amortization of $82 million and $79 million for the second
quarter of 2000 and 1999, respectively, and $163 million and $159 million
for the first six months of 2000 and 1999, respectively. The material items
in the reconcilation column related to average assets include goodwill and
nonqualifying CDI of $7 billion for all periods presented.
13
5. Mortgage Banking Activities
---------------------------
Mortgage banking activities include Wells Fargo Home Mortgage and mortgage
banking activities in other operating segments.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The outstanding balances of mortgage loans serviced
for others were $310 billion at June 30, 2000, $290 billion at December 31, 1999
and $273 billion at June 30, 1999.
The following table summarizes the changes in capitalized mortgage loan
servicing rights:
- ------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------ ------------------
(in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------
Balance, beginning of period $4,625 $3,691 $4,483 $3,144
Originations 115 208 259 473
Purchases 223 123 333 372
Amortization (116) (166) (239) (460)
Other (principally hedge activity) 1 288 12 615
------ ------ ------ ------
4,848 4,144 4,848 4,144
Less valuation allowance -- 64 -- 64
------ ------ ------ ------
Balance, end of period $4,848 $4,080 $4,848 $4,080
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------
The fair value of capitalized mortgage servicing rights included in the
consolidated balance sheet at June 30, 2000 was approximately $5.2 billion,
calculated using discount rates ranging from 500 to 700 basis points over the
ten-year U.S. Treasury rate.
14
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------
% Change
Quarter ended June 30, 2000 from Six months ended
------------------------------ ------------------------- ---------------------
(in millions, except JUNE 30, Mar. 31, June 30, Mar. 31, June 30, JUNE 30, June 30, %
per share amounts) 2000 2000 1999 2000 1999 2000 1999 Change
- -------------------------------------------------------------------------------------------------------------------------- ------
FOR THE PERIOD
Net income $ 1,039 $ 1,010 $ 931 3% 12% $ 2,049 $ 1,815 13%
Net income applicable to common
stock 1,035 1,006 922 3 12 2,040 1,798 13
Earnings per common share $ .64 $ .62 $ .56 3 14 $ 1.26 $ 1.09 16
Diluted earnings per common
share .63 .61 .55 3 15 1.25 1.08 16
Dividends declared per common
share .22 .22 .20 -- 10 .44 .385 14
Average common shares
outstanding 1,613.0 1,627.1 1,651.4 (1) (2) 1,620.0 1,649.2 (2)
Diluted average common shares
outstanding 1,631.8 1,640.2 1,672.3 (1) (2) 1,635.6 1,668.2 (2)
Profitability ratios (annualized)
Net income to average total
assets (ROA) 1.89% 1.88% 1.86% 1 2 1.88% 1.83% 3
Net income applicable to common
stock to average common
stockholders' equity (ROE) 19.04 18.24 17.50 4 9 18.63 17.42 7
Total revenue $ 4,562 $ 4,351 $ 4,125 5 11 $ 8,912 $ 8,118 10
Efficiency ratio(1) 57.6% 57.0% 57.3% 1 1 57.3% 58.0% (1)
Average loans $127,000 $121,172 $108,996 5 17 $124,086 $108,418 14
Average assets 220,766 216,458 200,342 2 10 218,612 199,537 10
Average core deposits 131,122 127,410 127,563 3 3 129,265 127,847 1
Net interest margin 5.55% 5.56% 5.69% -- (2) 5.56% 5.65% (2)
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE
DEPOSIT INTANGIBLE AMORTIZATION
AND BALANCES ("CASH")(2)
Net income applicable to common
stock $ 1,185 $ 1,145 $ 1,054 3 12 $ 2,330 $ 2,062 13
Earnings per common share .73 .70 .64 4 14 1.44 1.25 15
Diluted earnings per common
share .73 .70 .63 4 16 1.42 1.24 15
ROA 2.26% 2.23% 2.23% 1 1 2.25% 2.20% 2
ROE 37.16 34.15 33.43 9 11 35.62 33.89 5
Efficiency ratio 53.9 53.4 53.7 1 -- 53.7 54.3 (1)
AT PERIOD END
Securities available for sale $ 34,604 $ 36,774 $ 35,710 (6) (3) $ 34,604 $ 35,710 (3)
Loans 135,046 124,846 111,646 8 21 135,046 111,646 21
Allowance for loan losses 3,349 3,237 3,165 3 6 3,349 3,165 6
Goodwill 8,526 8,355 7,598 2 12 8,526 7,598 12
Assets 234,159 222,276 205,421 5 14 234,159 205,421 14
Core deposits 134,269 132,480 127,302 1 5 134,269 127,302 5
Common stockholders' equity 22,862 23,366 20,915 (2) 9 22,862 20,915 9
Stockholders' equity 23,127 23,629 21,375 (2) 8 23,127 21,375 8
Tier 1 capital(3) 13,406 13,354 13,454 -- -- 13,406 13,454 --
Total capital(3) 20,741 18,277 17,612 13 18 20,741 17,612 18
Capital ratios
Common stockholders' equity to
assets 9.76% 10.51% 10.18% (7) (4) 9.76% 10.18% (4)
Stockholders' equity to assets 9.88 10.63 10.41 (7) (5) 9.88 10.41 (5)
Risk-based capital(3)
Tier 1 capital 7.04 7.50 8.45 (6) (17) 7.04 8.45 (17)
Total capital 10.90 10.27 11.07 6 (2) 10.90 11.07 (2)
Leverage(3) 6.37 6.50 7.05 (2) (10) 6.37 7.05 (10)
Book value per common share $ 14.12 $ 14.35 $ 12.67 (2) 11 $ 14.12 $ 12.67 11
Staff (active, full-time
equivalent) 94,388 90,683 90,410 4 4 94,388 90,410 4
COMMON STOCK PRICE
High $ 47.75 $ 43.75 $ 44.88 9 6 $ 47.75 $ 44.88 6
Low 37.31 31.00 34.38 20 9 31.00 32.13 (4)
Period end 38.75 40.75 42.75 (5) (9) 38.75 42.75 (9)
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by the total
revenue (net interest income and noninterest income).
(2) Nonqualifying core deposit intangible (CDI) amortization and average balance
excluded from these calculations are, with the exception of the efficiency
and ROA ratios, net of applicable taxes. The pre-tax amount for the average
balance of nonqualifying CDI was $1,176 million for the quarter ended
June 30, 2000 and $1,195 million for the six months ended June 30, 2000. The
after-tax amounts for the amortization and average balance of nonqualifying
CDI were $26 million and $729 million, respectively, for the quarter ended
June 30, 2000 and $52 million and $741 million, respectively, for the six
months ended June 30, 2000. Goodwill amortization and average balance (which
are not tax effected) were $124 million and $8,314 million, respectively,
for the quarter ended June 30, 2000 and $237 million and $8,123 million,
respectively, for the six months ended June 30, 2000.
(3) See the Capital Adequacy/Ratios section for additional information.
15
OVERVIEW
- --------
Wells Fargo & Company is a $234 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 June 30, 2000 among U.S. bank holding companies. In this Form 10-Q,
Wells Fargo & Company together with its subsidiaries are 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.
Certain amounts in the financial review for prior quarters have been
reclassified to conform with the current financial statement presentation.
Net income for the second quarter of 2000 was $1,039 million, compared with
$931 million for the second quarter of 1999. Diluted earnings per common
share for the second quarter of 2000 were $.63, compared with $.55 for the
second quarter of 1999. Net income for the first six months of 2000 was
$2,049 million, or $1.25 per share, compared with $1,815 million, or $1.08
per share, for the first six months of 1999.
Return on average assets (ROA) was 1.89% and 1.88% in the second quarter and
first half of 2000, respectively, compared with 1.86% and 1.83% in the same
periods of 1999. Return on average common equity (ROE) was 19.04% and 18.63% in
the second quarter and first half of 2000, respectively, compared with 17.50%
and 17.42% in the same periods of 1999.
Diluted earnings before the amortization of goodwill and nonqualifying core
deposit intangible ("cash" earnings) in the second quarter and first half of
2000 were $.73 and $1.42 per share, respectively, compared with $.63 and $1.24
per share in the same periods of 1999. On the same basis, ROA was 2.26% and
2.25% in the second quarter and first half of 2000, respectively, compared with
2.23% and 2.20% in the same periods of 1999; ROE was 37.16% and 35.62% in the
second quarter and first half of 2000, respectively, compared with 33.43% and
33.89% in the same periods of 1999.
Net interest income on a taxable-equivalent basis was $2,485 million and
$4,941 million for the second quarter and first half of 2000, respectively,
compared with $2,328 million and $4,608 million for the same periods of 1999.
The Company's net interest margin was 5.55% and 5.56% for the second quarter and
first half of 2000, respectively, compared with 5.69% and 5.65% for the same
periods of 1999.
16
Noninterest income was $2,092 million and $4,002 million for the second
quarter and first half of 2000, respectively, compared with $1,814 million and
$3,541 million for the same periods of 1999.
Noninterest expense totaled $2,626 million and $5,103 million for the second
quarter and first half of 2000, respectively, compared with $2,364 million and
$4,706 million for the same periods of 1999. The efficiency ratio was 57.6% for
the second quarter of 2000, compared with 57.3% for the same quarter of 1999.
The provision for loan losses was $260 million and $515 million in the
second quarter and first half of 2000, respectively, compared with $260 million
and $530 million in the same periods of 1999. During the second quarter of 2000,
net charge-offs were $246 million, or .78% of average total loans (annualized),
compared with $261 million, or .96%, during the second quarter of 1999. The
allowance for loan losses was $3,349 million, or 2.48% of total loans, at June
30, 2000, compared with $3,170 million, or 2.65%, at December 31, 1999 and
$3,165 million, or 2.83%, at June 30, 1999.
At June 30, 2000, total nonaccrual and restructured loans were $804 million
or .6% of total loans, compared with $669 million, or .6%, at December 31, 1999
and $688 million, or .6%, at June 30, 1999. Foreclosed assets amounted to $135
million at June 30, 2000, $153 million at December 31, 1999 and $171 million at
June 30, 1999.
At June 30, 2000, the ratio of common stockholders' equity to total assets
was 9.76%, compared with 10.18% at June 30, 1999. The Company's total risk-based
capital (RBC) ratio at June 30, 2000 was 10.90% and its Tier 1 RBC ratio was
7.04%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively,
for bank holding companies. The Company's ratios at June 30, 1999 were 11.07%
and 8.45%, respectively. The Company's leverage ratio was 6.37% at June 30,
2000 and 7.05% at June 30, 1999, 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 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, which 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. In June 2000, the
FASB issued Statement No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS
AND CERTAIN HEDGING ACTIVITIES, an amendment of FASB Statement No. 133. The
Company does not expect to
17
implement FAS 133 before January 1, 2001 and has not completed the complex
analysis required to determine the impact on the financial statements.
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. 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, including pending acquisition transactions;
- - 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, 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.
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
18
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 "Quantitative and Qualitative Disclosures About
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 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.
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.
19
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 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.
20
OPERATING SEGMENT RESULTS
- -------------------------
COMMUNITY BANKING'S net income increased to $772 million in the second quarter
of 2000 from $684 million in the second quarter of 1999, an increase of 13%.
Net income increased to $1,493 million for the first six months of 2000 from
$1,306 million for the first six months of 1999, an increase of 14%. The
increase in net income was due to increases in both net interest and
noninterest income. Net interest income increased to $1,708 million in the
second quarter of 2000 from $1,620 million in the second quarter of 1999. Net
interest income increased to $3,397 million for the first six months of 2000
from $3,180 million in the first six months of 1999. The increase in net
interest income was primarily due to the continued improvement in the funding
mix based on an increase in core deposits and loan balances. The provision for
loan losses increased by $2 million and $1 million for the second quarter and
first six months of 2000, respectively, reflecting similar charge-offs on a
larger portfolio. Noninterest income for the second quarter of 2000 increased
by $285 million over the same period in 1999. The increase in noninterest
income was primarily due to higher venture capital gains, service charges on
deposit accounts, and trust and investment fees partially offset with losses
realized on the sales of securities. Noninterest expense increased by $233
million in the second quarter of 2000 over the same period in 1999. A
significant portion of this increase was from operating expenses of
acquisitions acquired over the past twelve months.
WHOLESALE BANKING'S net income was $201 million in the second quarter of 2000,
compared with $186 million in the second quarter of 1999, an increase of 8%.
Net income was $453 million for the first six months of 2000, compared with
$408 million in the first six months of 1999, an increase of 11%. Net interest
income was $414 million in the second quarter of 2000 and $340 million in the
second quarter of 1999. Net interest income increased to $830 million for the
first six months of 2000 from $678 million in the first six months of 1999. The
increase in net interest income was due to higher average loan and investment
securities balances within asset-based lending, commercial banking and capital
markets. Average outstanding loan balances grew to $40 billion in the second
quarter of 2000 from $34 billion in the second quarter of 1999. Noninterest
income increased to $282 million and $588 million in the second quarter and
first six months of 2000, respectively, from $269 million and $576 million in
the same periods of 1999. The increase for both periods was primarily due to
income from service charges, fees and commissions, and foreign exchange gains,
partially offset by lower revenue from investment securities and lower income
from loan sales. Noninterest expense increased to $326 million in the second
quarter of 2000 and $633 million for the first six months of 2000 from $274
million and $542 million for the same periods in the prior year. The increase
for the first six months of 2000 was primarily due to higher personnel costs
due to increased sales and sales staff.
WELLS FARGO HOME MORTGAGE'S (FORMERLY NORWEST MORTGAGE) net income in the
second quarter of 2000 decreased to $62 million from $67 million in the second
quarter of 1999, a decrease of 7%. Net income decreased to $129 million for the
first six months of 2000 from $133 million in the first six months of 1999, a
decrease of 3%. The decrease for both periods was principally due to a decrease
in funding activity. The servicing portfolio increased to
21
$298 billion at June 30, 2000 from $266 billion at June 30, 1999. The
weighted average coupon on loans in the servicing portfolio was 7.42% at June
30, 2000 compared with 7.30% a year earlier. Total capitalized mortgage
servicing rights amounted to $4.8 billion, or 1.63%, of the servicing
portfolio at June 30, 2000 compared with $4.1 billion, or 1.53%, at June 30,
1999. Amortization of capitalized mortgage servicing rights was $116 million
and $239 million for the second quarter and first six months of 2000,
respectively, compared with $166 million and $460 million for the same
periods of 1999. The decrease in amortization for the second quarter of 2000
was predominantly due to rising interest rates and a decrease in assumed
prepayments. Sales of mortgages resulted in net losses of $17 million for the
second quarter of 2000 and net gains of $29 million for the first six months
of 2000. This compares with net gains of $40 million and $223 million for the
quarter and six months ended June 30, 1999. The decrease for the second
quarter and first six months of 2000 was largely due to less favorable market
conditions and decreased loan sales. Fundings for the second quarter and
first six months of 2000 were $18 billion and $30 billion, respectively,
compared with $23 billion and $50 billion for the same periods of the prior
year. The decrease in the funding volume was experienced across all
origination channels. The percentage of fundings attributed to mortgage loan
refinancing was approximately 12% for the second quarter of 2000, compared
with 37% for the same period in 1999.
WELLS FARGO FINANCIAL'S (FORMERLY NORWEST FINANCIAL) net income increased to
$69 million in the second quarter of 2000 from $65 million for the same
period in 1999, an increase of 6%. Net income increased to $125 million for
the first six months of 2000 from $119 million for the same period in 1999,
an increase of 5%. Net interest income increased 6% in both the second
quarter and the first six months of 2000, as compared to the same period of
1999, substantially due to an increase in average loans.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $2,485 million in the
second quarter of 2000, compared with $2,328 million in the second quarter of
1999. The Company's net interest margin was 5.55% in the second quarter of
2000, compared with 5.69% in the second quarter of 1999. Net interest income
was $4,941 million in the first six months of 2000, compared with $4,608
million in the first six months of 1999. The Company's net interest margin
was 5.56% in the first six months of 2000, compared with 5.65% in the first
six months of 1999. The decrease in the margin from the second quarter of
1999 was primarily due to the impact of funding strong loan growth with
higher costing short-term borrowings largely offset by improved yields within
the investment securities portfolio from the restructuring that occurred
during the fourth quarter of 1999 and the first quarter of 2000.
Interest income was reduced by hedging expense of $10 million in the second
quarter of 2000, compared with hedging income of $61 million in the same
quarter of 1999. Interest expense included hedging expense of $8 million in
the second quarter of 2000, compared with hedging income of $28 million in
the same quarter of 1999.
22
Individual components of net interest income and the net interest margin are
presented in the rate/yield table on the following page.
Loans averaged $127.0 billion in the second quarter of 2000, compared with
$109.0 billion in the second quarter of 1999. For the first half of 2000, loans
averaged $124.1 billion, compared with $108.4 billion for the same period of
1999. The increase in average loans was primarily due to loan growth in the
commercial and other real estate mortgage portfolios, which increased by 17% and
21%, respectively, compared with the second quarter of 1999. In the second
quarter, the Company decided to reclassify approximately $1.6 billion of student
loans held for sale to the loan portfolio. The related impact of this
reclassification on the average balance in the consumer loan portfolio was
approximately $64 million and $32 million for the second quarter and six months
ended June 30, 2000, respectively.
Debt securities averaged $34.2 billion during the second quarter of 2000,
compared with $33.3 billion in the second quarter of 1999.
Average core deposits were $131.1 billion and $127.6 billion and funded 59%
and 64% of the Company's average total assets in the second quarter of 2000 and
1999, respectively. For the first six months of 2000 and 1999, average core
deposits were $129.3 billion and $127.8 billion, respectively, and funded 59%
and 64% of the Company's average total assets, respectively.
23
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS)(1)(2)
- ---------------------------------------------------------------------------------------------------
Quarter ended June 30,
--------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
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 $ 2,239 6.40% $ 36 $ 1,446 4.74% $ 17
Securities available for sale(3):
Securities of U.S. Treasury and
federal agencies 2,304 6.13 35 6,180 5.25 82
Securities of U.S. states and
political subdivisions 1,860 7.88 37 1,855 8.36 37
Mortgage-backed securities:
Federal agencies 23,652 7.18 433 19,261 6.59 315
Private collateralized mortgage
obligations 1,914 7.88 39 3,160 6.81 54
-------- ------ -------- ------
Total mortgage-backed
securities 25,566 7.24 472 22,421 6.62 369
Other debt securities(6) 4,469 7.22 56 2,850 7.52 43
-------- ------ -------- ------
Total debt securities
available for sale(6) 34,199 7.20 600 33,306 6.51 531
Loans held for sale(3) 5,633 8.60 121 5,618 7.22 101
Mortgages held for sale(3) 8,317 8.18 172 12,254 6.96 215
Loans:
Commercial 41,547 9.44 975 35,638 8.57 762
Real estate 1-4 family first
mortgage 14,125 7.67 270 12,075 7.65 231
Other real estate mortgage 20,460 8.88 452 16,977 8.71 368
Real estate construction 5,084 9.66 122 4,039 9.30 94
Consumer:
Real estate 1-4 family junior
lien mortgage 14,519 10.37 375 11,210 9.90 277
Credit card 5,218 14.54 190 5,337 13.61 182
Other revolving credit and
monthly payment 16,953 12.62 534 15,416 12.59 485
-------- ------ -------- ------
Total consumer 36,690 12.00 1,099 31,963 11.82 944
Lease financing 7,472 7.81 146 6,789 7.79 132
Foreign 1,622 21.22 86 1,515 21.05 80
-------- ------ -------- ------
Total loans(4) 127,000 9.96 3,150 108,996 9.60 2,611
Other 2,946 6.09 43 2,867 5.33 38
-------- ------ -------- ------
Total earning assets $180,334 9.21 4,122 $164,487 8.59 3,513
======== ------ ======== ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,144 1.76 14 $ 2,844 .79 6
Market rate and other savings 58,159 2.69 389 56,064 2.24 314
Savings certificates 24,842 5.17 319 25,926 4.72 305
Other time deposits 3,807 5.62 53 3,600 4.92 43
Deposits in foreign offices 6,436 6.16 99 1,032 4.28 11
-------- ------ -------- ------
Total interest-bearing
deposits 96,388 3.65 874 89,466 3.05 679
Short-term borrowings 23,375 6.08 353 17,496 4.61 201
Long-term debt 23,979 6.59 395 20,663 5.61 290
Guaranteed preferred beneficial
interests in Company's
subordinated debentures 785 7.77 15 785 7.52 15
-------- ------ -------- ------
Total interest-bearing
liabilities 144,527 4.55 1,637 128,410 3.70 1,185
Portion of noninterest-bearing
funding sources 35,807 -- -- 36,077 -- --
-------- ------ -------- ------
Total funding sources $180,334 3.66 1,637 $164,487 2.90 1,185
======== ------ ======== ------
NET INTEREST MARGIN AND NET
INTEREST INCOME ON A
TAXABLE-EQUIVALENT BASIS(5) 5.55% $2,485 5.69% $2,328
==== ====== ==== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 11,640 $ 11,116
Goodwill 8,314 7,657
Other 20,478 17,082
-------- --------
Total noninterest-earning
assets $ 40,432 $ 35,855
======== ========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 44,977 $ 42,729
Other liabilities 9,134 7,603
Preferred stockholders' equity 263 459
Common stockholders' equity 21,865 21,141
Noninterest-bearing funding sources
used to fund earning assets (35,807) (36,077)
-------- --------
Net noninterest-bearing
funding sources $ 40,432 $ 35,855
======== ========
TOTAL ASSETS $220,766 $200,342
======== ========
- ----------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 9.25% and 7.75% for the quarters
ended June 30, 2000 and 1999, respectively, and 8.97% and 7.75% for the six
months ended June 30, 2000 and 1999, respectively. The average three-month
London Interbank Offered Rate (LIBOR) was 6.65% and 5.07% for the quarters
ended June 30, 2000 and 1999, respectively, and 6.38% and 5.03% for the six
months ended June 30, 2000 and 1999, 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.
(4) Nonaccrual loans and related income are included in their respective loan
categories.
(5) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal and applicable
state income taxes. The federal statutory tax rate was 35% for both
quarters presented.
(6) Includes certain preferred securities.
24
- ----------------------------------------------------------------------------------------------------
Six months ended June 30,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
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 $ 2,095 5.98% $ 62 $ 1,304 4.86% $ 31
Securities available for sale(3):
Securities of U.S. Treasury and
federal agencies 3,299 5.87 101 5,452 5.41 148
Securities of U.S. states and
political subdivisions 1,843 8.00 75 1,771 8.38 70
Mortgage-backed securities:
Federal agencies 23,730 7.24 876 19,457 6.65 640
Private collateralized mortgage
obligations 2,041 7.52 79 3,234 6.78 110
-------- ------ -------- ------
Total mortgage-backed
securities 25,771 7.27 955 22,691 6.67 750
Other debt securities(6) 4,957 7.53 113 2,708 7.59 85
-------- ------ -------- ------
Total debt securities
available for sale(6) 35,870 7.19 1,244 32,622 6.61 1,053
Loans held for sale(3) 5,468 8.35 227 5,590 7.23 200
Mortgages held for sale(3) 8,602 7.86 342 13,822 6.82 473
Loans:
Commercial 40,384 9.30 1,868 35,258 8.55 1,496
Real estate 1-4 family first
mortgage 13,410 7.75 519 12,082 7.64 462
Other real estate mortgage 20,042 9.07 905 16,855 8.87 743
Real estate construction 4,964 9.52 235 3,971 9.33 184
Consumer:
Real estate 1-4 family junior
lien mortgage 13,917 10.28 714 11,092 9.89 545
Credit card 5,255 14.12 370 5,442 13.62 371
Other revolving credit and
monthly payment 16,861 12.55 1,056 15,542 12.55 973
-------- ------ -------- ------
Total consumer 36,033 11.90 2,140 32,076 11.81 1,889
Lease financing 7,648 7.75 296 6,682 7.84 261
Foreign 1,605 21.47 172 1,494 21.05 157
-------- ------ -------- ------
Total loans(4) 124,086 9.92 6,135 108,418 9.62 5,192
Other 3,142 5.84 92 2,417 5.43 66
-------- ------ -------- ------
Total earning assets $179,263 9.12 8,102 $164,173 8.61 7,015
======== ------ ======== ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,098 1.58 25 $ 2,784 .88 12
Market rate and other savings 57,527 2.61 746 55,822 2.31 639
Savings certificates 24,769 5.03 619 26,491 4.81 632
Other time deposits 3,506 5.45 95 3,657 5.02 91
Deposits in foreign offices 4,941 5.94 146 1,039 4.24 22
-------- ------ -------- ------
Total interest-bearing
deposits 93,841 3.50 1,631 89,793 3.14 1,396
Short-term borrowings 24,441 5.95 723 17,526 4.70 408
Long-term debt 23,905 6.49 777 19,780 5.80 573
Guaranteed preferred beneficial
interests in Company's
subordinated debentures 785 7.75 30 785 7.52 30
-------- ------ -------- ------
Total interest-bearing
liabilities 142,972 4.44 3,161 127,884 3.79 2,407
Portion of noninterest-bearing
funding sources 36,291 -- -- 36,289 -- --
-------- ------ -------- ------
Total funding sources $179,263 3.56 3,161 $164,173 2.96 2,407
======== ------ ======== ------
NET INTEREST MARGIN AND NET
INTEREST INCOME ON A
TAXABLE-EQUIVALENT BASIS(5) 5.56% $4,941 5.65% $4,608
==== ====== ==== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 11,769 $ 11,177
Goodwill 8,123 7,695
Other 19,457 16,492
-------- --------
Total noninterest-earning
assets $ 39,349 $ 35,364
======== ========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 43,871 $ 42,750
Other liabilities 9,483 7,627
Preferred stockholders' equity 267 461
Common stockholders' equity 22,019 20,815
Noninterest-bearing funding sources
used to fund earning assets (36,291) (36,289)
-------- --------
Net noninterest-bearing
funding sources $ 39,349 $ 35,364
======== ========
TOTAL ASSETS $218,612 $199,537
======== ========
- ----------------------------------------------------------------------------------------------------
25
NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------- % ------------------- %
(in millions) 2000 1999 Change 2000 1999 Change
- ------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 406 $ 367 11% $ 788 $ 711 11%
Trust and investment fees:
Asset management and custody fees 168 154 9 336 305 10
Mutual fund and annuity sales fees 166 134 24 328 258 27
All other 26 27 (4) 56 52 8
------ ------ ------ ------
Total trust and investment fees 360 315 14 720 615 17
Credit card fees 126 126 -- 249 258 (3)
Other fees:
Cash network fees 78 70 11 148 128 16
Charges and fees on loans 80 87 (8) 160 163 (2)
All other 134 110 22 254 214 19
------ ------ ------ ------
Total other fees 292 267 9 562 505 11
Mortgage banking:
Origination and other closing fees 88 115 (23) 149 228 (35)
Servicing fees, net of amortization 170 99 72 321 54 494
Net (losses) gains on sales of mortgages (16) 44 -- 40 244 (84)
All other 62 66 (6) 101 125 (19)
------ ------ ------ ------
Total mortgage banking 304 324 (6) 611 651 (6)
Insurance 114 119 (4) 206 204 1
Net venture capital gains 320 13 -- 1,205 126 856
Net (losses) gains on securities available for sale (39) 23 -- (641) 21 --
Income from equity investments accounted for by the:
Cost method 13 30 (57) 127 64 98
Equity method 40 20 100 78 41 90
Net gains on sales of loans 2 12 (83) 5 25 (80)
Net gains on dispositions of operations 4 103 (96) 6 102 (94)
All other 150 95 58 86 218 (61)
------ ------ ------ ------
Total $2,092 $1,814 15% $4,002 $3,541 13%
====== ====== ==== ====== ====== ====
- -------------------------------------------------------------------------------------------------------------------------------
The increase in service charges on deposits was due to an overall increase
in deposits compared with June 30, 1999.
The increase in mutual fund fees for the second quarter of 2000 was due to
the overall growth in mutual fund assets. The Company managed mutual funds with
$62.3 billion of assets at June 30, 2000, compared with $55.0 billion at
June 30, 1999. The Company also managed or maintained personal trust, employee
benefit trust and agency assets of approximately $460 billion and $408 billion
at June 30, 2000 and 1999, respectively.
The decrease in mortgage banking was due to a decrease in loan origination
fees along with net losses on sales of mortgages, predominantly offset by higher
net servicing revenue as a result of lower amortization of mortgage servicing
rights. The decrease in amortization was predominantly due to rising interest
rates, which decreased the prepayment speeds in the servicing portfolio.
26
The increase in net venture capital gains during the second quarter and
first half of 2000 was due to gains on various venture capital securities,
including a $560 million gain that was recognized during the first quarter on
the Company's investment in Siara Systems. Gains from 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 during the first six months of
2000 were predominantly due to the restructuring of the portfolio during the
first quarter.
Net gains from dispositions of operations decreased in the second quarter
and first six months of 2000 compared with the same periods of 1999 due to
divestitures of stores in Arizona and Nevada during the second quarter of 1999.
27
NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------- % ------------------- %
(in millions) 2000 1999 Change 2000 1999 Change
- ------------------------------------------------------------------------------------------------------------------------------
Salaries $ 838 $ 750 12% $1,656 $1,475 12%
Incentive compensation 156 135 16 289 269 7
Employee benefits 225 217 4 457 416 10
Equipment 189 182 4 382 373 2
Net occupancy 219 185 18 444 371 20
Goodwill 124 104 19 237 208 14
Core deposit intangible:
Nonqualifying(1) 42 45 (7) 84 92 (9)
Qualifying 3 5 (40) 7 10 (30)
Net gains on dispositions of premises and equipment (16) (13) 23 (49) (11) 345
Contract services 120 110 9 228 200 14
Outside professional services 87 88 (1) 174 160 9
Outside data processing 71 62 15 142 138 3
Telecommunications 73 64 14 135 125 8
Travel and entertainment 68 60 13 122 115 6
Advertising and promotion 71 56 27 129 106 22
Postage 61 58 5 117 115 2
Stationery and supplies 53 39 36 99 77 29
Insurance 55 50 10 97 86 13
Operating losses 29 37 (22) 65 66 (2)
Security 23 21 10 44 43 2
All other 135 109 24 244 272 (10)
------ ------ ------ ------
Total $2,626 $2,364 11% $5,103 $4,706 8%
====== ====== ==== ====== ====== ====
- --------------------------------------------------------------------------------------------------------------------------------
(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 increase in salaries and incentive compensation was due to an increase in
active full-time equivalent (FTE) staff. The Company's FTE staff was 94,388 at
June 30, 2000, compared with 90,410 at June 30, 1999.
INCOME TAXES
The Company's effective income tax rate was 38% for the second quarter of
2000 and 1999. The effective tax rate for the first six months of 2000 was 38%,
compared with 37% for the same period of 1999. The lower effective rate for the
first six months of 1999 was due to a reduction of state income tax and a higher
level of charitable donations of appreciated securities.
28
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
The following table reconciles reported earnings to net income excluding
goodwill and nonqualifying core deposit intangible amortization ("cash"
earnings) for the quarter ended June 30, 2000.
- ------------------------------------------------------------------------------------------------------------
Quarter ended
June 30, 2000
- ------------------------------------------------------------------------------------------------------------
Amortization
-----------------------
Nonqualifying
Reported core deposit "Cash"
(in millions, except per share amounts) Earnings Goodwill intangible earnings
- ------------------------------------------------------------------------------------------------------------
Income before income tax expense $1,676 $124 $42 $1,842
Income tax expense 637 -- 16 653
------ ---- --- ------
Net income 1,039 124 26 1,189
Preferred stock dividends 4 -- -- 4
------ ---- --- ------
Net income applicable to common stock $1,035 $124 $26 $1,185
====== ==== === ======
Earnings per common share $ .64 $ .73
====== ======
Diluted earnings per common share $ .63 $ .73
====== ======
- ------------------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and related balances for the quarter ended June
30, 2000 were calculated as follows:
- ---------------------------------------------------------------------------
Quarter ended
(in millions) June 30, 2000
- ---------------------------------------------------------------------------
ROA: A/(C-E-F) = 2.26%
ROE: B/(D-E-G) = 37.16%
Efficiency: (H-I)/J = 53.9%
Net income $ 1,189(A)
Net income applicable to common stock 1,185(B)
Average total assets 220,766(C)
Average common stockholders' equity 21,865(D)
Average goodwill 8,314(E)
Average pretax nonqualifying core deposit intangible 1,176(F)
Average after-tax nonqualifying core deposit intangible 729(G)
Noninterest expense 2,626(H)
Amortization expense for goodwill and nonqualifying core
deposit intangible 166(I)
Net interest income plus noninterest income 4,562(J)
- ---------------------------------------------------------------------------
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 for other information regarding funds
available for use by management.
29
BALANCE SHEET ANALYSIS
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 the periods presented.
- ------------------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
2000 1999 1999
-------------------- ----------------------- -----------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- ------------------------------------------------------------------------------------------------------------------------------
Securities of U.S. Treasury and federal
agencies $ 2,276 $ 2,267 $ 5,956 $ 5,631 $ 5,934 $ 5,619
Securities of U.S. states and political
subdivisions 2,153 2,109 2,041 2,061 2,041 2,105
Mortgage-backed securities:
Federal agencies 21,323 21,085 22,774 22,547 22,078 21,858
Private collateralized mortgage
obligations(1) 2,243 2,196 2,855 2,804 3,142 3,085
------- ------- ------- ------- ------- -------
Total mortgage-backed securities 23,566 23,281 25,629 25,351 25,220 24,943
Other 2,666 2,619 2,289 2,204 2,014 1,953
------- ------- ------- ------- ------- -------
Total debt securities 30,661 30,276 35,915 35,247 35,209 34,620
Marketable equity securities 2,328 4,328 1,314 3,271 433 1,090
------- ------- ------- ------- ------- -------
Total $32,989 $34,604 $37,229 $38,518 $35,642 $35,710
======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated
bonds collateralized by 1-4 family residential first mortgages.
The following table provides the components of the estimated unrealized net
gain on securities available for sale. The estimated unrealized net gain on
securities available for sale is reported on an after-tax basis as a component
of cumulative other comprehensive income.
- ------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2000 1999 1999
- ------------------------------------------------------------------------------------------------
Estimated unrealized gross gains $2,147 $2,174 $1,037
Estimated unrealized gross losses (532) (885) (969)
------ ------ ------
Estimated unrealized net gain $1,615 $1,289 $ 68
====== ====== ======
- ------------------------------------------------------------------------------------------------
30
The following table provides the components of the realized net loss on the
sales of 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.)
- -----------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
--------------- ----------------
(in millions) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------
Realized gross gains $ 23 $30 $ 37 $45
Realized gross losses (62) (7) (678) (24)
---- --- ----- ---
Realized net (losses) gains $(39) $23 $(641) $21
==== === ===== ===
- -----------------------------------------------------------------------------------------------------
The weighted average expected remaining maturity of the debt securities
portion of the securities available for sale portfolio was 7 years and 5 months
at June 30, 2000. Expected remaining maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties.
At June 30, 2000, mortgage-backed securities, including collateralized
mortgage obligations, were $23.3 billion, or 67.3% 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 $23.3 billion to $20.6 billion and the
expected remaining maturity of these securities would increase from 8 years to 8
years and 8 months.
31
LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
% Change
June 30, 2000 from
--------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 2000 1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
Commercial(1) $ 43,381 $ 38,688 $ 36,633 12% 18%
Real estate 1-4 family first mortgage 17,233 12,398 11,941 39 44
Other real estate mortgage(2) 20,524 19,178 17,157 7 20
Real estate construction 5,417 4,711 4,103 15 32
Consumer:
Real estate 1-4 family junior lien mortgage 15,127 12,938 11,494 17 32
Credit card 5,733 5,472 5,294 5 8
Other revolving credit and monthly payment 18,617 16,656 16,652 12 12
-------- -------- --------
Total consumer 39,477 35,066 33,440 13 18
Lease financing 7,391 7,850 6,875 (6) 8
Foreign 1,623 1,573 1,497 3 8
-------- -------- --------
Total loans (net of unearned income, including net
deferred loan fees, of $3,151, $3,200 and $2,974) $135,046 $119,464 $111,646 13% 21%
======== ======== ======== == ==
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes agricultural loans (loans to finance agricultural production and
other loans to farmers) of $3,334 million, $3,103 million and
$2,839 million at June 30, 2000, December 31, 1999 and June 30, 1999,
respectively.
(2) Includes agricultural loans that are secured by real estate of $1,237
million, $1,061 million and $984 million at June 30, 2000, December 31, 1999
and June 30, 1999, respectively.
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS(1)
- -----------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial(2) $462 $344 $338
Real estate 1-4 family first mortgage 107 127 147
Other real estate mortgage(3) 125 112 124
Real estate construction 17 7 11
Consumer:
Real estate 1-4 family junior lien mortgage 11 17 17
Other revolving credit and monthly payment 22 27 23
---- ---- ----
Total consumer 33 44 40
Lease financing 46 22 21
Foreign 11 9 6
---- ---- ----
Total nonaccrual loans(4) 801 665 687
Restructured loans 3 4 1
---- ---- ----
Nonaccrual and restructured loans 804 669 688
As a percentage of total loans .6% .6% .6%
Foreclosed assets 135 153 171
Real estate investments(5) 32 33 --
---- ---- ----
Total nonaccrual and restructured loans and other assets $971 $855 $859
==== ==== ====
- -----------------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to
interest or principal, but are both well-secured and in the process of
collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as
nonaccrual.
(2) Includes commercial agricultural loans of $25 million, $40 million and
$43 million at June 30, 2000, December 31, 1999 and June 30, 1999,
respectively.
(3) Includes agricultural loans secured by real estate of $14 million,
$16 million and $16 million at June 30, 2000, December 31, 1999 and
June 30, 1999, respectively.
(4) Of the total nonaccrual loans, $384 million, $358 million and $368 million
at June 30, 2000, December 31, 1999 and June 30, 1999, respectively, were
considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN.
(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 $79 million,
$89 million and $133 million at June 30, 2000, December 31, 1999 and
June 30, 1999, respectively.
32
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.
33
In accordance with FAS 114, the table below shows the recorded investment in
impaired loans and the related methodology used to measure impairment for the
periods presented:
- -----------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------
Impairment measurement based on:
Collateral value method $163 $174 $200
Discounted cash flow method 104 74 63
Historical loss factors 120 114 106
---- ---- ----
Total(1) $387 $362 $369
==== ==== ====
- -----------------------------------------------------------------------------------------------
(1) Includes $197 million, $196 million and $169 million of impaired loans with
a related FAS 114 allowance of $69 million, $43 million and $54 million at
June 30, 2000, December 31, 1999 and June 30, 1999, respectively.
The average recorded investment in impaired loans was $398 million and $369
million during the second quarter of 2000 and 1999, respectively, and
$382 million and $373 million during the first six months of 2000 and 1999,
respectively. Total interest income recognized on impaired loans was $1 million
and $2 million during the second quarter of 2000 and 1999, respectively, and
$3 million and $4 million during the first six months of 2000 and 1999,
respectively, a majority of which was 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.
The Company anticipates changes in the amount of nonaccrual loans that
result from increases in lending activity and reductions due to 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 may acquire loans from other financial
institutions that may be classified as nonaccrual based on the Company's
policies.
34
Loans 90 Days Or More Past Due And Still Accruing
- -------------------------------------------------
The following table shows loans contractually past due 90 days or more as to
interest or principal, but not included in the nonaccrual or restructured
categories. All loans in this category are both well-secured and in the process
of collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as
nonaccrual. Notwithstanding, real estate 1-4 family loans (first liens and
junior liens) are placed on nonaccrual within 120 days of becoming past due and
such nonaccrual loans are excluded from the following table.
- -----------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------
Commercial $ 58 $ 24 $ 34
Real estate 1-4 family first mortgage 28 39 46
Other real estate mortgage 10 15 25
Real estate construction 5 4 4
Consumer:
Real estate 1-4 family junior lien mortgage 33 35 33
Credit card 96 99 103
Other revolving credit and monthly payment 203 185 159
---- ---- ----
Total consumer 332 319 295
---- ---- ----
Total $433 $401 $404
==== ==== ====
- -----------------------------------------------------------------------------------------------
35
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------
Quarter Six months
Ended June 30, ended June 30,
--------------------- ---------------------
(in millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $3,237 $3,161 $3,170 $3,134
Allowances related to business combinations, net 98 5 164 35
Provision for loan losses 260 260 515 530
Loan charge-offs:
Commercial (89) (111) (190) (192)
Real estate 1-4 family first mortgage -- (6) (6) (7)
Other real estate mortgage (13) (4) (16) (12)
Real estate construction (3) (1) (4) (1)
Consumer:
Real estate 1-4 family junior lien mortgage (6) (6) (17) (15)
Credit card (84) (96) (166) (206)
Other revolving credit and monthly payment (120) (109) (251) (236)
------ ------ ------ ------
Total consumer (210) (211) (434) (457)
Lease financing (9) (10) (22) (21)
Foreign (21) (36) (45) (51)
------ ------ ------ ------
Total loan charge-offs (345) (379) (717) (741)
------ ------ ------ ------
Loan recoveries:
Commercial 19 23 51 36
Real estate 1-4 family first mortgage 1 2 2 3
Other real estate mortgage 4 12 7 29
Real estate construction 1 4 2 4
Consumer:
Real estate 1-4 family junior lien mortgage 4 4 8 7
Credit card 9 13 18 26
Other revolving credit and monthly payment 54 53 103 89
------ ------ ------ ------
Total consumer 67 70 129 122
Lease financing 3 3 6 6
Foreign 4 4 20 7
------ ------ ------ ------
Total loan recoveries 99 118 217 207
------ ------ ------ ------
Total net loan charge-offs (246) (261) (500) (534)
------ ------ ------ ------
BALANCE, END OF PERIOD $3,349 $3,165 $3,349 $3,165
====== ====== ====== ======
Total net loan charge-offs as a percentage of average total
loans (annualized) .78% .96% .81% .99%
====== ====== ====== ======
Allowance as a percentage of total loans 2.48% 2.83% 2.48% 2.83%
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------
The Company considers the allowance for loan losses of $3,349 million
adequate to cover losses inherent in loans, loan commitments and standby and
other letters of credit at June 30, 2000. The Company's determination of the
level of the allowance for loan losses rests
36
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.
INTEREST RECEIVABLE AND OTHER ASSETS
- --------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 2000 1999 1999
- --------------------------------------------------------------------------------------------------------
Nonmarketable equity investments $ 3,592 $ 3,347 $ 2,568
Trading assets 4,976 2,667 2,441
Government National Mortgage Association (GNMA) pool buy
outs 1,600 1,516 1,957
Interest receivable 1,231 1,169 1,150
Certain identifiable intangible assets 226 230 241
Interest-earning deposits 99 196 80
Foreclosed assets 135 153 203
Due from customers on acceptances 108 103 122
Other 8,218 5,967 5,970
------- ------- -------
Total interest receivable and other assets $20,185 $15,348 $14,732
======= ======= =======
- --------------------------------------------------------------------------------------------------------
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, U.S. Treasury securities and U.S. government agency obligations. Interest
income from trading assets was $23 million and $19 million in the second quarter
of 2000 and 1999, respectively, and $45 million and $30 million in the first
half of 2000 and 1999, respectively. Noninterest income from trading assets was
$65 million and $27 million in the second quarter of 2000 and 1999,
respectively, and $113 million and $65 million in the first half of 2000 and
1999, respectively.
Amortization expense for certain identifiable intangible assets included in
other assets was $10 million and $11 million in the second quarter of 2000 and
1999, respectively.
A significant portion of the change in "other" was due to an increase in broker
receivables related to sales of investment securities near the end of the
second quarter of 2000.
37
DEPOSITS
- -----------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 47,979 $ 42,916 $ 43,708
Interest-bearing checking 2,988 3,083 2,886
Market rate and other savings 57,855 55,791 55,144
Savings certificates 25,447 24,408 25,564
-------- -------- --------
Core deposits 134,269 126,198 127,302
Other time deposits 4,270 3,255 3,335
Deposits in foreign offices 7,909 3,255 1,905
-------- -------- --------
Total deposits $146,448 $132,708 $132,542
======== ======== ========
- -----------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS
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. Risk-based capital
(RBC) guidelines establish a risk-adjusted ratio relating capital to different
categories of assets and off-balance sheet exposures.
- ---------------------------------------------------------------------------------------------------
To be well
capitalized under
the FDICIA
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- ----------------- ------------------
(in billions) Amount Ratio Amount Ratio Amount Ratio
- ------------- -------- -------- ------ ------ ------ -------
As of June 30, 2000:
Total capital (to
risk-weighted assets)
Wells Fargo & Company $20.7 10.90% >$15.2 > 8.00%
- -
Norwest Bank Minnesota,
N.A. 2.5 10.46 > 1.9 > 8.00 > $2.4 > 10.00%
- - - -
Wells Fargo Bank, N.A. 11.3 12.82 > 7.1 > 8.00 > 8.8 > 10.00
- - - -
Tier 1 capital (to
risk-weighted assets)
Wells Fargo & Company $13.4 7.04% >$ 7.6 > 4.00%
- -
Norwest Bank Minnesota,
N.A. 2.3 9.63 > .9 > 4.00 > $1.4 > 6.00%
- - - -
Wells Fargo Bank, N.A. 6.8 7.71 > 3.5 > 4.00 > 5.3 > 6.00
- - - -
Tier 1 capital (to average
assets)
(Leverage ratio)
Wells Fargo & Company $13.4 6.37% >$ 8.4 > 4.00%(1)
- -
Norwest Bank Minnesota,
N.A. 2.3 5.36 > 1.7 > 4.00(1) > $2.1 > 5.00%
- - - -
Wells Fargo Bank, N.A. 6.8 7.39 > 3.7 > 4.00(1) > 4.6 > 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.
38
DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the aggregate notional or contractual
amounts, credit risk amount and net fair value of the Company's derivative
financial instruments at June 30, 2000 and December 31, 1999.
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2000 December 31, 1999
--------------------------------------------- ---------------------------------------------
NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated
CONTRACTUAL RISK NET FAIR contractual risk net fair
(in millions) AMOUNT AMOUNT(3) VALUE amount amount(3) value
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
HEDGES
Interest rate contracts:
Swaps(1) $28,921 $35 $(327) $31,570 $93 $(243)
Futures 37,534 -- -- 50,725 -- --
Floors and caps(1) 19,145 60 60 41,142 110 110
Options(1)(2) 11,944 26 37 11,940 22 43
Forwards(1) 25,811 72 (74) 22,528 108 43
Foreign exchange contracts:
Forwards(1) 102 1 -- 138 1 --
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Swaps(1) 33,572 183 (100) 21,702 158 (10)
Futures 11,765 -- -- 22,839 -- --
Floors and caps purchased(1) 10,931 74 74 6,130 51 51
Floors and caps written 11,641 -- (76) 5,804 -- (53)
Options purchased(1) 200 8 8 741 30 30
Options written -- -- -- 1,101 -- (51)
Forwards(1) 60 3 1 164 6 1
Commodity contracts:
Swaps(1) 95 29 1 116 10 --
Floors and caps purchased(1) 76 7 7 30 2 2
Floors and caps written 81 -- (10) 30 -- (2)
Foreign exchange contracts:
Forwards(1) 5,461 70 32 4,234 62 28
Options purchased(1) 63 1 1 41 -- --
Options written 3 -- -- 42 -- (1)
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these or the underlying financial instruments.
(2) A majority of purchased option contracts were options on
futures contracts, which are exchange traded and 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.
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.
39
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.
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.
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 and private placements.
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 $6.5 billion in
debt securities as of June 30, 2000. 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, Wells Fargo Financial, Inc. (WFFI) (formerly Norwest
Financial, Inc.) filed a shelf registration statement with the SEC, under which
WFFI may issue up to $2 billion in senior or subordinated debt securities. As of
June 30, 2000, WFFI had issued a total of $1.4 billion in debt securities under
that registration statement. Also in 1999, a subsidiary of WFFI filed a shelf
registration statement with the Canadian provincial securities authorities for
the
40
issuance of up to $1 billion (Canadian) in debt securities, and had issued
$515 million (Canadian) in debt securities from that registration statement as
of June 30, 2000.
Effective April 18, 2000, WFFI filed another shelf registration statement
with the SEC, under which WFFI may issue up to $3 billion in senior debt
securities. As of June 30, 2000, $300 million in debt securities had been
issued. An additional $300 million was issued from this shelf registration
statement on July 14, 2000.
In June 2000, Wells Fargo Bank, N.A. issued a total of $1.75 billion in
subordinated notes. These issuances were completed as private placements and are
not registered with the SEC.
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. As of June 30, 2000, the total
remaining common stock purchase authority was approximately 75 million shares.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk. 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. At June 30, 2000, 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 is projected to result
in a decrease in net income of $59 million. In the simulation that was run at
42
December 31, 1999, 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 $38 million.
The Company uses interest rate derivative financial instruments as
asset/liability management tools to hedge mismatches in interest rate exposures
indicated by the net interest income simulation described above. They are used
to reduce the Company's exposure to interest rate fluctuations and provide more
stable spreads between loan yields and the rates on their funding sources. 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.
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.
43
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3(b) to the Company's Current Report on
Form 8-K dated June 28, 1993. Certificates of Amendment of
Certificate of Incorporation, incorporated by reference to
Exhibit 3 to the Company's Current Report on Form 8-K
dated July 3, 1995 (authorizing preference stock), and
Exhibits 3(b) and 3(c) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (changing
the Company's name and increasing authorized common and
preferred stock, respectively)
(b) Certificate of Change of Location of Registered Office and
Change of Registered Agent, incorporated by reference to
Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999
(c) Certificate of Designations for the Company's ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994
(d) Certificate of Designations for the Company's 1995 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995
(e) Certificate Eliminating the Certificate of Designations for
the Company's Cumulative Convertible Preferred Stock, Series
B, incorporated by reference to Exhibit 3(a) to the
Company's Current Report on Form 8-K dated November 1, 1995
(f) Certificate Eliminating the Certificate of Designations for
the Company's 10.24% Cumulative Preferred Stock,
incorporated by reference to Exhibit 3 to the Company's
Current Report on Form 8-K dated February 20, 1996
(g) Certificate of Designations for the Company's 1996 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated February 26, 1996
(h) Certificate of Designations for the Company's 1997 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated April 14, 1997
(i) Certificate of Designations for the Company's 1998 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated April 20, 1998
44
3(j) Certificate of Designations for the Company's Adjustable
Cumulative Preferred Stock, Series B, incorporated by
reference to Exhibit 3(j) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998
(k) Certificate of Designations for the Company's
Fixed/Adjustable Rate Noncumulative Preferred Stock, Series
H, incorporated by reference to Exhibit 3(k) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998
(l) Certificate of Designations for the Company's Series C
Junior Participating Preferred Stock, incorporated by
reference to Exhibit 3(l) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
(m) Certificate Eliminating the Certificate of Designations for
the Company's Series A Junior Participating Preferred Stock,
incorporated by reference to Exhibit 3(a) to the Company's
Current Report on Form 8-K dated April 21, 1999
(n) Certificate of Designations for the Company's 1999 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3(b) to the Company's Current Report on
Form 8-K dated April 21, 1999
(o) Certificate of Designations for the Company's 2000 ESOP
Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 3(o) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
(p) By-Laws, incorporated by reference to Exhibit 3(m) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998
4(a) See Exhibits 3(a) through 3(p)
(b) Rights Agreement, dated as of October 21, 1998, between the
Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form 8-A dated
October 21, 1998
(c) The Company agrees to furnish upon request to the Commission
a copy of each instrument defining the rights of holders of
senior and subordinated debt of the Company.
27 Financial Data Schedule
45
99(a) Computation of Ratios of Earnings to Fixed Charges -- the
ratios of earnings to fixed charges, including interest on
deposits, were 2.00 and 2.23 for the quarters ended June 30,
2000 and 1999, respectively, and 2.02 and 2.17 for the six
months ended June 30, 2000 and 1999, respectively. The
ratios of earnings to fixed charges, excluding interest on
deposits, were 3.10 and 3.80 for the quarters ended June 30,
2000 and 1999, respectively, and 3.07 and 3.69 for the six
months ended June 30, 2000 and 1999, respectively.
(b) Computation of Ratios of Earnings to Fixed Charges and
Preferred Dividends -- the ratios of earnings to fixed
charges and preferred dividends, including interest on
deposits, were 1.99 and 2.21 for the quarters ended June 30,
2000 and 1999, respectively, and 2.01 and 2.14 for the six
months ended June 30, 2000 and 1999, respectively. The
ratios of earnings to fixed charges and preferred dividends,
excluding interest on deposits, were 3.08 and 3.69 for the
quarters ended June 30, 2000 and 1999, respectively, and
3.04 and 3.60 for the six months ended June 30, 2000 and
1999, respectively.
(b) The Company filed the following reports on Form 8-K during the second
quarter of 2000:
(1) April 18, 2000 under Item 5, containing the Company's financial
results for the quarter ended March 31, 2000
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 11, 2000.
WELLS FARGO & COMPANY
By: LES L. QUOCK
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Les L. Quock
Senior Vice President and Controller
(Principal Accounting Officer)
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