Exhibit 99(a)
SUPPLEMENTAL ANNUAL REPORT
TABLE OF CONTENTS
FINANCIAL REVIEW
Overview.............................................................................................. 1
Factors that May Affect Future Results................................................................ 3
Operating Segment Results............................................................................. 7
Earnings Performance.................................................................................. 8
Net Interest Income................................................................................ 8
Noninterest Income................................................................................. 8
Noninterest Expense................................................................................ 12
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI........................................... 12
Balance Sheet Analysis................................................................................ 14
Securities Available for Sale...................................................................... 14
(table on page 48)
Loan Portfolio..................................................................................... 16
(table on page 50)
Nonaccrual and Restructured Loans and Other Assets................................................. 17
Allowance for Loan Losses.......................................................................... 20
Deposits........................................................................................... 24
Market Risk........................................................................................ 25
Derivative Financial Instruments................................................................... 27
Liquidity and Capital Management................................................................... 28
Comparison of 1998 to 1997............................................................................ 29
Additional Information................................................................................ 29
SUPPLEMENTAL FINANCIAL STATEMENTS
Consolidated Statement of Income...................................................................... 31
Consolidated Balance Sheet............................................................................ 32
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income.................... 33
Consolidated Statement of Cash Flows.................................................................. 34
Notes to Financial Statements......................................................................... 35
INDEPENDENT AUDITORS' REPORT................................................................................... 101
QUARTERLY FINANCIAL DATA....................................................................................... 102
FINANCIAL REVIEW
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OVERVIEW
Wells Fargo & Company is a $241 billion financial services company providing
banking, mortgage and consumer finance through about 5,600 stores, the
Internet and other distribution channels throughout North America, including
all 50 states, and elsewhere internationally. It ranks seventh in assets at
December 31, 1999 among U.S. bank holding companies. In this Supplemental
Annual Report, Wells Fargo & Company and Subsidiaries is referred to as the
Company and Wells Fargo & Company alone is referred to as the Parent.
On October 25, 2000, the merger involving the Company and First Security
Corporation (FSCO Merger) was completed, with First Security Corporation
(First Security) surviving as a wholly-owned subsidiary of the Company. The
FSCO Merger was accounted for under the pooling of interests method of
accounting and, accordingly, the information included in the financial review
presents the financial results as if the FSCO Merger had been in effect for
all periods presented.
On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo
& Company (WFC 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 WFC Merger is referred to as the former
Norwest. The WFC Merger was accounted for under the pooling of interests
method of accounting and, accordingly, the information included in the
financial review presents the combined results as if the WFC Merger had been
in effect for all periods presented.
Certain amounts in the financial review for prior years have been
reclassified to conform with the current financial statement presentation.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (FAS 133), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In July 1999, the FASB issued
Statement No. 137, DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133,
that deferred the effective date of FAS 133 to no later than January 1, 2001
for the Company's financial statements. FAS 133 requires companies to record
derivatives on the balance sheet at fair value. Changes in the fair values of
those derivatives would be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value of assets or liabilities or cash flows from forecasted transactions.
The Company does not expect to implement FAS 133 before January 1, 2001 and
is in the process of completing the complex analysis required to determine
the impact on the financial statements.
1
Table 1
RATIOS AND PER COMMON SHARE DATA
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------
($ in millions, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS
Net income to average total assets (ROA) 1.78% 1.06% 1.37%
Net income applicable to common stock
to average common stockholders' equity (ROE) 17.55 10.26 13.10
Net income to average stockholders' equity 17.35 10.20 12.96
EFFICIENCY RATIO (1) 58.8% 68.2% 62.6%
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE (CDI) AMORTIZATION AND BALANCES
("CASH") (2)
Net income applicable to common stock $4,551 $2,716 $3,250
Earnings per common share 2.66 1.61 1.91
Diluted earnings per common share 2.62 1.59 1.88
ROA 2.13% 1.39% 1.74%
ROE 32.85 21.90 28.43
Efficiency ratio 55.2 64.3 58.2
CAPITAL RATIOS
At year end:
Common stockholders' equity to assets 9.79% 9.76% 10.16%
Stockholders' equity to assets 9.90 9.96 10.38
Risk-based capital (3)
Tier 1 capital 8.00 7.99 8.34
Total capital 10.93 10.78 11.37
Leverage (3) 6.76 6.58 6.81
Average balances:
Common stockholders' equity to assets 10.07 10.12 10.28
Stockholders' equity to assets 10.27 10.35 10.56
PER COMMON SHARE DATA
Dividend payout (4) 33.83% 54.81% 39.15%
Book value $13.91 $12.79 $12.28
Market prices (5):
High $49.94 $43.88 $39.50
Low 32.13 27.50 21.38
Year end 40.44 39.94 38.75
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(1) The efficiency ratio is defined as noninterest expense divided by total
revenue (net interest income and noninterest income).
(2) Nonqualifying core deposit intangible (acquired after regulatory rule
changes in 1992) amortization and average balance excluded from these
calculations are, with the exception of the efficiency and ROA ratios, net
of applicable taxes. The pretax amount for the average balance of
nonqualifying CDI was $1,333 million for the year ended December 31, 1999.
The after-tax amounts for the amortization and average balance of
nonqualifying CDI were $115 million and $826 million, respectively, for the
year ended December 31, 1999. Goodwill amortization and average balance
(which are not tax effected) were $459 million and $7,983 million,
respectively, for the year ended December 31, 1999. See page 13 for
additional information.
(3) See Note 22 to Financial Statements for additional information.
(4) Dividends declared per common share as a percentage of earnings per common
share.
(5) Based on daily prices reported on the New York Stock Exchange Composite
Transaction Reporting System.
2
Table 2
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
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% CHANGE
(in millions, 1999/
except per share amounts) 1999 1998 1997 1996 1995 1998
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 10,116 $ 9,673 $ 9,258 $ 8,776 $ 6,427 5%
Provision for loan losses 1,104 1,617 1,203 541 335 (32)
Noninterest income 7,975 6,920 6,046 5,075 3,450 15
Noninterest expense 10,637 11,311 9,580 9,256 6,143 (6)
Net income 4,012 2,191 2,712 2,411 2,114 83
Earnings per common share $ 2.32 $ 1.28 $ 1.57 $ 1.44 $ 1.68 81
Diluted earnings
per common share 2.29 1.26 1.55 1.42 1.64 82
Dividends declared
per common share .785 .70 .615 .525 .45 12
BALANCE SHEET
(at year end)
Securities available for sale $ 43,911 $ 36,660 $ 32,151 $ 33,077 $ 26,897 20%
Loans 133,004 119,662 116,435 115,119 79,126 11
Allowance for loan losses 3,344 3,307 3,220 3,202 2,846 1
Goodwill 8,046 7,889 8,237 8,307 1,365 2
Assets 241,053 224,135 203,819 204,075 135,716 8
Core deposits 138,247 144,179 133,051 137,409 85,801 (4)
Long-term debt 26,866 22,662 18,820 18,936 17,447 19
Guaranteed preferred beneficial
interests in Company's
subordinated debentures 935 935 1,449 1,300 -- --
Common stockholders' equity 23,600 21,869 20,700 20,466 9,518 8
Stockholders' equity 23,871 22,332 21,164 21,256 10,310 7
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FACTORS THAT MAY AFFECT FUTURE RESULTS
This Supplemental Annual Report (including information incorporated by
reference in this Supplemental Annual Report) and other documents filed by
the Company with the Securities and Exchange Commission (SEC) have
forward-looking statements. In addition, the Company's senior management may
make forward-looking statements orally to analysts, investors, the media and
others. Those forward-looking statements might include one or more of the
following:
- - Projections of revenues, income, earnings per share, capital expenditures,
dividends, capital structure or other financial items;
- - Descriptions of plans or objectives of management for future operations,
products or services;
3
- - 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 for the year ended December 31, 1999 filed with the SEC.
That Annual Report on Form 10-K is incorporated by reference into this
document. 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 include short-term and long-term interest rates,
inflation, monetary supply, fluctuations in both debt and equity capital
markets, and the strength of the U.S. economy, in general, and the local
economies in which the Company conducts business. Should any of these
conditions worsen in the United States or abroad, the Company's business and
earnings could be adversely affected. For example, an economic downturn or
higher interest rates could decrease the demand for loans and other products
and services offered by the Company and/or increase the number of customers
and counterparties who become delinquent or who default on their loans or
other obligations to the Company. An increase in the number of delinquencies
or defaults would result in a higher level of charge-offs and a higher level
of loan loss provision, which could adversely affect the Company's earnings.
Higher interest rates would also increase the Company's cost to borrow funds
and may increase the rate paid on deposits, which could more than offset, in
the net interest margin, the increase in rates earned by the Company on new
or floating rate loans or short-term investments. See "Market Risk" for more
information on interest rate risk.
4
COMPETITION. The Company operates in a highly competitive environment both in
terms of the products and services the Company offers and the geographic
markets in which the Company conducts business. The Company expects this
environment to become even more competitive in the future as a result of
legislative, regulatory and technological changes and the continued trend of
consolidation in the financial services industry. Technological advances, for
example, have lowered barriers to entry and made it possible for
non-depository institutions to offer products and services that traditionally
have been provided by banks, such as automatic transfer and automatic payment
systems. Also, investment banks and insurance companies are competing in an
increasing number of traditional banking businesses such as syndicated
lending and consumer banking. Many of the Company's competitors enjoy the
benefits of advanced technology, fewer regulatory constraints and lower cost
structures.
The financial services industry is likely to become even more competitive as
technological advances enable more companies to provide financial services.
The Company expects that the consolidation of the financial services industry
will result in larger, better capitalized companies offering a wide array of
financial services and products. Furthermore, recent legislative changes (see
"Legislation" below) will increase competition in the financial services
industry.
FISCAL AND MONETARY POLICIES. The Company's business and earnings are
affected significantly by the fiscal and monetary policies of the federal
government and its agencies. The Company is particularly affected by the
policies of the Federal Reserve Board, which regulates the supply of money
and credit in the United States. The Federal Reserve Board's policies
directly and indirectly influence the rate of interest that commercial banks
pay on their interest-bearing deposits and can also affect the value of
financial instruments held by the Company. Those policies also determine to a
significant extent the cost to the Company of funds for lending and
investing. Changes in those policies are beyond the Company's control and
hard to predict. Federal Reserve Board policies can also affect the Company's
customers and counterparties, potentially increasing the risk that such
customers and counterparties may become delinquent or default on their
obligations to the Company.
DISINTERMEDIATION. "Disintermediation" is the process of eliminating the role
of the mediator (or middleman) in completing a transaction. For the financial
services industry, this means eliminating or significantly reducing the role
of banks and other depository institutions in completing transactions that
have traditionally involved banks at one end or both ends of the transaction.
For example, technological advances now allow parties to pay bills and
transfer funds directly without the involvement of banks. Important
consequences of this disintermediation include the loss of customer deposits
(and the income generated from those deposits) and decreases in transactions
that generate fee income.
LEGISLATION. The Gramm-Leach-Bliley Act (the Act) permits, effective March
2000, affiliation among banks, securities firms and insurance companies by
creating a new type of financial services company called a "financial holding
company". Financial holding companies may offer virtually any type of
financial service, including banking, securities underwriting,
5
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 WFC Merger could adversely impact the Company's
business and earnings and in particular reduce the expected benefits of the
WFC Merger to the Company. These factors include the following:
- - expected cost savings and/or potential revenue enhancements from the WFC
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 WFC Merger might be greater than expected; and
- - costs or difficulties related to the integration of the businesses of the
two companies involved in the WFC Merger 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 WFC 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.
6
OPERATING SEGMENT RESULTS
COMMUNITY BANKING'S net income was $3,148 million in 1999, compared with
$1,629 million in 1998, an increase of 93%. This increase resulted from WFC
Merger-related charges in 1998, as well as significant growth in noninterest
income in 1999, reflecting increased fee-based revenue and venture capital
gains. Growth in consumer checking accounts also contributed to the increase
in noninterest income. Net interest income increased by $439 million, or 6%,
compared with 1998. A significant portion of the increase was due to growth
in business and construction loans to small businesses. The provision for
loan losses decreased by $118 million from 1998. Noninterest expense
decreased by $855 million from 1998, primarily due to the 1998 WFC
Merger-related charges, including irrevocable commitments to the Company's
Foundation in connection with the WFC Merger.
WHOLESALE BANKING'S net income was $850 million in 1999, compared with $780
million in 1998, an increase of 9%. Net interest income increased $84
million, or 6%, from 1998, due to growth in loan volumes. Commercial loan
balances increased $2,185 million, or 7%, from 1998. Noninterest income
increased by $157 million, or 15%, compared with 1998, predominantly due to
increased institutional trust and investment fees, foreign exchange and other
fees. Noninterest expense increased by $116 million, or 11%, from 1998,
partially due to contract services and professional fee expenses from WFC
Merger-related integration activities.
WELLS FARGO HOME MORTGAGE (FORMERLY NORWEST MORTGAGE) earned $277 million in
1999, a 28% increase over the $217 million earned in 1998. Mortgage
originations were $82 billion in 1999, compared with $109 billion in 1998.
The percentage of originations attributed to mortgage loan refinancings was
approximately 37% in 1999, compared with 52% in 1998. The servicing portfolio
increased to $280 billion at December 31, 1999 from $245 billion at December
31, 1998. The weighted average coupon of loans in the servicing portfolio was
7.33% at December 31, 1999, compared with 7.42% a year earlier. Total
capitalized mortgage servicing rights amounted to $4.5 billion, or 1.6%, of
the servicing portfolio at December 31, 1999. Amortization of capitalized
mortgage servicing rights was $683 million in 1999, compared with $786
million in 1998. Combined gains on sales of mortgages and servicing rights
were $186 million in 1999, compared with $303 million in 1998.
WELLS FARGO FINANCIAL (FORMERLY NORWEST FINANCIAL) reported net income of
$247 million in 1999, compared with a $19 million net loss in 1998. Results
in 1998 included a $351 million charge to the provision for loan losses that
included losses at Island Finance reflecting a review of the loan portfolio
and realignment of charge-off policies in other operating units. Net interest
income increased by $11 million from 1998, due to growth in average loans,
substantially offset by a decrease in the net interest margin.
7
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the difference between interest income (which includes
yield-related loan fees) and interest expense. Net interest income on a
taxable-equivalent basis was $10,185 million in 1999, compared with $9,739
million in 1998. The increase in net interest income for 1999 compared with
1998 was primarily due to an increase in earning assets.
Net interest income on a taxable-equivalent basis expressed as a percentage
of average total earning assets is referred to as the net interest margin, which
represents the average net effective yield on earning assets. For 1999, the net
interest margin was 5.47%, compared with 5.63% in 1998. The decrease in the
net interest margin for 1999 compared with 1998 was primarily due to higher
balances of lower yielding investment securities and lower yields on loans.
During the fourth quarter of 1999, the Company restructured its debt securities
available for sale portfolio by selling a portion of the portfolio and
subsequently purchasing debt securities with comparatively higher yields. The
Company expects that the positive effect on the net interest margin of that
restructuring will be realized in future periods.
Table 3 presents the individual components of net interest income and the net
interest margin.
Interest income included hedging income of $171 million in 1999, compared
with $93 million in 1998. Interest expense was offset by hedging income of
$105 million in 1999, compared with an offset of $94 million in 1998.
NONINTEREST INCOME
The increase in mortgage banking was due to higher servicing revenue,
including lower amortization of mortgage servicing rights, partially offset
by a decrease in loan origination and closing fees. The decrease in
amortization was largely due to rising interest rates, which decreased the
prepayment speeds in the servicing portfolio.
A major portion of the increase in trust and investment fees for 1999 was due
to an overall increase in mutual fund management fees, reflecting the growth
in mutual fund assets and an increase in transaction fees associated with
mutual funds and annuity sales. The Company managed mutual funds with $61
billion of assets at December 31, 1999, compared with $52 billion at
December 31, 1998. The Company also managed or maintained personal trust,
employee benefit trust and agency assets of approximately $439 billion and
$380 billion at December 31, 1999 and 1998, respectively.
The increase in net venture capital gains was primarily due to a gain of
about $560 million that was recognized on the Company's venture capital
investment in Cerent Corporation. Gains on sales of venture capital
securities are generally dependent on the timing of holdings becoming
8
publicly traded and subsequent market conditions, causing venture capital gains
to be unpredictable in nature.
The net losses on securities available for sale in 1999 were due to the
restructuring of the securities available for sale investment portfolio in
the fourth quarter of 1999.
9
Table 3
AVERAGE BALANCES, YIELDS, RATES PAID AND ANALYSIS OF CHANGES IN NET INTEREST
INCOME (TAXABLE-EQUIVALENT BASIS) (1)(2)
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE Balance Rates Expense
- --------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 1,673 5.11% $ 86 $ 1,770 5.57% $ 99
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies 6,124 5.51 348 5,916 6.02 353
Securities of U.S. states and political subdivisions 2,119 8.12 168 1,855 8.39 148
Mortgage-backed securities:
Federal agencies 23,542 6.77 1,599 20,079 6.99 1,376
Private collateralized mortgage obligations 3,945 6.77 270 3,072 6.72 205
-------- ------- -------- --------
Total mortgage-backed securities 27,487 6.77 1,869 23,151 6.95 1,581
Other debt securities (4) 3,519 7.49 209 1,570 7.94 105
-------- ------- -------- --------
Total debt securities available for sale (4) 39,249 6.69 2,594 32,492 6.90 2,187
Loans held for sale (3) 13,559 6.96 951 14,712 6.85 1,008
Mortgages held for sale (3) 5,154 7.31 377 4,876 7.71 376
Loans:
Commercial 38,932 8.66 3,370 35,805 8.85 3,169
Real estate 1-4 family first mortgage 13,315 7.78 1,036 13,870 7.92 1,098
Other real estate mortgage 18,822 8.74 1,645 17,539 9.40 1,648
Real estate construction 5,260 9.56 503 4,270 9.71 415
Consumer:
Real estate 1-4 family junior lien mortgage 11,656 9.96 1,161 10,708 10.43 1,117
Credit card 5,686 13.77 783 6,322 14.99 948
Other revolving credit and monthly payment 19,561 11.88 2,324 19,992 12.15 2,428
-------- ------- -------- --------
Total consumer 36,903 11.57 4,268 37,022 12.13 4,493
Lease financing 8,852 7.81 691 7,039 8.13 572
Foreign 1,554 20.65 321 1,353 20.65 279
-------- ------- -------- --------
Total loans (5)(6) 123,638 9.57 11,834 116,898 9.99 11,674
Other 3,252 5.01 162 3,092 5.86 181
-------- ------- -------- --------
Total earning assets/total increase
(decrease) in interest income $186,525 8.60 16,004 $173,840 8.97 15,525
======== ------- ======== --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,120 .99 31 $ 3,034 1.35 41
Market rate and other savings 60,901 2.30 1,399 56,724 2.63 1,492
Savings certificates 30,088 4.86 1,462 31,905 5.29 1,686
Other time deposits 3,957 4.94 196 4,565 5.47 250
Deposits in foreign offices 1,658 4.76 79 948 4.84 46
-------- ------- -------- --------
Total interest-bearing deposits 99,724 3.17 3,167 97,176 3.62 3,515
Short-term borrowings 22,559 5.00 1,127 17,927 5.36 963
Long-term debt 24,646 5.90 1,453 19,294 6.29 1,214
Guaranteed preferred beneficial interests in Company's
subordinated debentures 935 7.73 72 1,160 8.12 94
-------- ------- -------- --------
Total interest-bearing liabilities 147,864 3.94 5,819 135,557 4.27 5,786
Portion of noninterest-bearing funding sources 38,661 -- -- 38,283 -- --
-------- ------- -------- --------
Total funding sources/total increase
(decrease) in interest expense $186,525 3.13 5,819 $173,840 3.34 5,786
======== ------- ======== --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (7) 5.47% $10,185 5.63% $ 9,739
===== ======= ===== ========
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 12,252 $ 11,410
Goodwill 7,983 8,069
Other 18,339 14,255
-------- --------
Total noninterest-earning assets $ 38,574 $ 33,734
======== ========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 45,201 $ 43,229
Other liabilities 8,909 7,314
Preferred stockholders' equity 461 463
Common stockholders' equity 22,664 21,011
Noninterest-bearing funding sources used to
fund earning assets (38,661) (38,283)
-------- --------
Net noninterest-bearing funding sources $ 38,574 $ 33,734
======== ========
TOTAL ASSETS $225,099 $207,574
======== ========
- --------------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 8.00%, 8.35% and 8.44% for 1999,
1998 and 1997, respectively. The average three-month London Interbank
Offered Rate (LIBOR) was 5.42%, 5.56% and 5.74% for the same years,
respectively.
(2) Interest rates and amounts include the effects of hedge and risk management
activities associated with the respective asset and liability categories.
(3) Yields are based on amortized cost balances.
(4) Includes certain preferred securities.
10
- ------------------------------------------------------------------------------------------------------------------------------
1997 1999 over 1998(8)
-------------------------------- ------------------------------
Interest
Average Yields/ Income/
(in millions) Balance Rates Expense Volume Rates Total
- -------------------------------------------------------------------------------------------- ------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 1,207 5.40% $ 65 $ (5) $ (8) $ (13)
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies 5,987 6.22 371 16 (21) (5)
Securities of U.S. states and political subdivisions 1,630 8.35 133 24 (4) 20
Mortgage-backed securities:
Federal agencies 22,173 7.08 1,559 263 (40) 223
Private collateralized mortgage obligations 3,083 7.05 210 63 2 65
-------- --------
Total mortgage-backed securities 25,256 6.93 1,769
Other debt securities (4) 1,192 5.71 71 113 (9) 104
-------- --------
Total debt securities available for sale (4) 34,065 6.91 2,344
Loans held for sale (3) 7,314 7.27 532 (74) 17 (57)
Mortgages held for sale (3) 3,900 8.10 316 21 (20) 1
Loans:
Commercial 31,939 9.22 2,943 271 (70) 201
Real estate 1-4 family first mortgage 16,924 8.46 1,432 (43) (19) (62)
Other real estate mortgage 17,603 9.61 1,692 117 (120) (3)
Real estate construction 3,858 10.13 391 94 (6) 88
Consumer:
Real estate 1-4 family junior lien mortgage 9,882 9.61 950 96 (52) 44
Credit card 6,960 14.59 1,015 (91) (74) (165)
Other revolving credit and monthly payment 20,188 11.88 2,398 (51) (53) (104)
-------- --------
Total consumer 37,030 11.78 4,363
Lease financing 5,467 8.32 455 142 (23) 119
Foreign 1,042 20.40 212 42 -- 42
-------- --------
Total loans (5)(6) 113,863 10.09 11,488
Other 2,558 5.93 152 9 (28) (19)
-------- -------- ------ -------- -----
Total earning assets/total increase
(decrease) in interest income $162,907 9.15 14,897 1,007 (528) 479
======== -------- ------ -------- -----
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,491 1.72 60 $ 1 (11) (10)
Market rate and other savings 54,753 2.62 1,433 104 (197) (93)
Savings certificates 32,143 5.32 1,711 (92) (132) (224)
Other time deposits 4,112 5.61 231 (31) (23) (54)
Deposits in foreign offices 1,386 4.83 67 34 (1) 33
-------- --------
Total interest-bearing deposits 95,885 3.65 3,502
Short-term borrowings 14,038 5.36 756 233 (69) 164
Long-term debt 18,335 6.40 1,173 318 (79) 239
Guaranteed preferred beneficial interests in Company's
subordinated debentures 1,437 7.89 113 (18) (4) (22)
-------- --------
Total interest-bearing liabilities 129,695 4.27 5,544
Portion of noninterest-bearing funding sources 33,212 -- -- -- -- --
-------- -------- ------ ------- -----
Total funding sources/total increase
(decrease) in interest expense $162,907 3.41 5,544 549 (516) 33
======== -------- ------ ------- -----
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (7) 5.75% $ 9,353 $ 458 $ (12) $ 446
===== ======== ====== ======= =====
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 12,297
Goodwill 8,325
Other 14,689
--------
Total noninterest-earning assets $ 35,311
========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 39,903
Other liabilities 7,688
Preferred stockholders' equity 555
Common stockholders' equity 20,377
Noninterest-bearing funding sources used to
fund earning assets (33,212)
--------
Net noninterest-bearing funding sources $ 35,311
--------
TOTAL ASSETS $198,218
========
- -------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------
1998 over 1997(8)
--------------------------------
(in millions) Volume Rates Total
- ---------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 32 $ 2 $ 34
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies (5) (13) (18)
Securities of U.S. states and political subdivisions 14 1 15
Mortgage-backed securities:
Federal agencies (161) (22) (183)
Private collateralized mortgage obligations (1) (4) (5)
Total mortgage-backed securities 15 19 34
Other debt securities (4)
Total debt securities available for sale (4)
Loans held for sale (3) 508 (32) 476
Mortgages held for sale (3) 76 (16) 60
Loans:
Commercial 347 (121) 226
Real estate 1-4 family first mortgage (247) (87) (334)
Other real estate mortgage (6) (38) (44)
Real estate construction 41 (17) 24
Consumer:
Real estate 1-4 family junior lien mortgage 83 84 167
Credit card (94) 27 (67)
Other revolving credit and monthly payment (24) 54 30
Total consumer
Lease financing 128 (11) 117
Foreign 64 3 67
Total loans (5)(6)
Other 31 (2) 29
------ ------- --------
Total earning assets/total increase
(decrease) in interest income 801 (173) 628
------ ------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ (7) (12) (19)
Market rate and other savings 53 6 59
Savings certificates (14) (11) (25)
Other time deposits 25 (6) 9
Deposits in foreign offices (21) -- (21)
Total interest-bearing deposits
Short-term borrowings 207 -- 207
Long-term debt 61 (20) 41
Guaranteed preferred beneficial interests in Company's
subordinated debentures (22) 3 (19)
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources -- -- --
------ ------- --------
Total funding sources/total increase
(decrease) in interest expense 282 (40) 242
------ ------- --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (7) $ 519 $ (133) $ 386
====== ======= ========
- ---------------------------------------------------------------------------------------------
(5) Interest income includes loan fees, net of deferred costs, of approximately
$210 million, $148 million, $126 million, in 1999, 1998 and 1997,
respectively.
(6) Nonaccrual loans and related income are included in their respective loan
categories.
(7) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal and applicable
state income taxes. The federal statutory tax rate was 35% for all years
presented.
(8) These columns allocate the changes in net interest income on a
taxable-equivalent basis to changes in either average balances or average
rates for both interest-earning assets and interest-bearing liabilities.
11
NONINTEREST EXPENSE
The net losses on dispositions of premises and equipment in 1998 were mostly
due to WFC Merger-related costs from the 1998 restructuring charge for the
disposition of owned and leased premises.
A significant portion of the decrease in the "All other" category of
noninterest expense was due to the 1998 accrual of $208 million of
irrevocable commitments to the Company's Foundation in connection with the
WFC Merger.
During 1999, the Company completed its enterprise-wide project to prepare and
maintain the Company's systems for Year 2000 compliance. The Company incurred
approximately $360 million in total costs for the Year 2000 project,
including approximately $130 million in 1999.
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE
Table 4 reconciles reported earnings to net income excluding goodwill and
nonqualifying core deposit intangible amortization ("cash" earnings) for the
year ended December 31, 1999. Table 5 presents the calculation of the ROA,
ROE and efficiency ratios excluding goodwill and nonqualifying core deposit
intangible amortization and balances for the year ended December 31, 1999.
These calculations were specifically formulated by the Company and may not be
comparable to similarly titled measures reported by other companies. Also,
"cash" earnings are not entirely available for use by management. See the
Consolidated Statement of Cash Flows and Note 3 to Financial Statements for
other information regarding funds available for use by management.
12
Table 4
EARNINGS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- -------------------------------------------------------------------------------------------------------------------
Year ended
(in millions, except per share amounts) December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
Amortization
--------------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 6,350 $ 459 $ 186 $ 6,995
Income tax expense 2,338 -- 71 2,409
------- ------ ------ --------
Net income 4,012 459 115 4,586
Preferred stock dividends 35 -- -- 35
------- ------ ------ --------
Net income applicable to common stock $ 3,977 $ 459 $ 115 $ 4,551
======= ====== ====== ========
Earnings per common share $ 2.32 $ 2.66
======= ========
Diluted earnings per common share $ 2.29 $ 2.62
======= ========
- -------------------------------------------------------------------------------------------------------------------
Table 5
RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- -------------------------------------------------------------------------------------------------------------------
Year ended
(in millions) December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
ROA: A / (C-E-F) = 2.13%
ROE: B / (D-E-G) = 32.85%
Efficiency: (H-I) / J = 55.2%
Net income $ 4,586 (A)
Net income applicable to common stock 4,551 (B)
Average total assets 225,099 (C)
Average common stockholders' equity 22,664 (D)
Average goodwill 7,983 (E)
Average pretax nonqualifying core deposit intangible 1,333 (F)
Average after-tax nonqualifying core deposit intangible 826 (G)
Noninterest expense 10,637 (H)
Amortization expense for goodwill and nonqualifying core deposit intangible 645 (I)
Net interest income plus noninterest income 18,091 (J)
- -------------------------------------------------------------------------------------------------------------------
13
BALANCE SHEET ANALYSIS
A comparison between the year-end 1999 and 1998 balance sheets is presented
below.
SECURITIES AVAILABLE FOR SALE
Total securities available for sale averaged $39.2 billion in 1999, a 21%
increase from $32.5 billion in 1998. Total securities available for sale were
$43.9 billion at December 31, 1999, a 20% increase from $36.7 billion at
December 31, 1998. The increase from 1998 was due to additional holdings of
securities of U.S. Treasury and Federal agencies and marketable equity
securities.
Table 6 provides the components of the estimated unrealized net gain on
securities available for sale.
Table 6
ESTIMATED UNREALIZED GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------
Dec. 31,
------------------------------
(in millions) 1999 1998
- ----------------------------------------------------------------------------
Estimated unrealized gross gains $ 2,185 $ 974
Estimated unrealized gross losses (1,108) (96)
------- ------
Estimated unrealized net gain $ 1,077 $ 878
======= ======
- ----------------------------------------------------------------------------
14
The unrealized net loss of $887 million in the debt securities portion of the
securities available for sale portfolio at December 31, 1999 was attributable
to an increase in market interest rates in 1999. The unrealized net gain of
$1,964 million in the marketable equity securities portion of the securities
available for sale portfolio at December 31, 1999 was due to equity
securities held within the Company's venture capital portfolio that benefited
from favorable market conditions. The Company may decide to sell certain of
the securities available for sale to manage the level of earning assets (for
example, to offset loan growth that exceeds expected maturities and
prepayments of securities). (See Note 4 to Financial Statements for
securities available for sale by security type.)
The unrealized net gain on securities available for sale is reported on an
after-tax basis as a component of cumulative other comprehensive income. At
December 31, 1999, the unrealized net after-tax gain was $770 million,
compared with an unrealized net after-tax gain of $507 million at December
31, 1998.
At December 31, 1999, mortgage-backed securities, including collateralized
mortgage obligations (CMOs), were $29.5 billion, or 67.2% 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 $29.5 billion to
$26.8 billion and the expected remaining maturity of these securities would
increase from 7 years and 3 months to 8 years and 7 months.
15
LOAN PORTFOLIO
Table 7
The following table presents the remaining contractual principal maturities
of selected loan categories at December 31, 1999 and a summary of the major
categories of loans outstanding at the end of the last five years. At
December 31, 1999, the Company did not have loan concentrations that exceeded
10% of total loans, except as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
--------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
------------------ ---------------
FLOATING FLOATING
OR OR December 31,
ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE ---------------------------------------
(in millions) OR LESS RATE RATE RATE RATE TOTAL 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Selected loan maturities:
Commercial $20,932 $4,452 $13,165 $ 1,213 $1,909 $ 41,671 $ 38,218 $ 34,368 $ 33,047 $22,158
Real estate 1-4 family
first mortgage 2,452 410 396 6,712 3,536 13,506 12,613 15,220 17,186 10,000
Other real estate
mortgage 2,954 3,268 5,534 5,747 3,396 20,899 18,033 17,587 17,552 12,943
Real estate
construction 3,240 571 1,710 330 216 6,067 4,529 3,941 3,807 2,606
Foreign 779 133 428 174 86 1,600 1,528 1,155 1,154 943
------- ------ ------- ------- ------ -------- -------- -------- -------- -------
Total selected
loan maturities $30,357 $8,834 $21,233 $14,176 $9,143 83,743 74,921 72,271 72,746 48,650
======= ====== ======= ======= ====== -------- -------- -------- -------- -------
Other loan categories:
Consumer:
Real estate 1-4
family junior
lien mortgage 12,949 11,135 10,622 10,854 7,431
Credit card 5,805 6,119 6,989 7,341 5,981
Other revolving
credit and
monthly payment 20,617 19,441 20,255 19,615 14,051
-------- -------- -------- -------- -------
Total consumer 39,371 36,695 37,866 37,810 27,463
Lease financing 9,890 8,046 6,298 4,563 3,013
-------- -------- -------- -------- -------
Total loans $133,004 $119,662 $116,435 $115,119 $79,126
======== ======== ======== ======== =======
- -----------------------------------------------------------------------------------------------------------------------------------
A comparative schedule of average loan balances is presented in Table 3;
year-end balances are presented in Note 5 to Financial Statements.
Loans averaged $123.6 billion in 1999, compared with $116.9 billion in 1998,
an increase of 6%. Total loans at December 31, 1999 were $133.0 billion,
compared with $119.7 billion at year-end 1998, an increase of 11%. The
Company's total unfunded loan commitments increased to $82.3 billion at
December 31, 1999, from $80.8 billion at December 31, 1998.
16
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
Table 8, below, presents comparative data for nonaccrual and restructured
loans and other assets. Management's classification of a loan as nonaccrual
or restructured does not necessarily indicate that the principal of the loan
is uncollectible in whole or in part. Table 8 excludes loans that are
contractually past due 90 days or more as to interest or principal, but are
both well-secured and in the process of collection or are real estate 1-4
family first mortgage loans or consumer loans that are exempt under
regulatory rules from being classified as nonaccrual. This information is
presented in the text below. Notwithstanding, real estate 1-4 family loans
(first and junior liens) are placed on nonaccrual within 120 days of becoming
past due and are shown in Table 8. (Note 1 to Financial Statements describes
the Company's accounting policy relating to nonaccrual and restructured
loans.)
Table 8
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------
(in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual loans (1) (2) $724 $755 $743 $ 907 $730
Restructured loans (3) 4 1 9 10 16
---- ---- ---- ------ ----
Nonaccrual and restructured loans 728 756 752 917 746
As a percentage of total loans .5% .6% .6% .8% .9%
Foreclosed assets 161 152 216 273 235
Real estate investments (4) 33 1 4 4 12
---- ---- ---- ------ ----
Total nonaccrual and restructured
loans and other assets $922 $909 $972 $1,194 $993
==== ==== ==== ====== ====
- ------------------------------------------------------------------------------------------------------------------
(1) Includes commercial agricultural loans of $49 million, $41 million, $32
million, $31 million and $19 million and agricultural loans secured by real
estate of $17 million, $12 million, $18 million, $13 million and $5
million, at December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Of the total nonaccrual loans, $372 million, $389 million, $416 million,
$593 million and $513 million at December 31, 1999, 1998, 1997, 1996 and
1995, respectively, were considered impaired under FAS 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN.
(3) In addition to originated loans that were subsequently restructured, there
were loans of $50 million at December 31, 1995 that were purchased at a
steep discount whose contractual terms were modified after acquisition.
Those loans were restructured to yield a rate that was equal to or greater
than the rate charged for new loans with comparable risk and thus were not
required to be reported as impaired in the year following the
restructuring. Those loans were not impaired based on the terms specified
by the restructuring agreement.
(4) Represents the amount of real estate investments (contingent interest loans
accounted for as investments) that would be classified as nonaccrual if
such assets were recorded as loans. Real estate investments totaled $89
million, $128 million, $172 million, $154 million and $96 million at
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
The Company anticipates changes in the amount of nonaccrual loans that result
from increases in lending activity or from resolutions of loans in the
nonaccrual portfolio. The performance of any individual loan can be affected
by external factors, such as the interest rate environment or factors
particular to a borrower such as actions taken by a borrower's management. In
addition, from time to time, the Company purchases loans from other financial
institutions that may be classified as nonaccrual based on the Company's
policies.
The Company generally identifies loans to be evaluated for impairment under
FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN,
when such loans are on nonaccrual or have been restructured. However, not all
nonaccrual loans are impaired.
17
Generally, a loan is placed on nonaccrual status upon becoming 90 days past due
as to interest or principal (unless both well-secured and in the process of
collection), when the full timely collection of interest or principal becomes
uncertain or when a portion of the principal balance has been charged off. Real
estate 1-4 family loans (both first liens and junior liens) are placed on
nonaccrual status within 120 days of becoming past due as to interest or
principal, regardless of security. In contrast, under FAS 114, loans are
considered impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, rather than the
contractual terms specified by the restructuring agreement. Consequently, not
all impaired loans are necessarily placed on nonaccrual status. That is, loans
performing under restructured terms beyond a specified performance period are
classified as accruing but may still be deemed impaired under FAS 114.
For loans covered under FAS 114, the Company makes an assessment for
impairment when and while such loans are on nonaccrual, or when the loan has
been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the Company will estimate the amount of
impairment using discounted cash flows, except when the sole (remaining)
source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted
cash flows. Additionally, some impaired loans with commitments of less than
$1 million are aggregated for the purpose of estimating impairment using
historical loss factors as a means of measurement.
If the measurement of the impaired loan results in a value that is less than
the recorded investment in the loan (including accrued interest, net deferred
loan fees or costs and unamortized premium or discount), an impairment is
recognized by creating or adjusting an existing allocation of the allowance
for loan losses. FAS 114 does not change the timing of charge-offs of loans
to reflect the amount ultimately expected to be collected.
If interest that was due on the book balances of all nonaccrual and
restructured loans (including loans that were but are no longer on nonaccrual
or were restructured at year end) had been accrued under their original
terms, $58 million of interest would have been recorded in 1999, compared
with $20 million actually recorded.
Foreclosed assets at December 31, 1999 were $161 million, compared with $152
million at December 31, 1998. Substantially all of the foreclosed assets at
December 31, 1999 have been in the portfolio three years or less.
18
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Loans contractually past due 90 days or more as to interest or principal, but
not included in the nonaccrual or restructured categories totaled $433
million, $480 million, $578 million, $614 million and $377 million at
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
19
Table 9
ALLOWANCE FOR LOAN LOSSES
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------
(in millions) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $3,307 $ 3,220 $ 3,202 $ 2,846 $ 3,010
Allowances related to business combinations, net 48 148 172 874 119
Provision for loan losses 1,104 1,617 1,203 541 335
Loan charge-offs:
Commercial (395) (271) (369) (206) (104)
Real estate 1-4 family first mortgage (14) (29) (28) (25) (22)
Other real estate mortgage (28) (54) (27) (51) (60)
Real estate construction (2) (3) (5) (14) (10)
Consumer:
Real estate 1-4 family junior lien mortgage (33) (31) (37) (38) (24)
Credit card (403) (549) (593) (500) (340)
Other revolving credit and monthly payment (585) (1,069) (672) (530) (289)
------ ------- ------- ------- -------
Total consumer (1,021) (1,649) (1,302) (1,068) (653)
Lease financing (38) (49) (49) (36) (19)
Foreign (90) (84) (37) (35) (29)
------ ------- ------- ------- -------
Total loan charge-offs (1,588) (2,139) (1,817) (1,435) (897)
------ ------- ------- ------- -------
Loan recoveries:
Commercial 90 87 110 96 76
Real estate 1-4 family first mortgage 6 12 10 13 9
Other real estate mortgage 38 79 63 57 67
Real estate construction 5 4 12 13 5
Consumer:
Real estate 1-4 family junior lien mortgage 15 7 10 10 4
Credit card 49 59 64 52 28
Other revolving credit and monthly payment 243 187 166 117 72
------ ------- ------- ------- -------
Total consumer 307 253 240 179 104
Lease financing 12 12 15 9 13
Foreign 15 14 10 9 5
------ ------- ------- ------- -------
Total loan recoveries 473 461 460 376 279
------ ------- ------- ------- -------
Total net loan charge-offs (1,115) (1,678) (1,357) (1,059) (618)
------ ------- ------- ------- -------
BALANCE, END OF YEAR $3,344 $ 3,307 $ 3,220 $ 3,202 $ 2,846
====== ======= ======= ======= =======
Total net loan charge-offs as a percentage of
average total loans .90 % 1.44% 1.19% .99% .78%
====== ======= ======= ======= =======
Allowance as a percentage of total loans 2.51 % 2.76% 2.77% 2.78% 3.60%
====== ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
20
At December 31, 1999, the allowance for loan losses was $3,344 million, or
2.51% of total loans, compared with $3,307 million, or 2.76%, at December 31,
1998. The provision for loan losses totaled $1,104 million in 1999, $1,617
million in 1998 and $1,203 million in 1997. The provision for loan losses in
1999 approximated net charge-offs, and the Company anticipates that it will
continue to make a provision in 2000 that will approximate the level of
actual net charge-offs. Net charge-offs in 1999 were $1,115 million, or .90%
of average total loans, compared with $1,678 million, or 1.44%, in 1998 and
$1,357 million, or 1.19%, in 1997. Loan loss recoveries were $473 million in
1999, compared with $461 million in 1998 and $460 million in 1997. During
1999, net charge-offs exceeded the provision for loan losses by $11 million;
however, the addition of $48 million of allowances related to business
combinations in 1999 accounted for the net increase of $37 million in the
reserve from year-end 1998.
Any loan that is past due as to principal or interest and that is not both
well-secured and in the process of collection is generally charged off (to
the extent that it exceeds the fair value of any related collateral) after a
predetermined period of time that is based on loan category. Additionally,
loans are charged off when classified as a loss by either internal loan
examiners or regulatory examiners.
The SEC requires the Company to present the ratio of the allowance for loan
losses to total nonaccrual loans. This ratio was 462% and 438% at December
31, 1999 and 1998, respectively. This ratio may fluctuate significantly from
period to period due to such factors as the mix of loan types in the
portfolio, the prospects of borrowers and the value and marketability of
collateral as well as, for the nonaccrual portfolio taken as a whole, wide
variances from period to period in terms of delinquency and relationship of
book to contractual principal balance. Classification of a loan as nonaccrual
does not necessarily indicate that the principal of a loan is uncollectible
in whole or in part. Consequently, the ratio of the allowance for loan losses
to nonaccrual loans, taken alone and without taking into account numerous
additional factors, is not a reliable indicator of the adequacy of the
allowance for loan losses. Indicators of the credit quality of the Company's
loan portfolio and the method of determining the allowance for loan losses
are discussed below and in greater detail in the 1999 Annual Report to
Stockholders, incorporated by reference herein.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The table on page 24 provides a breakdown of the allowance for loan losses by
loan category. The Company has an established process to determine the
adequacy of the allowance for loan losses which assesses the risk and losses
inherent in its portfolio. This process provides an allowance consisting of
two components, allocated and unallocated. To arrive at the allocated
component of the allowance, the Company combines estimates of the allowances
needed for loans analyzed individually (including impaired loans subject to
Statement of Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis.
21
For discussion of the methodology by which the Company determines the
allocated and unallocated reserves, see Note 5 to Financial Statements.
The allocated component declined to $1,907 million from $2,111 million, while
the unallocated component grew to $1,437 million from $1,196 million, as of
December 31, 1999 and 1998, respectively.
The $204 million reduction in the allocated component was substantially due
to the lower allocated allowance to loans outstanding ratios in the other
consumer, commercial loan, and other real estate mortgage portfolios. In
total, lower allocated reserve ratios resulted in a reduction of roughly $388
million in allocated reserves, primarily a reflection of lower projected loss
rates in the loan portfolio. Of this reduction, $90 million was attributable
to the domestic portfolio of Wells Fargo Financial, although the overall
reserve in that entity actually increased by virtue of additions to the
unallocated portion of the reserve. An additional $117 million was
attributable to various other consumer lending products. Finally, the
commercial loan and other real estate mortgage portfolios showed continuing
gradual improvement in problem asset trends. The improvements in the credit
quality of those portfolios translated into a reduction of approximately $145
million in the allocated reserve. Other smaller portfolios accounted for the
remaining $36 million in allocated reserve ratio reductions during the year.
These changes in the allocated reserve relate primarily to projected rates of
loss in different portfolio segments. Analyzing the movements in the
allocated reserve strictly from a loan volume perspective indicates that, had
the ratio of allocated reserves to loans outstanding remained flat with the
1998 ratio of 1.76%, allocated reserves would have increased by roughly $242
million, as loans outstanding grew by $13.7 billion during the year. However,
due to a shift in portfolio composition, the higher volume increased the
allocated reserve by only $184 million, as relatively lower-risk commercial
loans, residential first and second mortgages, and lease financing grew at a
faster pace than higher-risk credit cards and other consumer loans.
There were no material changes in estimation methods and assumptions for the
allowance that took place during 1999. Relatively minor differences existed
in the methodologies for deriving the allocated portion of the allowance
employed by the former Norwest and the former Wells Fargo; these differences
were reconciled in the first quarter of 1999.
The Company considers the allowance for loan losses of $3,344 million
adequate to cover losses inherent in loans, commitments to extend credit and
standby and other letters of credit at December 31, 1999. However, no
assurance can be given that the Company will not, in any particular period,
sustain loan losses that are sizable in relation to the amount reserved, or
that subsequent evaluations of the loan portfolio, in light of the factors
then prevailing, including economic conditions and the ongoing examination
process by the Company and its regulators, will not require significant
increases in the allowance for loan losses. For discussion of the process by
which the Company determines the adequacy of the allowance for loan losses,
see Note 5 to Financial Statements.
22
The foregoing discussion contains forward-looking statements about the
adequacy of the Company's reserves for loan losses. These forward-looking
statements are inherently subject to risks and uncertainties. A number of
factors--many of which are beyond the Company's control--could cause actual
losses to be more than estimated losses. These factors include changes in
business and economic conditions that could increase the number of customers
and counterparties who become delinquent or who default on their loans or
other obligations to the Company. For a discussion of some of the other
factors that could cause actual losses to be more than estimated losses, see
"Financial Review - Factors that May Affect Future Results."
23
Table 10
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial $ 655 $ 664 $ 603 $ 519 $ 359
Real estate 1-4 family
first mortgage 64 58 71 59 77
Other real estate mortgage 220 238 284 347 295
Real estate construction 58 62 51 63 72
Consumer:
Credit card 349 356 483 452 395
Other consumer 428 588 575 485 345
------- ------ ------ ------- ------
Total consumer 777 944 1,058 937 740
Lease financing 71 66 67 55 47
Foreign 62 79 43 34 27
------- ------ ------ ------- ------
Total allocated 1,907 2,111 2,177 2,014 1,617
Unallocated component of
the allowance (1) 1,437 1,196 1,043 1,188 1,229
------- ------ ------ ------- ------
Total $ 3,344 $3,307 $3,220 $ 3,202 $2,846
======= ====== ====== ======= ======
December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan
ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry
AS % AS % as % as % as % as % as % as % as % as %
OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total
CATGRY LOANS catgry loans catgry loans catgry loans catgry loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Commercial 1.57% 31% 1.74% 32% 1.75% 30% 1.57% 29% 1.62% 28%
Real estate 1-4 family
first mortgage .47 10 .46 11 .47 13 .34 15 .77 13
Other real estate mortgage 1.05 16 1.32 15 1.61 15 1.98 15 2.28 16
Real estate construction .96 5 1.37 4 1.29 3 1.66 3 2.77 3
Consumer:
Credit card 6.01 4 5.82 5 6.91 6 6.15 6 6.60 8
Other consumer 1.28 26 1.92 25 1.86 27 1.59 27 1.60 27
------- ------ ------ ------ -----
Total consumer 1.97 30 2.57 30 2.79 33 2.48 33 2.69 35
Lease financing .72 7 .82 7 1.06 5 1.21 4 1.56 4
Foreign 3.88 1 5.17 1 3.72 1 2.95 1 2.87 1
------- ------ ------ ------ -----
Total allocated 1.43 100% 1.76 100% 1.87 100% 1.75 100% 2.04 100%
======= ====== ====== ====== =====
Unallocated component of
the allowance (1) 1.08 1.00 .90 1.03 1.56
------ ------ ------ ------ ------
Total 2.51% 2.76% 2.77% 2.78% 3.60%
====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
(1) This amount and any unabsorbed portion of the allocated allowance are also
available for any of the above listed loan categories.
DEPOSITS
Comparative detail of average deposit balances and rates is presented in
Table 3. Average core deposits funded 61.9% and 65.0% of the Company's
average total assets in 1999 and 1998, respectively. Year-end deposit
balances are presented in Table 11.
24
Table 11
DEPOSITS
- ----------------------------------------------------------------------------------------
December 31,
--------------------------------- %
(in millions) 1999 1998 Change
- ----------------------------------------------------------------------------------------
Noninterest-bearing $ 45,520 $ 49,479 (8)%
Interest-bearing checking 3,556 3,447 3
Market rate and other savings 60,339 59,538 1
Savings certificates 28,832 31,715 (9)
----------- -----------
Core deposits 138,247 144,179 (4)
Other time deposits 3,757 4,262 (12)
Deposits in foreign offices 3,914 1,005 289
----------- -----------
Total deposits $ 145,918 $ 149,446 (2)%
=========== =========== =====
- ----------------------------------------------------------------------------------------
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.
25
The Company's net interest income simulation includes all other-than-trading
financial assets, financial liabilities, derivative financial instruments and
leases where the Company is the lessor. It captures the dynamic nature of the
balance sheet by anticipating probable balance sheet and off-balance sheet
strategies and volumes under different interest rate scenarios over the
course of a one-year period. This simulation measures both the term structure
risk and the basis risk in the Company's positions. The simulation also
captures the option characteristics of products, such as caps and floors on
floating-rate loans, the right to prepay mortgage loans without penalty and
the ability of customers to withdraw deposits on demand. These options are
modeled directly in the simulation either through the use of option pricing
models, in the case of caps and floors on loans, or through statistical
analysis of historical customer behavior, in the case of mortgage loan
prepayments or non-maturity deposits.
The simulation model is used to measure the impact on net income, relative to
a base case scenario, of interest rates increasing or decreasing 100 basis
points over the next 12 months. The simulation showing the largest drop in
net income relative to the base case scenario over the next twelve months is
a 100 basis point increase in rates that will result in a decrease in net
income of $54 million. In the simulation that was run at December 31, 1998,
the largest drop in net income relative to the base case scenario over the
next twelve months was a 100 basis point increase in rates that was projected
to result in a decrease in net income of $23 million.
The Company uses interest rate derivative financial instruments as an
asset/liability management tool to hedge mismatches in interest rate
exposures indicated by the net income simulation described above. They are
used to reduce the Company's exposure to interest rate fluctuations and
provide more stable spreads between loan yields and the rates on their
funding sources. For example, the Company uses interest rate futures to
shorten the rate maturity of MRA savings deposits and better match the
maturity of prime-based loans. The Company also purchases interest rate
floors to protect against the loss in interest income on LIBOR-based loans
during a declining interest rate environment. Additionally, receive-fixed
rate swaps are used to convert floating-rate loans into fixed rates to better
match the liabilities that fund the loans. The Company also uses derivatives
including floors, futures contracts and options on futures contracts to hedge
the Company's mortgage servicing rights as well as forwards, futures and
options on futures and forwards to hedge the Company's 1-4 family real estate
first mortgage loan commitments and mortgage loans held for sale.
Looking toward managing interest rate risk in 2000, the Company will continue
to face term structure risk and basis risk and may be confronted with several
risk scenarios. If interest rates rise, net income may actually increase if
deposit rates lag increases in market rates (e.g., prime, LIBOR). The Company
could, however, experience downward pressure on net income in that scenario
if deposits are aggressively repriced as market rates increase.
A declining interest rate environment might result in a decrease in loan
rates, while deposit rates remain relatively stable, as they did between 1994
and 1996. This rate scenario could also create significant risk to net income.
The Company has partially hedged against that risk with interest rate floors,
receive-fixed rate swap contracts and fixed-rate mortgage backed securities. As
mentioned above, the Company has also partially hedged its mortgage servicing
26
rights against that rate scenario using primarily floors, futures contracts and
options on futures contracts. Based on its current and projected balance sheet,
the Company does not expect that a change in interest rates would significantly
affect its liquidity position.
The Company considers the fair values and the potential near term losses to
future earnings related to its customer accommodation derivative financial
instruments to be immaterial.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate derivative financial instruments as
asset/liability management tools to hedge the Company's exposure to interest
rate fluctuations. The Company also offers contracts to accommodate its
customers, but hedges such contracts by purchasing other financial contracts or
uses the contracts for asset/liability management. Table 12 reconciles the
beginning and ending notional or contractual amounts of derivative financial
instruments used for asset/liability management purposes for 1999 and shows the
expected remaining maturity at year-end 1999. For a further discussion of
derivative financial instruments, refer to Note 23 to Financial Statements.
Table 12
DERIVATIVE ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
-----------------------------------------------------------------------------------------
Weighted
average
expected
Amortization remaining
Beginning and Ending maturity (in
(in millions) balance Additions maturities Terminations balance yrs.-mos.)
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate contracts:
Swaps $ 25,402 $ 13,897 $ 5,087 $ 1,366 $ 32,846 2-9
Futures 62,753 98,771 23,119 87,520 50,885 3-6
Floors and caps 33,598 18,554 9,010 2,000 41,142 3-0
Options 25,822 155,380 58,287 110,975 11,940 0-11
Forwards 41,283 485,677 -- 504,432 22,528 0-1
Foreign exchange contracts:
Forwards 168 552 582 -- 138 0-3
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred losses related to interest rate futures contracts were $337
million at December 31, 1999, most of which will be fully amortized within seven
years. Net deferred losses on terminated derivative financial instruments were
$237 million at December 31, 1999, compared with net deferred gains of $414
million at December 31, 1998.
27
LIQUIDITY AND CAPITAL MANAGEMENT
The Company manages its liquidity and capital at both the parent and
subsidiary levels.
In addition to the immediately liquid resources of cash and due from banks
and federal funds sold and securities purchased under resale agreements, asset
liquidity is provided by the Company's securities available for sale portfolio.
The weighted average expected remaining maturity of the debt securities within
this portfolio was 8 and 2 months at December 31, 1999. Of the $40.4 billion of
debt securities in this portfolio at December 31, 1999, $5.5 billion, or 14%, is
expected to mature or be prepaid in 2000 and an additional $3.6 billion, or 9%,
is expected to mature or be prepaid in 2001. Asset liquidity is further enhanced
by the Company's ability to securitize assets such as mortgage loans.
Core deposits have historically provided the Company with a sizeable source
of relatively stable and low-cost funds. The Company's average core deposits and
stockholders' equity funded 72.2% and 75.3% of its average total assets in 1999
and 1998, respectively.
The remaining funding of average total assets was mostly provided by
long-term debt, deposits in foreign offices, short-term borrowings (federal
funds purchased and securities sold under repurchase agreements, commercial
paper and other short-term borrowings) and trust preferred securities.
Short-term borrowings averaged $22.6 billion and $17.9 billion in 1999 and 1998,
respectively. Long-term debt averaged $24.6 billion and $19.3 billion in 1999
and 1998, respectively. Trust preferred securities averaged $.9 billion and $1.2
billion in 1999 and 1998, respectively.
Liquidity for the Company is provided by interest income, deposit-raising
activities, potential disposition of readily marketable assets and through its
ability to raise funds in a variety of domestic and international money and
capital markets. The Company accesses the capital markets for long-term funding
through the issuance of registered debt.
In June 1999, the Parent filed a shelf registration statement with the SEC
under which the Company may issue up to $10 billion in debt and equity
securities, excluding common stock, except for common stock issuable upon the
exercise or conversion of debt and equity securities. That registration
statement, together with the $150 million issuance authority remaining on the
Company's registration statements filed in 1993 and 1995, permits the Company to
issue an aggregate of $10.15 billion in such debt and equity securities. Under
those registration statements, the Company had issued a total of $3 billion in
debt securities as of December 31, 1999 and had established a program to issue,
from time to time, additional debt securities in the form of Medium-Term Notes,
Series A and Subordinated Medium-Term Notes, Series B in the aggregate principal
amount of up to $7.15 billion. Proceeds from the issuance of the debt securities
listed above were, and with respect to any such securities issued in the future
are expected to be, used for general corporate purposes.
In April 1999, 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
28
senior or subordinated debt securities. As of December 31, 1999, WFFI had issued
a total of $1.1 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 issuance of up to $1 billion
(Canadian) in debt securities, and had issued $390 million (Canadian) in debt
securities from that registration statement as of December 31, 1999.
To accommodate future growth and current business needs, the Company has a
capital expenditure program, which includes equipment for stores, relocation and
remodeling of Company facilities and routine replacement of furniture and
equipment. The Company will fund these expenditures from various sources,
including retained earnings of the Company and borrowings of various maturities.
The Company and each of the subsidiary banks are subject to various
regulatory capital adequacy requirements administered by the Federal Reserve
Board and the Office of the Comptroller of the Currency. RBC guidelines
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet exposures. (See Note 22 to Financial Statements for
additional information.)
The Company repurchases common shares in the open market under a systematic
plan to meet the common stock issuance requirements of the Company's benefit
plans and for other common stock issuance requirements, including acquisitions
accounted for as purchases. In February of 2000, the Board of Directors
authorized the repurchase of up to 81 million additional shares of the Company's
outstanding common stock. At the time of that authorization, approximately 35
million shares remained to be purchased under the September 1999 common stock
purchase authority, substantially all of which are expected to be acquired for
announced acquisitions.
COMPARISON OF 1998 TO 1997
Net interest income increased $415 million in 1998 compared to 1997. The
increase was due to an increase in earning assets, which included the effects of
a significantly higher volume of mortgage origination activity during 1998.
Noninterest income in 1998 was $6,920 million, compared with $6,046 million
in 1997, an increase of 14.5%. The increase in noninterest income was primarily
due to higher fee-based revenues and increased earnings from mortgage banking
activities.
Noninterest expense in 1998 was $11,311 million, compared with $9,580
million in 1997. The increase was due to WFC Merger-related charges recorded in
the fourth quarter of 1998.
ADDITIONAL INFORMATION
Common stock of the Company is traded on the New York Stock Exchange and
the Chicago Stock Exchange. The high, low and end-of-period quarterly prices of
the Company's common stock as reported on the New York Stock Exchange Composite
Transaction Reporting System
29
are presented in the graphs. The number of holders of record of the Company's
common stock was 102,530 as of January 31, 2000.
Table 13
- -------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
----------------------------------------- ------------------------------------------
High $ 40.44 $ 44.88 $ 45.31 $ 49.94 $ 43.88 $ 43.75 $ 39.75 $ 40.88
Low 32.13 34.38 36.44 38.38 34.75 34.00 27.50 30.19
End of period 35.06 42.75 39.63 40.44 41.56 37.50 36.00 39.94
- -------------------------------------------------------------------------------------------------------------------
30
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------
(in millions, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Securities available for sale $ 2,533 $ 2,133 $ 2,300
Mortgages held for sale 951 1,008 532
Loans held for sale 377 376 316
Loans 11,823 11,660 11,431
Other interest income 250 278 220
--------- --------- ---------
Total interest income 15,934 15,455 14,799
--------- --------- ---------
INTEREST EXPENSE
Deposits 3,166 3,515 3,503
Short-term borrowings 1,127 961 762
Long-term debt 1,452 1,213 1,162
Guaranteed preferred beneficial interests in Company's
subordinated debentures 73 93 114
--------- --------- ---------
Total interest expense 5,818 5,782 5,541
--------- --------- ---------
NET INTEREST INCOME 10,116 9,673 9,258
Provision for loan losses 1,104 1,617 1,203
--------- --------- ---------
Net interest income after provision for loan losses 9,012 8,056 8,055
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 1,580 1,448 1,335
Trust and investment fees 1,366 1,116 995
Credit card fees 570 573 501
Other fees 1,094 989 861
Mortgage banking 1,407 1,289 1,034
Insurance 395 358 345
Net venture capital gains 1,008 113 191
Net (losses) gains on securities available for sale (228) 177 102
Other 783 857 682
--------- --------- ---------
Total noninterest income 7,975 6,920 6,046
--------- --------- ---------
NONINTEREST EXPENSE
Salaries 3,307 3,318 2,903
Incentive compensation 643 657 449
Employee benefits 901 807 754
Equipment 928 976 794
Net occupancy 813 804 757
Goodwill 459 429 439
Core deposit intangible 206 247 275
Net (gains) losses on dispositions of premises and equipment (16) 325 76
Other 3,396 3,748 3,133
--------- --------- ---------
Total noninterest expense 10,637 11,311 9,580
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 6,350 3,665 4,521
Income tax expense 2,338 1,474 1,809
--------- --------- ---------
NET INCOME $ 4,012 $ 2,191 $ 2,712
========= ========= =========
NET INCOME APPLICABLE TO COMMON STOCK $ 3,977 $ 2,156 $ 2,669
========= ========= =========
EARNINGS PER COMMON SHARE $ 2.32 $ 1.28 $ 1.57
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 2.29 $ 1.26 $ 1.55
========= ========= =========
DIVIDENDS DECLARED PER COMMON SHARE $ .785 $ .70 $ .615
========= ========= =========
Average common shares outstanding 1,714.0 1,688.1 1,699.3
========= ========= =========
Diluted average common shares outstanding 1,735.4 1,710.6 1,724.8
========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
31
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
(in millions, except shares) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 14,118 $ 13,652
Federal funds sold and securities purchased
under resale agreements 1,722 1,747
Securities available for sale 43,911 36,660
Mortgages held for sale 12,678 22,049
Loans held for sale 5,043 5,388
Loans 133,004 119,662
Allowance for loan losses 3,344 3,307
-------- --------
Net loans 129,660 116,355
-------- --------
Mortgage servicing rights 4,652 3,230
Premises and equipment, net 3,372 3,479
Core deposit intangible 1,299 1,516
Goodwill 8,046 7,889
Interest receivable and other assets 16,552 12,170
-------- --------
Total assets $241,053 $224,135
======== ========
LIABILITIES
Noninterest-bearing deposits $ 45,520 $ 49,479
Interest-bearing deposits 100,398 99,967
-------- --------
Total deposits 145,918 149,446
Short-term borrowings 31,727 19,670
Accrued expenses and other liabilities 11,736 9,090
Long-term debt 26,866 22,662
Guaranteed preferred beneficial interests in Company's
subordinated debentures 935 935
STOCKHOLDERS' EQUITY
Preferred stock 344 547
Unearned ESOP shares (73) (84)
-------- --------
Total preferred stock 271 463
Common stock - $1 2/3 par value, authorized
4,000,000,000 shares; issued 1,736,259,632 shares
and 1,729,200,465 shares 2,894 2,882
Additional paid-in capital 9,213 8,981
Retained earnings 12,565 10,256
Cumulative other comprehensive income 760 493
Notes receivable from ESOP (1) (3)
Treasury stock - 39,840,269 shares and 18,859,858 shares (1,831) (740)
-------- --------
Total stockholders' equity 23,871 22,332
-------- --------
Total liabilities and stockholders' equity $241,053 $224,135
======== ========
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
32
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------
Notes
Number Unearned Additional receivable
of Preferred ESOP Common paid-in Retained from Treasury
(in millions, except shares) shares stock shares stock capital earnings ESOP stock
- ------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $851 $(61) $2,377 $10,222 $7,817 $(11) $(243)
Adjustments for pooling
of interests (120) 120 (13)
---- ---- ------ ------- ------ ---- -----
BALANCE DECEMBER 31, 1996 (RESTATED) 851 (61) 2,257 10,342 7,804 (11) (243)
---- ---- ------ ------- ------ ---- -----
Comprehensive income
Net income-1997 2,712
Other comprehensive income,
net of tax:
Translation adjustments
Net unrealized gains (losses)
on securities available
for sale arising during
the year
Reclassification of net
(gains) losses on
securities available for
sale included
in net income
Total comprehensive income
Common stock issued 19,379,793 11 169 (151) 285
Common stock issued for
acquisitions 25,799,152 22 73 41 175
Preferred stock repurchased 1,100,000 (325)
Common stock repurchased 76,060,023 (97) (1,591) (2) (573)
Preferred stock issued to ESOP 51,700 52 (54) 2
Preferred stock released to ESOP 35 (1)
Preferred stock (34,335)
converted to common shares 1,223,574 (34) 6 28
Preferred stock dividends (43)
Common stock dividends (1,003)
Cash payments received on
notes receivable from ESOP 1
Stock split 635 (635)
---- ---- ------ ------- ------ ---- -----
Net change (307) (19) 571 (1,977) 1,554 1 (85)
---- ---- ------ ------- ------ ---- -----
BALANCE DECEMBER 31, 1997 544 (80) 2,828 8,365 9,358 (10) (328)
---- ---- ------ ------- ------ ---- -----
Comprehensive income
Net income-1998 2,191
Other comprehensive income,
net of tax:
Translation adjustments
Net unrealized gains (losses)
on securities available
for sale arising during
the year
Reclassification of net
(gains) losses on
securities available
for sale included
in net income
Total comprehensive income
Common stock issued 40,124,541 51 946 (191) 320
Common stock issued for
acquisitions 18,099,205 25 71 11 134
Common stock repurchased 34,300,254 (22) (407) (829)
Preferred stock issued to ESOP 35 (37) 2
Preferred stock released to ESOP 33 (1)
Preferred stock (31,161)
converted to common shares 803,903 (32) 3 29
Preferred stock dividends (35)
Common stock dividends (1,078)
Cash payments received on
notes receivable from ESOP 2 7
Increase in Rabbi trust assets
(classified as treasury stock) (66)
---- ---- ------ ------- ------ ---- -----
Net change 3 (4) 54 616 898 7 (412)
---- ---- ------ ------- ------ ---- -----
BALANCE DECEMBER 31, 1998 547 (84) 2,882 8,981 10,256 (3) (740)
---- ---- ------ ------- ------ ---- -----
Comprehensive income
Net income-1999 4,012
Other comprehensive income,
net of tax:
Translation adjustments
Net unrealized gains (losses)
on securities available
for sale arising during
the year
Reclassification of net
(gains) losses on
securities available
for sale included
in net income
Total comprehensive income
Common stock issued 21,793,709 1 119 (269) 781
Common stock issued for
acquisitions 11,059,131 11 113 2 200
Common stock repurchased 48,974,800 (2,141)
Preferred stock redeemed (191)
Preferred stock issued to ESOP 75 (80) 5
Preferred stock released to ESOP 91 (5)
Preferred stock (86,358)
converted to common shares 2,200,716 (87) 87
Preferred stock dividends (35)
Common stock dividends (1,401)
Cash payments received on
notes receivable from ESOP 2
Increase in Rabbi trust assets
(classified as treasury stock) (18)
---- ---- ------ ------- ------- ---- -------
Net change (203) 11 12 232 2,309 2 (1,091)
---- ---- ------ ------- ------- ---- -------
BALANCE DECEMBER 31, 1999 $344 $(73) $2,894 $9,213 $12,565 $(1) $(1,831)
==== ==== ====== ======= ======= ==== =======
- ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------
Cumulative
other Total
comprehensive stockholders'
(in millions, except shares) income equity
- -------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $317 $21,269
Adjustments for pooling
of interests (13)
----- -------
BALANCE DECEMBER 31, 1996 (RESTATED) 317 21,256
----- -------
Comprehensive income
Net income-1997 2,712
Other comprehensive income,
net of tax:
Translation adjustments 1 1
Net unrealized gains (losses)
on securities available
for sale arising during
the year 231 231
Reclassification of net
(gains) losses on
securities available for
sale included
in net income (62) (62)
-------
Total comprehensive income 2,882
Common stock issued 314
Common stock issued for
acquisitions 311
Preferred stock repurchased (325)
Common stock repurchased (2,263)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 34
Preferred stock (34,335)
converted to common shares --
Preferred stock dividends (43)
Common stock dividends (1,003)
Cash payments received on
notes receivable from ESOP 1
Stock split --
----- -------
Net change 170 (92)
----- -------
BALANCE DECEMBER 31, 1997 487 21,164
----- -------
Comprehensive income
Net income-1998 2,191
Other comprehensive income,
net of tax:
Translation adjustments (4) (4)
Net unrealized gains (losses)
on securities available
for sale arising during
the year 119 119
Reclassification of net
(gains) losses on
securities available
for sale included
in net income (109) (109)
-------
Total comprehensive income 2,197
Common stock issued 1,126
Common stock issued for
acquisitions 241
Common stock repurchased (1,258)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 32
Preferred stock (31,161)
converted to common shares --
Preferred stock dividends (35)
Common stock dividends (1,078)
Cash payments received on
notes receivable from ESOP 9
Increase in Rabbi trust assets
(classified as treasury stock) (66)
----- -------
Net change 6 1,168
----- -------
BALANCE DECEMBER 31, 1998 493 22,332
----- -------
Comprehensive income
Net income-1999 4,012
Other comprehensive income,
net of tax:
Translation adjustments 4 4
Net unrealized gains (losses)
on securities available
for sale arising during
the year 127 127
Reclassification of net
(gains) losses on
securities available
for sale included
in net income 136 136
-------
Total comprehensive income 4,279
Common stock issued 632
Common stock issued for
acquisitions 326
Common stock repurchased (2,141)
Preferred stock redeemed (191)
Preferred stock issued to ESOP --
Preferred stock released to ESOP 86
Preferred stock (86,358)
converted to common shares --
Preferred stock dividends (35)
Common stock dividends (1,401)
Cash payments received on
notes receivable from ESOP 2
Increase in Rabbi trust assets
(classified as treasury stock) (18)
----- -------
Net change 267 1,539
----- -------
BALANCE DECEMBER 31, 1999 $ 760 $23,871
===== =======
- ------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
33
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,012 $ 2,191 $ 2,712
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,104 1,617 1,203
Depreciation and amortization 1,971 2,231 1,783
Securities available for sale losses (gains) 228 (177) (102)
Gains on sales of mortgages held for sale (117) (182) (95)
Gains on sales of loans (68) (94) (47)
Gains on disposition of operations (107) (100) (15)
Release of preferred shares to ESOP 86 32 34
Net (increase) decrease in trading assets (462) 468 (519)
Deferred income tax expense (benefit) 1,611 (53) 230
Net (increase) decrease in accrued interest receivable (113) (11) 84
Net (decrease) increase in accrued interest payable (36) (2) 52
Originations of mortgages held for sale (94,988) (124,959) (61,592)
Proceeds from sales of mortgages held for sale 105,159 114,930 58,403
Net increase in loans held for sale (874) (822) (846)
Other assets, net (2,452) 74 1,507
Other accrued expenses and liabilities, net 1,321 621 (119)
------- -------- --------
Net cash provided (used) by operating activities 16,275 (4,236) 2,673
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 15,150 11,449 10,182
Proceeds from prepayments and maturities 8,757 12,419 8,104
Purchases (29,917) (27,192) (15,506)
Net cash paid for acquisitions (69) (222) (29)
Net increase in banking subsidiaries' loans
resulting from originations and collections (11,494) (5,126) (1,254)
Proceeds from sales (including participations) of banking
subsidiaries' loans 3,986 2,832 1,225
Purchases (including participations) of banking subsidiaries' loans (1,246) (135) (314)
Principal collected on nonbank subsidiaries' loans 4,844 7,788 8,456
Nonbank subsidiaries' loans originated (9,002) (8,962) (8,748)
Cash (paid for) proceeds from dispositions of operations (731) 484 16
Proceeds from sales of foreclosed assets 234 279 278
Net decrease (increase) in federal funds sold and securities
purchased under resale agreements 25 (492) 460
Net increase in mortgage servicing rights (2,094) (913) (627)
Other, net (2,366) (2,956) (233)
------- -------- --------
Net cash (used) provided by investing activities (23,923) (10,747) 2,010
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (4,868) 7,446 (6,192)
Net increase in short-term borrowings 11,912 2,912 3,567
Proceeds from issuance of long-term debt 13,325 9,642 4,606
Repayment of long-term debt (8,981) (5,748) (5,622)
Proceeds from issuance of guaranteed preferred beneficial
interests in Company's subordinated debentures -- -- 149
Proceeds from issuance of common stock 528 1,115 251
Redemption of preferred stock (191) -- (325)
Repurchases of common stock (2,141) (1,258) (2,263)
Net decrease in notes receivable from ESOP 2 9 1
Payment of cash dividends on preferred and common stock (1,436) (1,113) (1,046)
Other, net (36) 1,444 (1,213)
------- -------- --------
Net cash provided (used) by financing activities 8,114 14,449 (8,087)
------- -------- --------
NET CHANGE IN CASH AND DUE FROM BANKS 466 (534) (3,404)
Cash and due from banks at beginning of year 13,652 14,186 17,590
------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR $14,118 $ 13,652 $ 14,186
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,855 $ 5,784 $ 5,489
Income taxes $ 1,022 $ 1,350 $ 1,294
Noncash investing and financing activities:
Transfers from loans to foreclosed assets $ 220 $ 223 $ 162
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
34
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company and Subsidiaries (the Company) is a diversified
financial services company providing banking, mortgage and consumer finance
through about 5,600 stores, the Internet and other distribution channels
throughout North America, including all 50 states, and elsewhere
internationally. Wells Fargo & Company (the Parent) is a bank holding company.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles (GAAP) and prevailing practices within the
financial services industry. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and income and expenses during the reporting period. Actual
results could differ from those estimates. Certain amounts in the financial
statements for prior years have been reclassified to conform with the current
financial statement presentation.
On October 25, 2000, the merger involving the Company and First Security
Corporation (FSCO Merger) was completed, with First Security Corporation (First
Security) surviving as a wholly owned subsidiary of the Company. The FSCO Merger
was accounted for under the pooling of interests method of accounting and,
accordingly, the information included in the financial statements presents the
combined results as if the FSCO Merger had been in effect for all periods
presented.
On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo
& Company (WFC 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 WFC Merger is referred to as the former
Norwest. The WFC Merger was accounted for under the pooling of interests
method of accounting and, accordingly, the information included in the
financial statements presents the combined results as if the WFC Merger had
been in effect for all periods presented.
Certain amounts in the financial statements for prior years have been
reclassified to conform with the current financial statements presentation.
The following is a description of the significant accounting policies of the
Company.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
the Parent, and its majority-owned subsidiaries, which are consolidated on a
line-by-line basis. Significant intercompany accounts and transactions are
eliminated in consolidation. Other subsidiaries and affiliates in which there
is at least 20% ownership are generally accounted for by the equity method;
those in which there is less than 20% ownership are generally carried at cost.
35
Investments that are accounted for by either the equity or cost method are
included in other assets.
SECURITIES
Securities are accounted for according to their purpose and holding period.
SECURITIES AVAILABLE FOR SALE Debt securities that may not be held until
maturity and marketable equity securities are classified as securities
available for sale and are reported at fair value, with unrealized gains and
losses, after applicable taxes, reported as a component of cumulative other
comprehensive income. The estimated fair value of a security is determined
based on current quotations, where available. Where current quotations are
not available, the estimated fair value is determined based primarily on the
present value of future cash flows, adjusted for the quality rating of the
securities, prepayment assumptions and other factors. Declines in the value
of debt securities and marketable equity securities that are considered other
than temporary are recorded in noninterest income as a loss on securities
available for sale. Realized gains and losses are recorded in noninterest
income using the identified certificate method. For certain debt securities
(for example, Government National Mortgage Association securities), the
Company anticipates prepayments of principal in the calculation of the
effective yield.
TRADING SECURITIES Securities acquired for short-term appreciation or other
trading purposes are recorded in a trading portfolio and are carried at fair
value, with unrealized gains and losses recorded in noninterest income.
NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities include the
venture capital equity securities that are not publicly traded and securities
acquired for various purposes, such as troubled debt restructurings and as a
regulatory requirement (for example, Federal Reserve Bank stock). These
securities are generally accounted for at cost. The asset value is reduced when
declines in value are considered to be other than temporary and the estimated
loss is recorded in noninterest income as a loss from equity investments along
with income recognized on these assets.
MORTGAGES HELD FOR SALE
Mortgages held for sale are stated at the lower of aggregate cost or market
value. The determination of market value includes consideration of all open
positions, outstanding commitments from investors, related fees paid and related
hedging gains and losses. Gains and losses on sales of mortgages are recognized
at settlement dates and are determined by the difference between sales proceeds
and the carrying value of the mortgages. Gains and losses are recorded in
noninterest income.
36
LOANS HELD FOR SALE
Loans held for sale include those student loans which are classified as
held for sale because the Company does not intend to hold these loans until
maturity or sales of the loans are pending. Such loans are carried at the lower
of aggregate cost or market value. Gains and losses are recorded in noninterest
income, based on the difference between sales proceeds and carrying value.
LOANS
Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income, which includes deferred fees net of deferred direct
incremental loan origination costs, is amortized to interest income generally
over the contractual life of the loan using an interest method or the
straight-line method if it is not materially different.
NONACCRUAL LOANS Generally, loans are placed on nonaccrual status upon
becoming 90 days past due as to interest or principal (unless both well-secured
and in the process of collection), when the full timely collection of interest
or principal becomes uncertain or when a portion of the principal balance has
been charged off. Real estate 1-4 family loans (both first liens and junior
liens) are placed on nonaccrual status within 120 days of becoming past due as
to interest or principal, regardless of security. Generally, consumer loans not
secured by real estate are placed on nonaccrual status only when a portion of
the principal has been charged off. Such loans are entirely charged off when
deemed uncollectible or when they reach a predetermined number of days past due
depending upon loan product, industry practice, country, terms and other
factors.
When a loan is placed on nonaccrual status, the accrued and unpaid interest
receivable is reversed and the loan is accounted for on the cash or cost
recovery method thereafter, until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when all delinquent interest
and principal become current in accordance with the terms of the loan agreement
or when the loan is both well-secured and in the process of collection and
collectibility is no longer doubtful.
IMPAIRED LOANS Loans, other than those included in large groups of
smaller-balance homogeneous loans, are considered impaired when, based on
current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled interest payments. For a loan that has
been restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the
contractual terms specified by the restructuring agreement.
This assessment for impairment occurs when and while such loans are on
nonaccrual, or the loan has been restructured. When a loan with unique risk
characteristics has been identified as being impaired, the amount of
impairment will be measured by the Company using discounted cash flows,
except when it is determined that the sole (remaining) source of repayment
for the
37
loan is the operation or liquidation of the underlying collateral. In such
cases, the current fair value of the collateral, reduced by costs to sell, will
be used in place of discounted cash flows. Additionally, some impaired loans
with commitments of less than $1 million are aggregated for the purpose of
measuring impairment using historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount), an impairment is recognized by
creating or adjusting an existing allocation of the allowance for loan losses.
RESTRUCTURED LOANS In cases where a borrower experiences financial
difficulties and the Company makes certain concessionary modifications to
contractual terms, the loan is classified as a restructured (accruing) loan.
Loans restructured at a rate equal to or greater than that of a new loan with
comparable risk at the time the contract is modified may be excluded from the
impairment assessment and may cease to be considered impaired loans in the
calendar years subsequent to the restructuring if they are not impaired based on
the modified terms.
Generally, a nonaccrual loan that is restructured remains on nonaccrual for
a period of six months to demonstrate that the borrower can meet the
restructured terms. However, performance prior to the restructuring, or
significant events that coincide with the restructuring, are included in
assessing whether the borrower can meet the new terms and may result in the loan
being returned to accrual at the time of restructuring or after a shorter
performance period. If the borrower's ability to meet the revised payment
schedule is uncertain, the loan remains classified as a nonaccrual loan.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation
allowance for probable losses inherent in the portfolio as of the balance sheet
date. The Company's determination of the level of the allowance for loan losses
rests upon various judgments and assumptions, including general economic
conditions, loan portfolio composition, prior loan loss experience, evaluation
of credit risk related to certain individual borrowers and the Company's ongoing
examination process and that of its regulators. The Company considers the
allowance for loan losses adequate to cover losses inherent in loans, loan
commitments and standby and other letters of credit.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
A transfer of financial assets is accounted for as a sale when control is
surrendered over the assets transferred. Servicing rights and other retained
interests in the assets sold are recorded by allocating the previous recorded
investment between the asset sold and the interest retained based on their
relative fair values, if practicable to determine, at the date of transfer.
The Company recognizes as assets the rights to service mortgage loans for
others, whether the servicing rights are acquired through purchases or retained
upon sales of loan originations. For purposes of evaluating and measuring
impairment of mortgage servicing rights, the Company stratifies its portfolio on
the basis of certain risk characteristics including loan type and note
38
rate. Based upon current fair values and considering derivative financial
instruments used as hedges, mortgage servicing rights are periodically assessed
for impairment. Impairment is recognized during the period in which impairment
occurs. Mortgage servicing rights are amortized over the period of estimated net
servicing income and take into account appropriate prepayment assumptions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Capital leases are included in premises and equipment at the
capitalized amount less accumulated amortization.
Depreciation and amortization are computed primarily using the
straight-line method. Estimated useful lives range up to 40 years for buildings,
2 to 10 years for furniture and equipment, and up to the lease term for
leasehold improvements. Capitalized leased assets are amortized on a
straight-line basis over the lives of the respective leases, which generally
range from 20 to 35 years.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, results from purchase acquisitions made by the Company.
Substantially all of the Company's goodwill is being amortized using the
straight-line method over 25 years. Core deposit intangibles are amortized on an
accelerated basis based on an estimated useful life of 10 to 15 years. Certain
identifiable intangible assets that are included in other assets are generally
amortized using an accelerated method over an original life of 10 to 15 years.
The Company reviews its intangible assets periodically for
other-than-temporary impairment. If such impairment is indicated, recoverability
of the asset is assessed based on expected undiscounted net cash flows.
INCOME TAXES
The Company files a consolidated federal income tax return. Federal income
tax is generally allocated to individual subsidiaries as if each had filed a
separate return. Combined state tax returns are filed in certain states. State
taxes are also allocated to individual subsidiaries.
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
Foreign taxes paid are applied as credits to reduce federal income taxes
payable.
39
EARNINGS PER COMMON SHARE
Earnings per common share are presented under two formats: earnings per
common share and diluted earnings per common share. Earnings per common share
are computed by dividing net income (after deducting dividends on preferred
stock) by the average number of common shares outstanding during the year.
Diluted earnings per common share are computed by dividing net income (after
deducting dividends on preferred stock) by the average number of common shares
outstanding during the year, plus the impact of those common stock equivalents
(i.e., stock options, restricted share rights and convertible subordinated
debentures) that are dilutive.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE DERIVATIVES The Company uses interest rate derivative
financial instruments (futures contracts, forward contracts, swaps, caps, floors
and options) primarily to hedge mismatches in the rate maturity of loans and
their funding sources and the price risk of interest-rate sensitive assets.
These instruments serve to reduce rather than increase the Company's exposure to
movements in interest rates. At the inception of the hedge, the Company
identifies an individual asset or liability, or an identifiable group of
essentially similar assets or liabilities, that expose the Company to interest
rate risk at the consolidated or enterprise level. Interest rate derivatives are
accounted for by the deferral or accrual method only if they are designated as
hedges and are expected to be and are effective in substantially reducing the
risk arising from the asset or liability identified as exposing the Company to
risk. Futures contracts must meet specific high correlation tests. For caps,
floors and swaps that are used to hedge mismatches between interest-bearing
assets and liabilities, their notional amount, interest rate index and life must
closely match the related terms of the hedged asset or liability. Floors, swaps
and options that hedge mortgage servicing rights must correlate based on certain
duration and convexity parameters. For futures contracts, if the underlying
financial instrument differs from the hedged asset or liability, there must be a
clear economic relationship between the prices of the two financial instruments.
If periodic assessment indicates that the derivatives no longer provide an
effective hedge, hedge accounting is discontinued; previously unrecognized hedge
results and the net settlement upon close-out or termination that offset changes
in value of the hedged asset or liability are deferred and amortized over the
life of the asset or liability with excess amounts recognized in noninterest
income or noninterest expense.
Gains and losses on futures contracts, which result from the daily settlement
of their open positions, and on forward contracts are deferred and classified
on the balance sheet consistent with the hedge strategy. They are recognized
in income along with and when the effects of the related changes of the
hedged asset or liability are recognized. Amounts payable or receivable for
swaps, caps and floors are accrued with the passage of time, the effect of
which is included in income along with and when the effects of the related
changes of the hedged asset or liability are recognized. Gains and losses on
options are recognized as a component of the income reported on the hedged
asset or liability. Fees associated with these financial contracts are
included on the balance sheet at the time that the fee is paid and are
classified consistent with the hedge strategy. These fees are fully
recognized by the end of their contractual life.
40
If a hedged asset or liability settles before maturity of the hedging
interest rate derivatives, the derivatives are closed out or settled, or are
redesignated as hedges of other assets or liabilities. For those contracts that
are closed out or settled, previously unrecognized hedge results and the net
settlement upon close-out or termination are accounted for as part of the gains
and losses on the hedged asset or liability. If interest rate derivatives used
in an effective hedge are closed out or terminated before the hedged item
settles, previously unrecognized hedge results and the net settlement upon
close-out or termination are deferred and amortized over the life of the hedged
asset or liability. Cash flows resulting from interest rate derivatives
(including any related fees) that are accounted for as hedges of assets and
liabilities are classified in the cash flow statement in the same category as
the cash flows from the items being hedged and are reflected in that statement
when the cash receipts or payments due under the terms of the instruments are
collected, paid or settled.
Interest rate derivatives entered into as an accommodation to customers,
interest rate derivatives used to offset the interest rate risk of those
contracts and positions taken based on the Company's market expectations or to
benefit from price differentials between financial instruments and markets are
carried at fair value with unrealized gains and losses recorded in noninterest
income. Losses are recognized currently on put options written when the fair
value of the underlying security falls below the contractual price at which the
security may be put to the Company plus the premium received. Premiums received
on covered call options written are deferred until the option terminates. If the
fair value of the underlying asset is greater than the contractual price at
which the Company must sell the asset, the option should be exercised, at which
time the premium will be recorded as an adjustment of the gain or loss
recognized on the underlying asset. If the option expires, the premium is
recognized in other noninterest income. The fair value of interest rate
derivative financial instruments with an unrealized gain is included in trading
assets (i.e., within other assets) while the fair value of instruments with an
unrealized loss is included in other liabilities. Cash flows resulting from
instruments carried at fair value are classified in the cash flow statement as
operating cash flows and are reflected in that statement when the cash receipts
or payments due under the terms of the instruments are collected, paid or
settled.
Credit risk related to interest rate derivative financial instruments is
considered and, if material, provided for separately from the allowance for
loan losses.
FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange
derivative financial instruments (forward and spot contracts and options)
primarily as an accommodation to customers and offsets the related foreign
exchange risk with other foreign exchange derivatives. Those contracts are
carried at fair value, with unrealized gains and losses recorded in
noninterest income. Cash flows resulting from foreign exchange derivatives
are classified in the cash flow statement as operating cash flows and are
reflected in that statement when the cash receipts or payments due under the
terms of the foreign exchange derivatives are collected, paid or settled.
41
The Company also uses forward foreign exchange contracts to hedge
uncertainties in funding costs related to specific liabilities denominated in
foreign currencies. Gains and losses on those contracts are recognized in
income and classified on the balance sheet consistent with the hedged item.
Cash flows resulting from these foreign exchange derivatives (including any
related fees) are classified in the cash flow statement in the same category
as the cash flows from the item being hedged and are reflected in that
statement when the cash receipts or payments due under the terms of the
instruments are collected, paid or settled.
Credit risk related to all foreign exchange derivatives is considered and, if
material, provided for separately from the allowance for loan losses.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign consumer finance subsidiaries are
measured using local currency as the functional currency. Assets and
liabilities are translated into United States dollars at period-end exchange
rates, and income and expense accounts are translated at average monthly
exchange rates. Net exchange gains or losses resulting from such translation
are excluded from net income and included as a component of cumulative other
comprehensive income.
2.
BUSINESS COMBINATIONS
The Company regularly explores opportunities to acquire financial
institutions and related businesses. Generally, management of the Company
does not make a public announcement about an acquisition opportunity until a
definitive agreement is signed.
42
Excluding the merger involving Norwest Corporation and Wells Fargo & Company
in November, 1998, the table below includes transactions completed in the
years ended December 31, 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------------------
Date Assets Method of
(in millions) accounting
- ------------------------------------------------------------------------------------------------------------------------
1999
Mid-Penn Consumer Discount Company, Philadelphia, Pennsylvania January 21 $ 11 Purchase
Century Business Credit Corporation, New York, New York February 1 342 Purchase
Van Kasper & Company, San Francisco, California February 12 20 Purchase
Metropolitan Bancshares, Inc., Aurora, Colorado February 23 64 Purchase
Mercantile Financial Enterprises, Inc., Brownsville, Texas February 26 779 Pooling of interests*
Riverton State Bank Holding Company, Riverton, Wyoming March 12 81 Purchase
Comstock Bancorp, Reno, Nevada June 1 208 Purchase
Greater Midwest Leasing Company, Minneapolis, Minnesota June 3 24 Purchase
XEON Financial Corporation, Stateline, Nevada June 14 122 Purchase
Mustang Financial Corporation, Rio Vista, Texas June 25 254 Purchase
Eastern Heights Bank, St. Paul, Minnesota July 1 453 Purchase
Goodson Insurance Agency, Denver, Colorado August 1 -- Purchase
SB Insurance Company, Marshall, Minnesota October 15 -- Purchase
Allied Leasing Company, Burnsville, Minnesota November 1 17 Purchase
Eastdil Realty Company, L.L.C., New York, New York November 16 9 Purchase
Texas Bancshares, Inc., San Antonio, Texas December 16 370 Purchase
-------
$ 2,754
=======
1998
Finvercon S.A. Compania, Financiera, Argentina January 8 $ 57 Purchase
Fidelity Bancshares, Inc., Fort Worth, Texas January 13 111 Purchase
Rio Grande Bancshares, Inc., Las Cruces, New Mexico February 2 417 Purchase
Heritage Trust Company, Grand Junction, Colorado February 20 2 Purchase
Founders Trust Company, Dallas, Texas March 2 2 Purchase
The T. Eaton Acceptance Company Limited and National Retail
Credit Services Limited, Don Mills, Ontario, Canada April 21 370 Purchase
WMC Mortgage Corporation, Woodland Hills, California April 30 5 Purchase
First Bank, Katy, Texas May 22 310 Pooling of interests*
First Bank of Grants, Grants, New Mexico May 28 45 Purchase
Spring Mountain Escrow Corporation, Irvine, California May 29 1 Purchase
California State Bank, West Covina, California May 30 864 Pooling of interest*
Emjay Corporation, Milwaukee, Wisconsin June 15 6 Purchase
Six affiliated bank holding companies and related entities,
located in Minnesota, Wisconsin, New Mexico,
Arizona and Colorado, including MidAmerica July 2,23 1,317 Pooling of interests*
First Bancshares of Valley City, Inc., Valley City, North Dakota July 31 96 Purchase
Peoples Insurance Agency, Inc., Valley City, North Dakota July 31 -- Purchase
Star Bancshares, Inc., Austin, Texas August 31 582 Pooling of interests*
Freedom Trailer Leasing, Inc., Chesterfield, Missouri August 31 5 Purchase
Little Mountain Bancshares, Inc., Monticello, Minnesota September 8 82 Purchase
First National Bank of Missouri City, Missouri City, Texas October 30 91 Purchase
Franklin Bancshares, Inc., Franklin, Texas December 1 72 Purchase
Marine National Bank, Irvine, California December 21 259 Purchase
-------
$ 4,694
=======
1997
Franklin Federal Bancorp., F.S.B., Austin, Texas January 1 $ 621 Purchase of assets
Central Bancorporation, Inc., Fort Worth, Texas January 28 1,105 Pooling of interests*
Reliable Financial Services, Inc., San Juan, Puerto Rico February 21 39 Pooling of interests*
Statewide Mortgage Company, Birmingham, Alabama February 26 28 Purchase
The United Group, Inc., Charlotte, North Carolina March 21 41 Purchase
Farmers National Bancorp, Inc., Geneseo, Illinois March 24 198 Purchase
The First National Bankshares, Inc., Tucumcari, New Mexico June 17 90 Purchase
American Bancorp of Nevada, Las Vegas, Nevada June 30 304 Purchase
Tennessee Credit Corporation, Nashville, Tennessee July 18 13 Purchase
Western National Trust Company, National Association,
Odessa, Texas July 31 -- Purchase
Fidelity Acceptance Corporation, St. Louis, Missouri August 31 1,135 Purchase
The Bank of the Southwest, National Association, Pagosa Springs,
Colorado September 2 85 Purchase
International Bancorporation, Inc., Golden Valley, Minnesota October 21 483 Pooling of interests*
Subsidiaries of Cityside Holding L.L.C., Eden Prairie, Minnesota October 30 104 Purchase
J.L.J. Financial Services Corporation, Montvale, New Jersey October 31 26 Purchase
Myers Bancshares Inc., Dallas, Texas November 14 135 Purchase
Packers Management Company, Inc., Omaha, Nebraska November 25 162 Purchase
First Valley Bank Group, Inc., Los Fresnos, Texas December 1 519 Pooling of interests*
-------
$ 5,088
=======
- ------------------------------------------------------------------------------------------------------------------------
* Pooling of interests transaction was not material to the Company's
consolidated financial statements; accordingly, previously reported results
were not restated.
43
In connection with the foregoing transactions, the Company paid cash in the
aggregate amount of $541 million, $413 million and $490 million in 1999, 1998
and 1997, respectively, and issued aggregate common shares of 11.1 million,
18.1 million and 25.8 million in 1999, 1998 and 1997, respectively. At
December 31, 1999, the Company had announced 7 pending transactions with
total assets of approximately $6.9 billion and anticipated that 48 million
common shares would be issued upon consummation of these transactions. These
acquisitions were completed by mid-2000.
MERGER INVOLVING WELLS FARGO AND FIRST SECURITY
On October 25, 2000 the merger involving Wells Fargo & Company and First
Security Corporation was completed. Under the terms of the FSCO Merger
agreement, stockholders of First Security received 0.355 shares of common
stock of the Company for each share of common stock owned. Each outstanding
and unexercised option granted by First Security was converted into an option
to purchase common stock of the Company based on the agreed-upon exchange
ratio.
As a condition to the merger, the Company was required by regulatory agencies
to divest 39 stores in Idaho, New Mexico, Nevada and Utah having aggregate
deposits of approximately $1.5 billion. In the fourth quarter of 2000, the
Company entered into agreements to sell these stores. These sales are
expected to be completed in the first quarter of 2001.
Previously reported financial information for Wells Fargo and First Security
is shown in the table below.
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Revenue
Wells Fargo $16,775 $15,417 $14,323
First Security 1,319 1,178 983
Net Income
Wells Fargo $3,747 $1,950 $2,499
First Security 273 248 215
- -------------------------------------------------------------------------------------------------------------------
The combined financial results of the Company include adjustments to conform
the accounting policies of Wells Fargo and First Security. The December 31,
1996 balances of certain balance sheet accounts were adjusted to reflect the
conforming accounting treatment. Other liabilities increased $4 million and
retained earnings decreased $4 million to reflect the conforming post
retirement transition obligation identified with the implementation of FAS
106, Employers' Accounting for Post Retirement Benefits Other than Pension
Accounting Treatment. Premises and equipment at December 31, 1996 decreased
by $15 million and retained earnings decreased by
44
$9 million to reflect the conforming of the capitalization policies. Equipment
expense (pretax) increased $10 million, $9 million and $3 million in 1999, 1998
and 1997, respectively. Net income decreased $8 million, $7 million and $2
million in 1999, 1998 and 1997, respectively.
MERGER INVOLVING WELLS FARGO AND NORWEST
On November 2, 1998, the WFC Merger involving Wells Fargo & Company and
Norwest Corporation was completed. Under the terms of the merger agreement,
stockholders of the former Wells Fargo received 10 shares of common stock of
the Company for each share of common stock owned. Each share of former Wells
Fargo preferred stock was converted into one share of the Company's preferred
stock. These shares rank on parity with the Company's preferred stock as to
dividends and upon liquidation. Each outstanding and unexercised option
granted by the former Wells Fargo was converted into an option to purchase
common stock of the Company based on the agreed-upon exchange ratio.
As a condition to the WFC Merger, the Company was required by regulatory
agencies to divest stores in Arizona and Nevada having aggregate deposits of
approximately $1 billion. As a result of these sales, which were completed in
1999, $104 million of pretax gains were included in noninterest income as net
gains on dispositions of operations.
In connection with the WFC Merger, the Company recorded approximately $600
million of restructuring charges in the fourth quarter of 1998. The
restructuring plans are evaluated on a regular basis during the integration
process. The charges included a severance-related reserve of $250 million
associated with the elimination of about 5% of the Company's positions, most
of which is planned to occur by year-end 2000. This reserve was determined
based on the Company's existing severance plans for involuntary terminations.
The charges also included approximately $250 million related to dispositions
of owned and leased premises held for sale or remarketing, and $100 million
of other costs associated with exiting activities due to the WFC Merger. The
following table presents the 1999 activity in these restructuring reserves:
- -------------------------------------------------------------------------------------------------------------------
Severance-
related
(in millions) costs Premises Other Total
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 250 (1) $ 250 (2) $ 100 $ 600
Utilization (95) (131) (64) (290)
Changes in estimates -- (31) -- (31)
------ ------ ------ -------
Balance, December 31, 1999 $ 155 $ 88 (3) $ 36 $ 279
====== ====== ====== =======
- -------------------------------------------------------------------------------------------------------------------
(1) The 1998 charges recorded for severance-related costs were classified on the
income statement as salaries.
(2) The 1998 charges recorded for premises were classified on the income
statement as net losses on dispositions of premises and equipment.
(3) Includes $38 million of owned premises.
45
Total utilization included approximately $97 million of cash payments, $68
million of legal obligations as of December 31, 1999 and $125 million of
write-downs. Approximately 1,730 employees had entered the severance process
through December 31, 1999.
A majority of the changes in estimates resulted from a reassessment of the
economics and space requirements at a leased Colorado office building
complex. The reassessment indicated that the complex could be reconfigured to
meet the Company's needs. The changes in estimates were recorded on the
income statement as an adjustment to net (gains) losses on dispositions of
premises and equipment. The suspension of depreciation on assets held for
disposition reduced net occupancy and equipment expense by a total of $15
million in 1999.
3.
CASH, LOAN AND DIVIDEND RESTRICTIONS
Federal Reserve Board (FRB) regulations require reserve balances on deposits
to be maintained by each of the banking subsidiaries with the Federal Reserve
Banks. The average required reserve balance was $2.1 billion and $2.3 billion
in 1999 and 1998, respectively.
Federal law prevents the Company and its nonbank subsidiaries from borrowing
from its subsidiary banks unless the loans are secured by specified
collateral. Such secured loans by any subsidiary bank are generally limited
to 10% of the subsidiary bank's capital and surplus (as defined, which for
this purpose represents Tier 1 and Tier 2 capital, as calculated under the
risk-based capital guidelines, plus the balance of the allowance for loan
losses excluded from Tier 2 capital) and aggregate loans to the Company and
its nonbank subsidiaries are limited to 20% of the subsidiary bank's capital
and surplus. (For further discussion of risk-based capital, see Note 22 to
Financial Statements.)
The payment of dividends to the Parent by subsidiary banks is subject to
various federal and state regulatory limitations. Dividends payable by a
national bank to the Parent without the express approval of the Office of the
Comptroller of the Currency (OCC) are limited to that bank's retained net
profits for the preceding two calendar years plus retained net profits up to
the date of any dividend declaration in the current calendar year. Retained
net profits are defined by the OCC as net income, less dividends declared
during the period, both of which are based on regulatory accounting
principles. The Company also has state-chartered subsidiary banks that are
subject to state regulations that limit dividends. Under these provisions and
except for Wells Fargo Bank, N.A. (WFB, N.A.), the Company's national and
state-chartered subsidiary banks could have declared dividends of $1,571
million and $1,119 million in 1999 and 1998, respectively, without
obtaining prior regulatory approval. With the express approval of the OCC,
WFB, N.A. declared dividends in 1999 and 1998 of $500 million in excess of
its net income of $1,876 million for those years. (The total dividends
declared by WFB, N.A. in 1999, 1998 and 1997 were $900 million, $1,476
million and $2,019 million, respectively.) Therefore, before it can declare
dividends in 2000 without the approval of the OCC, WFB, N.A. must have net
income of $500 million plus an amount greater than the dividends declared in
2000. Since it is not expected to have net income of
46
$500 million plus an amount greater than the dividends expected to be
declared in 2000, WFB, N.A. will again need to obtain the approval of the OCC
before any dividends are declared in 2000. In addition, the Company's
non-bank subsidiaries could have declared dividends of $1,231 million and
$1,290 million at December 31, 1999 and 1998, respectively.
47
4.
SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major components
of securities available for sale carried at fair value. There were no
securities classified as held to maturity at the end of 1999 or 1998.
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- -----------------------------------------------
ESTIMATED ESTIMATED Estimated Estimated
UNREALIZED UNREALIZED ESTIMATED unrealized unrealized Estimated
GROSS GROSS FAIR gross gross fair
(in millions) COST GAINS LOSSES VALUE Cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------------
Securities of U.S. Treasury and
federal agencies $ 6,426 $ 13 $ 348 $ 6,091 $ 3,902 $ 53 $19 $ 3,936
Securities of U.S. states and
political subdivisions 2,352 50 35 2,367 2,036 123 5 2,154
Mortgage-backed securities:
Federal agencies 26,239 110 477 25,872 23,301 322 30 23,593
Private collateralized
mortgage obligations (1) 3,747 12 106 3,653 4,181 30 9 4,202
------- ------ ------ ------- ------- ---- --- -------
Total mortgage-backed
securities 29,986 122 583 29,525 27,482 352 39 27,795
Other 2,544 8 114 2,438 1,924 41 21 1,944
------- ------ ------ ------- ------- ---- --- -------
Total debt securities 41,308 193 1,080 40,421 35,344 569 84 35,829
Marketable equity securities 1,526 1,992 28 3,490 438 405 12 831
------- ------ ------ ------- ------- ---- --- -------
Total $42,834 $2,185 $1,108 $43,911 $35,782 $974 $96 $36,660
======= ====== ====== ======= ======= ==== === =======
- --------------------------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated
bonds collateralized by 1-4 family residential first mortgages.
At December 31, 1999, the Company held no securities of any single issuer
(excluding the U.S. Treasury and federal agencies) with a book value that
exceeded 10% of stockholders' equity.
Securities pledged primarily to secure trust and public deposits and for
other purposes as required or permitted by law were $19.0 billion and $14.2
billion at December 31, 1999 and 1998, respectively.
The table below provides the components of the realized net (loss) gain on
securities from the securities available for sale portfolio. (Realized gains
on marketable equity securities from venture capital investments are reported
as net venture capital gains.)
- ---------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------
Realized gross gains $ 91 $217 $174
Realized gross losses (319) (40) (72)
----- ---- ----
Realized net (loss) gain $(228) $177 $102
===== ==== ====
- ------------------------------------------------------------------------------------
48
The table below provides the remaining contractual principal maturities and
yields (taxable-equivalent basis) of debt securities available for sale. The
remaining contractual principal maturities for mortgage-backed securities were
allocated assuming no prepayments. Expected remaining maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
------------------------------------------------------------------------------------------------
Remaining contractual principal maturity
----------------------------------------------------------------------------
After one year After five years
Weighted Within one year through five years through ten years After ten years
Total average --------------- ------------------ ----------------- ------------------
(in millions) amount yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Securities of U.S. Treasury
and federal agencies $6,091 5.75% $ 639 6.38% $1,558 6.34% $3,069 5.33% $ 825 5.73%
Securities of U.S. states and
political subdivisions 2,367 7.87 159 6.86 441 7.23 275 6.64 1,492 8.40
Mortgage-backed securities:
Federal agencies 25,872 7.03 650 6.55 5,162 6.68 2,453 7.18 17,607 7.13
Private collateralized
mortgage obligations 3,653 6.52 76 6.32 317 6.40 1,295 6.51 1,965 6.55
------ ------ ------ ------ -------
Total mortgage-backed
securities 29,525 6.97 726 6.53 5,479 6.67 3,748 6.95 19,572 7.07
Other 2,438 5.51 81 5.04 541 4.00 992 5.75 824 6.26
------ ------ ------ ------ -------
ESTIMATED FAIR VALUE
OF DEBT SECURITIES (1) $40,421 6.75% $1,605 6.43% $8,019 6.45% $8,084 6.18% $22,713 7.08%
======= ==== ====== ===== ====== ==== ====== ==== ======= ====
TOTAL COST OF DEBT SECURITIES $41,308 $1,650 $8,303 $ 8,384 $22,971
======= ====== ====== ======== =======
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of debt
securities available for sale.
49
5.
LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the major categories of loans outstanding is shown in the following
table.
- ----------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
1999 1998
(in millions) OUTSTANDING Outstanding
- ----------------------------------------------------------------------------------------------------------
Commercial $ 41,671 $ 38,218
Real estate 1-4 family first mortgage 13,506 12,613
Other real estate mortgage 20,899 18,033
Real estate construction 6,067 4,529
Consumer:
Real estate 1-4 family junior lien mortgage 12,949 11,135
Credit card 5,805 6,119
Other revolving credit and monthly payment 20,617 19,441
---------- ---------
Total consumer 39,371 36,695
Lease financing 9,890 8,046
Foreign 1,600 1,528
---------- ---------
Total loans (1) $133,004 $119,662
========== =========
- ----------------------------------------------------------------------------------------------------------
(1) Outstanding loan balances at December 31, 1999 and 1998 are net of
unearned income, including net deferred loan fees, of $3,378 million and
$3,095 million, respectively.
Total commitments to extend credit were $82,310 million and $80,820 million
at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998,
the commercial loan category and related unfunded commitments did not have an
industry concentration that exceeded 10% of total loans and unfunded
commitments.
In the course of evaluating the credit risk presented by a customer and the
pricing that will adequately compensate the Company for assuming that risk,
management may require a certain amount of collateral support. The type of
collateral held varies, but may include accounts receivable, inventory, land,
buildings, equipment, income-producing commercial properties and residential
real estate. The Company has the same collateral policy for loans whether
they are funded immediately or on a delayed basis (commitment).
A commitment to extend credit is a legally binding agreement to lend funds to
a customer usually at a stated interest rate and for a specified purpose.
Such commitments have fixed expiration dates and generally require a fee. The
extension of a commitment gives rise to credit risk. The actual liquidity
needs or the credit risk that the Company will experience will be lower than
the contractual amount of commitments to extend credit shown in the table
above because a significant portion of those commitments are expected to
expire without being drawn upon. Certain commitments are subject to loan
agreements containing covenants regarding the financial performance of the
customer that must be met before the Company is required to fund
50
the commitment. The Company uses the same credit policies in making
commitments to extend credit as it does in making loans.
In addition, the Company manages the potential credit risk in commitments to
extend credit by limiting the total amount of arrangements, both by
individual customer and in the aggregate; by monitoring the size and maturity
structure of these portfolios; and by applying the same credit standards
maintained for all of its related credit activities. The credit risk
associated with these commitments is considered in management's determination
of the allowance for loan losses.
Standby letters of credit totaled $4,759 million and $3,661 million at
December 31, 1999 and 1998, respectively. Standby letters of credit are
issued on behalf of customers in connection with contracts between the
customers and third parties. Under standby letters of credit, the Company
assures that the third parties will receive specified funds if customers fail
to meet their contractual obligations. The liquidity risk to the Company
arises from its obligation to make payment in the event of a customer's
contractual default. The credit risk involved in issuing standby letters of
credit and the Company's management of that credit risk is considered in
management's determination of the allowance for loan losses. Standby letters
of credit are net of participations sold to other institutions of $1,628
million in 1999 and $1,141 million in 1998.
Included in standby letters of credit are those that back financial
instruments (financial guarantees). The Company had issued or purchased
participations in financial guarantees of approximately $2,607 million and
$2,188 million at December 31, 1999 and 1998, respectively. The Company also
had commitments for commercial and similar letters of credit of $766 million
and $704 million at December 31, 1999 and 1998, respectively. Substantially
all fees received from the issuance of financial guarantees are deferred and
amortized on a straight-line basis over the term of the guarantee.
The Company has an established process to determine the adequacy of the
allowance for loan losses which assesses the risk and losses inherent in its
portfolio. This process provides an allowance consisting of two components,
allocated and unallocated. To arrive at the allocated component of the
allowance, the Company combines estimates of the allowances needed for loans
analyzed individually (including impaired loans subject to Statement of
Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis.
The determination of allocated reserves for portfolios of larger commercial
and commercial real estate loans involves a review of individual higher-risk
transactions, focusing on the accuracy of loan grading, assessments of
specific loss content, and, in some cases, strategies for resolving problem
credits. These considerations supplement the application of loss factors
delineated by individual loan grade to the existing distribution of risk
exposures, thus framing an assessment of inherent losses across the entire
wholesale lending portfolio segment which is responsive to shifts in
portfolio risk content. The loss factors used for this analysis have been
derived from migration models which track actual portfolio movements from
problem asset loan grades to
51
loss over a 5 to 10 year period. In the case of pass loan grades, the loss
factors are derived from analogous loss experience in public debt markets,
calibrated to the long-term average loss experience of the Company's
portfolios. The loan loss reserve allocations arrived at through this factor
methodology are adjusted by management's judgment concerning the effect of
recent economic events on portfolio performance.
In the case of more homogeneous portfolios, such as consumer loans and
leases, residential mortgage loans, and some segments of small business
lending, the determination of allocated reserves is conducted at a more
aggregate, or pooled, level. For portfolios of this nature, the risk
assessment process emphasizes the development of rigorous forecasting models,
which focus on recent delinquency and loss trends in different portfolio
segments to project relevant risk metrics over an intermediate-term horizon.
Such analyses are updated frequently to capture the most recent behavioral
characteristics of the subject portfolios, as well as any changes in
management's loss mitigation or customer solicitation strategies, in order to
reduce the differences between estimated and observed losses. A reserve which
approximates one year of projected net losses is provided as the baseline
allocation for most homogeneous portfolios, to which management will add
certain adjustments to ensure that a prudent amount of conservatism is
present in the specific assumptions underlying that forecast.
While coverage of one year's losses is often adequate (particularly for
homogeneous pools of loans and leases), the time period covered by the
allowance may vary by portfolio, based on the Company's best estimate of the
inherent losses in the entire portfolio as of the evaluation date. To
mitigate the imprecision inherent in most estimates of expected credit
losses, the allocated component of the allowance is supplemented by an
unallocated component. The unallocated component includes management's
judgmental determination of the amounts necessary for concentrations,
economic uncertainties and other subjective factors; correspondingly, the
relationship of the unallocated component to the total allowance for loan
losses may fluctuate from period to period. At December 31, 1999, the
unallocated portion amounted to 43% of the total allowance, compared with 36%
at December 31, 1998. Although management has allocated a portion of the
allowance to specific loan categories, the adequacy of the allowance must be
considered in its entirety.
The Company's determination of the level of the allowance and,
correspondingly, the provision for loan losses rests upon various judgments
and assumptions, including general economic conditions, loan portfolio
composition, prior loan loss experience and the Company's ongoing examination
process and that of its regulators. The Company has an internal risk analysis
and review staff that continuously reviews loan quality and reports the
results of its examinations to executive management and the Board of
Directors. Such reviews also assist management in establishing the level of
the allowance. Like all national banks, subsidiary national banks continue to
be subject to examination by their primary regulator, the Office of the
Comptroller of the Currency (OCC), and some have OCC examiners in residence.
These examinations occur throughout the year and target various activities of
the subsidiary national banks, including specific segments of the loan
portfolio (for example, commercial real estate and shared national credits).
In addition to the subsidiary national banks being examined by the OCC, the
Parent and its nonbank subsidiaries are examined by the FRB.
52
The Company considers the allowance for loan losses of $3,344 million
adequate to cover losses inherent in loans, loan commitments and standby and
other letters of credit at December 31, 1999.
53
Changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 3,307 $ 3,220 $ 3,202
Allowances related to business combinations, net 48 148 172
Provision for loan losses 1,104 1,617 1,203
Loan charge-offs:
Commercial (395) (271) (369)
Real estate 1-4 family first mortgage (14) (29) (28)
Other real estate mortgage (28) (54) (27)
Real estate construction (2) (3) (5)
Consumer:
Real estate 1-4 family junior lien mortgage (33) (31) (37)
Credit card (403) (549) (593)
Other revolving credit and monthly payment (585) (1,069) (672)
-------- -------- ---------
Total consumer (1,021) (1,649) (1,302)
Lease financing (38) (49) (49)
Foreign (90) (84) (37)
-------- -------- ---------
Total loan charge-offs (1,588) (2,139) (1,817)
-------- -------- ---------
Loan recoveries:
Commercial 90 87 110
Real estate 1-4 family first mortgage 6 12 10
Other real estate mortgage 38 79 63
Real estate construction 5 4 12
Consumer:
Real estate 1-4 family junior lien mortgage 15 7 10
Credit card 49 59 64
Other revolving credit and monthly payment 243 187 166
-------- -------- ---------
Total consumer 307 253 240
Lease financing 12 12 15
Foreign 15 14 10
-------- -------- ---------
Total loan recoveries 473 461 460
-------- -------- ---------
Total net loan charge-offs (1,115) (1,678) (1,357)
-------- -------- ---------
BALANCE, END OF YEAR $ 3,344 $ 3,307 $ 3,220
======== ========= =========
Total net loan charge-offs as a percentage of
average total loans .90% 1.44% 1.19%
======== ========= =========
Allowance as a percentage of total loans 2.51% 2.76% 2.77%
======== ========= =========
- -------------------------------------------------------------------------------------------------------------------
54
In accordance with FAS 114, the table below shows the recorded investment in
impaired loans by methodology used to measure impairment at December 31, 1999
and 1998:
- ----------------------------------------------------------------------------------------
December 31,
-----------------------------
(in millions) 1999 1998
- ----------------------------------------------------------------------------------------
Impairment measurement based on:
Collateral value method $ 188 $ 231
Discounted cash flow method 74 70
Historical loss factors 114 89
------- ------
Total (1) $ 376 $ 390
======= ======
- ----------------------------------------------------------------------------------------
(1) Includes $210 million and $157 million of impaired loans with a related
FAS 114 allowance of $48 million and $39 million at December 31, 1999 and
1998, respectively.
The average recorded investment in impaired loans during 1999, 1998 and 1997
was $376 million, $456 million and $519 million, respectively. Total interest
income recognized on impaired loans during 1999, 1998 and 1997 was $7
million, $13 million and $15 million, respectively, which was primarily
recorded using the cash method.
The Company uses either the cash or cost recovery method to record cash
receipts on impaired loans that are on nonaccrual. Under the cash method,
contractual interest is credited to interest income when received. This
method is used when the ultimate collectibility of the total principal is not
in doubt. Under the cost recovery method, all payments received are applied
to principal. This method is used when the ultimate collectibility of the
total principal is in doubt. Loans on the cost recovery method may be changed
to the cash method when the application of the cash payments has reduced the
principal balance to a level where collection of the remaining recorded
investment is no longer in doubt.
55
6.
PREMISES, EQUIPMENT, LEASE COMMITMENTS, INTEREST RECEIVABLE AND OTHER ASSETS
The following table presents comparative data for premises and equipment:
- -----------------------------------------------------------------------------------------
December 31,
----------------------------
(in millions) 1999 1998
- -----------------------------------------------------------------------------------------
Land $ 409 $ 406
Buildings 2,549 2,437
Furniture and equipment 2,670 2,828
Leasehold improvements 745 753
Premises leased under capital leases 76 80
-------- ---------
Total 6,449 6,504
Less accumulated depreciation and amortization 3,077 3,025
-------- ---------
Net book value $3,372 $3,479
======== =========
- -----------------------------------------------------------------------------------------
Depreciation and amortization expense was $499 million, $510 million and $478
million in 1999, 1998 and 1997, respectively.
The Company is obligated under a number of noncancelable operating leases for
premises (including vacant premises) and equipment with terms, including
renewal options, up to 100 years, many of which provide for periodic
adjustment of rentals based on changes in various economic indicators. The
following table shows future minimum payments under noncancelable operating
leases and capital leases, net of sublease rentals, with terms in excess of
one year as of December 31, 1999:
- ---------------------------------------------------------------------------
(in millions) Operating leases Capital leases
- ---------------------------------------------------------------------------
Year ended December 31,
2000 $436 $ 6
2001 362 5
2002 290 4
2003 210 3
2004 168 2
Thereafter 861 17
-------- -----
Total minimum lease payments $2,327 37
========
Executory costs (2)
Amounts representing interest (5)
-----
Present value of net minimum lease payments $ 30
=====
- ---------------------------------------------------------------------------
Rental expense, net of rental income, for all operating leases was $418
million, $504 million and $466 million in 1999, 1998 and 1997, respectively.
56
The components of interest receivable and other assets at December 31, 1999
and 1998 were as follows:
- -------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Nonmarketable equity investments $ 3,525 $ 2,539
Trading assets 2,690 1,089
Government National Mortgage Association
(GNMA) pool buy outs 1,516 1,624
Interest receivable 1,286 1,175
Certain identifiable intangible assets 264 240
Interest-earning deposits 199 113
Foreclosed assets 161 152
Due from customers on acceptances 103 128
Other 6,808 5,110
---------- ----------
Total interest receivable and other assets $ 16,552 $ 12,170
========== ==========
- -------------------------------------------------------------------------------------------------------------------
Noninterest income from nonmarketable equity investments accounted for using
the cost method was $138 million, $151 million and $157 million in 1999, 1998
and 1997, respectively.
GNMA pool buy outs are advances made to GNMA mortgage pools that are
guaranteed by the Federal Housing Administration or by the Department of
Veterans Affairs (collectively, "the guarantors"). These advances are made to
buy out government agency-guaranteed delinquent loans, pursuant to the
Company's servicing agreements. The Company, on behalf of the guarantors,
undertakes the collection and foreclosure process. After the foreclosure
process is complete, the Company is reimbursed for substantially all costs
incurred, including the advances, by the guarantors.
Trading assets consist predominantly of securities, including corporate debt
and U.S. government agency obligations. A major portion of the increase at
December 31, 1999, compared with December 31, 1998 was due to an increase in
U.S. Treasury securities. Interest income from trading assets was $81
million, $108 million and $89 million in 1999, 1998 and 1997, respectively.
Noninterest income from trading assets was $112 million, $207 million and
$152 million in 1999, 1998 and 1997, respectively.
Amortization expense for certain identifiable intangible assets included in
other assets was $68 million, $87 million and $76 million in 1999, 1998 and
1997, respectively.
57
7.
DEPOSITS
The aggregate amount of time certificates of deposit and other time deposits
issued by domestic offices was $32,589 million and $35,977 million at
December 31, 1999 and 1998, respectively. Substantially all of those deposits
were interest bearing. The contractual maturities of those deposits are shown
in the following table.
- -------------------------------------------------
(in millions) December 31, 1999
2000 $25,686
2001 4,460
2002 1,289
2003 531
2004 385
Thereafter 238
---------
Total $32,589
=========
- ------------------------------------------------
Of the total above, the amount of time deposits with a denomination of
$100,000 or more was $9,909 million and $9,518 million at December 31, 1999
and 1998, respectively. The contractual maturities of these deposits are
shown in the following table.
- --------------------------------------------------------------
(in millions) December 31, 1999
Three months or less $4,232
After three months through six months 2,312
After six months through twelve months 2,199
After twelve months 1,166
--------
Total $9,909
========
- --------------------------------------------------------------
Time certificates of deposit and other time deposits issued by foreign
offices with a denomination of $100,000 or more represent substantially all
of the foreign deposit liabilities of $3,914 million and $1,005 million at
December 31, 1999 and 1998, respectively.
Demand deposit overdrafts that have been reclassified as loan balances were
$903 million and $680 million at December 31, 1999 and 1998, respectively.
58
8.
SHORT-TERM BORROWINGS
The table below shows selected information for short-term borrowings. These
borrowings generally mature in less than 30 days.
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(in millions) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
Commercial paper and other short-term borrowings $ 17,246 6.06% $ 9,579 5.26% $ 6,477 5.73%
Federal funds purchased and securities sold under
agreements to repurchase 14,481 4.73 10,091 4.41 10,177 5.52
--------- -------- --------
Total $ 31,727 5.45 $ 19,670 4.82 $ 16,654 5.61
========= ======== ========
YEAR ENDED DECEMBER 31,
AVERAGE DAILY BALANCE
Commercial paper and other short-term borrowings $ 10,272 5.40% $ 7,706 5.60% $ 5,499 5.59%
Federal funds purchased and securities sold under
agreements to repurchase 12,287 4.69 10,221 5.17 8,539 5.22
--------- -------- --------
Total $ 22,559 5.00 $ 17,927 5.36 $ 14,038 5.36
========= ======== ========
MAXIMUM MONTH-END BALANCE
Commercial paper and other short-term borrowings (1) $ 17,246 NA $ 10,272 NA $ 6,477 NA
Federal funds purchased and securities sold under
agreements to repurchase (2) 15,147 NA 13,840 NA 11,698 NA
NA-Not applicable.
- -------------------------------------------------------------------------------------------------------------------
(1) Highest month-end balance in each of the last three years appeared in
December 1999, October 1998 and December 1997, respectively.
(2) Highest month-end balance in each of the last three years appeared in
August 1999, April 1998 and June 1997, respectively.
At December 31, 1999, the Company had available lines of credit totaling $4.2
billion, of which $2.2 billion was obtained by a subsidiary, Wells Fargo
Financial. Of the remaining $2.0 billion, 1.8 billion was in the form of a
revolving credit facility. A portion of these financing arrangements require
the maintenance of compensating balances or payment of fees, which are not
material.
59
9.
LONG-TERM DEBT
The following is a summary of long-term debt (reflecting unamortized debt
discounts and premiums, where applicable) owed by the Parent and its
subsidiaries:
- ------------------------------------------------------------------------------------------------------------------
Maturity Interest
(in millions) date rate(s) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
WELLS FARGO & COMPANY (PARENT ONLY)
SENIOR
Global Notes (1) 2002 - 2004 6.5% - 6.625% $ 2,243 $ --
Global Notes 2001 Various 747 --
Medium-Term Notes (1) 2000 - 2006 5.225% - 8.15% 3,993 3,275
Medium-Term Notes 2000 - 2027 6.75% - 7.75% 820 1,125
Floating-Rate Medium-Term Notes 2000 Various 2,100 700
Floating-Rate Euro Medium-Term Notes 2001 Various 300 300
Notes (1) 2004 6.00% 1 2
Notes (1) 2000 6.00% 200 202
ESOP Notes 1999 8.52% -- 4
-------- -------
Total senior debt - Parent 10,404 5,608
-------- -------
SUBORDINATED
Notes 2003 6.625% 199 200
Debentures 2023 6.65% 198 200
Other notes (1) 2000 - 2003 6.58% - 6.75% 3 2
-------- -------
Total subordinated debt - Parent 400 402
-------- -------
Total long-term debt - Parent 10,804 6,010
-------- -------
WFC HOLDINGS CORPORATION
SENIOR
Floating-Rate Medium-Term Notes 1999 Various -- 150
Medium-Term Notes (1)(2) 2001 - 2002 6.875% - 10.83% 221 228
Medium-Term Notes 2001 - 2002 9.04% - 10.9% 15 15
Notes payable by subsidiaries 51 51
Other notes and debentures 2003 8.5% 4 4
Obligations of subsidiaries
under capital leases (Note 6) 15 20
-------- -------
Total senior debt - WFC Holdings 306 468
-------- -------
SUBORDINATED
Floating-Rate Notes (3) 2000 Various 118 118
Capital Notes (4) 1999 8.625% -- 183
Notes 2002 8.75% 195 195
Notes 2002 8.375% 138 138
Notes 2003 6.875% 150 150
Notes 2003 6.125% 249 249
Notes (1)(2) 2004 9.125% 133 136
Notes (1)(2) 2004 9.0% -- 127
Notes (1) 2006 6.875% 499 499
Notes (1) 2006 7.125% 299 299
Notes 2008 6.25% 199 199
Medium-Term Notes (1) 2001 9.9% - 11.25% 127 127
Medium-Term Notes 2002 9.375% 30 30
Medium-Term Notes (1) 2013 6.50% - 6.63% 50 50
-------- -------
Total subordinated debt - WFC Holdings 2,187 2,500
-------- -------
Total long-term debt - WFC Holdings $ 2,493 $ 2,968
-------- -------
- -------------------------------------------------------------------------------------------------------------------
(Continued on following page)
60
(Continued from preceding page)
- ------------------------------------------------------------------------------------------------------------------
Maturity Interest
(in millions) date rate(s) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
WELLS FARGO FINANCIAL, INC. AND ITS
SUBSIDIARIES (WFFI)
SENIOR
Notes 2000 - 2009 5.125% - 8.65% $ 4,511 $ 4,341
Floating-Rate Notes 2000 Various 550 --
Floating-Rate Medium-Term Notes 2001 Various 21 --
Medium-Term Notes 2000 - 2008 4.9% - 6.54% 832 932
------- -------
Total long-term debt - WFFI 5,914 5,273
------- -------
FIRST SECURITY CORPORATION AND ITS
SUBSIDIARIES (FSCO)
SENIOR
Medium-Term Notes 1999 - 2003 5.71% - 6.40% 24 29
Floating-Rate Notes 1999 Various -- 7
Floating-Rate Notes (6) 2005 Various 200 --
Floating-Rate European Medium-Term Notes (8) 2002 Various 300 300
Floating-Rate European Medium-Term Notes 2003 Various 285 285
Notes 1999 7.875% -- 99
Notes 2003 5.875% 325 325
Notes 2006 6.875% 150 150
Other notes payables (7) 2000-2019 4.80% - 6.84% 2,007 1,558
------- -------
Total senior debt 3,291 2,753
------- -------
SUBORDINATED
Notes 2002 7.50% 75 75
Notes 2005 7.00% 125 125
------- -------
Total subordinated debt 200 200
------- -------
Total long-term debt - FSCO 3,491 2,953
------- -------
OTHER CONSOLIDATED SUBSIDIARIES
SENIOR
Federal Home Loan Bank (FHLB) Notes and
Advances (5) 2000 - 2027 3.15% - 8.38% 345 2,768
Floating Rate FHLB Advances (5) 2000 - 2011 6.391% - 6.47% 3,775 2,655
Notes 2000 12.25% 1 1
Other notes and debentures 2000 - 2015 3.00% - 10.00% 28 18
Capital lease obligations (Note 6) 15 16
------- -------
Total long-term debt - other
consolidated subsidiaries 4,164 5,458
------- -------
Total consolidated long-term debt $26,866 $22,662
======= =======
- ------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially
all of these Notes, whereby the Company receives fixed-rate interest
payments approximately equal to interest on the Notes and makes interest
payments based on an average three-month or six-month LIBOR rate.
(2) The interest rate swap agreement for these Notes is callable by the
counterparty prior to the maturity of the Notes.
(3) Notes are currently redeemable in whole or in part, at par, or at any time
in the event withholding taxes are imposed by the United States.
(4) Mandatory Equity Notes.
(5) The maturities of the FHLB advances are determined quarterly, based on the
outstanding balance, the then current LIBOR rate, and the maximum life of
the advance. Advances maturing within the next year are expected to be
refinanced, extending the maturity of such borrowings beyond one year.
(6) The notes are callable on the interest payment dates at par on or after
June 1, 2000.
(7) Other long-term debt of the banking subsidiaries as of December 31, 1999
consisted of $2,000 million of advances from the Federal Home Loan Bank
which are collateralized primarily by mortgage loans, bear interest at
rates generally ranging from 4.8% to 6.84%, and are payable principally
through November 2019; and $7 million of miscellaneous notes payable at
various rates and maturities. Federal Home Loan Bank advances of $1,055
million have contractual maturities in 2000. Additionally, $167 million
is callable in 2000 at the option of the creditor.
(8) The Company entered into an interest rate swap agreement for these notes,
whereby the Company receives interest payments based on an average
three-month LIBOR rate and makes fixed-rate interest payments ranging from
5.625% to 5.65%.
61
At December 31, 1999, the principal payments, including sinking fund
payments, on long-term debt are due as noted in the following table.
- -----------------------------------------------------
(in millions) Parent Company
- -----------------------------------------------------
2000 $4,400 $10,043
2001 1,550 2,880
2002 1,275 3,164
2003 390 2,670
2004 1,501 2,792
Thereafter 1,688 5,317
------- -------
Total $10,804 $26,866
======= =======
- -----------------------------------------------------
The interest rates on floating-rate notes are determined periodically by
formulas based on certain money market rates, subject, on certain notes, to
minimum or maximum interest rates.
Certain of the agreements under which debt has been issued contain provisions
that may limit the merger or sale of certain subsidiary banks and the
issuance of capital stock or convertible securities by certain subsidiary
banks. The Company was in compliance with the provisions of those borrowing
agreements at December 31, 1999.
62
10.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES
The Company established special purpose trusts in 1996 and 1997 for the
purpose of issuing trust preferred securities. The proceeds from such
issuances, together with the proceeds of the related issuances of common
securities of the trusts, were invested in junior subordinated deferrable
interest debentures (debentures) of WFC Holdings and First Security.
Concurrent with the issuance of the preferred securities by the trusts, WFC
Holdings and First Security issued guarantees for the benefit of the security
holders. These trust preferred securities provide the Company with a more
cost-effective means of obtaining Tier 1 capital for regulatory purposes than
if the Company itself were to issue additional preferred stock because the
Company is allowed to deduct, for income tax purposes, distributions to the
holders of the trust preferred securities. The sole assets of these special
purpose trusts are the debentures. WFC Holdings owns all of the common
securities of the five trusts bearing the Wells Fargo name. First Security
owns all of the common securities of First Security Capital 1. Those common
securities and debentures, along with the related income effects, are
eliminated within the consolidated financial statements. The preferred
securities issued by the trusts rank senior to the common securities. The
obligations of WFC Holdings under the debentures, the indentures, the
relevant trust agreements and the guarantees, in the aggregate, constitute a
full and unconditional guarantee by WFC Holdings of the obligations of the
trusts under the trust preferred securities and rank subordinate and junior
in right of payment to all other liabilities of WFC Holdings. The Parent
guaranteed the obligations of WFC Holdings at the time of the Norwest and
Wells Fargo merger. The obligations of First Security under the debentures,
the indentures, the relevant trust agreements and the guarantees, in the
aggregate, constitute a full and unconditional guarantee by First Security of
the obligations of the trusts under the trust preferred securities and rank
subordinate and junior in right of payment to all other liabilities of First
Security.
The trust preferred securities are subject to mandatory redemption at the
stated maturity date of the debentures, upon repayment of the debentures, or
earlier, pursuant to the terms of the Trust Agreement. The table on the next
page summarizes the outstanding preferred securities issued by each special
purpose trust and the debentures issued by WFC Holdings and First Security to
each trust as of December 31, 1999:
63
- ---------------------------------------------------------------------------------------------------------------------------
(in millions) Trust preferred securities
and debentures Interest
Trust preferred securities Principal -------------------------------- payable/
-------------------------- balance of Stated Annualized distribution
Trust name Issuance date Amount debentures maturity coupon rate dates (1)
- ---------------------------------------------------------------------------------------------------------------------------
Wells Fargo Capital A November 1996 $85 $ 94 December 1, 2026 8.13% Semi-annual -
June 1 and
December 1
Wells Fargo Capital B November 1996 153 159 December 1, 2026 7.95% Semi-annual -
June 1 and
December 1
Wells Fargo Capital C November 1996 186 194 December 1, 2026 7.73% Semi-annual -
June 1 and
December 1
Wells Fargo Capital I December 1996 212 224 December 15, 2026 7.96% Semi-annual -
June 15 and
December 15
Wells Fargo Capital II January 1997 149 (2) 155 January 30, 2027 LIBOR + .5% Quarterly -
January 30,
April 30,
July 30 and
October 30
First Security Capital I December 1996 150 150 December 15, 2026 8.41% Semi-annual -
June 15 and
December 15
----
Total $935
====
- --------------------------------------------------------------------------------------------------------------------------
(1) All distributions are cumulative.
(2) Net of discount of $1 million.
On or after December 2006 for Wells Fargo Capital A, Wells Fargo Capital B,
Wells Fargo Capital C and Wells Fargo Capital I and on or after January 2007
for Wells Fargo Capital II, each of the series of trust preferred securities
may be redeemed and the corresponding debentures may be prepaid at the option
of WFC Holdings, subject to FRB approval, at declining redemption prices.
Prior to December 2006 for Wells Fargo Capital A, Wells Fargo Capital B,
Wells Fargo Capital C and Wells Fargo Capital I and prior to January 2007 for
Wells Fargo Capital II, the securities may be redeemed at the option of WFC
Holdings on the occurrence of certain events that result in a negative tax
impact, negative regulatory impact on the trust preferred securities of WFC
Holdings or negative legal or regulatory impact on the appropriate special
purpose trust which would define it as an investment company. In addition,
WFC Holdings has the right to defer payment of interest on the debentures
and, therefore, distributions on the trust preferred securities for up to
five years.
On or after December 2006 for First Security Capital I, the securities may be
redeemed and the corresponding debentures may be repaid at the option of
First Security. Prior to December 2006 the securities may be redeemed at the
option of First Security on the occurrence of certain events that result in a
negative tax impact, negative regulatory impact on the trust preferred
securities of First Security or negative legal or regulatory impact on the
appropriate special purpose trust which would define it as an investment
company. In addition, First Security has the right to defer payment of
interest on the debentures and, therefore, distributions on the trust
preferred securities for up to five years.
64
11.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock and
4,000,000 shares of preference stock, both without par value. All preferred
shares outstanding rank senior to common shares both as to dividends and
liquidation preference but have no general voting rights. No preference
shares have been issued under this authorization.
The following table is a summary of preferred stock:
- ---------------------------------------------------------------------------------------------------------------------------------
Shares issued Carrying amount Dividends declared
and outstanding (in millions) (in millions)
----------------------- --------------- Adjustable -----------------------
December 31, December 31, dividend rate Year ended December 31,
----------------------- --------------- -------------------- -----------------------
1999 1998 1999 1998 Minimum Maximum 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Cumulative, Series B
(Liquidation preference $50) 1,500,000 1,500,000 $ 75 $ 75 5.5% 10.5% $ 4 $ 4 $ 4
8-7/8% Cumulative, Series D
(Liquidation preference $500) (1) -- -- -- -- -- -- -- -- 3
9% Cumulative, Series G
(Liquidation preference $200) (2) -- -- -- -- -- -- -- -- 5
6.59%/Adjustable-Rate Noncumulative
Preferred Stock, Series H
(Liquidation preference $50) (3) 4,000,000 4,000,000 200 200 7.0 13.0 13 13 13
Cumulative Tracking (4)
(Liquidation preference $200) -- 980,000 -- 196 -- -- 18 18 18
1999 ESOP Cumulative Convertible
(Liquidation preference $1,000) 22,263 -- 22 -- 10.30 11.30 -- -- --
1998 ESOP Cumulative Convertible
(Liquidation preference $1,000) 8,386 8,740 8 9 10.75 11.75 -- -- --
1997 ESOP Cumulative Convertible
(Liquidation preference $1,000) 10,839 19,698 11 20 9.50 10.50 -- -- --
1996 ESOP Cumulative Convertible
(Liquidation preference $1,000) 12,011 22,068 12 22 8.50 9.50 -- -- --
1995 ESOP Cumulative Convertible
(Liquidation preference $1,000) 11,990 20,130 12 20 10.0 10.0 -- -- --
ESOP Cumulative Convertible
(Liquidation preference $1,000) 3,732 9,726 4 10 9.0 9.0 -- -- --
Unearned ESOP shares (5) -- -- (73) (84) -- -- -- -- --
$3.15 Cumulative Convertible
Preferred Stock, Series A 9,000 9,000 -- -- -- -- -- -- --
Less: Cumulative Tracking
held by subsidiary
(Liquidation preference $200) (4) -- 25,000 -- 5 -- -- -- -- --
--------- --------- ---- ---- --- --- ---
Total 5,578,221 6,544,362 $271 $463 $35 $35 $43
========= ========= ==== ==== === === ===
- ---------------------------------------------------------------------------------------------------------------------------------
(1) In March 1997, the Company redeemed all $175 million (350,000 shares) of
its Series D preferred stock.
(2) In May 1997, the Company redeemed all $150 million (750,000 shares) of
its Series G preferred stock.
(3) Annualized dividend rate is 6.59% through October 1, 2001, after which the
rate will become adjustable, subject to the minimum and maximum rates
disclosed.
(4) In December 1999, the Company redeemed all $196 million (980,000 shares)
of its Cumulative Tracking preferred stock.
(5) In accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE
STOCK OWNERSHIP PLANS, the Company recorded a corresponding charge to
unearned ESOP shares in connection with the issuance of the ESOP Preferred
Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred
Stock are committed to be released. For information on dividends declared,
see Note 12.
65
ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares are
redeemable at the option of the Company at $50 per share plus accrued and
unpaid dividends. Dividends are cumulative and payable quarterly on the 15th
of February, May, August and November. For each quarterly period, the
dividend rate is 76% of the highest of the three-month Treasury bill discount
rate, 10-year constant maturity Treasury security yield or 20-year constant
maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum
of 10.5% per year. The average dividend rate was 5.5% during 1999, 1998 and
1997.
6.59%/ADJUSTABLE-RATE NONCUMULATIVE PREFERRED STOCK, SERIES H These shares
are redeemable at the option of the Company on or after October 1, 2001 at a
price of $50 per share plus accrued and unpaid dividends. Dividends are
noncumulative and payable on the first day of each calendar quarter at an
annualized rate of 6.59% through October 1, 2001. The dividend rate after
October 1, 2001 will be equal to .44% plus the highest of the Treasury bill
discount rate, the 10-year constant maturity rate and the 30-year constant
maturity rate, as determined in advance of such dividend period, limited to a
minimum of 7% and a maximum of 13%.
ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of the Company's 1999,
1998, 1997, 1996 and 1995 ESOP Cumulative Convertible Preferred Stock and
ESOP Cumulative Convertible Preferred Stock (collectively, ESOP Preferred
Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company
401(k) Plan (formerly known as the Savings Investment Plan). Dividends on the
ESOP Preferred Stock are cumulative from the date of initial issuance and are
payable quarterly at annual rates ranging from 8.50 percent to 11.75 percent,
depending upon the year of issuance. Each share of ESOP Preferred Stock
released from the unallocated reserve of the Plan is converted into shares of
common stock of the Company based on the stated value of the ESOP Preferred
Stock and the then current market price of the Company's common stock. The
ESOP Preferred Stock is also convertible at the option of the holder at any
time, unless previously redeemed. The ESOP Preferred Stock may be redeemed at
any time, in whole or in part, at the option of the Company at a redemption
price per share equal to the higher of (a) $1,000 per share plus accrued and
unpaid dividends and (b) the fair market value, as defined in the
Certificates of Designation of the ESOP Preferred Stock.
66
12.
COMMON STOCK AND STOCK PLANS
COMMON STOCK
The table below summarizes common stock reserved, issued and authorized as of
December 31, 1999:
- -------------------------------------------------------------------------------------
Number of shares
- -------------------------------------------------------------------------------------
Acquisition contingencies 411,445
Convertible subordinated debentures and warrants (1) 20,082,094
Dividend reinvestment and common stock purchased plans 2,132,503
Director plans 2,274,435
Employee stock plans 228,786,472
-------------
Total shares reserved 253,686,949
Shares issued 1,736,259,632
Shares not reserved 2,010,053,419
-------------
Total shares authorized 4,000,000,000
=============
- -------------------------------------------------------------------------------------
(1) Includes warrants issued by the Company to subsidiaries to purchase shares
of the Company's common stock as follows: 8,928,172 shares at $42.50 per
share in 1996 and 11,000,176 shares at $37.50 per share in 1995.
Each share of the Company's common stock includes one preferred share
purchase right. These rights will become exercisable only if a person or
group acquires or announces an offer to acquire 15 percent or more of the
Company's common stock. When exercisable, each right will entitle the holder
to buy one one-thousandth of a share of a new series of junior participating
preferred stock at a price of $160 for each one one-thousandth of a preferred
share. In addition, upon the occurrence of certain events, holders of the
rights will be entitled to purchase either the Company's common stock or
shares in an "acquiring entity" at one-half of the then current market value.
The Company will generally be entitled to redeem the rights at one cent per
right at any time before they become exercisable. The rights will expire on
November 23, 2008, unless extended, previously redeemed or exercised. The
Company has reserved 1.7 million shares of preferred stock for issuance upon
exercise of the rights.
DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLANS
The Company's dividend reinvestment and common stock direct purchase plans
permit participants to purchase at fair market value shares of the Company's
common stock by reinvestment of dividends and/or optional cash payments,
subject to the terms of the plan.
67
DIRECTOR PLANS
Under the Company's director plans, non-employee directors receive stock as
part of their annual retainer. Another plan provides for annual grants of
options to purchase common stock to each non-employee director elected or
re-elected at the annual meeting of stockholders. Options granted become
exercisable after six months and may be exercised until the tenth anniversary
of the date of grant. Compensation expense for the options is measured as the
quoted market price of the stock at the date of grant less the exercise price
and is accrued over the vesting period.
EMPLOYEE STOCK PLANS
LONG-TERM INCENTIVE PLANS The Company's stock incentive plans provide for
awards of incentive and nonqualified stock options, stock appreciation
rights, restricted shares, restricted share rights, performance awards and
stock awards without restrictions. Employee stock options can be granted with
exercise prices at or above the fair market value (as defined in the plan) of
the stock at the date of grant and with terms of up to ten years. The options
generally become fully exercisable over three to four years from the date of
grant. Except as otherwise permitted under the plan, upon termination of
employment for reasons other than retirement, permanent disability or death,
the option period is reduced or the options are canceled. Options also may
include the right to acquire a "reload" stock option. If an option contains
the reload feature and if a participant pays all or part of the exercise
price of the option with shares of stock purchased in the market or held by
the participant for at least six months, upon exercise of the option, the
participant is granted a reload option to purchase, at the fair market value
of the stock as of the date of the reload, the number of shares of stock
equal to the sum of the number of shares used in payment of the exercise
price and a number of shares with respect to taxes. No compensation expense
was recorded for the options granted under the plans, as the exercise price
was equal to the quoted market price of the stock at the date of grant. The
total number of shares of common stock available for grant under the plans as
of December 31, 1999 was 94,045,899.
Holders of restricted shares and restricted share rights are entitled at no
cost to the related shares of common stock generally over three to five years
after the restricted shares or restricted share rights were granted. Upon
grant of the restricted shares or restricted share rights, holders generally
are entitled to receive quarterly cash payments equal to the cash dividends
that would be paid on common stock equal to the number of restricted shares
or restricted share rights. Except in limited circumstances, restricted
shares and restricted share rights are canceled upon termination of
employment. In 1999, 1998 and 1997, 204,868, 371,560 and 280,020 restricted
shares and restricted share rights were granted, respectively, with a
weighted-average grant-date fair value of $43.24, $37.72 and $30.89,
respectively. As of December 31, 1999, 1998 and 1997, there were 2,423,999,
3,086,500 and 2,084,540 restricted shares and restricted share rights
outstanding, respectively. The compensation expense for the restricted shares
and restricted share rights equals the quoted market price of the related
stock at the date of grant and is accrued over the vesting period. The total
68
compensation expense recognized for the restricted shares and restricted
share rights was $21 million, $9 million and $11 million in 1999, 1998 and
1997, respectively.
In connection with various acquisitions and mergers since 1992, the Company
converted employee and director stock options of acquired or merged companies
into stock options to purchase the Company's common stock based on the
original stock option plan and the agreed-upon exchange ratio.
BROAD-BASED PLANS In 1996, the Company adopted the Best Practices
PARTNERSHARES(R) Plan, a broad-based employee stock option plan covering
full-and part-time employees who were not participants in the long-term
incentive plans described above. The total number of shares of common stock
issuable under the plan as of December 31, 1999, was 62,000,000, including
23,410,400 shares available for grant. Options granted under the
PARTNERSHARES Plan have an exercise date that generally is the earlier of
five years after the date of grant or when the quoted market price of the
stock reaches a predetermined price. Those options generally expire ten years
after the date of grant. No compensation expense has been recorded for the
oustanding options, as the exercise prices were equal to or higher than the
quoted market price of the Company's common stock at the respective dates of
grant.
69
The following table summarizes the Company's stock option activity and
related information for the three years ended December 31, 1999:
- -----------------------------------------------------------------------------------------------------------------------
Director Plans Long-Term Incentive Plans Broad-Based Plans (5)
------------------------ --------------------------- --------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Number price Number price Number price
- -----------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1996 503,328 $13.82 52,670,146 $12.89 10,774,060 $17.42
-------- ----------- -----------
1997:
Granted 104,689 (1) 23.65 30,534,928 (2)(3) 30.49 23,678,530 (4) 30.11
Canceled (1,388,884) 23.05 (3,935,110) 17.93
Exercised (32,824) 10.97 (15,242,529) 10.36 (5,275,570) 17.57
-------- ----------- -----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1997 575,193 15.77 66,573,661 21.37 25,241,910 29.21
-------- ----------- -----------
1998:
Granted 104,030 (1) 40.76 10,174,089 (2)(3) 37.53 21,295,860 (4) 37.29
Canceled (1,559,438) 27.66 (2,866,310) 31.22
Exercised (116,633) 12.71 (11,057,166) 15.31 (1,865,480) 21.40
-------- ----------- -----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1998 562,590 21.02 64,131,146 24.78 41,805,980 33.60
-------- ----------- -----------
1999:
GRANTED 38,253 (1) 42.60 17,492,150 (2)(3) 39.59 -- --
CANCELED (2,198,972) 28.30 (7,836,842) 34.76
EXERCISED (75,745) 16.57 (12,817,198) 19.63 (1,454,838) 24.40
-------- ----------- -----------
OPTIONS OUTSTANDING AS OF
DECEMBER 31, 1999 525,098 $23.24 66,607,125 $29.53 32,514,300 $33.72
======== ====== =========== ====== =========== ======
Outstanding options
exercisable as of:
December 31, 1997 451,468 $13.73 36,025,605 $14.21 3,315,200 $16.90
December 31, 1998 475,378 17.56 38,290,197 19.55 3,255,200 22.05
DECEMBER 31, 1999 511,225 22.06 39,582,781 24.86 1,646,500 17.64
- -----------------------------------------------------------------------------------------------------------------------
(1) The weighted-average per share fair value of options granted was $12.09,
$14.38 and $10.31 for 1999, 1998 and 1997, respectively.
(2) The weighted-average per share fair value of options granted was $10.16,
$8.18 and $5.27 for 1999, 1998 and 1997, respectively.
(3) Includes 2,285,910, 2,094,111 and 2,687,762 reload grants at December
31, 1999, 1998 and 1997, respectively.
(4) The weighted-average per share fair value of options granted was $5.42
and $4.92 for 1998 and 1997, respectively.
(5) Activity for broad-based plans in 1999, 1998 and 1997 includes the options
related to the Employee Stock Purchase Plan, which was discontinued in
1999.
70
The following table is a summary of selected information for the Company's
stock option plans described on the preceding page:
- -------------------------------------------------------------------------------------------------------
December 31, 1999
--------------------------------------------
Weighted-
average Weighted-
remaining average
contractual exercise
life (in yrs.) Number price
- -------------------------------------------------------------------------------------------------------
RANGE OF EXERCISE PRICES
DIRECTOR PLANS
$.10
Options outstanding/exercisable 2.9 19,910 $ .10
$4.46-$7.83
Options outstanding/exercisable 1.8 50,000 6.94
$7.84-$13.48
Options outstanding/exercisable 3.0 54,890 10.62
$13.49-$16.00
Options outstanding/exercisable 5.2 89,210 15.07
$16.01-$25.04
Options outstanding/exercisable 6.6 82,510 23.70
$19.92-$42.23
Options outstanding/exercisable 5.4 41,091 19.92
$25.05-$38.29
Options outstanding/exercisable 7.8 129,620 32.31
$38.30-$51.00
Options outstanding 9.3 38,253 42.60
Options exercisable 37,160 42.69
$42.25-$67.58
Options outstanding/exercisable 7.4 799 44.59
$67.61-$69.01
Options outstanding 8.4 18,815 69.01
Options exercisable 6,035 69.01
LONG-TERM INCENTIVE PLANS
$2.24-$3.36
Options outstanding/exercisable 1.5 73,330 2.49
$3.37-$5.06
Options outstanding/exercisable 6.5 117,564 4.36
$5.07-$7.60
Options outstanding 2.1 2,124,574 7.30
Options exercisable 2,115,774 7.30
$7.41-$14.06
Options outstanding/exercisable 1.6 333,649 8.90
$7.61-$11.41
Options outstanding/exercisable 2.9 1,895,482 10.61
$11.42-$17.13
Options outstanding 4.1 7,959,825 13.90
Options exercisable 7,791,391 13.86
$14.08-$22.51
Options outstanding 3.5 1,282,566 19.24
Options exercisable 1,280,675 19.24
$17.14-$25.71
Options outstanding 5.1 3,532,869 20.36
Options exercisable 3,510,439 20.34
$22.54-$36.59
Options outstanding 6.2 347,132 33.44
Options exercisable 261,531 33.35
$25.72-$38.58
Options outstanding 8.0 43,369,877 33.42
Options exercisable 18,949,401 31.30
$36.62-$53.49
Options outstanding 7.0 481,138 40.85
Options exercisable 238,834 40.68
$38.59-$57.89
Options outstanding 7.5 3,997,116 42.66
Options exercisable 2,907,876 42.09
$53.52-$71.30
Options outstanding 8.7 1,092,003 63.80
Options exercisable 106,835 63.58
BROAD-BASED PLANS
$16.56- $24.84
Options outstanding/exercisable 6.6 1,542,500 16.56
$24.85-$37.81
Options outstanding 8.3 30,971,800 34.58
Options excercisable 104,000 33.61
- -------------------------------------------------------------------------------------------------------
71
In accordance with FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to continue applying the provisions of Accounting
Principles Board Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in
accounting for the stock plans described above. Had compensation cost for
those stock plans been determined based on the (optional) fair value method
established by FAS 123, the Company's net income and earnings per common
share would have been reduced to the pro forma amounts indicated below.
- -------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------
(in millions, except per common share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------
Net income as reported $ 4,012 $ 2,191 $ 2,712
Pro forma (1) 3,909 2,104 2,659
Earnings per common share as reported $ 2.32 $ 1.28 $ 1.57
Pro forma (1) 2.26 1.23 1.54
Diluted earnings per common share as reported $ 2.29 $ 1.26 $ 1.55
Pro forma (1) 2.23 1.21 1.52
- -------------------------------------------------------------------------------------------
(1) The pro forma amounts noted above only reflect the effects of stock-based
compensation grants made after 1994. Because stock options may be granted
each year and generally vest over three years, these pro forma amounts may
not reflect the full effect of applying the (optional) fair value method
established by FAS 123 that would be expected if all outstanding stock
option grants were accounted for under this method.
The fair value of each option grant is estimated based on the date of grant
using an option-pricing model. The following weighted-average assumptions
were used in 1999, 1998 and 1997: expected dividend yield ranging from 1.4%
to 3.4%; expected volatility ranging from 20.0% to 42.0%; risk-free interest
rates ranging from 5.3% to 7.8% and expected life ranging from 1 to 10 years.
EMPLOYEE STOCK OWNERSHIP PLAN The 401(k) Plan (formerly known as the Savings
Investment Plan (SIP)), is a defined contribution employee stock ownership
plan (ESOP) under which the 401(k) Plan may borrow money to purchase the
Company's common or preferred stock. Beginning in 1994, the Company has
loaned money to the 401(k) Plan which has been used to purchase shares of the
Company's ESOP Preferred Stock. As ESOP Preferred Stock is released and
converted into common shares, compensation expense is recorded equal to the
current market price of the common shares. Dividends on the common shares
allocated as a result of the release and conversion of the ESOP Preferred
Stock are recorded as a reduction of retained earnings and the shares are
considered outstanding for purposes of earnings per share computations.
Dividends on the unallocated ESOP Preferred Stock are not recorded as a
reduction of retained earnings, and the shares are not considered to be
common stock equivalents for purposes of earnings per share computations.
Loan principal and interest payments are made from the Company's
contributions to the 401(k) Plan, along with dividends paid on the ESOP
Preferred Stock. With each principal and interest payment, a portion of the
ESOP Preferred Stock is released and, after conversion of the ESOP Preferred
Stock into common shares, allocated to the 401(k) Plan participants.
72
In 1989, the Company loaned money to the 401(k) Plan which was used to
purchase shares of the Company's common stock (the 1989 ESOP shares). The
Company accounts for the 1989 ESOP shares in accordance with AICPA Statement
of Position 76-3, ACCOUNTING PRACTICES FOR CERTAIN EMPLOYEE STOCK OWNERSHIP
PLANS. Accordingly, the Company's ESOP loan to the 401(k) Plan related to the
purchase of the 1989 ESOP shares was recorded as a reduction of stockholders'
equity, and compensation expense based on the cost of the shares was recorded
as shares were released and allocated to participants' accounts. The loan
from the Company to the 401(k) Plan was repaid in 1999. Interest income on
all of these loans was $.1 million in 1999 and $1 million in 1998 and 1997
and was recorded as a reduction in employee benefits expense. The 1989 ESOP
shares are considered outstanding for purposes of earnings per share
computations and dividends on the shares are recorded as a reduction to
retained earnings.
The Company issued Series A and B ESOP Notes in the market place in
connection with the purchase of common shares. Series B ESOP matured April
26, 1999 and Series A matured in 1996. Total interest expense on the Series B
ESOP Notes was $.1 million in 1999 and $1 million in 1998 and 1997. Total
dividends paid to the 401(k) Plan on ESOP shares were as follows:
- -------------------------------------------------------------
Year ended December 31,
-----------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------
ESOP Preferred Stock:
Common dividends $ 7 $ 6 $ 4
Preferred dividends 11 9 4
1989 ESOP shares:
Common dividends 11 11 11
---- ---- ----
Total $ 29 $ 26 $ 19
==== ==== ====
- -------------------------------------------------------------
The ESOP shares as of December 31, 1999, 1998 and 1997 were as follows:
- ----------------------------------------------------------------------------------
December 31,
----------------------------------------
(in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
ESOP Preferred Stock:
Allocated shares (common) 10,784,773 8,592,898 7,793,681
Unreleased shares (preferred) 69,221 80,362 76,405
1989 ESOP shares:
Allocated shares 13,016,033 15,018,861 15,555,673
Unreleased shares 76,070 320,285 1,053,925
Fair value of unearned
ESOP shares (in millions) $ 69 $ 80 $ 76
- ---------------------------------------------------------------------------------
73
13.
EMPLOYEE BENEFITS AND OTHER EXPENSES
EMPLOYEE BENEFITS
The Company provides two noncontributory defined benefit retirement plans,
the Cash Balance Plan, which cover eligible employees of Wells Fargo, and the
FSCO Retirement Plan, which covers the eligible employees of First Security.
On July 1, 1999, the Norwest Corporation Pension Plan was converted to the
Cash Balance Plan. At the same time, the First Interstate Bancorp Retirement
Plan was merged into the Cash Balance Plan.
Under the Cash Balance Plan, eligible employees' Cash Balance Plan accounts
receive a compensation credit based on a certain percentage of their
certified compensation. The compensation credit percentage is based on age
and years of service. In addition, participants receive investment credits on
their accumulated balances. Employees become vested in their Cash Balance
Plan accounts after completion of five years of vesting service. Pension
benefits accrued prior to the conversion to the Cash Balance Plan are
guaranteed. In addition, certain employees are eligible for a special
transition benefit.
Under the FSCO Retirement Plan, benefits are based on years of service and
the average of the employee's highest three consecutive years of base salary
with 100% vesting at 5 years of service. The Company's policy is to fund the
actuarially computed retirement cost accrued. Contributions are intended to
provide not only for benefits attributed to service to date but also for
those expected to be earned in the future.
Effective July 1, 1999, the SIP was renamed the Wells Fargo & Company 401(k)
Plan (the 401(k) Plan) and the former Wells Fargo Tax Advantage and
Retirement Plan merged into the 401(k) Plan. Under the 401(k) Plan, eligible
employees who have completed one month of service are eligible to contribute
up to 18% of their pretax certified compensation, although a lower limit may
be applied to certain employees in order to maintain the qualified status of
the 401(k) Plan. Eligible employees who complete one year of service are
eligible for matching company contributions, which are generally a dollar for
dollar match up to 6% of an employee's certified compensation. The Company's
matching contributions are generally subject to a four-year vesting schedule.
As of June 30, 1999, eligible employees from the former Wells Fargo were 100%
vested in the matching contributions under the 401(k) Plan.
Under the FSCO 401(k) Plan, eligible employees who are 21 or older with one
year of service are eligible to contribute up to 17% of their pretax
certified compensation, although a lower limit may be applied to certain
employees in order to maintain the qualified status of the FSCO 401(k) Plan.
Eligible employees are eligible for matching company contributions, which are
generally equal to 50% of the first 6% of an employee's certified
compensation. The Company's matching contributions are fully vested upon
enrollment.
74
The Company provides health care and life insurance benefits for certain
retired employees and reserves the right to terminate or amend any of the
benefits described above at any time.
The following table shows the changes in the benefit obligation and the fair
value of plan assets during 1999 and 1998 and the amounts included in the
Company's Consolidated Balance Sheet as of December 31, 1999 and 1998 for the
Company's defined benefit pension and other postretirement benefit plans:
- -----------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------
1999 1998
------------------------ -----------------------
PENSION OTHER Pension Other
(in millions) BENEFITS BENEFITS benefits benefits
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $2,653 $ 545 $2,269 $ 464
Service cost 119 25 75 18
Interest cost 143 35 161 34
Plan participants' contributions -- 6 -- 5
Amendments 17 (3) 1 --
Plan mergers 7 -- -- --
Actuarial loss (323) (5) 256 60
Acquisitions -- -- 5 --
Benefits paid (110) (37) (114) (35)
------ ----- ------ -----
Benefit obligation at end of year $2,506 $ 566 $2,653 $ 546
====== ===== ====== =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $2,699 $ 218 $2,648 $ 140
Actual return on plan assets 246 5 126 12
Plan mergers 12 -- -- --
Acquisitions -- -- 4 --
Employer contribution 24 17 36 96
Plan participants' contributions -- 6 -- 5
Benefits paid (110) (37) (114) (35)
------ ----- ------ -----
Fair value of plan assets at end of year $2,871 $ 209 $2,700 $ 218
====== ===== ====== =====
Funded status $ 364 $(357) $ 47 $(328)
Unrecognized net actuarial gain (392) 1 (24) (4)
Unrecognized net transition asset (3) 1 (8) --
Unrecognized prior service cost 22 (2) 13 1
------ ----- ------ -----
Prepaid (accrued) benefit cost $ (9) $(357) $ 28 $(331)
====== ===== ====== =====
- -----------------------------------------------------------------------------------------------------------------
75
The weighted-average assumptions used in calculating the amounts above were:
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -------------------------
PENSION OTHER Pension Other Pension Other
BENEFITS BENEFITS benefits benefits benefits benefits
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.5-8.0% 7.5-8.0% 6.5-7.0% 6.5-7.0% 6.5-7.25% 6.9-7.25%
Expected return
on plan assets 9.0% 9.0% 8.5-9.0% 9.0% 8.5-9.0% 5.4%
Rate of compensation
increase 4.5-5.0% --% 4.5-5.0% --% 4.5-5.0% --%
- -------------------------------------------------------------------------------------------------------------------
The following table sets forth the components of net periodic benefit cost
for 1999, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- --------------------
PENSION OTHER Pension Other Pension Other
(in millions) BENEFITS BENEFITS benefits benefits benefits benefits
- ----------------------------------------------------------------------------------------------------------------------------------
Service cost $120 $ 25 $ 75 $ 19 $ 55 $ 14
Interest cost 144 35 161 34 150 30
Expected return on plan assets (200) (6) (216) (11) (183) (10)
Recognized net actuarial (gain) loss (1) (3) (8) 21 (1) 13 (9)
Amortization of prior service cost 3 -- 2 -- 2 --
Amortization of unrecognized transition asset (2) -- (2) -- (2) --
---- ---- ----- ----- ----- ----
Net periodic benefit cost $ 62 $ 46 $ 41 $ 41 $ 35 $ 25
==== ==== ===== ===== ===== ====
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Net actuarial (gain) loss is generally amortized over five years.
Accounting for the postretirement health care plans uses a health care cost
trend rate to recognize the effect of expected changes in future health care
costs due to medical inflation, utilization changes, technological changes,
regulatory requirements and Medicare cost shifting. Average annual increases
of 8.5% to 9.3% for HMOs and 8.5% for all other types of coverage in the per
capita cost of covered health care benefits were assumed for 2000. By 2006
and thereafter, rates were assumed at 5.5% for HMOs and for all other types
of coverage. Increasing the assumed health care trend by one percentage point
in each year would increase the benefit obligation as of December 31, 1999 by
$35 million and the aggregate of the interest cost and service cost
components of the net periodic benefit cost for 1999 by $3 million.
Decreasing the assumed health care trend by one percentage point in each year
would decrease the benefit obligation as of December 31, 1999 by $33 million
and the aggregate of the interest cost and service cost components of the net
periodic benefit cost for 1999 by $3 million.
Expenses for defined contribution retirement plans were $155 million, $179
million and $178 million in 1999, 1998 and 1997, respectively.
76
OTHER EXPENSES
The table below shows expenses which exceeded 1% of total interest income and
noninterest income and which are not otherwise shown separately in the
financial statements or notes thereto.
- ----------------------------------------------------------------
Year ended December 31,
-------------------------
(in millions) 1999 1998 1997
- ----------------------------------------------------------------
Contract services $ 473 $ 353 $ 277
Outside professional services 381 398 271
Outside data processing 312 293 259
Telecommunications 286 269 257
Travel and entertainment 262 225 198
Advertising and promotion 251 252 216
Postage 238 242 221
Donations 49 259 45
- ----------------------------------------------------------------
14.
INCOME TAXES
The following is a summary of the components of income tax expense applicable
to income before income taxes:
- -------------------------------------------------------------------------
Year ended December 31,
----------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------
Current:
Federal $ 628 $ 1,250 $ 1,294
State and local 46 278 252
Foreign 53 (1) 33
-------- -------- -------
727 1,527 1,579
-------- -------- -------
Deferred:
Federal 1,416 (16) 195
State and local 195 (22) 46
Foreign -- (15) (11)
-------- -------- -------
1,611 (53) 230
-------- -------- -------
Total $ 2,338 $ 1,474 $ 1,809
======== ======== =======
- -------------------------------------------------------------------------
The Company's tax benefit related to the exercise of employee stock options
that were allocated to stockholders' equity was $88 million, $102 million and
$98 million for 1999, 1998 and 1997, respectively.
77
The Company had a net deferred tax liability of $2,275 million and $502
million at December 31, 1999 and 1998, respectively. The tax effects of
temporary differences that gave rise to significant portions of deferred tax
assets and liabilities at December 31, 1999 and 1998 are presented below:
- ------------------------------------------------------------------------
Year ended December 31,
-----------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for loan losses $ 1,377 $ 1,208
Net tax-deferred expenses 788 1,325
Other 169 290
-------- -------
Total deferred tax assets 2,334 2,823
-------- -------
DEFERRED TAX LIABILITIES
Core deposit intangible 428 498
Leasing 1,398 1,198
Mark to market 800 201
Mortgage servicing 1,291 914
FAS 115 adjustment 366 296
Other 326 218
-------- -------
Total deferred tax liabilities 4,609 3,325
-------- -------
NET DEFERRED TAX LIABILITY $ (2,275) $ (502)
======== =======
- ------------------------------------------------------------------------
The Company has determined that it is not required to establish a valuation
reserve for any of the deferred tax assets since it is more likely than not
that these assets will be realized principally through carryback to taxable
income in prior years, and future reversals of existing taxable temporary
differences, and, to a lesser extent, future taxable income and tax planning
strategies. The Company's conclusion that it is "more likely than not" that
the deferred tax assets will be realized is based on federal taxable income
in excess of $3.5 billion in the carryback period, substantial state taxable
income in the carryback period, as well as a history of growth in earnings
and the prospects for continued growth.
The deferred tax liability related to unrealized gains and losses on
securities available for sale had no impact on 1999, 1998 or 1997 income tax
expense as these gains and losses, net of taxes, were recorded in cumulative
other comprehensive income.
78
The following table is a reconciliation of the statutory federal income tax
expense and rate to the effective income tax expense and rate:
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
(in millions) AMOUNT % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------
Statutory federal income tax expense and rate $2,222 35% $ 1,283 35% $1,583 35%
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit 158 2.5 168 4.6 172 3.8
Amortization of goodwill not
deductible for tax return purposes 133 2.1 129 3.5 153 3.4
Tax exempt income (71) (1.1) (63) (1.7) (42) (.9)
Other (104) (1.7) (43) (1.2) (57) (1.3)
------ ----- ------- ----- ------ -----
Effective income tax expense and rate $2,338 36.8% $ 1,474 40.2% $1,809 40%
====== ===== ======= ===== ====== =====
- -------------------------------------------------------------------------------------------------------------------
The Company has not recognized a federal deferred tax liability of $36
million on $102 million of undistributed earnings of a foreign subsidiary
because such earnings are indefinitely reinvested in the subsidiary and are
not taxable under current law. A deferred tax liability would be recognized
to the extent the Company changed its intent to not indefinitely reinvest a
portion or all of such undistributed earnings. In addition, a current tax
liability would be recognized if the Company recovered those undistributed
earnings in a taxable manner, such as through the receipt of dividends or
sale of the entity, or if the tax law changed.
79
15.
EARNINGS PER COMMON SHARE
The table below shows dual presentation of earnings per common share and
diluted earnings per common share and a reconciliation of the numerator and
denominator of both earnings per common share calculations.
- --------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
(in millions, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
Net income $ 4,012 $ 2,191 $ 2,712
Less: Preferred stock dividends 35 35 43
--------- --------- --------
Net income applicable to common stock $ 3,977 $ 2,156 $ 2,669
========= ========= ========
EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 3,977 $ 2,156 $ 2,669
========= ========= ========
Average common shares outstanding (denominator) 1,714.0 1,688.1 1,699.3
========= ========= ========
Per share $ 2.32 $ 1.28 $ 1.57
========= ========= ========
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (numerator) $ 3,977 $ 2,156 $ 2,669
========= ========= ========
Average common shares outstanding 1,714.0 1,688.1 1,699.3
Add: Stock options 19.7 20.4 22.8
Restricted share rights 1.6 2.0 2.6
Convertible preferred .1 .1 .1
--------- --------- --------
Diluted average common shares outstanding
(denominator) 1,735.4 1,710.6 1,724.8
========= ========= ========
Per share $ 2.29 $ 1.26 $ 1.55
========= ========= ========
- --------------------------------------------------------------------------------------------------
80
16.
COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income and
the related tax effect allocated to each component:
- -----------------------------------------------------------------------------------------------------------------
Before
tax Net of
(in millions) amount Tax effect tax
- -----------------------------------------------------------------------------------------------------------------
1997:
Translation adjustments $ 1 $ -- $ 1
----- ---- -----
Net unrealized gains on securities available for sale
arising during the year 380 149 231
Reclassification of net losses (gains) on
securities available for sale included in net income (104) (42) (62)
----- ---- -----
Net unrealized gains arising during the year 276 107 169
----- ---- -----
Other comprehensive income $ 277 $107 $ 170
===== ==== =====
1998:
Translation adjustments $ (6) $ (2) $ (4)
----- ---- -----
Net unrealized gains on securities available for sale
arising during the year 196 77 119
Reclassification of net losses (gains) on
securities available for sale included in net income (182) (73) (109)
----- ---- -----
Net unrealized gains arising during the year 14 4 10
----- ---- -----
Other comprehensive income $ 8 $ 2 $ 6
===== ==== =====
1999:
Translation adjustments $ 6 $ 2 $ 4
----- ---- -----
Net unrealized gains on securities available for sale
arising during the year 205 78 127
Reclassification of net losses (gains) on
securities available for sale included in net income 219 83 136
----- ---- -----
Net unrealized gains arising during the year 424 161 263
----- ---- -----
Other comprehensive income $ 430 $163 $ 267
===== ==== =====
- -----------------------------------------------------------------------------------------------------------------
81
The following table presents cumulative other comprehensive income balances:
- -------------------------------------------------------------------------------------------
Cumulative
Net unrealized other
Translation gains on comprehensive
(in millions) adjustments securities income
- -------------------------------------------------------------------------------------------
Balance, December 31, 1996 $(11) $328 $317
---- ---- ----
Net change 1 169 170
---- ---- ----
Balance, December 31, 1997 (10) 497 487
---- ---- ----
Net change (4) 10 6
---- ---- ----
Balance, December 31, 1998 (14) 507 493
---- ---- ----
Net change 4 263 267
---- ---- ----
BALANCE, DECEMBER 31, 1999 $(10) $770 $760
==== ==== ====
- -------------------------------------------------------------------------------------------
82
17.
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 services include the Wells
Fargo Internet Services Group and BUSINESS GATEWAY-Registered Trademark-, a
personal computer banking service exclusively for the small business customer.
THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of
$10 million and maintains relationships with major corporations throughout
the United States. Wholesale Banking provides a complete line of commercial
and corporate banking services. These include traditional commercial loans
and lines of credit, letters of credit, asset-based lending,
83
equipment leasing, international trade facilities, foreign exchange services,
cash management, and investment management. 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 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 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.
84
OPERATING SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
Wells Fargo Recon- Consoli-
(income/expense in millions, Community Wholesale Home Wells Fargo ciliation dated
average balances in billions) Banking Banking Mortgage Financial Column(4) Company
- ------------------------------------------------------------------------------------------------------------------------------
1999
NET INTEREST INCOME (1) $7,277 $1,429 $ 168 $1,314 $ (72) $10,116
PROVISION FOR LOAN LOSSES 710 103 4 288 (1) 1,104
NONINTEREST INCOME 5,142 1,172 1,240 311 110 7,975
NONINTEREST EXPENSE 6,956 1,142 958 947 634 10,637
------ ------ ------ ------ ----- -------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 4,753 1,356 446 390 (595) 6,350
INCOME TAX EXPENSE (BENEFIT) (2) 1,605 506 169 143 (85) 2,338
------ ------ ------ ------ ----- -------
NET INCOME (LOSS) $3,148 $ 850 $ 277 $ 247 $(510) $ 4,012
====== ====== ====== ====== ===== =======
1998
Net interest income (1) $6,838 $1,345 $ 254 $1,303 $ (67) $ 9,673
Provision for loan losses 828 33 4 752 -- 1,617
Noninterest income 4,376 1,015 1,078 303 148 6,920
Noninterest expense 7,811 1,026 986 878 610 11,311
------ ------ ------ ------ ----- -------
Income (loss) before income
tax expense (benefit) 2,575 1,301 342 (24) (529) 3,665
Income tax expense (benefit) (2) 946 521 125 (5) (113) 1,474
------ ------ ------ ------ ----- -------
Net income (loss) $1,629 $ 780 $ 217 $ (19) $(416) $ 2,191
====== ====== ====== ====== ===== =======
1997
Net interest income (1) $6,803 $1,281 $ 69 $1,167 $ (62) $ 9,258
Provision for loan losses 1,035 (6) 18 332 (176) 1,203
Noninterest income 3,506 1,086 961 303 190 6,046
Noninterest expense 6,374 1,055 774 758 619 9,580
------ ------ ------ ------ ----- -------
Income (loss) before income
tax expense (benefit) 2,900 1,318 238 380 (315) 4,521
Income tax expense (benefit) (2) 1,081 534 87 138 (31) 1,809
------ ------ ------ ------ ----- -------
Net income (loss) $1,819 $ 784 $ 151 $ 242 $(284) $ 2,712
====== ====== ====== ====== ===== =======
1999
AVERAGE LOANS $ 79 $ 34 $ 1 $ 10 $ -- $ 124
AVERAGE ASSETS 140 42 23 11 9 225
AVERAGE CORE DEPOSITS 126 9 5 -- (1) 139
1998
Average loans $ 75 $ 32 $ 1 $ 9 $ -- $ 117
Average assets 126 38 23 11 9 207
Average core deposits 121 9 5 -- -- 135
- ------------------------------------------------------------------------------------------------------------------------------
(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 $902 million, $1,023 million and $549
million for 1999, 1998 and 1997, respectively, and interest expense of $734
million, $769 million and $480 million for 1999, 1998 and 1997,
respectively.)
(2) Taxes vary by geographic concentration of revenue generation. Taxes as
presented are also higher than the consolidated Company's effective tax rate
as a result of taxable-equivalent adjustments that primarily relate to
income on certain loans and securities that is exempt from federal and
applicable state income taxes. The offsets for these adjustments are found
in the reconciliation column.
(3) Equity is allocated to the operating segments based on an assessment of the
inherent risk associated with each business so that the returns on allocated
equity are on a risk-adjusted basis and comparable across operating
segments.
(4) The material items in the reconciliation column related to revenue (i.e.,
net interest income plus noninterest income) and net income consist of
Treasury activities and unallocated items. Revenue includes Treasury
activities of $83 million, $125 million and $153 million; and unallocated
items of $(45) million, $(44) million, and $(25) million for 1999, 1998 and
1997, respectively. Net income includes Treasury activities of $50 million,
$72 million and $88 million; and unallocated items of $(560) million, $(488)
million and $(472) million for 1999, 1998 and 1997, respectively. The
material items in the reconciliation column related to noninterest expense
include goodwill and nonqualifying CDI amortization of $518 million, $534
million and $539 million for 1999, 1998 and 1997, respectively. The material
items in the reconciliation column related to average assets include
goodwill and nonqualifying CDI of $8 billion for both 1999 and 1998.
85
18.
MORTGAGE BANKING ACTIVITIES
Mortgage banking activities include Wells Fargo Home Mortgage and mortgage
banking activities in other operating segments. The following table presents the
components of mortgage banking noninterest income:
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Origination and other closing fees $ 406 $ 557 $ 315
Servicing fees, net of amortization 404 15 336
Net gains on sales of servicing rights 193 227 80
Net gains on sales of mortgages 117 182 95
All other 287 308 208
-------- -------- --------
Total mortgage banking noninterest income $ 1,407 $ 1,289 $ 1,034
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the Company's
Consolidated Balance Sheet. The outstanding balances of serviced loans were
$306 billion, $264 billion and $241 billion at December 31, 1999, 1998 and
1997, respectively.
The following table summarizes the changes in capitalized mortgage loan
servicing rights:
- ---------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,294 $ 3,218 $ 3,036
Originations 1,110 965 459
Purchases 695 720 462
Sales (172) (478) (90)
Amortization (721) (849) (528)
Other (principally hedge activity) 446 (282) (121)
-------- -------- --------
4,652 3,294 3,218
Less valuation allowance -- 64 64
-------- -------- --------
Balance, end of year $ 4,652 $ 3,230 $ 3,154
======== ======== ========
- ---------------------------------------------------------------------------------------------
The fair value of capitalized mortgage servicing rights included in the
consolidated balance sheet at December 31, 1999 was approximately $5 billion,
calculated using discount rates ranging from 500 to 700 basis points over the
ten-year U.S. Treasury rate.
86
19.
PARENT COMPANY
Condensed financial information of the Parent follows. For information
regarding the Parent's long-term debt, see Note 9.
CONDENSED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries:
Bank $ 2,378 $ 1,450 $ 1,360
Nonbank 153 403 343
Interest income from subsidiaries 616 459 388
Service fees from subsidiaries 104 127 118
Noninterest income 95 21 152
------- ------- -------
Total income 3,346 2,460 2,361
------- ------- -------
EXPENSE
Interest on:
Short-term borrowings 350 275 153
Long-term debt 514 341 364
Noninterest expense 380 379 177
------- ------- -------
Total expense 1,244 995 694
------- ------- -------
Income before income tax benefit and
undistributed income of subsidiaries 2,102 1,465 1,667
Income tax (expense) benefit (161) 105 16
Equity in undistributed income of subsidiaries 2,071 621 1,029
------- ------- -------
NET INCOME $ 4,012 $ 2,191 $ 2,712
======= ======= =======
- -------------------------------------------------------------------------------------------------
87
CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------------
December 31,
---------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------
ASSETS
Cash and noninterest-bearing balances due from:
Subsidiary banks $ 83 $ --
Non-affiliates 9 5
Interest-bearing balances due from
subsidiary banks 6,028 678
Securities available for sale 1,765 1,541
Loans and advances to subsidiaries:
Bank -- 10
Nonbank 8,114 9,431
Investment in subsidiaries (1):
Bank 21,709 21,216
Nonbank 4,922 1,862
Other assets 1,558 1,603
-------- --------
Total assets $ 44,188 $ 36,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 7,274 $ 5,418
Other liabilities 1,737 1,279
Long-term debt 10,804 6,010
Indebtedness to subsidiaries 499 1,296
Stockholders' equity 23,874 22,343
-------- --------
Total liabilities and stockholders' equity $ 44,188 $ 36,346
======== ========
- ------------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's
total equity investment in subsidiaries to its total stockholders' equity,
was 112% and 103% at December 31, 1999 and 1998, respectively.
88
CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,012 $ 2,191 $ 2,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (2,071) (621) (1,029)
Depreciation and amortization 26 10 19
Securities available for sale gains -- (3) (6)
Release of preferred shares to ESOP 86 33 34
Other assets, net 114 (401) (798)
Accrued expenses and other liabilities 536 618 304
-------- -------- --------
Net cash provided by operating activities 2,703 1,827 1,236
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 348 185 164
Proceeds from prepayments and maturities 120 665 299
Purchases (872) (1,273) (326)
Net advances to non-bank subsidiaries 724 (1,210) (140)
Principal collected on notes/loans of subsidiaries 1,108 89 46
Capital notes and term loans made to subsidiaries (505) (1,158) (113)
Net increase in investment in subsidiaries (1,003) (295) (384)
-------- -------- --------
Net cash used by investing activities (80) (2,997) (454)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings
and indebtedness to subsidiaries 1,059 2,773 1,709
Proceeds from issuance of long-term debt 6,574 500 403
Repayment of long-term debt (1,780) (295) (981)
Proceeds from issuance of common stock 517 171 150
Repurchases of common stock (2,122) (742) (483)
Net decrease in ESOP loans 2 9 1
Payment of cash dividends (1,436) (1,113) (1,046)
-------- -------- --------
Net cash provided (used) by financing activities 2,814 1,303 (247)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,437 133 535
Cash and cash equivalents at beginning of year 683 550 15
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,120 $ 683 $ 550
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
89
20.
WFC HOLDINGS CORPORATION
WFC Holdings is a wholly owned subsidiary of the Parent and is the sole
stockholder of Wells Fargo Bank, N.A. The Parent guarantees the debt
obligations of WFC Holdings. In view of this, the summarized assets,
liabilities and results of operations of WFC Holdings are presented below.
Prior year amounts have been restated due to certain legal reorganizations
within the Company.
SUMMARIZED CONSOLIDATED INCOME STATEMENT
- ------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
Interest income $ 6,829 $ 7,085 $ 7,271
Interest expense 2,270 2,508 2,670
Provision for loan losses 655 728 624
Noninterest income 4,301 3,925 3,575
Noninterest expense 6,239 5,923 5,346
------- ------- -------
Income before income tax expense 1,966 1,851 2,206
Income tax expense 889 892 1,017
------- ------- -------
Net income $ 1,077 $ 959 $ 1,189
======= ======= =======
- ------------------------------------------------------------------------------------
SUMMARIZED CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------
December 31,
------------------------
(in millions) 1999 1998
- -----------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,899 $ 7,668
Securities available for sale 12,452 11,128
Mortgages held for sale 1,511 2,843
Loans, net 65,547 63,763
Mortgage servicing rights 4,492 3,222
Other assets 20,381 23,003
--------- ---------
Total assets $ 112,282 $ 111,627
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term borrowings $ 4,306 $ 5,219
Long-term debt 4,148 5,691
Other liabilities 88,729 85,522
Guaranteed preferred beneficial interests
in Company's subordinated debentures 785 785
Stockholder's equity 14,314 14,410
--------- ---------
Total liabilities and stockholder's equity $ 112,282 $ 111,627
========= =========
- -----------------------------------------------------------------------------------
90
21.
LEGAL ACTIONS
In the normal course of business, the Company is at all times subject to
numerous pending and threatened legal actions, some for which the relief or
damages sought are substantial. After reviewing pending and threatened
actions with counsel, management believes that the outcome of such actions
will not have a material adverse effect on stockholders' equity of the
Company. The Company is not able to predict whether the outcome of such
actions may or may not have a material adverse effect on results of
operations in a particular future period as the timing and amount of any
resolution of such actions and its relationship to the future results of
operations are not known.
22.
RISK-BASED CAPITAL
The Company and each of the subsidiary banks are subject to various
regulatory capital adequacy requirements administered by the FRB and the OCC,
respectively. The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) required that the federal regulatory agencies adopt regulations
defining five capital tiers for banks: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that the Company and each of the subsidiary banks maintain
minimum ratios (set forth in the table on the following page) of capital to
risk-weighted assets. There are two categories of capital under the
guidelines. Tier 1 capital includes common stockholders' equity, qualifying
preferred stock and trust preferred securities, less goodwill and certain
other deductions (including the unrealized net gains and losses, after
applicable taxes, on securities available for sale carried at fair value).
Tier 2 capital includes preferred stock not qualifying as Tier 1 capital,
subordinated debt, the allowance for loan losses and net unrealized gains on
marketable equity securities, subject to limitations by the guidelines. Tier
2 capital is limited to the amount of Tier 1 capital (i.e., at least half of
the total capital must be in the form of Tier 1 capital).
Under the guidelines, capital is compared to the relative risk related to the
balance sheet. To derive the risk included in the balance sheet, one of four
risk weights (0%, 20%, 50% and 100%) is applied to the different balance
sheet and off-balance sheet assets, primarily based on the relative credit
risk of the counterparty. For example, claims guaranteed by the U.S.
government or one of its agencies are risk-weighted at 0%. Off-balance sheet
items, such as loan commitments and derivative financial instruments, are
also applied a risk weight after calculating balance sheet equivalent
amounts. One of four credit conversion factors (0%,
91
20%, 50% and 100%) is assigned to loan commitments based on the likelihood of
the off-balance sheet item becoming an asset. For example, certain loan
commitments are converted at 50% and then risk-weighted at 100%. Derivative
financial instruments are converted to balance sheet equivalents based on
notional values, replacement costs and remaining contractual terms. (See
Notes 5 and 23 for further discussion of off-balance sheet items.) The
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Management believes that, as of December 31, 1999, the Company and each of
the significant subsidiary banks met all capital adequacy requirements to
which they are subject.
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the OCC categorized each of the significant
subsidiary banks as well capitalized. To be categorized as well capitalized,
the institution must maintain a total risk-based capital ratio as set forth
in the following table and not be subject to a capital directive order. There
are no conditions or events since that notification that management believes
have changed the risk-based capital category of any of the significant
subsidiary banks.
- -----------------------------------------------------------------------------------------------------------
For capital
Actual adequacy purposes
--------------- ----------------------------------------
(in billions) Amount Ratio Amount Ratio
- --------------------------------------------- ------ ----- --------------------- -----------------
As of December 31, 1999:
Total capital (to risk-weighted assets)
Wells Fargo & Company $ 20.5 10.93% > $ 15.0 > 8.00%
- -
Wells Fargo Bank Minnesota, N.A.
(formerly Norwest Bank Minnesota, N.A.) 2.1 10.63 > 1.6 > 8.00
- -
Wells Fargo Bank, N.A. 9.3 11.24 > 6.6 > 8.00
- -
Tier 1 capital (to risk-weighted assets)
Wells Fargo & Company $ 15.0 8.00% > $ 7.5 > 4.00%
- -
Wells Fargo Bank Minnesota, N.A. 1.9 9.61 > .8 > 4.00
- -
Wells Fargo Bank, N.A. 6.4 7.82 > 3.3 > 4.00
- -
Tier 1 capital (to average assets)
(Leverage ratio)
Wells Fargo & Company $ 15.0 6.76% > $ 8.9 > 4.00% (1)
- -
Wells Fargo Bank Minnesota, N.A. 1.9 5.64 > 1.4 > 4.00 (1)
- -
Wells Fargo Bank, N.A. 6.4 7.23 > 3.6 > 4.00 (1)
- -
- -----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
To be well
capitalized under
the FDICIA
prompt corrective
action provisions
---------------------------------------
(in billions) Amount Ratio
- --------------------------------------------- ------------------ -----------------
As of December 31, 1999:
Total capital (to risk-weighted assets)
Wells Fargo & Company
Wells Fargo Bank Minnesota, N.A.
(formerly Norwest Bank Minnesota, N.A.) > $ 2.0 > 10.00%
- -
Wells Fargo Bank, N.A. > 8.2 > 10.00
- -
Tier 1 capital (to risk-weighted assets)
Wells Fargo & Company
Wells Fargo Bank Minnesota, N.A. > $ 1.2 > 6.00%
- -
Wells Fargo Bank, N.A. > 4.9 > 6.00
- -
Tier 1 capital (to average assets)
(Leverage ratio)
Wells Fargo & Company
Wells Fargo Bank Minnesota, N.A. > $ 1.7 > 5.00%
- -
Wells Fargo Bank, N.A. > 4.5 > 5.00
- -
- -------------------------------------------------------------------------------------------
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average
total assets, excluding goodwill and certain other items. The minimum
leverage ratio guideline is 3% for banking organizations that do not
anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective
management and monitoring of market risk and, in general, are considered
top-rated, strong banking organizations.
92
23.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into a variety of financial contracts, which include
interest rate futures and forward contracts, interest rate floors and caps,
options and interest rate swap agreements. The contract or notional amount of
a derivative is used to determine, along with the other terms of the
derivative, the amounts to be exchanged between the counterparties. Because
the contract or notional amount does not represent amounts exchanged by the
parties, it is not a measure of loss exposure related to the use of
derivatives nor of exposure to liquidity risk. The Company is primarily an
end-user of these instruments. The Company also offers such contracts to its
customers but offsets such contracts by purchasing other financial contracts
or uses the contracts for asset/liability management. To a lesser extent, the
Company takes positions based on market expectations or to benefit from price
differentials between financial instruments and markets.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. The Company controls the credit risk
of its financial contracts except for contracts for which credit risk is DE
MINIMUS through credit approvals, limits and monitoring procedures. Credit
risk related to derivative financial instruments is considered and, if
material, provided for separately from the allowance for loan losses. As the
Company generally enters into transactions only with high quality
counterparties, losses associated with counterparty nonperformance on
derivative financial instruments have been immaterial. Further, the Company
obtains collateral where appropriate and uses master netting arrangements in
accordance with FASB Interpretation No. 39, OFFSETTING OF AMOUNTS RELATED TO
CERTAIN CONTRACTS, as amended by FASB Interpretation No. 41, OFFSETTING OF
AMOUNTS RELATED TO CERTAIN REPURCHASE AND REVERSE REPURCHASE AGREEMENTS.
93
The following table summarizes the aggregate notional or contractual amounts,
credit risk amount and estimated net fair value for the Company's derivative
financial instruments at December 31, 1999 and 1998.
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
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) $ 32,846 $ 109 $ (244) $ 25,402 $ 738 $ 679
Futures 50,885 - (2) 62,753 - -
Floors and caps (1) 41,142 110 110 33,598 504 504
Options (1) (2) 11,940 22 43 25,822 112 101
Forwards (1) 22,528 108 41 41,283 11 (58)
Foreign exchange contracts:
Forwards (1) 138 1 - 168 - (1)
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Swaps (1) 21,716 158 (10) 7,815 81 9
Futures 22,839 - - 9,190 - -
Floors and caps purchased (1) 6,149 52 52 5,622 42 42
Floors and caps written 5,823 - (53) 5,719 - (42)
Options purchased (1) 741 30 30 - - -
Options written 1,101 - (51) - - -
Forwards (1) 164 6 1 850 24 4
Commodity contracts:
Swaps (1) 116 10 - 78 4 -
Floors and caps purchased (1) 30 2 2 4 - -
Floors and caps written 30 - (2) 4 - -
Foreign exchange contracts:
Forwards (1) 4,416 62 30 3,684 37 3
Options purchased (1) 41 - - 44 2 2
Options written 42 - (1) 43 - (2)
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these contracts or the underlying financial instruments.
(2) At December 31, 1999, a majority of the purchased option contracts were
options on futures contracts, which are exchange traded for which the
exchange assumes counterparty risk.
(3) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
Interest rate futures and forward contracts are contracts in which the buyer
agrees to purchase and the seller agrees to make delivery of a specific
financial instrument at a predetermined price or yield. These contracts may
be settled either in cash or by delivery of the underlying financial
instrument. Futures contracts are standardized and are traded on exchanges.
Gains
94
and losses on futures contracts are settled daily with the exchange based on
a notional principal value. The exchange assumes the risk that a counterparty
will not pay and generally requires margin payments to minimize such risk.
Market risks arise from movements in interest rates and security values. The
Company uses 90- to 120-day futures contracts on Eurodollar deposits and U.S.
Treasury notes to shorten the interest rate maturity of deposits ($5 billion
at December 31, 1999) and to reduce the price risk of interest-sensitive
assets ($46 billion at December 31, 1999), primarily mortgage servicing
rights. Initial margin requirements on futures contracts are provided by
investment securities pledged as collateral.
Interest rate floors and caps are interest rate protection instruments that
involve the payment from the seller to the buyer of an interest differential.
This differential represents the difference between a short-term rate (e.g.,
three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a
notional principal amount. By purchasing a floor, the Company will be paid
the differential by a counterparty, should the current short-term rate fall
below the strike level of the agreement. The Company generally receives cash
quarterly on purchased floors (when the current interest rate falls below the
strike rate) and purchased caps (when the current interest rate exceeds the
strike rate). The primary risk associated with purchased floors and caps is
the ability of the counterparties to meet the terms of the contract. Of the
total purchased floors and caps for asset/liability management of $41 billion
at December 31, 1999, the Company had $9 billion of floors to protect
variable-rate loans from a drop in interest rates. The Company also had
purchased floors of $13 billion at December 31, 1999 to hedge mortgage
servicing rights. Cash flows from the floors offset lost future servicing
revenue caused by increased levels of loan prepayments associated with lower
interest rates. The remaining purchased floors and caps of $19 billion at
December 31, 1999 were used to hedge interest rate risk of various other
specific assets and liabilities.
Interest rate swap contracts are entered into primarily as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate payments for
floating-rate payments, based on a notional principal amount. Payments
related to the Company's swap contracts are made either monthly, quarterly or
semi-annually by one of the parties depending on the specific terms of the
related contract. The primary risk associated with all swaps is the exposure
to movements in interest rates and the ability of the counterparties to meet
the terms of the contract. At December 31, 1999, the Company had $33 billion
of interest rate swaps outstanding for interest rate risk management purposes
on which the Company receives payments based on fixed interest rates and
makes payments based on variable rates (e.g., three-month LIBOR). Included in
this amount, $19 billion was used to convert floating-rate loans into
fixed-rate assets. The remaining swap contracts used for interest rate risk
management of $14 billion at December 31, 1999 were used to hedge interest
rate risk of various other specific assets and liabilities.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell the underlying
financial instrument at a set price during a period or at a specified date in
the future. The writer of the option is obligated to purchase or sell the
underlying financial instrument, if the purchaser chooses to exercise the
option. The writer of the option receives a premium when the option is
entered into and bears the risk of an
95
unfavorable change in the price of the underlying financial instrument. Of
the total options for asset/liability management of $12 billion at December
31, 1999, the Company had $6 billion of options on futures contracts hedging
mortgage servicing rights. The futures exchange assumes the risk that a
counterparty will not pay. Market risks arise from movements in interest
rates and/or security values. The remaining options used for interest rate
risk management of $6 billion at December 31, 1999 were used to hedge
interest rate risk of various other specific assets.
The Company has entered into futures contracts and mandatory and standby
forward contracts, including options on futures and forward contracts, to
reduce interest rate risk on certain mortgage loans held for sale and other
commitments. For forward contracts, the primary risk is the exposure to
movements in interest rates and the ability of the counterparties to meet the
terms of the contracts. The net unrealized loss on these futures and forward
contracts at December 31, 1999 and 1998 was $136 million and $10 million,
respectively. These contracts mature within 180 days.
24.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires that
the Company disclose estimated fair values for its financial instruments.
Fair value estimates, methods and assumptions set forth below for the
Company's financial instruments are made solely to comply with the
requirements of this Statement and should be read in conjunction with the
financial statements and notes in this Annual Report. The carrying amounts in
the table are recorded in the Consolidated Balance Sheet under the indicated
captions, except for the derivative financial instruments, which are recorded
in the specific asset or liability balance being hedged or in other assets if
the derivative financial instrument is a customer accommodation.
Fair values are based on estimates or calculations using present value
techniques in instances where quoted market prices are not available. Because
broadly traded markets do not exist for most of the Company's financial
instruments, the fair value calculations attempt to incorporate the effect of
current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policy, the economic and competitive environment, the
characteristics of the financial instruments and other such factors. These
calculations are subjective in nature, involve uncertainties and matters of
significant judgment and do not include tax ramifications; therefore, the
results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used,
including discount rates and estimates of future cash flows, could
significantly affect the results. The Company has not included certain
material items in its disclosure, such as the value of the long-term
relationships with the Company's deposit, credit card and trust customers,
since these intangibles are not financial instruments. For all of these
reasons, the
96
aggregation of the fair value calculations presented herein do not represent,
and should not be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial
instruments, as defined by FAS 107:
- -------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------
1999 1998
-------------------------- -------------------------
CARRYING ESTIMATED Carrying Estimated
(in millions) AMOUNT FAIR VALUE Amount fair value
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Mortgages held for sale $ 12,678 $ 12,826 $ 22,049 $ 22,294
Loans, net (1) 129,513 126,998 116,209 116,951
Nonmarketable equity investments 3,525 3,854 2,539 2,867
FINANCIAL LIABILITIES
Deposits $ 145,918 $ 144,737 $ 149,446 $ 148,927
Long-term debt (2) 26,836 26,553 22,626 22,964
Guaranteed preferred beneficial interests
in Company's subordinated debentures 935 886 935 1,048
DERIVATIVE FINANCIAL INSTRUMENTS (3)
Interest rate contracts:
Floors and caps purchased $ 274 $ 162 $ 189 $ 546
Floors and caps written (64) (53) (42) (42)
Options purchased 83 76 154 161
Options written (55) (55) (62) (60)
Swaps 238 (254) (24) 688
Forwards 18 42 (52) (54)
Foreign exchange contracts 27 29 1 3
- -------------------------------------------------------------------------------------------------------------------
(1) Loans are net of deferred fees on loan commitments and standby letters of
credit of $147 million and $146 million at December 31, 1999 and 1998,
respectively.
(2) The carrying amount and fair value exclude obligations under capital
leases of $30 million and $36 million at December 31, 1999 and 1998,
respectively.
(3) The carrying amounts include unamortized fees paid or received and gains or
losses on derivative financial instruments receiving mark-to-market
treatment.
97
FINANCIAL ASSETS
- ----------------
SHORT-TERM FINANCIAL ASSETS
Short-term financial assets include cash and due from banks, federal funds
sold and securities purchased under resale agreements and due from customers
on acceptances. The carrying amount is a reasonable estimate of fair value
because of the relatively short period of time between the origination of the
instrument and its expected realization.
SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1999 and 1998 are set forth in
Note 4.
LOANS
The fair valuation calculation process differentiates loans based on their
financial characteristics, such as product classification, loan category,
pricing features and remaining maturity. Prepayment estimates are evaluated
by product and loan rate.
The fair value of commercial loans, other real estate mortgage loans and real
estate construction loans is calculated by discounting contractual cash flows
using discount rates that reflect the Company's current pricing for loans
with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, fair value is
calculated by discounting contractual cash flows, adjusted for prepayment
estimates, using discount rates based on current industry pricing for loans
of similar size, type, remaining maturity and repricing characteristics.
For credit card loans, the portfolio's yield is equal to the Company's
current pricing and, therefore, the fair value is equal to book value.
For other consumer loans, the fair value is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, based on the
current rates offered by the Company for loans with similar characteristics.
For auto lease financing, the fair value is calculated by discounting the
contractual cash flows at the Company's current pricing for items with
similar remaining terms, not including tax benefits.
Commitments, standby letters of credit and commercial and similar letters of
credit not included in the previous table have contractual values of $82,310
million, $4,759 million and $766 million, respectively, at December 31, 1999,
and $80,820 million, $3,661 million and $704 million, respectively, at
December 31, 1998. These instruments generate ongoing fees at the Company's
current pricing levels. Of the commitments at December 31, 1999, 60% mature
within one year.
98
NONMARKETABLE EQUITY INVESTMENTS
There are restrictions on the sale and/or liquidation of the Company's
nonmarketable equity investments, which are generally in the form of limited
partnerships; and the Company has no direct control over the investment
decisions of the limited partnerships. To estimate fair value, a significant
portion of the underlying limited partnerships' investments are valued based
on market quotes.
FINANCIAL LIABILITIES
- ---------------------
DEPOSIT LIABILITIES
FAS 107 states that the fair value of deposits with no stated maturity, such
as noninterest-bearing demand deposits, interest-bearing checking and market
rate and other savings, is equal to the amount payable on demand at the
measurement date. Although the FASB's requirement for these categories is not
consistent with the market practice of using prevailing interest rates to
value these amounts, the amount included for these deposits in the previous
table is their carrying value at December 31, 1999 and 1998. The fair value
of other time deposits is calculated based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for like deposits with similar remaining maturities.
SHORT-TERM FINANCIAL LIABILITIES
Short-term financial liabilities include federal funds purchased and
securities sold under repurchase agreements, commercial paper and other
short-term borrowings. The carrying amount is a reasonable estimate of fair
value because of the relatively short period of time between the origination
of the instrument and its expected realization.
99
LONG-TERM DEBT
The fair value of the Company's underwritten long-term debt is estimated
based on the quoted market prices of the instruments. The fair value of the
medium-term note programs, which are part of long-term debt, is calculated
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for new notes with similar
remaining maturities.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES
The fair value of the Company's trust preferred securities is estimated based
on the quoted market prices of the instruments.
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
The fair value of derivative financial instruments is based on the estimated
amounts that the Company would receive or pay to terminate the contracts at
the reporting date (i.e., mark-to-market value). Dealer quotes are available
for substantially all of the Company's derivative financial instruments.
LIMITATIONS
- -----------
These fair value disclosures are made solely to comply with the requirements
of FAS 107. The calculations represent management's best estimates; however,
due to the lack of broad markets and the significant items excluded from this
disclosure, the calculations do not represent the underlying value of the
Company. The information presented is based on fair value calculations and
market quotes as of December 31, 1999 and 1998. These amounts have not been
updated since year end; therefore, the valuations may have changed
significantly since that point in time.
As discussed above, certain of the Company's asset and liability financial
instruments are short-term, and therefore, the carrying amounts in the
Consolidated Balance Sheet approximate fair value. Other significant assets
and liabilities, which are not considered financial assets or liabilities and
for which fair values have not been estimated, include premises and
equipment, goodwill and other intangibles, deferred taxes and other
liabilities.
100
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Wells Fargo & Company:
We have audited the accompanying supplemental consolidated balance sheets of
Wells Fargo & Company and Subsidiaries as of December 31, 1999 and 1998, and
the related supplemental consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Wells Fargo & Company and First Security Corporation on
October 25, 2000, which has been accounted for as a pooling-of-interests
as described in Note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Wells Fargo & Company and Subsidiaries after financial statements covering
the date of consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Wells Fargo & Company and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles applicable after financial statements are
issued for a period which includes the date of consummation of the business
combination.
KPMG LLP
November 27, 2000
101
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME -- QUARTERLY
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998
QUARTER ENDED Quarter ended
(in millions, -------------------------------------------- --------------------------------------------
except per share amounts) DEC. 31(1) SEPT. 30(1) JUNE 30(1) MAR. 31(1) Dec. 31(1) Sept. 30(1) June 30(1) Mar. 31(1)
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME $ 4,173 $ 4,042 $ 3,865 $ 3,852 $ 3,960 $ 3,890 $ 3,836 $ 3,769
INTEREST EXPENSE 1,569 1,465 1,375 1,409 1,480 1,452 1,436 1,414
------- ------- ------- ------- ------- ------- ------- -------
NET INTEREST INCOME 2,604 2,577 2,490 2,443 2,480 2,438 2,400 2,355
Provision for loan losses 294 253 271 287 647 325 327 318
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,310 2,324 2,219 2,156 1,833 2,113 2,073 2,037
------- ------- ------- ------- ------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 418 408 389 366 387 379 355 327
Trust and investment fees 358 346 341 321 287 279 281 270
Credit card fees 151 146 134 139 147 151 142 134
Other fees 283 274 285 253 264 252 243 230
Mortgage banking 306 367 375 359 300 327 347 315
Insurance 87 98 122 88 72 76 113 97
Net venture capital gains (losses) 721 162 13 112 (4) 4 53 59
Net (losses) gains on securities
available for sale (261) (2) 28 7 13 76 68 21
Other 144 149 279 210 231 196 235 190
------- ------- ------- ------- ------- ------- ------- -------
Total noninterest income 2,207 1,948 1,966 1,855 1,697 1,740 1,837 1,643
------- ------- ------- ------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 867 846 815 779 1,025 786 771 735
Incentive compensation 164 150 166 164 149 187 169 153
Employee benefits 215 227 238 221 214 183 204 205
Equipment 294 217 203 213 349 214 213 199
Net occupancy 200 217 197 198 212 198 197 198
Goodwill 135 109 107 106 106 110 106 106
Core deposit intangible 51 51 52 53 61 59 62 64
Net (gains) losses on dispositions
of premises and equipment (10) 6 (13) 2 270 7 41 7
Other 963 809 820 802 1,291 790 873 795
------- ------- ------- ------- ------- ------- ------- -------
Total noninterest expense 2,879 2,632 2,585 2,538 3,677 2,534 2,636 2,462
------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 1,638 1,640 1,600 1,473 (147) 1,319 1,274 1,218
Income tax expense (benefit) 600 608 604 527 (20) 519 500 475
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS) $ 1,038 $ 1,032 $ 996 $ 946 $ (127) $ 800 $ 774 $ 743
======= ======= ======= ======= ======= ======= ======= =======
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 1,029 $ 1,023 $ 987 $ 937 $ (136) $ 791 $ 765 $ 734
======= ======= ======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE $ .60 $ .60 $ .58 $ .55 $ (.08) $ .47 $ .46 $ .44
======= ======= ======= ======= ======= ======= ======= =======
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .59 $ .59 $ .57 $ .54 $ (.08) $ .46 $ .45 $ .43
======= ======= ======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER
COMMON SHARE $ .20 $ .20 $ .20 $ .185 $ .185 $ .185 $ .165 $ .165
======= ======= ======= ======= ======= ======= ======= =======
Average common shares outstanding 1,705.1 1,718.0 1,719.3 1,713.9 1,709.3 1,684.0 1,676.9 1,681.8
======= ======= ======= ======= ======= ======= ======= =======
Diluted average common
shares outstanding 1,727.5 1,738.4 1,742.0 1,732.9 1,729.7 1,709.4 1,701.2 1,707.8
======= ======= ======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the pooling-of-interests accounting
treatment of the FSCO and WFC Merger. The restated amounts include
adjustments to conform the accounting policies of the former Norwest, First
Security and the former Wells Fargo.
102
AVERAGE BALANCES, YIELDS AND RATES PAID
(TAXABLE-EQUIVALENT BASIS)--QUARTERLY (1)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended December 31,
--------------------------------------------------------------------
1999 1998
------------------------------- ---------------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 2,162 5.06% $ 27 $ 2,153 5.24% $ 28
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies 6,070 5.55 90 4.678 5.90 69
Securities of U.S. states and political subdivisions 2,106 8.09 43 1,888 8.30 37
Mortgage-backed securities:
Federal agencies 23,706 6.82 412 23,177 6.81 388
Private collateralized mortgage obligations 3,595 6.86 64 3,919 6.64 65
-------- ------ -------- ------
Total mortgage-backed securities 27,301 6.82 476 27,096 6.79 453
Other debt securities (4) 4,588 7.62 62 2,551 7.51 44
-------- ------ -------- ------
Total debt securities available for sale (4) 40,065 6.76 671 36,213 6.80 603
Loans held for sale (3) 11,132 7.12 202 19,131 6.72 322
Mortgages held for sale (3) 4,844 7.62 93 5,164 7.63 98
Loans:
Commercial 40,420 8.92 909 37,259 8.53 800
Real estate 1-4 family first mortgage 13,467 7.89 266 12,847 8.00 257
Other real estate mortgage 19,895 8.59 430 17,609 8.95 397
Real estate construction 5,945 9.53 143 4,515 9.40 107
Consumer:
Real estate 1-4 family junior lien mortgage 12,579 10.11 319 11,014 10.06 279
Credit card 5,603 13.66 191 5,956 14.69 218
Other revolving credit and monthly payment 20,327 12.23 623 19,939 12.04 602
-------- ------ -------- ------
Total consumer 38,509 11.75 1,133 36,909 11.88 1,099
Lease financing 9,520 7.98 190 7,745 7.94 154
Foreign 1,572 20.87 83 1,483 20.74 77
-------- ------ -------- ------
Total loans (5) 129,328 9.71 3,154 118,367 9.73 2,891
Other 4,085 4.43 45 2,587 5.39 35
-------- ------ -------- ------
Total earning assets $191,616 8.73 4,192 $183,615 8.67 3,977
======== ------ ======== ------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 3,062 1.13 9 $ 3,008 1.11 8
Market rate and other savings 61,399 2.27 351 58,658 2.51 372
Savings certificates 29,020 4.84 354 31,857 5.18 416
Other time deposits 3,833 4.98 48 4,359 5.34 59
Deposits in foreign offices 2,244 5.12 29 1,261 4.70 15
-------- ------ -------- ------
Total interest-bearing deposits 99,558 3.15 791 99,143 3.48 870
Short-term borrowings 24,930 5.48 344 20,594 5.07 263
Long-term debt 27,233 6.11 416 21,656 6.08 329
Guaranteed preferred beneficial interests in Company's
subordinated debentures 935 7.83 18 924 7.79 18
-------- ------ -------- ------
Total interest-bearing liabilities 152,656 4.09 1,569 142,317 4.13 1,480
Portion of noninterest-bearing funding sources 38,960 -- -- 41,298 -- --
-------- ------ -------- ------
Total funding sources $191,616 3.26 1,569 $183,615 3.22 1,480
======== ------ ======== ------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (6) 5.46% $2,623 5.45% $2,497
==== ====== ==== ======
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 13,075 $ 11,875
Goodwill 7,953 7,914
Other 19,045 14,739
-------- --------
Total noninterest-earning assets $ 40,073 $ 34,528
======== ========
NONINTEREST-BEARING FUNDING SOURCES
Deposits $ 45,408 $ 45,831
Other liabilities 10,050 7,504
Preferred stockholders' equity 461 463
Common stockholders' equity 23,114 22,028
Noninterest-bearing funding sources used to
fund earning assets (38,960) (41,298)
-------- --------
Net noninterest-bearing funding sources $ 40,073 $ 34,528
======== ========
TOTAL ASSETS $231,689 $218,143
======== ========
- -----------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 8.37% and 7.92% for the quarters
ended December 31, 1999 and 1998, respectively. The average three-month
London Interbank Offered Rate (LIBOR) was 6.14% and 5.28% for the same
quarters, 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) Includes certain preferred securities.
(5) Nonaccrual loans and related income are included in their respective loan
categories.
(6) Includes taxable-equivalent adjustments that primarily relate to income
on certain loans and securities that is exempt from federal and
applicable state income taxes. The federal statutory tax rate was 35% for
both quarters presented.
103