UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission file number 1-6214
------------------------
WFC HOLDINGS CORPORATION
(SUCCESSOR TO WELLS FARGO & COMPANY)
(Exact name of Registrant as specified in its charter)
Delaware 41-1921346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 1-800-411-4932
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
October 31, 1998
------------------
Common stock, $5 par value 87,794,370
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Statement of Income................................. 2
Consolidated Balance Sheet....................................... 3
Consolidated Statement of Changes in Stockholders' Equity........ 4
Consolidated Statement of Cash Flows............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Summary Financial Data........................................... 7
Overview......................................................... 8
Merger with Norwest Corporation.................................. 10
Earnings Performance............................................. 11
Net Interest Income............................................ 11
Noninterest Income............................................. 14
Noninterest Expense............................................ 16
Earnings/Ratios Excluding Goodwill and Nonqualifying CDI ...... 19
Balance Sheet Analysis........................................... 20
Investment Securities.......................................... 20
Loan Portfolio................................................. 22
Commercial real estate...................................... 22
Nonaccrual and Restructured Loans and Other Assets............. 23
Loans 90 days past due and still accruing................... 26
Allowance for Loan Losses...................................... 27
Other Assets................................................... 29
Deposits....................................................... 30
Capital Adequacy/Ratios........................................ 30
Derivative Financial Instruments............................... 32
Liquidity Management........................................... 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 33
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 35
SIGNATURE.................................................................. 36
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The information furnished in these interim statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for such periods. Such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q. The results
of operations in the interim statements are not necessarily indicative of the
results that may be expected for the full year. In addition, this Form 10-Q
includes forward-looking statements that involve inherent risks and
uncertainties. WFC Holdings Corporation (the Company) cautions readers that a
number of important factors could cause actual results to differ materially
from those in the forward-looking statements. Those factors include
fluctuations in interest rates, inflation, government regulations, customer
disintermediation, technology changes (including the Year 2000 issue) and
economic conditions and competition in the geographic and business areas in
which the Company conducts its operations. The interim financial information
should be read in conjunction with the Company's 1997 Annual Report on Form
10-K.
1
PART I - FINANCIAL INFORMATION
WFC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------
Quarter Nine months
ended September 30, ended September 30,
------------------------ ------------------------
(in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Federal funds sold and securities
purchased under resale agreements $ 16 $ 3 $ 32 $ 15
Investment securities 128 175 403 573
Loans 1,497 1,513 4,524 4,570
Other 26 16 69 39
------ ------ ------ ------
Total interest income 1,667 1,707 5,028 5,197
------ ------ ------ ------
INTEREST EXPENSE
Deposits 407 430 1,219 1,280
Federal funds purchased and securities sold under
repurchase agreements 16 44 76 109
Commercial paper and other short-term borrowings 4 5 14 12
Senior and subordinated debt 68 75 217 234
Guaranteed preferred beneficial interests in
Company's subordinated debentures 25 25 76 75
------ ------ ------ ------
Total interest expense 520 579 1,602 1,710
------ ------ ------ ------
NET INTEREST INCOME 1,147 1,128 3,426 3,487
Provision for loan losses 160 175 510 420
------ ------ ------ ------
Net interest income after provision for loan losses 987 953 2,916 3,067
------ ------ ------ ------
NONINTEREST INCOME
Fees and commissions 274 246 801 694
Service charges on deposit accounts 235 214 665 649
Trust and investment services income 115 117 343 338
Investment securities gains (losses) 18 (1) 41 6
Other 95 101 347 309
------ ------ ------ ------
Total noninterest income 737 677 2,197 1,996
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries 299 308 907 964
Incentive compensation 61 54 175 143
Employee benefits 73 80 244 256
Equipment 96 97 294 289
Net occupancy 96 96 295 292
Goodwill 80 81 242 245
Core deposit intangible 55 64 172 193
Operating losses 23 40 79 262
Other 305 267 869 806
------ ------ ------ ------
Total noninterest expense 1,088 1,087 3,277 3,450
------ ------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 636 543 1,836 1,613
Income tax expense 289 253 837 756
------ ------ ------ ------
NET INCOME $ 347 $ 290 $ 999 $ 857
------ ------ ------ ------
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $ 343 $ 285 $ 986 $ 836
------ ------ ------ ------
------ ------ ------ ------
EARNINGS PER COMMON SHARE $ 4.03 $ 3.26 $11.55 $ 9.38
------ ------ ------ ------
------ ------ ------ ------
DILUTED EARNINGS PER COMMON SHARE $ 3.99 $ 3.23 $11.44 $ 9.28
------ ------ ------ ------
------ ------ ------ ------
DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.30 $ 3.90 $ 3.90
------ ------ ------ ------
------ ------ ------ ------
Average common shares outstanding 85.2 87.5 85.4 89.1
------ ------ ------ ------
------ ------ ------ ------
Diluted average common shares outstanding 85.9 88.4 86.2 90.1
------ ------ ------ ------
------ ------ ------ ------
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2
WFC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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SEPTEMBER 30, December 31, September 30,
(in millions) 1998 1997 1997
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ASSETS
Cash and due from banks $ 6,538 $ 8,169 $ 7,823
Federal funds sold and securities
purchased under resale agreements 1,080 82 188
Securities available for sale 8,242 9,888 10,737
Loans 64,374 65,734 65,104
Allowance for loan losses 1,833 1,828 1,823
------- ------- -------
Net loans 62,541 63,906 63,281
------- ------- -------
Due from customers on acceptances 103 98 104
Accrued interest receivable 502 507 537
Premises and equipment, net 1,913 2,117 2,173
Core deposit intangible 1,537 1,709 1,771
Goodwill 6,757 7,031 7,149
Other assets 3,602 3,949 3,892
------- ------- -------
Total assets $92,815 $97,456 $97,655
------- ------- -------
------- ------- -------
LIABILITIES
Noninterest-bearing deposits $22,542 $23,953 $23,005
Interest-bearing deposits 47,227 48,246 47,917
------- ------- -------
Total deposits 69,769 72,199 70,922
Federal funds purchased and securities
sold under repurchase agreements 1,419 3,576 4,268
Commercial paper and other short-term borrowings 451 249 458
Acceptances outstanding 103 98 104
Accrued interest payable 241 175 245
Other liabilities 2,519 2,403 2,574
Senior debt 1,284 1,983 2,280
Subordinated debt 2,530 2,585 2,585
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1,299 1,299 1,299
STOCKHOLDERS' EQUITY
Preferred stock 275 275 275
Common stock - $5 par value,
authorized 150,000,000 shares; issued and
outstanding 85,237,292 shares, 86,152,779 shares
and 86,780,522 shares 426 431 434
Additional paid-in capital 8,375 8,712 8,925
Retained earnings 4,069 3,416 3,235
Cumulative other comprehensive income 55 55 51
------- ------- -------
Total stockholders' equity 13,200 12,889 12,920
------- ------- -------
Total liabilities and stockholders' equity $92,815 $97,456 $97,655
------- ------- -------
------- ------- -------
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3
WFC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
--------------------------------------------------------
1998 1997
---------------------- ---------------------
STOCK- COMPRE- Stock- Compre-
HOLDERS' HENSIVE holders' hensive
(in millions) EQUITY INCOME equity income
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance, beginning of period $ 275 $ 600
Preferred stock redeemed -- (325)
------- -------
Balance, end of period 275 275
------- -------
COMMON STOCK
Balance, beginning of period 431 457
Common stock issued under employee benefit and
dividend reinvestment plans 2 3
Common stock repurchased (7) (26)
------- -------
Balance, end of period 426 434
------- -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 8,712 10,287
Common stock issued under employee benefit and
dividend reinvestment plans 85 64
Common stock repurchased (422) (1,426)
------- -------
Balance, end of period 8,375 8,925
------- -------
RETAINED EARNINGS
Balance, beginning of period 3,416 2,749
Net income 999 $999 857 $857
Preferred stock dividends (13) (21)
Common stock dividends (333) (350)
------- -------
Balance, end of period 4,069 3,235
------- -------
CUMULATIVE OTHER COMPREHENSIVE INCOME
Balance, beginning of period 55 19
Unrealized gains on investment securities arising during
the period, net of tax of $16 million and $19 million 24 24 32 32
Reclassification adjustment for investment securities gains included
in net income, net of tax of $17 million and $2 million (24) (24) (4) (4)
Foreign currency translation adjustments, net of tax of ($4) million -- -- 4 4
------- ---- ------- ----
Balance, end of period 55 51
------- -------
COMPREHENSIVE INCOME $999 $889
---- ----
---- ----
Total stockholders' equity $13,200 $12,920
------- -------
------- -------
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4
WFC HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
------------------------------
(in millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 999 $ 857
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 510 420
Depreciation and amortization 683 683
Investment securities gains (41) (6)
Gains on sales of loans (67) (41)
Gains from dispositions of operations (89) (7)
Net decrease in accrued interest receivable 5 128
Net increase in accrued interest payable 66 74
Net decrease (increase) in loans originated for sale 174 (75)
Other, net (117) 1,227
------- --------
Net cash provided by operating activities 2,123 3,260
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 558 275
Proceeds from prepayments and maturities 4,038 3,270
Purchases (2,868) (726)
Net (increase) decrease in loans resulting from originations and collections (463) 1,755
Proceeds from sales (including participations) of loans 1,237 158
Purchases (including participations) of loans (97) (210)
Proceeds from dispositions of operations 473 8
Proceeds from sales of foreclosed assets 115 116
Net increase in federal funds sold and securities
purchased under resale agreements (998) (1)
Other, net (151) 54
------- --------
Net cash provided by investing activities 1,844 4,699
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (2,430) (10,899)
Net increase (decrease) in short-term borrowings (1,955) 2,296
Proceeds from issuance of senior debt -- 700
Repayment of senior debt (693) (525)
Proceeds from issuance of subordinated debt 250 --
Repayment of subordinated debt (300) (351)
Proceeds from issuance of guaranteed preferred beneficial interests
in Company's subordinated debentures -- 149
Proceeds from issuance of common stock 87 67
Redemption of preferred stock -- (325)
Repurchase of common stock (429) (1,452)
Payment of cash dividends on preferred stock (13) (21)
Payment of cash dividends on common stock (333) (350)
Other, net 218 (1,161)
------- --------
Net cash used by financing activities (5,598) (11,872)
------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (DUE FROM BANKS) (1,631) (3,913)
Cash and cash equivalents at beginning of period 8,169 11,736
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,538 $ 7,823
------- --------
------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,536 $ 1,636
Income taxes $ 645 $ 558
Noncash investing activities:
Transfers from loans to foreclosed assets $ 73 $ 76
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5
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6
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change
Quarter ended Sept. 30, 1998 from Nine months ended
------------------------------ ------------------- -------------------
SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, %
(in millions) 1998 1998 1997 1998 1997 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Net income $ 347 $ 337 $ 290 3% 20% $ 999 $ 857 17%
Net income applicable to common stock 343 333 285 3 20 986 836 18
Earnings per common share $ 4.03 $ 3.91 $ 3.26 3 24 $ 11.55 $ 9.38 23
Diluted earnings per common share 3.99 3.87 3.23 3 24 11.44 9.28 23
Dividends declared per common share 1.30 1.30 1.30 -- -- 3.90 3.90 --
Average common shares outstanding 85.2 85.2 87.5 -- (3) 85.4 89.1 (4)
Diluted average common shares outstanding 85.9 86.1 88.4 -- (3) 86.2 90.1 (4)
Profitability ratios (annualized)
Net income to average total assets (ROA) 1.49% 1.45% 1.18% 3 26 1.43% 1.14% 25
Net income applicable to common stock to
average common stockholders' equity (ROE) 10.70 10.66 8.94 -- 20 10.48 8.62 22
Efficiency ratio (1) 57.8% 58.2% 60.2% (1) (4) 58.3% 62.9% (7)
Average loans $63,638 $64,397 $63,865 (1) -- $64,362 $ 64,653 --
Average assets 92,335 93,148 97,032 (1) (5) 93,570 100,703 (7)
Average core deposits 69,608 69,807 70,744 -- (2) 69,756 73,937 (6)
Net interest margin 6.18% 6.22% 5.94% (1) 4 6.14% 6.00% 2
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND NONQUALIFYING CORE DEPOSIT
INTANGIBLE AMORTIZATION AND BALANCES
("CASH" OR "TANGIBLE") (2)
Net income applicable to common stock $ 452 $ 444 $ 400 2 13 $ 1,319 $ 1,181 12
Earnings per common share 5.31 5.21 4.57 2 16 15.44 13.25 17
Diluted earnings per common share 5.26 5.15 4.52 2 16 15.30 13.11 17
ROA 2.14% 2.11% 1.81% 1 18 2.08% 1.74% 20
ROE 35.64 37.78 35.44 (6) 1 36.92 33.83 9
Efficiency ratio 50.9 51.2 52.6 (1) (3) 51.3 55.4 (7)
AT PERIOD END
Securities available for sale $ 8,242 $ 8,449 $10,737 (2) (23) $ 8,242 $ 10,737 (23)
Loans 64,374 64,320 65,104 -- (1) 64,374 65,104 (1)
Allowance for loan losses 1,833 1,835 1,823 -- 1 1,833 1,823 1
Goodwill 6,757 6,837 7,149 (1) (5) 6,757 7,149 (5)
Assets 92,815 93,200 97,655 -- (5) 92,815 97,655 (5)
Core deposits 69,491 70,209 70,580 (1) (2) 69,491 70,580 (2)
Common stockholders' equity 12,925 12,675 12,645 2 2 12,925 12,645 2
Stockholders' equity 13,200 12,950 12,920 2 2 13,200 12,920 2
Tier 1 capital (3) 6,802 6,425 6,005 6 13 6,802 6,005 13
Total capital (Tiers 1 and 2) (3) 9,844 9,491 9,153 4 8 9,844 9,153 8
Capital ratios
Common stockholders' equity to assets 13.93% 13.60% 12.95% 2 8 13.93% 12.95% 8
Stockholders' equity to assets 14.22 13.90 13.23 2 7 14.22 13.23 7
Risk-based capital (3)
Tier 1 capital 8.47 8.08 7.53 5 12 8.47 7.53 12
Total capital 12.26 11.94 11.47 3 7 12.26 11.47 7
Leverage (3) 8.04 7.53 6.76 7 19 8.04 6.76 19
Book value per common share $151.63 $148.96 $145.72 2 4 $151.63 $ 145.72 4
Staff (active, full-time equivalent) 31,600 31,620 32,663 -- (3) 31,600 32,663 (3)
COMMON STOCK PRICE
High $392.94 $387.25 $279.88 1 40 $392.94 $ 319.25 23
Low 281.88 329.13 250.13 (14) 13 281.88 246.00 15
Period end 355.00 369.00 275.00 (4) 29 355.00 275.00 29
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(1) The efficiency ratio is defined as noninterest expense divided by the total
of net interest income and noninterest income.
(2) Nonqualifying core deposit intangible (CDI) amortization and average
balance excluded from these calculations are, with the exception of the
efficiency ratio, net of applicable taxes. The after-tax amounts for the
amortization and average balance of nonqualifying CDI were $29 million and
$884 million, respectively, for the quarter ended September 30, 1998 and
$90 million and $913 million, respectively, for the nine months ended
September 30, 1998. Goodwill amortization and average balance (which are
not tax effected) were $80 million and $6,797 million, respectively, for
the quarter ended September 30, 1998 and $242 million and $6,896 million,
respectively, for the nine months ended September 30, 1998.
(3) See the Capital Adequacy/Ratios section for additional information.
7
OVERVIEW
On November 2, 1998, Wells Fargo & Company (the former Wells Fargo) merged (the
Merger) with WFC Holdings Corporation, a wholly-owned subsidiary of Norwest
Corporation (WFC Holdings), with WFC Holdings as the surviving corporation. In
connection with the Merger, Norwest Corporation changed its name to "Wells Fargo
& Company." WFC Holdings Corporation (Parent) is a bank holding company whose
principal subsidiary is Wells Fargo Bank, N.A. (Bank). In this Form 10-Q, WFC
Holdings Corporation and its subsidiaries are referred to as the Company.
Because the Merger occurred after September 30, 1998, this report does not give
effect to the Merger. The results presented in this report represent the results
of the former Wells Fargo & Company for all periods presented.
Net income for the third quarter of 1998 was $347 million, compared with $290
million for the third quarter of 1997, an increase of 20%. Earnings per share
for the third quarter of 1998 were $4.03, compared with $3.26 in the third
quarter of 1997, an increase of 24%. Net income for the first nine months of
1998 was $999 million, or $11.55 per share, compared with $857 million, or $9.38
per share, for the first nine months of 1997.
Return on average assets (ROA) was 1.49% and 1.43% in the third quarter and
first nine months of 1998, respectively, compared with 1.18% and 1.14% in the
same periods of 1997. Return on average common equity (ROE) was 10.70% and
10.48% in the third quarter and first nine months of 1998, respectively,
compared with 8.94% and 8.62% in the same periods of 1997.
Earnings before the amortization of goodwill and nonqualifying core deposit
intangible ("cash" or "tangible" earnings) in the third quarter and first nine
months of 1998 were $5.31 and $15.44 per share, respectively, compared with
$4.57 and $13.25 per share in the same periods of 1997. On the same basis, ROA
was 2.14% and 2.08% in the third quarter and first nine months of 1998,
respectively, compared with 1.81% and 1.74% in the same periods of 1997; ROE was
35.64% and 36.92% in the third quarter and first nine months of 1998,
respectively, compared with 35.44% and 33.83% in the same periods of 1997.
Net interest income on a taxable-equivalent basis was $1,151 million and $3,435
million in the third quarter and first nine months of 1998, respectively,
compared with $1,132 million and $3,497 million in the same periods of 1997. The
Company's net interest margin was 6.18% for the third quarter of 1998, compared
with 5.94% in the same quarter of 1997 and 6.22% in the second quarter of 1998.
The increase in net interest margin for the third quarter of 1998 compared with
the same period of 1997 was mostly due to an improvement in the funding mix.
Noninterest income was $737 million and $2,197 million in the third quarter and
first nine months of 1998, respectively, compared with $677 million and $1,996
million in the same periods of 1997. A significant portion of the increase from
a year ago was due to service charges on deposit accounts and higher fees and
commissions income.
8
Noninterest expense in the third quarter and first nine months of 1998 was
$1,088 million and $3,277 million, respectively, compared with $1,087 million
and $3,450 million for the same periods of 1997.
The provision for loan losses in the third quarter and first nine months of 1998
was $160 million and $510 million, respectively, compared with $175 million and
$420 million for the same periods in 1997. During the third quarter of 1998, net
charge-offs totaled $162 million, or 1.01% of average loans (annualized). This
compared with $165 million, or 1.02%, during the second quarter of 1998 and $202
million, or 1.25%, during the third quarter of 1997. The allowance for loan
losses of $1,833 million was 2.85% of total loans at September 30, 1998 and June
30, 1998, compared with 2.80% at September 30, 1997.
Total nonaccrual and restructured loans were $506 million, or .8% of total
loans, at September 30, 1998, compared with $537 million, or .8% of total loans,
at December 31, 1997 and $574 million, or .9% of total loans, at September 30,
1997. Foreclosed assets amounted to $130 million at September 30, 1998, $158
million at December 31, 1997 and $196 million at September 30, 1997.
Common stockholders' equity to total assets was 13.93% at September 30, 1998,
compared with 13.60% and 12.95% at June 30, 1998 and September 30, 1997,
respectively. The Company's total risk-based capital ratio at September 30, 1998
was 12.26% and its Tier 1 risk-based capital ratio was 8.47%, exceeding minimum
guidelines of 8% and 4%, respectively, for bank holding companies and the "well
capitalized" guidelines for banks of 10% and 6%, respectively. At June 30, 1998,
the risk-based capital ratios were 11.94% and 8.08%, respectively; at September
30, 1997, these ratios were 11.47% and 7.53%, respectively. The Company's
leverage ratios were 8.04%, 7.53% and 6.76% at September 30, 1998, June 30, 1998
and September 30, 1997, respectively, exceeding the minimum regulatory guideline
of 3% for bank holding companies and the "well capitalized" guideline of 5% for
banks.
The Company has bought in the past shares to offset common stock issued or
expected to be issued under the Company's employee benefit and dividend
reinvestment plans. In addition to these shares, the Board of Directors
authorized in April 1996 the repurchase of up to 9.6 million shares of the
Company's outstanding common stock under a repurchase program begun in 1994.
In October 1997, the Board of Directors authorized the repurchase from time
to time of up to an additional 8.6 million shares of the Company's
outstanding stock under the same program. Under these programs, the Company
has repurchased 7.7 million shares (net of shares issued) in 1996, 5.3
million shares (net of shares issued) in 1997 and 1.1 million shares (net of
shares issued) in the first half of 1998. In connection with the Merger, the
Company rescinded all of its share repurchase programs effective June 7,
1998. In addition, on October 12, 1998, the Company issued 2.5 million shares
to cure a portion of previously repurchased "tainted" shares and, thus, allow
the Merger to be accounted for as a pooling of interests.
9
MERGER WITH NORWEST CORPORATION
On November 2, 1998, Wells Fargo & Company (the former Wells Fargo) merged with
WFC Holdings, a wholly owned subsidiary of Norwest Corporation, with WFC
Holdings as the surviving corporation. In connection with the Merger, Norwest
Corporation changed its name to Wells Fargo & Company. The corporate
headquarters for Wells Fargo & Company is in San Francisco. Minneapolis is the
headquarters for the Midwest banking business. The Merger is accounted for as a
pooling of interests.
The combined Board of Directors consists of an equal number of representatives
from each of the companies. Under the terms of the merger agreement, the former
Wells Fargo & Company shareholders received a tax-free exchange of ten shares of
Norwest common stock for each share of the former Wells Fargo & Company's common
stock.
At September 30, 1998, Norwest had assets of $104 billion and was the tenth
largest bank holding company in the nation. Norwest had 3,961 financial services
stores in all 50 states, Canada, the Caribbean, Latin America and elsewhere
internationally. At September 30, 1998, the former Wells Fargo & Company had
1,865 physical distribution offices in ten western states.
In order to comply with the Department of Justice merger guidelines, the company
is required to sell deposits of approximately $1.2 billion. The divestitures are
in various markets in Arizona and Nevada.
Wells Fargo & Company expects to achieve approximately $650 million ($430
million after tax) in annual cost savings within three years of the merger date.
The savings are expected to result from the conversion to one systems platform,
the elimination of duplicate systems development and maintenance, the
consolidation of operations and branches and the elimination of duplicate
overhead functions.
Wells Fargo & Company expects to incur approximately $950 million ($625 million
after tax) in transition-related expenses. The estimated transition-related
expenses consist primarily of employee-related expense and costs associated with
systems integration and operations.
The following discussions included in Earnings Performance and Balance Sheet
Analysis sections of this report do not reflect the expected impact of the
Merger.
The foregoing paragraphs contain a number of forward-looking statements with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of Wells Fargo & Co., as well as certain
information relating to the Merger, including, without limitation (i)
statements relating to the cost savings estimated to result from the Merger,
(ii) statements relating to the Merger and integration costs estimated to be
incurred in connection with the Merger and (iii) statements preceded by,
followed by or that include the words "expects," "estimates" or similar
expressions. These forward-looking statements involve certain risks and
uncertainties. Actual results may differ materially from those contemplated
by such forward-looking statements due to, among others, the following
factors: (a) expected cost savings from the Merger
10
are not fully realized, realized within the expected time frame or additional
or unexpected costs are incurred; (b) competitive pressures among financial
services companies increase; (c) costs or difficulties related to the
integration of the business of Norwest and Wells Fargo or other acquired
businesses are greater than expected; (d) changes in the interest rate
environment reduce interest margins; (e) general economic conditions, either
internationally or nationally or in the states or countries in which the
Company is doing business, are less favorable than expected; (f) legislative
or regulatory changes adversely affect the businesses in which the Company is
engaged; (g) personal or commercial customers' bankruptcies increase; and (h)
technological changes (including "Year 2000" data systems compliance issues)
are more difficult or expensive than anticipated.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Individual components of net interest income and the net interest margin are
presented in the rate/yield table on pages 12 and 13.
Net interest income on a taxable-equivalent basis was $1,151 million in the
third quarter of 1998, compared with $1,132 million in the third quarter of
1997. The Company's net interest margin was 6.18% in the third quarter of 1998,
compared with 5.94% in the third quarter of 1997 and 6.22% in the second quarter
of 1998. Net interest income on a taxable-equivalent basis was $3,435 million in
the first nine months of 1998, compared with $3,497 million in the first nine
months of 1997. The Company's net interest margin was 6.14% in the first nine
months of 1998, compared with 6.00% in the first nine months of 1997.
Interest income included hedging income of $20 million in the third quarter of
1998, compared with $16 million in the third quarter of 1997. Interest expense
included hedging expense of $3 million in the third quarter of 1998, compared
with $4 million in the same quarter of 1997.
Loans averaged $63.6 billion in the third quarter of 1998, compared with $63.9
billion in the third quarter of 1997, and $64.4 billion in the first nine months
of 1998, compared with $64.7 billion in the first nine months of 1997.
Securities available for sale averaged $8.1 billion during the third quarter of
1998, compared with $11.0 billion in the third quarter of 1997, and $8.5 billion
in the first nine months of 1998, compared with $12.0 billion in the first nine
months of 1997. The decrease was predominantly due to maturities.
Average core deposits were $69.6 billion and $70.7 billion in the third
quarter of 1998 and 1997, respectively, and funded 75% and 73% of the
Company's average total assets in the third quarter of 1998 and 1997,
respectively. For the first nine months of 1998 and 1997, average core
deposits were $69.8 billion and $73.9 billion, respectively, and funded 75%
and 73%, respectively, of the Company's average total assets.
11
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------
Quarter ended September 30,
-------------------------------------------------------------
1998 1997
-------------------------- ----------------------------
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 $ 1,152 5.64% $ 16 $ 229 5.63% $ 3
Securities available for sale (3):
U.S. Treasury securities 1,771 6.05 27 2,634 6.00 40
Securities of U.S. government agencies
and corporations 2,928 6.60 48 5,303 6.42 85
Private collateralized mortgage obligations 2,832 6.62 47 2,737 6.68 46
Other securities 553 6.84 8 330 6.41 4
------- ------ -------- ------
Total securities available for sale 8,084 6.50 130 11,004 6.38 175
Loans:
Commercial 20,965 8.89 469 18,283 9.11 419
Real estate 1-4 family first mortgage 7,550 7.54 143 9,543 7.52 180
Other real estate mortgage 11,509 9.67 281 11,421 9.35 269
Real estate construction 2,534 9.43 60 2,304 10.90 63
Consumer:
Real estate 1-4 family junior lien mortgage 5,368 9.07 123 5,946 9.35 140
Credit card 4,279 15.30 164 5,073 14.66 186
Other revolving credit and monthly payment 6,606 9.45 156 7,638 9.26 178
------- ------ -------- ------
Total consumer 16,253 10.86 443 18,657 10.75 504
Lease financing 4,684 8.58 100 3,533 8.99 79
Foreign 143 7.37 3 124 6.88 2
------- ------ -------- ------
Total loans (4) 63,638 9.37 1,499 63,865 9.45 1,516
Other 1,405 7.24 26 883 7.18 16
------- ------ -------- ------
Total earning assets $74,279 8.96 1,671 $ 75,981 8.97 1,710
------- ------ -------- ------
------- --------
FUNDING SOURCES
Deposits:
Interest-bearing checking $ 1,711 1.39 6 $ 1,736 1.45 6
Market rate and other savings 30,356 2.69 206 31,098 2.64 207
Savings certificates 15,082 5.05 192 15,602 5.17 203
Other time deposits 205 4.74 2 253 4.83 3
Deposits in foreign offices 55 3.95 1 731 5.48 10
------- ------ -------- ------
Total interest-bearing deposits 47,409 3.40 407 49,420 3.45 429
Federal funds purchased and securities sold
under repurchase agreements 1,186 5.33 16 3,211 5.48 44
Commercial paper and other short-term borrowings 261 5.41 4 343 5.82 5
Senior debt 1,487 6.17 23 1,770 6.47 29
Subordinated debt 2,593 6.99 45 2,604 7.12 46
Guaranteed preferred beneficial interests in Company's
subordinated debentures 1,299 7.81 25 1,299 7.81 25
------- ------ -------- ------
Total interest-bearing liabilities 54,235 3.81 520 58,647 3.92 578
Portion of noninterest-bearing funding sources 20,044 -- -- 17,334 -- --
------- ------ -------- ------
Total funding sources $74,279 2.78 520 $ 75,981 3.03 578
------- ------ -------- ------
------- --------
NET INTEREST MARGIN AND NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS (5) 6.18% $1,151 5.94% $1,132
---- ------ ---- ------
---- ------ ---- ------
NONINTEREST-EARNING ASSETS
Cash and due from banks $ 6,384 $ 7,299
Goodwill 6,797 7,190
Other 4,875 6,562
------- --------
Total noninterest-earning assets $18,056 $ 21,051
------- --------
------- --------
NONINTEREST-BEARING FUNDING SOURCES
Deposits $22,459 $ 22,308
Other liabilities 2,649 3,135
Preferred stockholders' equity 275 275
Common stockholders' equity 12,717 12,667
Noninterest-bearing funding sources used to
fund earning assets (20,044) (17,334)
------- --------
Net noninterest-bearing funding sources $18,056 $ 21,051
------- --------
------- --------
TOTAL ASSETS $92,335 $ 97,032
------- --------
------- --------
- -----------------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of Wells Fargo Bank was 8.50% for the quarters ended
September 30, 1998 and 1997 and 8.50% and 8.42% for the nine months ended
September 30, 1998 and 1997, respectively. The average three-month London
Interbank Offered Rate (LIBOR) was 5.62% and 5.73% for the quarters ended
September 30, 1998 and 1997, respectively, and 5.65% and 5.71% for the nine
months ended September 30, 1998 and 1997, 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. The average amortized cost
balances for securities available for sale totaled $7,971 million and
$10,931 million for the quarters ended September 30, 1998 and 1997,
respectively, and $8,349 million and $11,973 million for the nine months
ended September 30, 1998 and 1997, respectively.
(4) Nonaccrual loans and related income are included in their respective loan
categories.
(5) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal and applicable
state income taxes. The federal statutory tax rate was 35% for all periods
presented.
12
- --------------------------------------------------------------
Nine months ended September 30,
------------------------------------------------------------
1998 1997
-------------------------- ---------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
BALANCE RATES EXPENSE balance rates expense
- --------------------------------------------------------------
$ 759 5.65% $ 32 $ 351 5.58% $ 15
2,105 6.09 95 2,745 6.03 124
3,413 6.60 167 5,972 6.43 287
2,422 6.65 120 2,935 6.63 147
511 7.07 25 340 6.42 15
-------- ------ -------- ------
8,451 6.51 407 11,992 6.39 573
20,550 8.99 1,382 18,373 9.07 1,246
8,109 7.50 456 9,899 7.49 555
11,810 9.61 848 11,514 9.82 846
2,444 9.55 175 2,288 10.23 175
5,521 9.32 385 6,049 9.34 423
4,554 15.19 519 5,188 14.39 560
6,841 9.20 471 7,913 9.29 550
-------- ------ -------- ------
16,916 10.85 1,375 19,150 10.69 1,533
4,408 8.64 286 3,295 8.83 218
125 7.68 7 134 6.91 7
-------- ------ -------- ------
64,362 9.40 4,529 64,653 9.46 4,580
1,261 7.29 69 770 6.79 39
-------- ------ -------- ------
$ 74,833 9.00 5,037 $ 77,766 8.94 5,207
-------- ------ -------- ------
-------- --------
$ 1,735 1.41 18 $ 1,847 1.30 18
30,408 2.68 610 32,562 2.59 632
15,076 5.10 576 15,596 5.10 595
234 4.79 8 201 4.47 7
189 5.03 7 708 5.38 28
-------- ------ -------- ------
47,642 3.42 1,219 50,914 3.36 1,280
1,895 5.40 76 2,712 5.37 109
323 5.89 14 264 5.96 12
1,709 6.26 80 1,840 6.33 87
2,619 6.96 137 2,808 6.99 147
1,299 7.80 76 1,283 7.82 75
-------- ------ -------- ------
55,487 3.86 1,602 59,821 3.82 1,710
19,346 -- -- 17,945 -- --
-------- ------ -------- ------
$ 74,833 2.87 1,602 $ 77,766 2.94 1,710
-------- ------ -------- ------
-------- --------
6.14% $3,435 6.00% $3,497
---- ------ ---- ------
---- ------ ---- ------
$ 6,547 $ 8,293
6,896 7,255
5,294 7,389
-------- --------
$ 18,737 $ 22,937
-------- --------
-------- --------
$ 22,537 $ 23,932
2,687 3,588
275 397
12,584 12,965
(19,346) (17,945)
-------- --------
$ 18,737 $ 22,937
-------- --------
-------- --------
$ 93,570 $100,703
-------- --------
-------- --------
- --------------------------------------------------------------
13
NONINTEREST INCOME
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Nine months
ended Sept. 30, ended Sept. 30,
-------------- % --------------- %
(in millions) 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------
Fees and commissions:
Credit card membership and other credit card fees $ 66 $ 62 6% $ 195 $ 162 20%
ATM network fees 50 43 16 144 125 15
Charges and fees on loans 42 37 14 125 100 25
Debit and credit card merchant fees 27 25 8 74 72 3
Mutual fund and annuity sales fees 22 18 22 65 51 27
All other (1) 67 61 10 198 184 8
---- ---- ------ ------
Total fees and commissions 274 246 11 801 694 15
Service charges on deposit accounts 235 214 10 665 649 2
Trust and investment services income:
Asset management and custody fees 62 64 (3) 187 186 1
Mutual fund management fees 47 47 -- 137 131 5
All other 6 6 -- 19 21 (10)
---- ---- ------ ------
Total trust and investment services income 115 117 (2) 343 338 1
Investment securities gains (losses) 18 (1) -- 41 6 583
Income from equity investments accounted for by the:
Cost method 32 18 78 116 109 6
Equity method 12 11 9 43 42 2
Check printing charges 22 17 29 60 53 13
Gains on sales of loans 14 28 (50) 67 41 63
Gains (losses) from dispositions of operations 18 (1) -- 89 7 --
Losses on dispositions of premises and equipment (7) (10) (30) (58) (45) 29
All other 4 38 (89) 30 102 (71)
---- ---- ------ ------
Total $737 $677 9% $2,197 $1,996 10%
---- ---- --- ------ ------ ---
---- ---- --- ------ ------ ---
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage loan servicing fees totaling $1 million and $24 million
for purchased mortgage servicing rights for the quarters ended September
30, 1998 and 1997, respectively, and $40 million and $73 million for the
nine months ended September 30, 1998 and 1997, respectively. Also includes
the related amortization expense of none and $16 million for the quarters
ended September 30, 1998 and 1997, respectively, and $30 million and $51
million for the nine months ended September 30, 1998 and 1997,
respectively.
Fees and commissions increased $28 million, or 11%, from the third quarter of
1997 reflecting increased fees in all major business units.
Service charges on deposit accounts increased $21 million, or 10%, from the
third quarter of 1997 due to an increase in fees.
The increase in gains on sales of investment securities was predominantly due
to sales of U.S. Treasury securities.
In June 1998, the Company sold its mortgage servicing business to GMAC Mortgage
Corporation. The resulting pre-tax gain of $58 million was included in gains
from dispositions of operations in the second quarter and an additional $4
million was included in the third quarter. Pre-tax income from the mortgage
servicing business was none and $7 million in the third quarter and first nine
months of 1998, respectively, compared with $3 million and $10 million in the
same periods of 1997.
14
At December 31, 1997, the Company had a liability of $48 million related to the
disposition of premises and, to a lesser extent, severance and miscellaneous
expenses associated with 65 branches not acquired as a result of the acquisition
of First Interstate Bancorp (First Interstate) or with First Interstate branches
that were identified in the fourth quarter of 1997 for closure in 1998. Of this
amount, $21 million represented the balance of the fourth-quarter 1996 accrual
related to 32 traditional branches in California and $27 million represented the
fourth-quarter 1997 accrual for the disposition of 33 traditional branches
located mostly outside of California. Of the total 65 branches, 31 branches were
closed in the first nine months of 1998, including 3 in the third quarter of
1998. In the second and third quarters of 1998, the Company evaluated the
remaining 34 scheduled branch closures and decided to retain 32 branches, which
resulted in reducing the liability by $18 million. The decision was made based
on numerous factors, including the need to maintain customer service levels,
particularly given the earlier unstable operating environment associated with
integrating First Interstate, as well as the review of profitability analyses
demonstrating increased customer usage and improved profitability for these 32
branches. These developments were not anticipated or foreseen at the time these
accruals were originally recorded. The remaining balance of $1 million at
September 30, 1998 is for the expected closure of 2 branches by year-end 1998.
The decrease in "All Other" was predominantly due to losses on trading of
commercial mortgage-backed securities.
At September 30, 1998, the Company had 842 traditional branches, 582 in-store
branches, 365 banking centers and 34 business centers. Motor banking facilities
("motorbanks") were available at 42 of the traditional branches.
15
NONINTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------------------
Quarter Nine months
ended Sept. 30, ended Sept. 30,
--------------------- % --------------------- %
(in millions) 1998 1997 Change 1998 1997 Change
- ----------------------------------------------------------------------------------------------------------------------
Salaries $ 299 $ 308 (3)% $ 907 $ 964 (6)%
Incentive compensation 61 54 13 175 143 22
Employee benefits 73 80 (9) 244 256 (5)
Equipment 96 97 (1) 294 289 2
Net occupancy 96 96 -- 295 292 1
Goodwill 80 81 (1) 242 245 (1)
Core deposit intangible:
Nonqualifying (1) 49 56 (13) 152 169 (10)
Qualifying 6 8 (25) 20 24 (17)
Operating losses 23 40 (43) 79 262 (70)
Contract services 73 56 30 206 172 20
Telecommunications 34 35 (3) 98 108 (9)
Security 22 22 -- 63 66 (5)
Postage 17 19 (11) 55 64 (14)
Outside professional services 24 20 20 72 56 29
Advertising and promotion 30 19 58 84 53 58
Stationery and supplies 14 19 (26) 40 56 (29)
Travel and entertainment 18 15 20 51 44 16
Check printing 12 12 -- 36 42 (14)
Outside data processing 21 11 91 51 37 38
Foreclosed assets (1) 1 -- (1) (2) (50)
All other 41 38 8 114 110 4
------ ------ ------ ------
Total $1,088 $1,087 -- % $3,277 $3,450 (5)%
------ ------ --- ------ ------ ---
------ ------ --- ------ ------ ---
- ----------------------------------------------------------------------------------------------------------------------
(1) Amortization of core deposit intangible acquired after February 1992 that
is subtracted from stockholders' equity in computing regulatory capital for
bank holding companies.
Salaries expense decreased $9 million and $57 million in the third quarter and
first nine months of 1998, respectively, due to reduced staff levels. The
Company's active full-time equivalent (FTE) staff, including hourly employees,
was 31,600 at September 30, 1998, compared with 32,663 at September 30, 1997.
Goodwill and CDI amortization resulting from the acquisition of First Interstate
on April 1, 1996 were $72 million and $49 million, respectively, for the quarter
ended September 30, 1998, compared with $73 million and $56 million,
respectively, for the quarter ended September 30, 1997. The core deposit
intangible is amortized on an accelerated basis based on an estimated useful
life of 15 years. The impact on noninterest expense from the amortization of the
nonqualifying core deposit intangible in 1998, 1999 and 2000 is expected to be
$199 million, $178 million and $162 million, respectively. The related impact on
income tax expense is expected to be a benefit of $81 million, $72 million and
$66 million in 1998, 1999 and 2000, respectively.
The Company, following an initial awareness phase, utilizes a four-phase plan
for achieving Year 2000 readiness. The Assessment Phase is intended to determine
which computers, operating systems, applications and facilities require
remediation and prioritizing those remediation efforts. The Assessment Phase has
been completed except for the on-going
16
assessment of new systems. The Renovation Phase addressed the correction or
replacement of any non-compliant hardware, software or facilities and has
been substantially completed. All renovated software, both in-house
applications and vendor software was placed back into production before
commencement of the Validation Phase. The Validation Phase, which involves
testing of in-house systems, vendor software and service providers, is in
process. Testing of internal mission-critical systems is anticipated to be
substantially completed by December 31, 1998, and testing of mission-critical
service providers is anticipated to be substantially completed by March 31,
1999. During the fourth phase, the Implementation Phase, remediated and
validated code will be tested in interfaces with customers, business
partners, government institutions and others. It is anticipated that the
Implementation Phase will be substantially completed by June 30, 1999.
The Company may be impacted by the Year 2000 compliance issues of governmental
agencies, businesses and other entities who provide data to, or receive data
from, the Company, and by entities, such as borrowers, vendors,
customers and business partners, whose financial condition or operational
capability is significant to the Company. The Company's Year
2000 project also includes assessing the Year 2000 readiness of certain
customers, borrowers, vendors, business partners, counterparties and
governmental entities. In addition to assessing the readiness of these external
parties, the Company is developing contingency plans which will include
plans to recover operations and alternatives to mitigate the effects of
counterparties whose own failure to properly address Year 2000 issues may
adversely impact the Company's ability to perform certain functions.
These contingency plans are currently being developed and are expected to be
substantially completed by June 30, 1999.
The Company currently estimates that its total cost for the Year 2000 project
will approximate $141 million. To date, the Company has incurred charges of
$77 million related to its Year 2000 project, and $24 million and $67 million
total expenditures were incurred in the quarter and nine months ended
September 30, 1998, respectively. Charges include the cost of external
consulting costs and costs of accelerated replacement of hardware and
software, but do not include the cost of internal staff redeployed to the
Year 2000 project. The Company does not believe that the redeployment of
internal staff will have a material impact on its financial condition or
results of operations.
The foregoing paragraphs contain a number of forward-looking statements.
These statements reflect management's best current estimates, which were
based on numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other third parties, and additional factors. There can
be no guarantee that these estimates, including Year 2000 costs, will be
achieved, and actual results could differ materially from those estimates. A
number of important factors could cause management's estimates and the impact
of the Year 2000 issue to differ materially from what is described in the
forward-looking statements contained in the above paragraphs. Those factors
include, but are not limited to, uncertainties in the cost of hardware and
software, the availability and cost of programmers and other systems
personnel, inaccurate or incomplete execution of the phases, ineffective
remediation of computer code, and whether the
17
Company's customers, vendors, competitors and counterparties effectively
address the Year 2000 issue.
If Year 2000 issues are not adequately addressed by the Company and significant
third parties, the Company's business, results of operations and financial
position could be materially adversely affected. Failure of certain vendors to
be Year 2000 compliant could result in disruption of important services upon
which the Company depends, including, but not limited to, such services
as telecommunications, electrical power and data processing. Failure of the
Company's loan customers to properly prepare for the Year 2000 could
also result in increases in problem loans and credit losses in future years.
Notwithstanding the Company's efforts, there can be no assurance that the
Company or significant third party vendors or other significant third parties
will adequately address their Year 2000 issues. The Company is continuing to
assess the Year 2000 readiness of third parties but does not know at this time
whether the failure of third parties to be Year 2000 compliant will have a
material effect on the Company's results of operations, liquidity and
financial condition.
The forward-looking statements made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
In February 1998, the FASB issued FAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, which will be effective for the year-end 1998
financial statements. FAS 132 only addresses disclosure issues; it does not
address measurement and recognition of pensions and other postretirement
benefits. FAS 132 requires the reconciliation of changes in benefit obligation
and plan assets for both pensions and other postretirement benefits, showing the
effects of the major components separately for each reconciliation. FAS 132 will
be adopted at year-end 1998 and is not expected to materially change the
Company's current pension and other postretirement disclosures.
18
EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
The following table reconciles reported earnings to net income excluding
goodwill and nonqualifying core deposit intangible ("cash" or "tangible") for
the quarter ended September 30, 1998:
- -------------------------------------------------------------------------------------------------------------------
Quarter ended
(in millions) September 30, 1998
- -------------------------------------------------------------------------------------------------------------------
Amortization
-------------------------
Nonqualifying
Reported core deposit "Cash"
earnings Goodwill intangible earnings
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 636 $ 80 $ 49 $ 765
Income tax expense 289 -- 20 309
----- ---- ---- -----
Net income 347 80 29 456
Preferred stock dividends 4 -- -- 4
----- ---- ---- -----
Net income applicable to common stock $ 343 $ 80 $ 29 $ 452
----- ---- ---- -----
----- ---- ---- -----
Earnings per common share $4.03 $.94 $.34 $5.31
----- ---- ---- -----
----- ---- ---- -----
Diluted earnings per common share $3.99 $.93 $.34 $5.26
----- ---- ---- -----
----- ---- ---- -----
- -------------------------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core
deposit intangible amortization and balances for the quarter ended September 30,
1998 were calculated as follows:
- -------------------------------------------------------------------------------------------------------------------
Quarter ended
(in millions) September 30, 1998
- -------------------------------------------------------------------------------------------------------------------
ROA: A*/ (C-E) = 2.14%
ROE: B*/ (D-E) = 35.64%
Efficiency: (F-G) / H = 50.89%
Net income $ 456 (A)
Net income applicable to common stock 452 (B)
Average total assets 92,335 (C)
Average common stockholders' equity 12,717 (D)
Average goodwill ($6,797) and after-tax nonqualifying core deposit intangible ($884) 7,681 (E)
Noninterest expense 1,088 (F)
Amortization expense for goodwill and nonqualifying core deposit intangible 129 (G)
Net interest income plus noninterest income 1,884 (H)
- -------------------------------------------------------------------------------------------------------------------
* Annualized
These calculations were specifically formulated by the Company and may not be
comparable to similarly titled measures reported by other companies. Also,
"cash" or "tangible" earnings are not entirely available for use by management.
See the Consolidated Statement of Cash Flows on page 5 for other information
regarding funds available for use by management.
19
BALANCE SHEET ANALYSIS
INVESTMENT SECURITIES
The following table provides the cost and fair value for the major components of
securities available for sale (there were no securities held to maturity at the
end of the periods presented):
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
1998 1997 1997
------------------ ----------------- ------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $1,206 $1,215 $2,535 $2,549 $ 2,638 $ 2,652
Securities of U.S. government
agencies and corporations (1) 3,181 3,224 4,390 4,425 5,050 5,088
Private collateralized mortgage
obligations (2) 3,040 3,073 2,390 2,396 2,656 2,656
Other 634 654 441 453 283 283
------ ------ ------ ------ ------- -------
Total debt securities 8,061 8,166 9,756 9,823 10,627 10,679
Marketable equity securities 58 76 40 65 24 58
------ ------ ------ ------ ------- -------
Total $8,119 $8,242 $9,796 $9,888 $10,651 $10,737
------ ------ ------ ------ ------- -------
------ ------ ------ ------ ------- -------
- -------------------------------------------------------------------------------------------------------------------
(1) All securities of U.S. government agencies and corporations are
mortgage-backed securities.
(2) Substantially all private collateralized mortgage obligations (CMOs) are
AAA rated bonds collateralized by 1-4 family residential first mortgages.
The securities available for sale portfolio includes both debt and marketable
equity securities. At September 30, 1998, the securities available for sale
portfolio had an unrealized net gain of $123 million, or less than 2% of the
cost of the portfolio, comprised of unrealized gross gains of $135 million and
unrealized gross losses of $12 million. At December 31, 1997, the securities
available for sale portfolio had an unrealized net gain of $92 million,
comprised of unrealized gross gains of $112 million and unrealized gross losses
of $20 million. At September 30, 1997, the securities available for sale
portfolio had an unrealized net gain of $86 million, comprised of unrealized
gross gains of $110 million and unrealized gross losses of $24 million. The
unrealized net gain or loss on securities available for sale is included as a
separate component of cumulative other comprehensive income in stockholders'
equity. At September 30, 1998, the amount included in cumulative other
comprehensive income on a net of tax basis was an unrealized net gain of $55
million, compared with $55 million at December 31, 1997 and $51 million at
September 30, 1997.
The unrealized net gain in the securities available for sale portfolio at
September 30, 1998 was primarily due to investments in mortgage-backed
securities. This unrealized net gain reflected current interest rates that were
lower than those at the time the investments were purchased. 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 may exceed expected
maturities and prepayments of securities).
20
Realized gross gains resulting from the sale of securities available for sale
were $41 million and $8 million in the first nine months of 1998 and 1997,
respectively. Realized gross losses were none and $2 million in the first
nine months of 1998 and 1997, respectively.
At September 30, 1998, mortgage-backed securities included in securities of U.S.
government agencies and corporations primarily consisted of pass-through
securities and collateralized mortgage obligations (CMOs) and all were issued or
backed by federal agencies. These securities, along with the private CMOs,
represented $6,297 million, or 76%, of the Company's securities available for
sale portfolio at September 30, 1998. The CMO securities held by the Company
(including the private issues) are primarily shorter-maturity class bonds that
were structured to have more predictable cash flows by being less sensitive to
prepayments during periods of changing interest rates. As an indication of
interest rate risk, the Company has estimated the impact 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 this rate scenario,
mortgage-backed securities would decrease in fair value from $6,297 million to
$6,094 million and the expected remaining maturity of these securities would
increase from 2 years and 1 month to 3 years and 5 months.
In October 1998, the FASB issued FAS 134, Accounting for Mortgage-Backed
Securities Retained after Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise. This Statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold investments.
FAS 134 will be implemented at the beginning of 1999 and is not expected to have
a material effect on the Company's financial statements.
21
LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
% Change
Sept. 30, 1998 from
------------------------
SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
Commercial (1)(2) $21,705 $20,144 $19,512 8% 11%
Real estate 1-4 family first mortgage 7,384 8,869 9,311 (17) (21)
Other real estate mortgage (3) 11,715 12,186 11,614 (4) 1
Real estate construction 2,475 2,320 2,351 7 5
Consumer:
Real estate 1-4 family junior lien mortgage 5,375 5,865 5,931 (8) (9)
Credit card (4) 4,049 5,039 5,020 (20) (19)
Other revolving credit and monthly payment 6,610 7,185 7,513 (8) (12)
------- ------- -------
Total consumer 16,034 18,089 18,464 (11) (13)
Lease financing 4,919 4,047 3,754 22 31
Foreign 142 79 98 80 45
------- ------- -------
Total loans (net of unearned income,
including net deferred loan fees,
of $897, $832 and $781) $64,374 $65,734 $65,104 (2)% (1)%
------- ------- ------- --- ---
------- ------- ------- --- ---
- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes loans (primarily unsecured) to real estate developers and real
estate investment trusts (REITs) of $1,944 million, $1,772 million and
$1,397 million at September 30, 1998, December 31, 1997 and September 30,
1997, respectively.
(2) Includes agricultural loans (loans to finance agricultural production and
other loans to farmers) of $1,582 million, $1,599 million and $1,464
million at September 30, 1998, December 31, 1997 and September 30, 1997,
respectively.
(3) Includes agricultural loans that are secured by real estate of $375
million, $343 million and $326 million at September 30, 1998, December 31,
1997 and September 30, 1997, respectively.
(4) As a result of reevaluating its credit card lending strategies, the
Company has decided to make available for sale certain accounts within
the credit card portfolio. Accordingly, approximately $375 million of
primarily out-of-franchise territory accounts were considered available
for sale as of September 30, 1998. If sold, it is anticipated that a
loss (charge-off) would result due to the credit quality of this
portion, which has been provided for in the allocation of the allowance
for loan losses. The Company intends to hold the remaining credit card
portfolio for the foreseeable future.
The table below presents comparative period-end commercial real estate loans.
- ------------------------------------------------------------------------------------------------------------------------------
% Change
Sept. 30, 1998 from
------------------------
SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
Commercial loans to real
estate developers and REITs (1) $ 1,944 $ 1,772 $ 1,397 10% 39%
Other real estate mortgage 11,715 12,186 11,614 (4) 1
Real estate construction 2,475 2,320 2,351 7 5
------- ------- -------
Total $16,134 $16,278 $15,362 (1)% 5%
-- ---
-- ---
Nonaccrual loans $ 236 $ 252 $ 277 (6)% (15)%
------- ------- ------- -- ---
------- ------- ------- -- ---
Nonaccrual loans as a % of total 1.5% 1.5% 1.8%
------- ------- -------
------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------
(1) Included in commercial loans.
22
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial (2)(3) $180 $155 $172
Real estate 1-4 family first mortgage 73 104 100
Other real estate mortgage (4) 205 228 258
Real estate construction 30 23 18
Consumer:
Real estate 1-4 family junior lien mortgage 15 17 16
Other revolving credit and monthly payment 3 1 1
---- ---- ----
Total nonaccrual loans (5) 506 528 565
Restructured loans (6) -- 9 9
---- ---- ----
Nonaccrual and restructured loans 506 537 574
As a percentage of total loans .8% .8% .9%
Foreclosed assets 130 158 196
Real estate investments (7) 2 4 4
---- ---- ----
Total nonaccrual and restructured loans
and other assets $638 $699 $774
---- ---- ----
---- ---- ----
- ------------------------------------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to
interest or principal, but are both well-secured and in the process of
collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as
nonaccrual.
(2) Includes loans (primarily unsecured) to real estate developers and REITs of
$1 million for the periods presented.
(3) Includes agricultural loans of $10 million, $13 million and $16 million at
September 30, 1998, December 31, 1997 and September 30, 1997, respectively.
(4) Includes agricultural loans secured by real estate of $10 million, $13
million and $15 million at September 30, 1998, December 31, 1997 and
September 30, 1997, respectively.
(5) Of the total nonaccrual loans, $338 million, $321 million and $356 million
at September 30, 1998, December 31, 1997 and September 30, 1997,
respectively, were considered impaired under FAS 114 (Accounting by
Creditors for Impairment of a Loan).
(6) In addition to originated loans that were subsequently restructured, there
were loans of $23 million for the periods presented that were purchased at
a steep discount whose contractual terms were modified after acquisition.
The modified terms did not affect the book balance nor the yields expected
at the date of purchase. Of the total restructured loans and loans
purchased at a steep discount, $23 million were considered impaired under
FAS 114 for the periods presented.
(7) Represents the amount of real estate investments (contingent interest loans
accounted for as investments) that would be classified as nonaccrual if
such assets were loans. Real estate investments totaled $133 million, $172
million and $170 million at September 30, 1998, December 31, 1997 and
September 30, 1997, respectively.
The Company generally identifies loans to be evaluated for impairment under FAS
114 (Accounting by Creditors for Impairment of a Loan) when such loans are on
nonaccrual or have been restructured. However, not all nonaccrual loans are
impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days
past due as to interest or principal (unless both well-secured and in the
process of collection), when the full timely collection of interest or principal
becomes uncertain or when a portion of the principal balance has been charged
off. Real estate 1-4 family loans (both first liens and junior liens) are placed
on nonaccrual status within 150 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, not the contractual
terms specified by the restructuring agreement. Not all impaired loans are
necessarily placed on
23
nonaccrual status. That is, restructured 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 the loan has been
restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by
the Company using discounted cash flows, except when it is determined that
the sole (remaining) source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such cases, the current fair
value of the collateral, reduced by costs to sell, will be used in place of
discounted cash flows. Additionally, some impaired loans with commitments of
less than $1 million are aggregated for the purpose of measuring impairment
using historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment
in the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. FAS 114
does not change the timing of charge-offs of loans to reflect the amount
ultimately expected to be collected.
The average recorded investment in impaired loans was $357 million and $350
million during the third quarter and first nine months of 1998, respectively,
and $394 million and $435 million during the third quarter and first nine
months of 1997, respectively. Total interest income recognized on impaired
loans was $2 million and $7 million during the third quarter and first nine
months of 1998, respectively, and $2 million and $11 million during the third
quarter and first nine months of 1997, respectively. The interest income for
all periods was recorded using the cash method.
24
The table below shows the recorded investment in impaired loans by loan
category.
- -------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------------------------
Commercial $129 $103 $110
Real estate 1-4 family first mortgage 2 2 1
Other real estate mortgage (1) 200 216 249
Real estate construction 27 22 17
Other 3 1 2
---- ---- ----
Total (2) $361 $344 $379
---- ---- ----
---- ---- ----
Impairment measurement based on:
Collateral value method $246 $256 $298
Discounted cash flow method 97 61 60
Historical loss factors 18 27 21
---- ---- ----
$361 $344 $379
---- ---- ----
---- ---- ----
- -------------------------------------------------------------------------------------------------
(1) Includes accruing loans of $23 million purchased at a steep discount for
the periods presented whose contractual terms were modified after
acquisition. The modified terms did not affect the book balance nor the
yields expected at the date of purchase.
(2) Includes $18 million, $27 million and $26 million of impaired loans with a
related FAS 114 allowance of $1 million, $2 million and $4 million at
September 30, 1998, December 31, 1997 and September 30, 1997, respectively.
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.
25
The Company anticipates normal influxes of nonaccrual loans as it further
increases its lending activity as well as resolutions of loans in the nonaccrual
portfolio. The performance of any individual loan can be impacted 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 its policies.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The following table shows loans contractually past due 90 days or more as to
interest or principal, but not included in the nonaccrual or restructured
categories. All loans in this category are both well-secured and in the process
of collection or are real estate 1-4 family first mortgage loans or consumer
loans that are exempt under regulatory rules from being classified as nonaccrual
because they are automatically charged off after being past due for a prescribed
period (generally, 180 days). Notwithstanding, real estate 1-4 family loans
(first liens and junior liens) are placed on nonaccrual within 150 days of
becoming past due and such nonaccrual loans are excluded from the following
table.
- -------------------------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Commercial $ 16 $ 8 $ 14
Real estate 1-4 family first mortgage 20 35 42
Other real estate mortgage 12 5 11
Real estate construction 1 1 1
Consumer:
Real estate 1-4 family junior lien mortgage 38 42 37
Credit card 108 133 123
Other revolving credit and monthly payment 8 19 13
---- ---- ----
Total consumer 154 194 173
---- ---- ----
Total $203 $243 $241
---- ---- ----
---- ---- ----
- -------------------------------------------------------------------------------------------------------------------
26
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------
Quarter Nine months
ended Sept. 30, ended Sept. 30,
------------------- --------------------
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $1,835 $1,850 $1,828 $2,018
Provision for loan losses 160 175 510 420
Loan charge-offs:
Commercial (1) (50) (69) (145) (198)
Real estate 1-4 family first mortgage (3) (5) (11) (15)
Other real estate mortgage (18) (2) (29) (13)
Real estate construction -- -- (2) (3)
Consumer:
Real estate 1-4 family junior lien mortgage (2) (6) (8) (18)
Credit card (105) (124) (340) (372)
Other revolving credit and monthly payment (45) (55) (147) (168)
------ ------ ------ ------
Total consumer (152) (185) (495) (558)
Lease financing (9) (10) (31) (29)
------ ------ ------ ------
Total loan charge-offs (232) (271) (713) (816)
------ ------ ------ ------
Loan recoveries:
Commercial (2) 12 21 44 53
Real estate 1-4 family first mortgage 2 1 5 3
Other real estate mortgage 26 13 62 42
Real estate construction -- 1 2 3
Consumer:
Real estate 1-4 family junior lien mortgage 1 2 4 6
Credit card 11 12 34 34
Other revolving credit and monthly payment 15 17 48 51
------ ------ ------ ------
Total consumer 27 31 86 91
Lease financing 3 2 9 9
------ ------ ------ ------
Total loan recoveries 70 69 208 201
------ ------ ------ ------
Total net loan charge-offs (162) (202) (505) (615)
BALANCE, END OF PERIOD $1,833 $1,823 $1,833 $1,823
------ ------ ------ ------
------ ------ ------ ------
Total net loan charge-offs as a percentage
of average loans (annualized) 1.01% 1.25% 1.05% 1.27%
------ ------ ------ ------
------ ------ ------ ------
Allowance as a percentage of total loans 2.85% 2.80% 2.85% 2.80%
------ ------ ------ ------
------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
(1) There were no charge-offs of loans (primarily unsecured) to real estate
developers and REITs for the periods presented.
(2) Includes recoveries from loans (primarily unsecured) to real estate
developers and REITs of none and $1 million for the quarters ended
September 30, 1998 and 1997, respectively, and $1 million and $2 million
for the nine months ended September 30, 1998 and 1997, respectively.
27
The table below presents net charge-offs by loan category.
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended September 30, Nine months ended September 30,
-------------------------------------- -----------------------------------------
1998 1997 1998 1997
-------------------------------------- -----------------------------------------
% OF % of % OF % of
AVERAGE average AVERAGE average
(in millions) AMOUNT LOANS(1) Amount loans(1) AMOUNT LOANS(1) Amount loans(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 38 .71% $ 48 1.03% $101 .66% $145 1.04%
Real estate 1-4 family first mortgage 1 .05 4 .16 6 .09 12 .16
Other real estate mortgage (8) (.27) (11) (.36) (33) (.38) (29) (.34)
Real estate construction -- -- (1) (.21) -- .04 -- --
Consumer:
Real estate 1-4 family
junior lien mortgage 1 .06 4 .25 4 .09 12 .27
Credit card 94 8.78 112 8.77 306 9.00 338 8.71
Other revolving credit
and monthly payment 30 1.81 38 1.99 99 1.93 117 1.98
---- ---- ---- ----
Total consumer 125 3.07 154 3.28 409 3.23 467 3.26
Lease financing 6 .55 8 .82 22 .69 20 .83
---- ---- ---- ----
Total net loan charge-offs $162 1.01% $202 1.25% $505 1.05% $615 1.27%
---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated on an annualized basis.
The commercial loan category includes net charge-offs for the commercial loan
component of small business loans of $25 million (or 2.30% of average small
business loans in this category) in the third quarter of 1998, compared with $26
million (or 2.45%) in the second quarter of 1998 and $33 million (or 3.38%) in
the third quarter of 1997. During the last half of 1997, the period of charging
off past due loans for the Business Direct product within this portfolio was
changed from 180 to 120 days. The target market for small business loans is
expected to experience higher loss rates on a recurring basis than is the case
with loans to middle market and corporate borrowers, and such loans are priced
at appropriately higher spreads.
The largest category of net charge-offs in the third quarter of 1998 and 1997
was credit card loans, comprising 58% and 55%, respectively, of total net
charge-offs. During the third quarter of 1998, credit card gross charge-offs due
to bankruptcies were $40 million, or 38%, of total credit card gross
charge-offs, compared with $47 million, or 40%, in the second quarter of 1998
and $54 million, or 43%, in the third quarter of 1997. In addition, credit card
loans 30 to 89 days past due and still accruing totaled $154 million at
September 30, 1998, compared with $133 million at June 30, 1998 and $180 million
at September 30, 1997.
The Company considers the allowance for loan losses of $1,833 million adequate
to cover losses inherent in loans, commitments to extend credit and standby
letters of credit at September 30, 1998. 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 (particularly
California) economic conditions, loan portfolio composition, prior loan loss
experience and the Company's ongoing examination process and that of its
regulators. The Company made a $160 million provision in the third quarter of
1998.
28
OTHER ASSETS
- -------------------------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Nonmarketable equity investments $1,146 $1,113 $1,114
Trading assets 922 815 541
Net deferred tax asset 57 209 347
Certain identifiable intangible assets 160 479 491
Foreclosed assets 130 158 196
Other 1,187 1,175 1,203
------ ------ ------
Total other assets $3,602 $3,949 $3,892
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Income from nonmarketable equity investments accounted for using the cost method
was $32 million and $18 million in the third quarter of 1998 and 1997,
respectively, and $116 million and $109 million in the nine months ended
September 30, 1998 and 1997, respectively.
Trading assets consist largely of securities, including corporate debt and U.S.
government agency obligations. Gains (losses) from trading assets were $(8)
million and $21 million in the third quarter of 1998 and 1997, respectively, and
$30 million and $59 million in the nine months ended September 30, 1998 and
1997, respectively.
The Company estimates that approximately $52 million of the $57 million net
deferred tax asset at September 30, 1998 could be realized by the recovery of
previously paid federal taxes; however, the Company expects to actually realize
the federal net deferred tax asset by claiming deductions against future taxable
income. The balance of approximately $5 million primarily relates to net
deductions that are expected to reduce future state taxable income. The Company
believes that it is more likely than not that it will have sufficient future
state taxable income to fully utilize these deductions. The amount of the total
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carry forward periods are
reduced.
Included in certain identifiable intangible assets were purchased mortgage
servicing rights of none, $292 million and $301 million at September 30, 1998,
December 31, 1997 and September 30, 1997, respectively. In June 1998, the
Company sold its mortgage servicing business to GMAC Mortgage Corporation. (See
page 14 for additional information.)
The other identifiable intangible assets included in other assets are generally
amortized using an accelerated method, which is based on estimated useful lives
ranging from 5 to 15 years. Amortization expense was $6 million and $7 million
for the quarters ended September 30, 1998 and 1997, respectively.
29
DEPOSITS
- -------------------------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing $22,542 $23,953 $23,005
Interest-bearing checking 1,799 2,155 2,209
Market rate and other savings 29,954 29,940 29,906
Savings certificates 15,196 15,349 15,460
------- ------- -------
Core deposits 69,491 71,397 70,580
Other time deposits 208 205 288
Deposits in foreign offices 70 597 54
------- ------- -------
Total deposits $69,769 $72,199 $70,922
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS
Risk-based capital (RBC) guidelines issued by the Federal Reserve Board (FRB)
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet and market risk exposures. The Company's Tier 1 and
Tier 2 capital components are presented on the following page. The guidelines
require a minimum total RBC ratio of 8%, with at least half of the total capital
in the form of Tier 1 capital. To supplement the RBC guidelines, the FRB
established a minimum leverage ratio guideline of 3% of Tier 1 capital to
average total assets.
The increase in the Company's ratios at September 30, 1998 compared with
December 31, 1997 was due to an increase in common stockholders' equity
(predominantly retained earnings).
30
The table below presents the Company's risk-based capital and leverage ratios.
- ------------------------------------------------------------------------------------------------------
SEPT. 30, Dec. 31, Sept. 30,
(in billions) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------
Tier 1:
Common stockholders' equity $12.9 $12.6 $12.6
Preferred stock .3 .3 .3
Guaranteed preferred beneficial interests in
Company's subordinated debentures 1.3 1.3 1.3
Goodwill and other deductions (1) (7.7) (8.1) (8.2)
----- ----- -----
Total Tier 1 capital 6.8 6.1 6.0
----- ----- -----
Tier 2:
Mandatory convertible debt -- .1 .2
Subordinated debt and unsecured senior debt 2.0 2.0 2.0
Allowance for loan losses allowable in Tier 2 1.0 1.0 1.0
----- ----- -----
Total Tier 2 capital 3.0 3.1 3.2
----- ----- -----
Total risk-based capital $ 9.8 $ 9.2 $ 9.2
----- ----- -----
----- ----- -----
Risk-weighted balance sheet assets $75.6 $77.6 $77.1
Risk-weighted off-balance sheet items:
Commitments to make or purchase loans 9.2 9.4 9.4
Standby letters of credit 1.6 1.6 1.7
Other 1.4 .7 .6
----- ----- -----
Total risk-weighted off-balance sheet items 12.2 11.7 11.7
----- ----- -----
Market risk equivalent assets (2) 1.0 -- --
Goodwill and other deductions (1) (7.7) (8.1) (8.2)
Allowance for loan losses not included in Tier 2 (.8) (.8) (.8)
----- ----- -----
Total risk-weighted assets $80.3 $80.4 $79.8
----- ----- -----
----- ----- -----
Risk-based capital ratios:
Tier 1 capital (4% minimum requirement) 8.47% 7.61% 7.53%
Total capital (8% minimum requirement) 12.26 11.49 11.47
Leverage ratio (3% minimum requirement) (3) 8.04% 6.95% 6.76%
- ------------------------------------------------------------------------------------------------------
(1) Other deductions include CDI acquired after February 1992 (nonqualifying
CDI) and the unrealized net gain (loss) on securities available for sale.
(2) As the Company met at September 30, 1998 certain trading thresholds as
defined by the FRB, its risk-based capital ratios now include a regulatory
measurement for market risk, which represents the risk of loss in trading
activities that result from movements in market prices.
(3) Tier 1 capital divided by quarterly average total assets (excluding
goodwill, nonqualifying CDI and other items which were deducted to arrive
at Tier 1 capital).
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a "well
capitalized" bank must have a Tier 1 RBC ratio of at least 6%, a combined Tier 1
and Tier 2 ratio of at least 10% and a leverage ratio of at least 5%. At
September 30, 1998, the Bank had a Tier 1 RBC ratio of 7.88%, a combined Tier 1
and Tier 2 ratio of 11.01 % and a leverage ratio of 7.07%.
31
DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the aggregate notional or contractual amounts,
credit risk amount and net fair value of the Company's derivative financial
instruments at September 30, 1998 and December 31, 1997.
- ------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 December 31, 1997
--------------------------------------- ---------------------------------------
NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated
CONTRACTUAL RISK FAIR contractual risk fair
(in millions) AMOUNT AMOUNT(2) VALUE amount amount(2) value
- ------------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT HEDGES
Interest rate contracts:
Swaps (1) $20,008 $ 642 $ 635 $16,301 $ 233 $ 174
Futures 6,645 -- -- 6,259 -- --
Floors purchased (1) 17,721 168 168 20,727 63 63
Caps purchased (1) 186 -- -- 240 1 1
Options purchased -- -- -- 42 -- --
Foreign exchange contracts:
Forwards (1) 129 -- (1) 57 1 1
CUSTOMER ACCOMMODATIONS
Interest rate contracts:
Swaps (1) 6,259 102 28 3,158 13 4
Futures 6,647 -- -- 2,387 -- --
Floors purchased (1) 1,327 34 34 1,141 13 13
Caps purchased (1) 2,970 3 3 2,836 8 8
Floors written 1,312 -- (33) 1,122 -- (13)
Caps written 2,948 -- (3) 2,871 -- (9)
Options purchased (1) -- -- -- 37 -- --
Options written (1) -- -- -- 27 -- --
Forwards (1) 1,072 44 7 59 2 2
Foreign exchange contracts:
Forwards and spots (1) 2,527 37 2 1,853 29 3
Options purchased (1) 135 2 2 110 -- --
Options written 123 -- (2) 110 -- --
- ------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the
counterparties for these or the underlying financial instruments.
(2) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
The Company enters into a variety of financial contracts, which include
interest rate futures and forward contracts, interest rate floors and caps
and interest rate swap agreements. The contractual or notional amounts of
derivatives do not represent amounts exchanged by the parties and therefore
are not a measure of exposure through the use of derivatives. The amounts
exchanged are determined by reference to the notional amounts and the other
terms of the derivatives. The contractual or notional amounts do not
represent exposure to liquidity risk. The Company is not a dealer but an
end-user of these instruments and does not use them speculatively. The
Company also offers contracts to its customers, but offsets such contracts by
purchasing other financial contracts or uses the contracts for
asset/liability management.
The Company also 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 derivative financial instruments.
32
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 futures contracts and floor, cap and
option contracts written 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.
In June 1998, the FASB issued FAS 133, Accounting for Derivative Instruments
and Hedging Activities, which will be effective for the Company's financial
statements for periods beginning January 1, 2000. The new standard requires
companies to record derivatives on the balance sheet, measured at fair value.
Changes in the fair values of those derivatives would be accounted for
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 or cash flows. The Company has not yet determined when it will
implement the Statement nor has it completed the complex analysis required to
determine the impact on the financial statements.
LIQUIDITY MANAGEMENT
Liquidity for the Parent Company and its subsidiaries is generated through
its ability to raise funds in a variety of domestic and international money
and capital markets, and through dividends from subsidiaries and lines of
credit. In 1996, the Company filed a shelf registration with the Securities
and Exchange Commission (SEC) that allows for the issuance of $3.5 billion of
senior or subordinated debt or preferred stock. This shelf registration was
amended on October 12, 1998 to include 2.5 million shares of common stock. In
October 1998, the Company issued $759 million of common stock under this
shelf registration to cure a portion of previously repurchased "tainted"
shares and, thus, allow the Merger to be accounted for as a pooling of
interests. The proceeds from the sale of any securities will be used for
general corporate purposes. As of September 30, 1998, the Company had issued
$.2 billion of preferred stock and $.7 billion of medium-term notes under
this shelf registration. As of November 16, 1998, this shelf registration is
no longer effective.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different
times as 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 the
Company's main source of interest rate risk and is significantly more
difficult to quantify and manage than term structure risk.
33
The Company employs a sensitivity analysis in the form of a net interest
income simulation to help characterize the market risk arising from changes
in interest rates in the other-than-trading portfolio. The Company's net
interest income simulation includes all other-than-trading financial assets,
financial liabilities, derivative financial instruments and leases where the
Company is the lessor. It captures the dynamic nature of the balance sheet by
anticipating probable balance sheet and off-balance sheet strategies and
volumes under different interest rate scenarios over the course of a one-year
period. This simulation measures both the term structure risk and the basis
risk in the Company's positions. The simulation also captures the option
characteristics of products, such as caps and floors on floating rate loans,
the right to prepay mortgage loans without penalty and the ability of
customers to withdraw deposits on demand. These options are modeled directly
in the simulation either through the use of option pricing models, in the
case of caps and floors on loans, or through statistical analysis of
historical customer behavior, in the case of mortgage loan prepayments or
non-maturity deposits.
The Company uses four standard scenarios - rates unchanged, expected rates,
high rates and low rates - in analyzing interest rate sensitivity. The
expected scenario is based on the Company's projected future interest rates,
while the high-rate and low-rate scenarios cover 90% probable upward and
downward rate movements based on the Company's own interest rate models.
The current interest rate risk limit using the net interest income simulation
allows up to 30 basis points (.30%) of sensitivity in the expected average
net interest margin over the next 12 months. As of September 30, 1998, the
simulation showed a decline in the net interest margin of 9 basis points
(.09%, or $67 million decline in net interest income over the next 12 months)
for the low-rate scenario case relative to the expected case.
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 interest income simulation described above.
They are used to reduce the Company's exposure to interest rate fluctuations
and provide more stable spreads between loan yields and the rates on their
funding sources.
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.
34
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of shareholders was held on October 20, 1998,
to consider a proposal to adopt the Agreement and Plan of
Merger, dated as of June 7, 1998, and amended and restated as of
September 10, 1998 (the "Agreement"), by and among Wells Fargo &
Company, Norwest Corporation and WFC Holdings Corporation. The
Agreement was adopted by the following vote:
For 57,428,537
Against 500,572
Abstain 266,623
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger, dated as of
June 7, 1998, and amended and restated as of
September 10, 1998, by and among Wells Fargo
& Company, Norwest Corporation and WFC
Holdings Corporation, filed as Exhibit 2.1 to
the Registration Statement on Form S-4 of
Norwest Corporation, File No. 333-63247,
filed September 11, 1998, and incorporated
herein by reference.
3(a) Certificate of Incorporation
(b) By-Laws
4 The Company hereby agrees to furnish to the
Commission upon request a copy of each
instrument defining the rights of holders of
securities of the Company.
10(a) Employment Agreement, dated as of June 7,
1998, by and between Norwest Corporation and
Paul Hazen, filed as Exhibit 10.1 to the
Registration Statement on Form S-4 of Norwest
Corporation, File No. 333-63247, filed
September 11, 1998, and incorporated herein
by reference.
10(b) Employment Agreement, dated as of June 7,
1998, by and between Norwest Corporation and
Rodney L. Jacobs, filed as Exhibit 10.2 to the
Registration Statement on Form S-4 of Norwest
Corporation, File No. 333-63247, filed
September 11, 1998, and incorporated herein
by reference.
10(c) Wells Fargo & Company Change of Control
Severance Plan, adopted October 20, 1998.
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
99(a) Computation of Ratios of Earnings to Fixed
Charges -- the ratios of earnings to fixed
charges, including interest on deposits, were
2.15 and 1.89 for the quarters ended
September 30, 1998 and 1997, respectively,
and 2.08 and 1.89 for the nine months ended
September 30, 1998 and 1997, respectively.
The ratios of earnings to fixed charges,
excluding interest on deposits, were 5.42 and
4.02 for the quarters ended September 30,
1998 and 1997, respectively, and 4.84 and
4.07 for the nine months ended September 30,
1998 and 1997, respectively.
35
99(b) Computation of Ratios of Earnings to Fixed
Charges and Preferred Dividends -- the
ratios of earnings to fixed charges and
preferred dividends, including interest on
deposits, were 2.13 and 1.86 for the
quarters ended September 30, 1998 and 1997,
respectively, and 2.05 and 1.85 for the nine
months ended September 30, 1998 and 1997,
respectively. The ratios of earnings to
fixed charges and preferred dividends,
excluding interest on deposits, were 5.17
and 3.83 for the quarters ended September
30, 1998 and 1997, respectively, and 4.61
and 3.78 for the nine months ended September
30, 1998 and 1997, respectively.
(b) The Company filed the following reports on Form 8-K
during the third quarter of 1998 and through the
date hereof:
(1) July 21, 1998 under Item 5, containing the
Press Release that announced the Company's
financial results for the quarter ended June
30, 1998
(2) July 24, 1998 under Item 5, containing the
abridged analyst presentation materials dated
June 8, 1998 regarding the proposed merger
between the Company and Norwest Corporation
(3) September 15, 1998 under Item 7, containing
the unaudited pro forma combined financial
information of the Company and Norwest
Corporation for the six months ended June 30,
1998 and the years ended December 31, 1997,
1996 and 1995
(4) October 15, 1998 under Item 5, containing the
Underwriting Agreement between the Company
and Goldman, Sachs & Co., dated October 12,
1998 in connection with the sale of 2.5
million shares of the Company's common stock,
$5 par value per share, pursuant to the
Company's Prospectus Supplement dated October
12, 1998 to the Prospectus dated September
16, 1998
(5) October 20, 1998 under Item 5, containing the
Press Release that announced the Company's
financial results for the quarter ended
September 30, 1998
(6) November 16, 1998 under Items 2 and 7, describing
the consummation of the Merger by and among Former
Wells Fargo & Company, Norwest Corporation and
WFC Holdings Corporation pursuant to an Agreement
and Plan of Merger dated as of June 7, 1998 and
amended and restated as of September 10, 1998 and
containing the Press Release dated November 2, 1998
issued by Norwest Corporation announcing the
completion of the Merger
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on November 23, 1998.
WFC HOLDINGS CORPORATION
By: LES L. QUOCK
-------------------------------------
Les L. Quock
Senior Vice President and Controller
(Principal Accounting Officer)
36