-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWBbcXx+TeDqBL/YOIbtNajjQUlfS+v5+Tvbj7cYleNmE5dhs9ccJuRgPkYtxOwc 2x9KzMD0V3pqvZHdMDdQ5Q== 0000912057-00-012168.txt : 20000320 0000912057-00-012168.hdr.sgml : 20000320 ACCESSION NUMBER: 0000912057-00-012168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO/MN CENTRAL INDEX KEY: 0000072971 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410449260 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02979 FILM NUMBER: 572372 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY STREET STREET 2: SIXTH & MARQUETTE CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 6126671234 MAIL ADDRESS: STREET 1: NORWEST CENTER STREET 2: SIXTH & MARQUETTE CITY: MINNEAPOLIS STATE: MN ZIP: 55479 FORMER COMPANY: FORMER CONFORMED NAME: NORWEST CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST BANCORPORATION DATE OF NAME CHANGE: 19830516 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission File Number 001-2979 WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware No. 41-0449260 (State of incorporation) (I.R.S. Employer 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 Former name of registrant: Norwest Corporation SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, par value $1-2/3 New York Stock Exchange Chicago Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Chicago Stock Exchange 6 3/4% Convertible Subordinated Debentures Due 2003 New York Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange No securities are registered pursuant to Section 12(g) of the Act.
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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 29, 2000, 1,623,901,005 shares of common stock were outstanding having an aggregate market value, based on a closing price of $33.06 per share, of $53,690 million. At that date, the aggregate market value of common stock held by non-affiliates was approximately $52,508 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 Annual Report to Stockholders - Incorporated into Parts I, II and IV. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders - Incorporated into Part III. FORM 10-K CROSS-REFERENCE INDEX
Page(s) ----------------------------------------------- FORM Annual Proxy 10-K Report (1) Statement(2) ---- ------ --------- PART I Item 1. Business Description of Business 2-9 33-98 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 9 39-41 -- Investment Portfolio -- 44, 56, 63 -- Loan Portfolio 10-11 45-47, 57, 64-66 -- Summary of Loan Loss Experience 12-16 47, 57, 65-66 -- Deposits -- 47, 68 -- Return on Equity and Assets -- 34-35 -- Short-Term Borrowings -- 68 -- Derivative Financial Instruments -- 49, 58-59, 91-93 -- Item 2. Properties 16 67 -- Item 3. Legal Proceedings -- 90 -- Item 4. Submission of Matters to a Vote of Security Holders (3) -- -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- 51 -- Item 6. Selected Financial Data -- 36 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- 34-51 -- Item 7A. Quantitative and Qualitative Disclosures About Market Risk -- 48-49 -- Item 8. Financial Statements and Supplementary Data -- 52-98 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant 17-20 -- 6-9,34 Item 11. Executive Compensation -- -- 13-30,34 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 4-5 Item 13. Certain Relationships and Related Transactions -- -- 31-33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-27 52-98 -- SIGNATURES 28 -- -- - -------------------------------------------------------------------------------------------------------------------
(1) The 1999 Annual Report to Stockholders, portions of which are incorporated by reference into this Form 10-K. (2) The information required to be submitted in response to these items is incorporated by reference to the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on April 25, 2000, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. (3) Not applicable. 1 DESCRIPTION OF BUSINESS GENERAL Wells Fargo & Company is a diversified financial services company organized under the laws of Delaware and registered under the Bank Holding Company Act (BHC Act) of 1956, as amended. Based on assets as of December 31, 1999, it was the seventh largest bank holding company in the United States. As a diversified financial services organization, Wells Fargo & Company (Parent) owns subsidiaries engaged in banking and a variety of related businesses. Subsidiaries of the Parent provide retail, commercial and corporate banking services through banks located in Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin and Wyoming. Additional financial services are provided to customers by subsidiaries engaged in various businesses: principally wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency services, computer and data processing services, trust services, mortgage-backed securities servicing and venture capital investment. Wells Fargo & Company together with its subsidiaries is referred to in this report as the Company. As of December 31, 1999, its significant subsidiaries, as defined by Securities and Exchange Commission (SEC) rules, are (a) Norwest Bank Minnesota, N.A. and its consolidated subsidiaries, (b) Norwest Limited, L.L.C., (c) Norwest Venture Partners VI, LP, and (d) WFC Holdings Corporation and its consolidated subsidiaries, including its principal subsidiary, Wells Fargo Bank, N.A. On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo & Company (the Merger) was completed. Norwest Corporation changed its name to "Wells Fargo & Company" and the former Wells Fargo & Company (the former Wells Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest Corporation as it was before the Merger is referred to as the former Norwest. The Merger was accounted for as a pooling of interests and, accordingly, the information included in this Form 10-K presents the combined results as if the Merger had been in effect for all periods presented. The Company has four operating segments for the purpose of management reporting: Community Banking, Wholesale Banking, Norwest Mortgage and Norwest Financial. Financial information and narrative descriptions of these operating segments are included in the 1999 Annual Report to Stockholders, incorporated by reference herein. HISTORY AND GROWTH The former Norwest provided banking services to customers in 16 states and additional financial services through subsidiaries engaged in a variety of businesses including mortgage banking and consumer finance. The former Wells Fargo's principal subsidiary, Wells Fargo Bank, N.A., continues to be a significant subsidiary of the new Company. The bank was the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later 2 operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. The California banking business was separated from the express business in 1905, was merged in 1960 with American Trust Company, another of the oldest banks in the Western United States, and became Wells Fargo Bank, N.A., a national banking association, in 1968. The former Wells Fargo acquired First Interstate Bancorp in April 1996. First Interstate's assets had an approximate book value of $55 billion. The transaction was valued at approximately $11.3 billion and was accounted for as a purchase. The Company expands its business, in part, by acquiring banking institutions and other companies engaged in activities closely related to banking. The Company continues to explore opportunities to acquire banking institutions and other companies. Discussions are continually being carried on related to such acquisitions. It is not presently known whether, or on what terms, such discussions will result in further acquisitions. Generally it is the policy of the Company not to comment on such discussions or possible acquisitions until a definitive acquisition agreement has been signed. COMPETITION The financial services industry is highly competitive. The Company's subsidiaries compete with financial services providers, such as banks, savings and loan associations, credit unions, finance companies, mortgage banking companies, insurance companies, and money market and mutual fund companies. They also face increased competition from non-banking institutions such as brokerage houses and insurance companies, as well as from financial services subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy the benefits of fewer regulatory constraints and lower cost structures. Effective March 13, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This may significantly change the competitive environment in which the Company and its subsidiaries conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. REGULATION AND SUPERVISION The following discussion, together with Notes 3 and 22 to Financial Statements, incorporated by reference herein, sets forth the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to the Company. This regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole, and not for the protection of security holders. To the extent that the information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. Further, 3 such statutes, regulations and policies are continually under review by Congress and state legislatures, and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or its subsidiaries could have a material effect on the business of the Company. This regulatory environment, among other things, may restrict the Company's ability to diversify into certain areas of financial services, acquire depository institutions in certain states, and pay dividends on the Company's capital stock. It may also require the Company to provide financial support to one or more of its subsidiary banks, maintain capital balances in excess of those desired by management, and pay higher deposit insurance premiums as a result of the deterioration in the financial condition of depository institutions in general. GENERAL PARENT BANK HOLDING COMPANY. As a bank holding company (BHC), the Company is subject to regulation, inspection, examination and supervision by the Federal Reserve Board (FRB). SUBSIDIARY BANKS. The Company's national subsidiary banks are subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC) and secondarily by the Federal Deposit Insurance Corporation (FDIC) and the FRB. The Company's state-chartered banks are subject to primary federal regulation and examination by the FDIC or the FRB and, in addition, are regulated and examined by their respective state banking departments. NONBANK SUBSIDIARIES. Many of the Company's nonbank subsidiaries are also subject to regulation by the FRB and other applicable federal and state agencies. The Company's brokerage subsidiaries are regulated by the SEC, the National Association of Securities Dealers, Inc. and state securities regulators. The Company's insurance subsidiaries are subject to regulation by applicable state insurance regulatory agencies. Other nonbank subsidiaries of the Company are subject to the laws and regulations of both the federal government and the various states in which they conduct business. PARENT BANK HOLDING COMPANY ACTIVITIES PERMITTED ACTIVITIES. Prior to March 13, 2000, a BHC generally was prohibited under the BHC Act from acquiring the beneficial ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the FRB's prior approval. Also, prior to March 13, 2000, a BHC generally was limited to engaging in banking and such other activities as determined by the FRB to be closely related to banking. Under the Gramm-Leach-Bliley Act of 1999 (the GLB Act), beginning March 13, 2000, an eligible BHC may elect to become a financial holding company and thereafter affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance 4 underwriting and agency; merchant banking activities; activities that the FRB has determined to be closely related to banking; and other activities that the FRB, after consultation with the Secretary of the Treasury, determines by regulation or order to be financial in nature or incidental to a financial activity. No FRB approval is required for a financial holding company to acquire a company, other than a BHC, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as defined in the GLB Act or as determined by the FRB. A BHC is eligible to become a financial holding company if each of its subsidiary banks and savings associations is well capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Act (the FDI Act), is well managed and has a rating under the Community Reinvestment Act (CRA) of satisfactory or better. If any bank or savings association subsidiary of a financial holding company ceases to be well capitalized or well managed, the FRB may require the financial holding company to divest the subsidiary. Alternatively, the financial holding company may elect to conform its activities to those permissible for BHCs that do not elect to become financial holding companies. If any bank or savings association subsidiary of a financial holding company receives a CRA rating of less than satisfactory, the financial holding company will be prohibited from engaging in new activities or acquiring companies other than BHCs, banks or savings associations. The Company became a financial holding company effective March 13, 2000. It continues to maintain its status as a BHC for purposes of other FRB regulations. INTERSTATE BANKING. Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal Act), a BHC may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the BHC not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the BHC's initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. States may opt out of the Riegle-Neal Act and thereby prohibit interstate mergers in the state. The Company will be unable to consolidate its banking operations in one state with those of another state if either state in question has opted out of the Riegle-Neal Act. Of the Company's banking states, only the state of Montana has opted out until at least the year 2001. REGULATORY APPROVAL. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution's record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act of 1977, as amended. 5 DIVIDEND RESTRICTIONS Wells Fargo & Company is a legal entity separate and distinct from its subsidiary banks and other subsidiaries. Its principal source of funds to pay dividends on its common and preferred stock and debt service on its debt is dividends from its subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends the Company's subsidiary banks and certain other subsidiaries of the Company may pay without regulatory approval. For information about the restrictions applicable to the Company's subsidiary banks, see Note 3 to Financial Statements, incorporated by reference herein. Federal bank regulatory agencies have the authority to prohibit the Company's subsidiary banks from engaging in unsafe or unsound practices in conducting their businesses. The payment of dividends, depending on the financial condition of the bank in question, could be deemed an unsafe or unsound practice. The ability of the Company's subsidiary banks to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. HOLDING COMPANY STRUCTURE TRANSFER OF FUNDS FROM SUBSIDIARY BANKS. The Company's subsidiary banks are subject to restrictions under federal law that limit the transfer of funds or other items of value from such subsidiaries to the Parent and its nonbank subsidiaries (including affiliates) in so-called "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10% of the subsidiary bank's capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20% of the subsidiary bank's capital and surplus. Also, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. SOURCE OF STRENGTH DOCTRINE. The FRB has a policy that a BHC is expected to act as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required at times when the BHC may not have the resources to provide it. Capital loans by a BHC to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank. In addition, in the event of a BHC's bankruptcy, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. DEPOSITOR PREFERENCE. The FDI Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository 6 institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the institution's parent holding company. LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. Under the FDI Act, an insured depository institution is generally liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (a) the default of a commonly controlled insured depository institution or (b) any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. CAPITAL REQUIREMENTS The Company is subject to risk-based capital requirements and guidelines imposed by the FRB, which are substantially similar to the capital requirements and guidelines imposed by the FRB, the OCC and the FDIC on depository institutions within their respective jurisdictions. For information about these capital requirements and guidelines, see Note 22 to Financial Statements, incorporated by reference herein. The FRB's capital guidelines provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Also, the guidelines indicate that the FRB will consider a "tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 capital (excluding intangibles) to average total assets (excluding intangibles). The FRB, the FDIC and the OCC also have adopted rules to incorporate market and interest rate risk components into their risk-based capital standards. Under the market risk requirements, capital will be allocated to support the amount of market risk related to a financial institution's ongoing trading activities. As an additional means to identify problems in the financial management of depository institutions, the FDI Act requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards. The FDI Act requires federal bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will 7 depend upon how its capital levels compare to various capital measures and certain other factors, as established by regulation. FDIC INSURANCE Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of the Company's depository institution subsidiaries up to prescribed per depositor limits. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution's capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The BIF assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate could have a material adverse effect on the Company's earnings, depending on the amount of the increase. The FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of deposit insurance for one or more of the Company's subsidiary depository institutions could have a material adverse effect on the Company's earnings, depending on the collective size of the particular institutions involved. All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-insured depository institutions paid approximately 2.1 cents per $100 of BIF-assessable deposits in 1999, and will continue to pay as assessed until the earlier of December 31, 2000 or the date the last savings and loan association ceases to exist. Thereafter, they will pay an assessment rate equal to the rate assessed on deposits insured by the Savings Association Insurance Fund. FISCAL AND MONETARY POLICIES The Company's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository 8 institutions' deposits, and (d) imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the FRB have a material effect on the earnings of the Company. ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.
- ---------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ----------------------------------------------------------------- 1999 OVER 1998 1998 over 1997 ------------------------------ ----------------------------- (in millions) VOLUME RATE TOTAL Volume Rate Total - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Federal funds sold and securities purchased under resale agreements $ (13) $ (9) $ (22) $ 29 $ 2 $ 31 Securities available for sale: Securities of U.S. Treasury and federal agencies 50 (21) 29 (13) (12) (25) Securities of U.S. states and political subdivisions 24 (3) 21 12 -- 12 Mortgage-backed securities: Federal agencies 213 (34) 179 (199) (17) (216) Private collateralized mortgage obligations 17 4 21 (14) (2) (16) Other securities 69 20 89 29 7 36 Loans held for sale 20 (19) 1 75 (16) 59 Mortgages held for sale (56) 11 (45) 433 (25) 408 Loans: Commercial 243 (61) 182 299 (76) 223 Real estate 1-4 family first mortgage (57) (12) (69) (209) (129) (338) Other real estate mortgage 94 (102) (8) 5 (34) (29) Real estate construction 55 (4) 51 29 (18) 11 Consumer: Real estate 1-4 family junior lien mortgage 96 (52) 44 72 94 166 Credit card (91) (72) (163) (96) 28 (68) Other revolving credit and monthly payment (47) (44) (91) (56) 60 4 Lease financing 110 (25) 85 109 (7) 102 Foreign 40 1 41 58 7 65 Other 5 (26) (21) 33 (1) 32 ----- ----- ----- ----- ----- ----- Total increase (decrease) in interest income 772 (448) 324 596 (139) 457 ----- ----- ----- ----- ----- ----- Increase (decrease) in interest expense: Deposits: Interest-bearing checking 1 (10) (9) (5) (10) (15) Market rate and other savings 92 (185) (93) 30 15 45 Savings certificates (103) (123) (226) (44) (14) (58) Other time deposits (29) (20) (49) 19 (6) 13 Deposits in foreign offices 24 (1) 23 (23) -- (23) Short-term borrowings 197 (50) 147 167 -- 167 Long-term debt 258 (76) 182 18 (14) 4 Guaranteed preferred beneficial interests in Company's subordinated debentures (17) (4) (21) (23) 3 (20) ----- ----- ----- ----- ----- ----- Total increase (decrease) in interest expense 423 (469) (46) 139 (26) 113 ----- ----- ----- ----- ----- ----- Increase (decrease) in net interest income on a taxable-equivalent basis $ 349 $ 21 $ 370 $ 457 $(113) $ 344 ===== ===== ===== ===== ===== ===== - -----------------------------------------------------------------------------------------------------------------------------------
9 LOAN PORTFOLIO The following table presents the remaining contractual principal maturities of selected loan categories at December 31, 1999 and a summary of the major categories of loans outstanding at the end of the last five years. At December 31, 1999, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 ---------------------------------------------------------- OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ------------------ --------------- FLOATING FLOATING OR OR December 31, ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE ------------------------------------- (in millions) OR LESS RATE RATE RATE RATE TOTAL 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Selected loan maturities: Commercial $19,528 $3,741 $12,879 $ 697 $1,843 $ 38,688 $ 35,450 $ 32,061 $ 30,794 $20,127 Real estate 1-4 family first mortgage 2,429 367 394 5,813 3,395 12,398 11,496 14,165 16,051 8,799 Other real estate mortgage 2,795 3,080 5,424 4,784 3,095 19,178 16,668 16,326 16,419 11,857 Real estate construction 2,127 555 1,490 326 213 4,711 3,790 3,326 3,247 2,108 Foreign 774 112 428 173 86 1,573 1,478 1,155 1,132 932 ------- ------- ------- ------- ------ -------- -------- -------- -------- ------- Total selected loan maturities $27,653 $7,855 $20,615 $11,793 $8,632 76,548 68,882 67,033 67,643 43,823 ======= ====== ======= ======= ====== -------- -------- -------- -------- ------- Other loan categories: Consumer: Real estate 1-4 family junior lien mortgage 12,938 11,128 10,618 10,357 6,970 Credit card 5,472 5,795 6,671 7,028 5,667 Other revolving credit and monthly payment 16,656 15,809 17,021 16,916 11,715 -------- -------- -------- -------- ------- Total consumer 35,066 32,732 34,310 34,301 24,352 Lease financing 7,850 6,380 4,968 3,816 2,605 -------- -------- -------- -------- ------- Total loans $119,464 $107,994 $106,311 $105,760 $70,780 ======== ======== ======== ======== ======= - ----------------------------------------------------------------------------------------------------------------------------------
The table at the top of the following page summarizes other real estate loans by state and property type. The table at the bottom of the following page summarizes real estate construction loans by state and project type. 10 REAL ESTATE MORTGAGE LOANS BY STATE AND TYPE (excluding 1-4 family first mortgages)
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 ------------------------------------------------------------------------------------------------------------- Other Non- California Texas Minnesota Colorado states(2) All states accruals --------------- -------------- -------------- -------------- --------------- ---------------- as a % Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- of total (in millions) loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual by type - ------------------------------------------------------------------------------------------------------------------------------------ Office buildings $2,142 $16 $ 390 $ 2 $ 110 $-- $242 $-- $1,515 $ 2 $ 4,399 $ 20 --% Retail buildings 1,467 22 356 4 242 1 217 -- 1,510 7 3,792 34 1 Industrial 1,779 6 316 4 271 -- 177 1 837 5 3,380 16 -- Hotels/motels 290 1 317 -- 58 -- 79 -- 1,251 2 1,995 3 -- Apartments 624 3 221 -- 96 -- 80 -- 625 3 1,646 6 -- Institutional 242 4 22 -- -- -- 1 -- 109 3 374 7 2 Agricultural 270 4 64 1 84 -- 36 -- 552 2 1,006 7 1 Land 341 5 125 1 40 -- 57 -- 238 1 801 7 1 1-4 family structures (1) 154 1 25 -- 7 -- 9 -- 68 -- 263 1 -- Other 699 2 182 1 125 1 100 -- 416 7 1,522 11 1 ------ --- ------ --- ----- --- ---- --- ----- --- ------ ---- Total by state $8,008 $64 $2,018 $13 $1,033 $ 2 $998 $ 1 $7,121 $32 $19,178 $112 1% ====== === ====== === ====== === ==== === ====== === ======= ==== == % of total loans 42% 11% 5% 5% 37% 100% ====== ====== ====== ==== ====== ======= Nonaccruals as a % of total by state 1% 1% --% --% --% === === === === === - -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) Consists of 40 states; no state had loans in excess of $928 million at December 31, 1999. REAL ESTATE CONSTRUCTION LOANS BY STATE AND TYPE
- -------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 --------------------------------------------------------------------------------------------------------- Other Non- California Arizona Texas Colorado states(1) All states accruals -------------- ------------- ------------- -------------- ------------- -------------- as a % Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- of total (in millions) loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual by type - -------------------------------------------------------------------------------------------------------------------------------- Retail buildings $ 225 $-- $ 93 $-- $ 39 $-- $ 25 $-- $ 253 $-- $ 635 $-- --% 1-4 family: Land 140 -- -- -- 9 -- 12 -- 59 -- 220 -- -- Structures 157 -- 86 2 128 1 130 -- 312 1 813 4 -- Land (excluding 1-4 family) 203 -- 92 -- 54 1 38 -- 278 1 665 2 -- Apartments 135 -- 75 -- 35 -- 13 -- 133 -- 391 -- -- Office buildings 282 -- 30 -- 45 -- 43 -- 329 -- 729 -- -- Industrial 183 -- 28 -- 39 -- 50 -- 180 -- 480 -- -- Hotels/motels 55 -- 5 -- 2 -- 3 -- 79 -- 144 -- -- Institutional 12 -- 3 -- 8 -- -- -- 14 -- 37 -- -- Agricultural 3 -- -- -- -- -- -- -- 2 -- 5 -- -- Other 224 -- 10 -- 56 1 22 -- 280 -- 592 1 -- ------ --- ---- --- ---- --- ---- --- ------ --- ------ --- Total by state $1,619 $-- $422 $ 2 $415 $ 3 $336 $-- $1,919 $ 2 $4,711 $ 7 --% ====== === ==== === ==== === ==== === ====== === ====== === === % of total loans 34% 9% 9% 7% 41% 100% ====== ==== ==== ==== ====== ====== Nonaccruals as a % of total by state --% --% 1% --% --% === === === ==== === - ---------------------------------------------------------------------------------------------------------------------------------
(1) Consists of 33 states; no state had loans in excess of $280 million at December 31, 1999. 11 CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 3,134 $ 3,062 $ 3,059 $ 2,711 $ 2,872 Allowances related to business combinations, net 40 144 168 870 119 Provision for loan losses 1,045 1,545 1,140 500 312 Loan charge-offs: Commercial (382) (261) (357) (200) (99) Real estate 1-4 family first mortgage (12) (26) (26) (24) (20) Other real estate mortgage (28) (54) (26) (50) (59) Real estate construction (2) (3) (5) (14) (10) Consumer: Real estate 1-4 family junior lien mortgage (33) (31) (37) (38) (23) Credit card (388) (535) (579) (487) (330) Other revolving credit and monthly payment (512) (1,002) (618) (488) (255) ------- ------- ------- ------- ------- Total consumer (933) (1,568) (1,234) (1,013) (608) Lease financing (38) (48) (46) (35) (18) Foreign (90) (84) (37) (35) (29) ------- ------- ------- ------- ------- Total loan charge-offs (1,485) (2,044) (1,731) (1,371) (843) ------- ------- ------- -------- ------- Loan recoveries: Commercial 86 82 105 89 68 Real estate 1-4 family first mortgage 6 11 9 12 8 Other real estate mortgage 37 78 62 57 65 Real estate construction 5 4 12 12 5 Consumer: Real estate 1-4 family junior lien mortgage 15 7 10 10 4 Credit card 46 56 61 50 26 Other revolving credit and monthly payment 214 163 144 101 57 ------- ------- ------- ------- ------- Total consumer 275 226 215 161 87 Lease financing 12 12 13 9 13 Foreign 15 14 10 9 5 ------- ------- ------- ------- ------- Total loan recoveries 436 427 426 349 251 ------- ------- ------- ------- ------- Total net loan charge-offs (1,049) (1,617) (1,305) (1,022) (592) ------- ------- ------- ------- -------- BALANCE, END OF YEAR $ 3,170 $ 3,134 $ 3,062 $ 3,059 $ 2,711 ======= ======= ======= ======= ======= Total net loan charge-offs as a percentage of average total loans .94% 1.52% 1.25% 1.04% .84% ======= ======= ======= ======= ======= Allowance as a percentage of total loans 2.65% 2.90% 2.88% 2.89% 3.83% ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------
12 The SEC requires the Company to present the ratio of the allowance for loan losses to total nonaccrual loans. This ratio was 477% and 442% at December 31, 1999 and 1998, respectively. This ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, the prospects of borrowers and the value and marketability of collateral as well as, for the nonaccrual portfolio taken as a whole, wide variances from period to period in terms of delinquency and relationship of book to contractual principal balance. Classification of a loan as nonaccrual does not necessarily indicate that the principal of a loan is uncollectible in whole or in part. Consequently, the ratio of the allowance for loan losses to nonaccrual loans, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan losses. Indicators of the credit quality of the Company's loan portfolio and the method of determining the allowance for loan losses are discussed below and in greater detail in the 1999 Annual Report to Stockholders, incorporated by reference herein. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table on page 16 provides a breakdown of the allowance for loan losses by loan category. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to Statement of Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis. The determination of allocated reserves for portfolios of larger commercial and commercial real estate loans involves a review of individual higher-risk transactions, focusing on the accuracy of loan grading, assessments of specific loss content and, in some cases, strategies for resolving problem credits. These considerations supplement the application of loss factors delineated by individual loan grade to the existing distribution of risk exposures, thus framing an assessment of inherent losses across the entire wholesale lending portfolio segment which is responsive to shifts in portfolio risk content. The loss factors used for this analysis have been derived from migration models which track actual portfolio movements from problem asset loan grades to loss over a 5 to 10 year period. In the case of pass loan grades, the loss factors are derived from analogous loss experience in public debt markets, calibrated to the long-term average loss experience of the Company's portfolios. The loan loss reserve allocations arrived at through this factor methodology are adjusted based on management's judgment concerning the effect of recent economic events on portfolio performance. In the case of more homogeneous portfolios, such as consumer loans and leases, residential mortgage loans and some segments of small business lending, the determination of allocated reserves is conducted at a more aggregate, or pooled, level. For portfolios of this nature, the risk assessment process emphasizes the development of rigorous forecasting models, which focus on recent delinquency and loss trends in different portfolio segments to project relevant risk metrics over an intermediate-term horizon. Such analyses are updated frequently to 13 capture the most recent behavioral characteristics of the subject portfolios, as well as any changes in management's loss mitigation or customer solicitation strategies, in order to reduce the differences between estimated and observed losses. A reserve which approximates one year of projected net losses is provided as the baseline allocation for most homogeneous portfolios, to which management may add certain adjustments to ensure that a prudent amount of conservatism is present in the specific assumptions underlying that forecast. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans and leases), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. At December 31, 1999, the allowance for loan losses was $3,170 million, or 2.65% of total loans, compared with $3,134 million, or 2.90%, at December 31, 1998. During 1999, net charge-offs exceeded the provision for loan losses by $4 million; however, the addition of $40 million of allowances related to business combinations in 1999 accounted for the net increase of $36 million in the reserve, year over year. The components of the allowance, allocated and unallocated, are shown in the table on page 16. The allocated component declined to $1,767 million from $1,968 million, while the unallocated component grew to $1,403 million from $1,166 million, as of December 31, 1999 and 1998, respectively. The $201 million reduction in the allocated component was substantially due to the lower allocated allowance to loans outstanding ratios in the other consumer, commercial loan, and other real estate mortgage portfolios. In total, lower allocated reserve ratios resulted in a reduction of roughly $361 million in allocated reserves, primarily a reflection of lower projected loss rates in the loan portfolio. Of this reduction, $90 million was attributable to the domestic portfolio of Norwest Financial, although the overall reserve in that entity actually increased by virtue of additions to the unallocated portion of the reserve. An additional $106 million was attributable to various other consumer lending products. Finally, the commercial loan and other real estate mortgage portfolios showed continuing gradual improvement in problem asset trends. The improvements in the credit quality of those portfolios translated into a reduction of approximately $132 million in the allocated reserve. Other smaller portfolios accounted for the remaining $33 million in allocated reserve ratio reductions during the year. These changes in the allocated reserve relate primarily to projected rates of loss in different portfolio segments. Analyzing the movements in the allocated reserve strictly from a loan volume perspective indicates that, had the ratio of allocated reserves to loans outstanding remained flat with the 1998 ratio of 1.82%, allocated reserves would have increased by roughly 14 $208 million, as loans outstanding grew by $11.5 billion during the year. However, due to a shift in portfolio composition, the higher volume increased the allocated reserve by only $160 million, as relatively lower-risk commercial loans, residential first and second mortgages, and lease financing grew at a faster pace than higher-risk credit cards and other consumer loans. There were no material changes in estimation methods and assumptions for the allowance that took place during 1999. Relatively minor differences existed in the methodologies for deriving the allocated portion of the allowance employed by the former Norwest and the former Wells Fargo; these differences were reconciled in the first quarter of 1999. The Company considers the allowance for loan losses of $3,170 million adequate to cover losses inherent in loans, loan commitments, and standby and other letters of credit at December 31, 1999. The foregoing discussion contains forward-looking statements about the adequacy of the Company's reserves for loan losses. These forward-looking statements are inherently subject to risks and uncertainties. A number of factors--many of which are beyond the Company's control--could cause actual losses to be more than estimated losses. These factors include changes in business and economic conditions that could increase the number of customers and counterparties who become delinquent or who default on their loans or other obligations to the Company. For a discussion of some of the other factors that could cause actual losses to be more than estimated losses, see "Factors that May Affect Future Results" in "Management's Discussion and Analysis of Financial Condition and Results of Operations," incorporated by reference herein. 15 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Commercial $ 605 $ 605 $ 560 $ 472 $ 321 Real estate 1-4 family first mortgage 56 50 64 53 73 Other real estate mortgage 210 230 277 340 291 Real estate construction 48 56 46 59 68 Consumer: Credit card 337 344 471 440 383 Other consumer 397 550 542 452 313 ------ ------ ------ ------ ------ Total consumer 734 894 1,013 892 696 Lease financing 52 54 58 47 41 Foreign 62 79 43 34 27 ------ ------ ------ ------ ------ Total allocated 1,767 1,968 2,061 1,897 1,517 Unallocated component of the allowance (1) 1,403 1,166 1,001 1,162 1,194 ------ ------ ------ ------ ------ Total $3,170 $3,134 $3,062 $3,059 $2,711 ====== ====== ====== ====== ======
December 31, -------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- ---------------- ---------------- ---------------- ----------------- ALLOC. LOAN Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan ALLOW. CATGRY allow. catgry allow. catgry allow. catgry allow. catgry AS % AS % as % as % as % as % as % as % as % as % OF LOAN OF TOTAL of loan of total of loan of total of loan of total of loan of total CATGRY LOANS catgry loans catgry loans catgry loans catgry loans ------- -------- ------- -------- ------- ------- -------- -------- ------- -------- Commercial 1.56% 32% 1.71% 33% 1.75% 30% 1.53% 29% 1.59% 28% Real estate 1-4 family first mortgage .45 10 .43 11 .45 14 .33 15 .83 13 Other real estate mortgage 1.10 16 1.38 15 1.70 15 2.07 16 2.45 17 Real estate construction 1.02 4 1.48 4 1.38 3 1.82 3 3.23 3 Consumer: Credit card 6.16 5 5.94 5 7.06 6 6.26 6 6.76 8 Other consumer 1.34 25 2.04 25 1.96 26 1.66 26 1.68 26 --- --- --- --- --- Total consumer 2.09 30 2.73 30 2.95 32 2.60 32 2.86 34 Lease financing .66 7 .85 6 1.17 5 1.23 4 1.57 4 Foreign 3.94 1 5.35 1 3.72 1 3.00 1 2.90 1 --- --- --- --- --- Total allocated 1.48 100% 1.82 100% 1.94 100% 1.79 100% 2.14 100% === === === === === Unallocated component of the allowance (1) 1.17 1.08 .94 1.10 1.69 ---- ---- ---- ---- ---- Total 2.65% 2.90% 2.88% 2.89% 3.83% ==== ==== ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------------
(1) This amount and any unabsorbed portion of the allocated allowance are also available for any of the above listed loan categories. PROPERTIES The Company owns and occupies its 340,000 square foot headquarters at 420 Montgomery Street, San Francisco, California. In addition, the Company leases and occupies approximately 488,000 square feet in the Norwest Center, Sixth & Marquette, Minneapolis, Minnesota, which is a 1.1 million square foot office tower owned in part by a subsidiary of the Company. Major office and operational facilities are owned or leased in Arizona, California, Colorado, Iowa, Minnesota, Oregon, South Dakota and Texas. Approximately 5,500 stores and secondary office facilities are owned or leased throughout the United States and some foreign countries. For further information with respect to premises and equipment and commitments under noncancelable leases for premises and equipment, refer to Note 6 to Financial Statements, incorporated by reference herein. 16 EXECUTIVE OFFICERS OF THE REGISTRANT
YEARS WITH NAME AND COMPANY OR COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - ---------------- ----------------------------------------- --- ------------ John A. Berg Group Executive Vice President (Central Banking) (November 1998 to 54 24 Group Executive Present); Senior Vice President and Regional Group Head of former Vice President (Central Norwest (March 1998 to November 1998); Regional President (Greater Banking) Minnesota/La Crosse Region) (January 1990 to March 1998) Leslie S. Biller Vice Chairman and Chief Operating Officer (November 1998 to Present); 52 12 Vice Chairman and Chief President and Chief Operating Officer of former Norwest (February 1997 Operating Officer to November 1998); Executive Vice President (South Central Community Banking) (July 1990 to February 1997) Patricia R. Callahan Executive Vice President (Human Resources) (November 1998 to 46 22 Executive Vice President Present); Executive Vice President of former Wells Fargo (Personnel) (Human Resources) (September 1998 to November 1998); Executive Vice President (Wholesale Banking) (July 1997 to September 1998); Executive Vice President (Personnel) (March 1993 to July 1997) James R. Campbell Group Executive Vice President (Minnesota Banking) (November 1998 to 57 35 Group Executive Present); Executive Vice President (North Central Banking) of former Vice President (Minnesota Norwest (August 1997 to November 1998); Executive Vice President Banking) (Commercial Banking Services, Specialized Lending and Nebraska) (January 1996 to August 1997); Executive Vice President (Twin Cities Banking) (February 1993 to January 1996) Teresa A. Dial Group Executive Vice President (California, Business Banking, 50 27 Group Executive Telephone Banking, Distribution Strategies, Insurance, Diversified Vice President Products Group, Education Finance) (November 1998 to Present); Vice (California, Chair (Consumer and Business Banking) of former Wells Fargo Business Banking, (March 1996 to November 1998); Group Executive Vice President Telephone Banking, (Business Banking) (September 1991 to March 1996) Distribution Strategies, Insurance, Diversified Products Group, Education Finance)
17
YEARS WITH NAME AND COMPANY OR COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - ---------------- ----------------------------------------- --- ------------ David A. Hoyt Group Executive Vice President (Wholesale Banking) (November 1998 to 44 18 Group Executive Present); Vice Chair (Real Estate, Capital Markets, Vice President International) of former Wells Fargo (May 1997 to November (Wholesale Banking) 1998); Executive Vice President (Capital Markets, Special Loans) (September 1994 to May 1997) Ross J. Kari Executive Vice President and Chief Financial Officer (January 2000 to 41 17 Executive Vice President & Present); Executive Vice President and Deputy Chief Financial Officer Chief Financial Officer (November 1998 to January 2000); Chief Financial Officer of former Wells Fargo (May 1998 to November 1998); Executive Vice President (Group Head of Finance) (March 1997 to May 1998); Executive Vice President and General Auditor (September 1995 to March 1997); Senior Vice President and General Auditor (January 1995 to September 1995) Richard M. Kovacevich President and Chief Executive Officer (November 1998 to Present); 56 14 President and Chief Chairman and Chief Executive Officer of former Norwest (January 1997 Executive Officer to November 1998); Chairman, President and Chief Executive Officer (May 1995 to January 1997); President and Chief Executive Officer (January 1993 to May 1995) Ely L. Licht Executive Vice President and Chief Credit Officer (November 1998 to 52 16 Executive Vice President Present); Executive Vice President (Credit Administration) of former (Chief Credit Officer) Wells Fargo (February 1990 to November 1998) Dennis J. Mooradian Group Executive Vice President (Private Client Services) (July 1999 52 3 Group Executive Vice to Present); Executive Vice President of Wells Fargo Bank, N.A. (May President (Private Client 1996 to Present); various positions with Lehman Brothers since 1977 Services) including Global Private Client Services Division's Chief Operating Officer (April 1995 to May 1996) and Managing Director (Head of Domestic Branches) (August 1993 to April 1995)
18
YEARS WITH NAME AND COMPANY OR COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - ---------------- ----------------------------------------- --- ------------ John C. Nelson Group Executive Vice President (Western Banking) (November 1998 to 55 33 Group Executive Present); Chairman and Chief Executive Officer of Norwest Bank Vice President (Western Colorado, N.A. of former Norwest (January 1995 to November 1998) Banking) Mark C. Oman Group Executive Vice President (Mortgage and Home Equity) (November 45 20 Group Executive 1998 to Present); Executive Vice President (Mortgage Services and Vice President (Mortgage Iowa Community Banking) of former Norwest (February 1997 to November and Home Equity) 1998); President and Chief Executive Officer of Norwest Mortgage, Inc. (August 1989 to February 1997); also Chairman and Chief Executive Officer of Norwest Mortgage, Inc. (February 1997 to Present) Clyde W. Ostler Group Executive Vice President (Internet Services) (October 1999 to 53 29 Group Executive Present); Group Executive Vice President (Investments) (November 1998 Vice President (Internet to October 1999); Vice Chair (Trust and Investment Services) of Services) former Wells Fargo (May 1993 to November 1998) Daniel W. Porter Group Executive Vice President (Norwest Financial) and Chairman and 44 -- Group Executive Vice Chief Executive Officer of Norwest Financial, Inc. (December 1999 to President (Norwest Present); various positions with GE Capital since 1986 including Financial) Managing Director of GE Capital Europe in London (European Transportation Group) (March 1998 to December 1999); President of Global Consumer Development (September 1997 to March 1998); and President and Chief Executive Officer of Retailer Financial Services (April 1994 to September 1997) Les L. Quock, CPA Senior Vice President and Controller (November 1998 to Present); 46 20 Senior Vice President and Senior Vice President (Payment Systems Services Group) of former Controller (Principal Wells Fargo (February 1997 to November 1998); Senior Vice President Accounting Officer) (Business Banking Group Systems) (October 1996 to February 1997); Senior Vice President (Business Loan Finance and Administration) (November 1995 to October 1996); Senior Vice President (Business Loan Administration) (January 1994 to November 1995)
19
YEARS WITH NAME AND COMPANY OR COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - ---------------- ----------------------------------------- --- ------------ Stanley S. Stroup Executive Vice President and General Counsel (November 1998 to 56 16 Executive Vice President Present); Executive Vice President and General Counsel of former and General Counsel Norwest (February 1993 to November 1998) (Law Department and Government Relations) John G. Stumpf Group Executive Vice President (Southwestern Banking) (November 1998 46 18 Group Executive to Present); Regional President of Norwest Bank Texas, N.A. of former Vice President Norwest (July 1994 to November 1998) (Southwestern Banking)
There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. 20 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits: (1) The consolidated financial statements and related notes, the independent auditors' report thereon and supplementary data that appear on pages 52 through 98 of the 1999 Annual Report to Stockholders are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits: The Company's SEC file number is 001-2979. On or before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo filed documents under SEC file number 001-6214.
Exhibit number Description ------ ----------- 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company's Current Report on Form 8-K dated June 28, 1993. Certificates of Amendment of Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated July 3, 1995 (authorizing preference stock), and Exhibits 3(b) and 3(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (changing the Company's name and increasing authorized common and preferred stock, respectively) (b) Certificate of Change of Location of Registered Office and Change of Registered Agent, incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (c) Certificate of Designations for the Company's ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (d) Certificate of Designations for the Company's 1995 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (e) Certificate Eliminating the Certificate of Designations for the Company's Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated November 1, 1995 21 3(f) Certificate Eliminating the Certificate of Designations for the Company's 10.24% Cumulative Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 20, 1996 (g) Certificate of Designations for the Company's 1996 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 26, 1996 (h) Certificate of Designations for the Company's 1997 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 14, 1997 (i) Certificate of Designations for the Company's 1998 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 20, 1998 (j) Certificate of Designations for the Company's Adjustable Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (k) Certificate of Designations for the Company's Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H, incorporated by reference to Exhibit 3(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (l) Certificate of Designations for the Company's Series C Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (m) Certificate Eliminating the Certificate of Designations for the Company's Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated April 21, 1999 (n) Certificate of Designations for the Company's 1999 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3(b) to the Company's Current Report on Form 8-K dated April 21, 1999 (o) Certificate Eliminating the Certificate of Designations for the Company's Cumulative Tracking Preferred Stock (p) By-Laws, incorporated by reference to Exhibit 3(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 22 4(a) See Exhibits 3(a) through 3(p) (b) Rights Agreement, dated as of October 21, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated October 21, 1998 (c) The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. 10*(a) Long-Term Incentive Compensation Plan, as amended effective November 23, 1999 (including Forms of Award Term Sheet for grants of restricted share rights). Forms of Non-Qualified Stock Option and Restricted Stock Agreements for grants subsequent to November 2, 1998, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Forms of Non-Qualified Stock Option and Restricted Stock Agreements for grants prior to November 2, 1998, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 *(b) Long-Term Incentive Plan, incorporated by reference to Exhibit A to the former Wells Fargo's Proxy Statement filed March 14, 1994 *(c) Executive Incentive Compensation Plan, incorporated by reference to Exhibit 19(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. Amendment to Executive Incentive Compensation Plan, incorporated by reference to Exhibit 19(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989 *(d) Performance-Based Compensation Policy *(e) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1995 *(f) 1982 Equity Incentive Plan, incorporated by reference to Exhibit 10(g) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1993 *(g) Employees' Stock Deferral Plan, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 *(h) Deferred Compensation Plan, as amended and restated effective January 1, 2000 *(i) 1999 Directors Stock Option Plan, incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 23 10*(j) 1990 Director Option Plan for directors of the former Wells Fargo, incorporated by reference to Exhibit 10(c) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1997 *(k) 1987 Director Option Plan for directors of the former Wells Fargo, incorporated by reference to Exhibit A to the former Wells Fargo's Proxy Statement filed March 10, 1995, and as further amended by the amendment adopted September 16, 1997, incorporated by reference to Exhibit 10 to the former Wells Fargo's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 *(l) 1991 Director Option Plan for directors of the former First Interstate Bancorp, incorporated by reference to First Interstate Bancorp's Registration Statement on Form S-8 (SEC File No. 033-37299) and to the former Wells Fargo's Post-Effective Amendment No. 1 on Form S-8 filed on April 2, 1996 (SEC File No. 033-64575) *(m) Deferred Compensation Plan for Non-Employee Directors of the former Norwest, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(n) Directors' Stock Deferral Plan for directors of the former Norwest, incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(o) Directors' Formula Stock Award Plan for directors of the former Norwest, incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(p) Deferral Plan for Directors of the former Wells Fargo, incorporated by reference to Exhibit 10(b) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1997 *(q) 1999 Deferral Plan for Directors *(r) 1999 Directors Formula Stock Award Plan, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 *(s) Supplemental 401(k) Plan, incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(t) Supplemental Cash Balance Plan, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 24 10*(u) Supplemental Long Term Disability Plan, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. Amendment to Supplemental Long Term Disability Plan, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 *(v) Agreement between the Company and Richard M. Kovacevich dated March 18, 1991, incorporated by reference to Exhibit 19(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991. Amendment effective January 1, 1995, to the March 18, 1991 agreement between the Company and Richard M. Kovacevich, incorporated by reference to Exhibit 11(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 *(w) Employment Agreement, dated as of June 7, 1998, between the Company and Paul Hazen, incorporated by reference to Exhibit 10.01 to the Company's Registration Statement No. 333-63247 on Form S-4 filed September 11, 1998. Forms of Stock Option and Restricted Stock Agreements pursuant to Employment Agreement, incorporated by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 *(x) Employment Agreement, dated as of January 1, 1999, between the Company and Rodney L. Jacobs, incorporated by reference to Exhibit 10(dd) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 *(y) Agreements between the Company and three executive officers dated October 7, 1998, May 7, 1999 and October 25, 1999, respectively *(z) Form of severance agreement between the Company and six executive officers, including two directors, and agreement between the Company and officer Terri A. Dial, incorporated by reference to Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Amendment effective January 1, 1995, to the March 11, 1991 agreement between the Company and Richard M. Kovacevich, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 *(aa) Change of Control Severance Plan of the former Wells Fargo, incorporated by reference to Exhibit 10(c) to the former Wells Fargo's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 25 10*(bb) Consulting Agreement dated January 25, 1999, between the Company and Chang-Lin Tien, incorporated by reference to Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 *(cc) Directors' Retirement Plan for directors of the former Wells Fargo, as amended effective November 2, 1998, incorporated by reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 *(dd) Description of Relocation Program for Designated High- Cost Areas *(ee) Description of Executive Financial Planning Program *(ff) Executive Loan Plan, incorporated by reference to Exhibit 10(i) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1994 12(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.16, 1.63, 1.81, 1.78 and 1.80 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 3.49, 2.56, 3.10, 2.98 and 2.73 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.13, 1.61, 1.79, 1.73 and 1.74 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.41, 2.49, 2.99, 2.77 and 2.55 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. 13 1999 Annual Report to Stockholders, pages 33 through 98 21 Subsidiaries of the Company 23 Consent of Independent Accountants 24 Powers of Attorney 27 Financial Data Schedule (b) The Company filed the following report on Form 8-K during the fourth quarter of 1999: (1) October 19, 1999 under Item 5, containing the Company's financial results for the quarter ended September 30, 1999
- ---------------------- * Management contract or compensatory plan or arrangement Stockholders may obtain a copy of any Exhibit, in Item 14(a)(3), upon payment of a reasonable fee, by writing Wells Fargo & Company, Office of the Secretary, Norwest Center, N9305-173, Sixth and Marquette, Minneapolis, Minnesota 55479. 26 STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 1999, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents filed prior to January 1, 2000 pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 (other than the Current Report on Form 8-K filed October 14, 1997, containing a description of the Company's common stock) for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 15, 2000. WELLS FARGO & COMPANY BY: /s/ Richard M. Kovacevich ------------------------------------- Richard M. Kovacevich President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. By: /s/ Ross J. Kari ------------------------------------ Ross J. Kari Executive Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Les L. Quock ------------------------------------ Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) The Directors of Wells Fargo & Company listed below have duly executed powers of attorney empowering Philip J. Quigley to sign this document on their behalf. Leslie S. Biller Richard D. McCormick Michael R. Bowlin Cynthia H. Milligan Edward M. Carson Benjamin F. Montoya David A. Christensen Donald B. Rice William S. Davila Ian M. Rolland Susan E. Engel Susan G. Swenson Paul Hazen Daniel M. Tellep William A. Hodder Chang-Lin Tien Robert L. Joss Michael W. Wright Reatha Clark King John A. Young Richard M. Kovacevich
By: /s/ Philip J. Quigley ------------------------------------ Philip J. Quigley Director and Attorney-in-fact March 15, 2000 28 EX-3.(O) 2 EX-3.(O) CERTIFICATE ELIMINATING THE CERTIFICATE OF DESIGNATIONS WITH RESPECT TO THE CUMULATIVE TRACKING PREFERRED STOCK OF WELLS FARGO & COMPANY --------------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------------------------------- The undersigned DOES HEREBY CERTIFY that the following resolutions were duly adopted by the Board of Directors of Wells Fargo & Company, a Delaware corporation (the "Company"), at a meeting duly convened and held on January 25, 2000, at which a quorum was present and acting throughout: WHEREAS resolutions were adopted by the Board of Directors, which resolutions are set forth in a Certificate of Designations filed with the Secretary of State of the State of Delaware on December 30, 1994, providing for and authorizing the issuance of 980,000 shares of Cumulative Tracking Preferred Stock ("Tracking Preferred Stock"); and WHEREAS by resolutions adopted by the Preferred Stock Redemption Committee II of the Board of Directors of the Company (the "Committee") on November 23, 1999, pursuant to authority expressly granted by the Board of Directors on November 23, 1999, the Committee authorized the redemption of all the outstanding shares of the Tracking Preferred Stock; and WHEREAS all the outstanding shares of the Tracking Preferred Stock were redeemed on December 31, 1999 upon and in connection with the redemption on December 31, 1999 of all outstanding Class A preferred limited liability company interests of Residential Home Mortgage, L.L.C. RESOLVED that none of the authorized shares of the Tracking Preferred Stock are outstanding and none will be issued subject to the Certificate of Designations previously filed on December 30, 1994 with the Secretary of State of the State of Delaware with respect to such series. RESOLVED that the President, any Vice Chairman, any Executive Vice President, any Senior Vice President, the Secretary and any Assistant Secretary are hereby authorized to execute, acknowledge, and file such instruments and documents as they, or any of them, may deem necessary or advisable to eliminate from the Company's Restated Certificate of Incorporation, as amended, all matters set forth in said Certificate of Designations with respect to the Tracking Preferred Stock. IN WITNESS WHEREOF, WELLS FARGO & COMPANY has caused its corporate seal to be hereunto affixed and this Certificate to be signed by Laurel A. Holschuh, its Senior Vice President, and attested by Rachelle M. Graham, its Assistant Secretary, this 21st day of February, 2000. WELLS FARGO & COMPANY By /s/ Laurel A. Holschuh ------------------------------- Senior Vice President ATTEST: /s/ Rachelle M. Graham ------------------------------- Assistant Secretary [Filed in the Office of the Delaware Secretary of State on February 22, 2000] Cert Eliminating Tracking Pref Stock/holsl01/board -2- EX-10.A 3 EX-10-A LONG-TERM INCENTIVE COMPENSATION PLAN (As amended effective November 23, 1999) 1. PURPOSE. The purpose of Wells Fargo & Company's Long-Term Incentive Compensation Plan (the "Plan") is to motivate key employees to produce a superior return to the stockholders of Wells Fargo & Company by offering them an opportunity to participate in stockholder gains, by facilitating stock ownership and by rewarding them for achieving a high level of corporate financial performance. The Plan is also intended to facilitate recruiting and retaining talented executives for key positions by providing an attractive capital accumulation opportunity. 2. DEFINITIONS. 2.1 The following terms, whenever used in this Plan, shall have the meanings set forth below: (a) "Affiliate" means any corporation or limited liability company, a majority of the voting stock or membership interests of which is directly or indirectly owned by the Company, and any partnership or joint venture designated by the Committee in which any such corporation or limited liability company is a partner or joint venturer. (b) "Award" means a grant made under this Plan in the form of Performance Shares, Restricted Stock, Restricted Share Rights, Stock Options, Performance Units, Stock Appreciation Rights, or Stock. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means a committee selected by the Board and consisting of two or more members of the Board. (e) "Company" means Wells Fargo & Company, a Delaware corporation. (f) "Employee" means a regular salaried employee (including an officer or director who is also an employee) of the Company or an Affiliate. (g) "Fair Market Value" as of any date means the immediately preceding trading day's closing price of a share of Stock as reported by the consolidated tape of the New York Stock Exchange. (h) "Incentive Stock Option" means any Option designated as such and granted in accordance with the requirements of Section 422A of the Internal Revenue Code of 1986, as amended. (i) "Non-Qualified Stock Option" means an Option other than an Incentive Stock Option. (j) "Option" means a right to purchase Stock. (k) "Participant" means a person designated by the Committee to receive an Award under the Plan who is an Employee at the time of such designation. (l) "Performance Cycle" means the period of time of not fewer than two years nor more than five years as specified by the Committee over which Performance Shares or Performance Units are to be earned. (m) "Performance Shares" means an Award made pursuant to Section 6 which entitles a Participant to receive Shares, their cash equivalent or a combination thereof based on the achievement of performance targets during a Performance Cycle. (n) "Performance Units" means an Award made pursuant to Section 6 which entitles a Participant to receive cash, Stock or a combination thereof based on the achievement of performance targets during a Performance Cycle. (o) "Plan" means this Long-Term Incentive Compensation Plan, as amended from time to time. (p) "Restricted Share Right" means a grant under Section 9 of the right to receive a Share subject to vesting and such other restrictions imposed pursuant to said Section, together with dividend equivalents with respect to such Share if and as so determined by the Committee. (q) "Restricted Stock" means Stock granted under Section 7 that is subject to restrictions imposed pursuant to said Section. (r) For all Awards outstanding on November 2, 1998, "Retirement" means retirement which would entitle a Participant to a benefit under Section 6.1 or Section 6.2 of the Norwest Corporation Pension Plan or under Section 4.1 or Section 4.2 of the Norwest Financial Pension Plan if such plans had remained in effect under their terms as of November 2, 1998. For all Awards granted subsequent to November 2, 1998, "Retirement" means termination of employment after -2- reaching the earlier of (i) age 55 with 10 completed years of service, or (ii) 80 points (with one point credited for each completed age year and one point credited for each completed year of service), or (iii) age 65. For purposes of this definition, a Participant is credited with one year of service after completion of each full 12-month period of employment with the Company or an Affiliate as determined by the Company or Affiliate. (s) "Share" means a share of Stock. (t) "Stock" means the common stock, $1-2/3 par value per share, of the Company. (u) "Stock Appreciation Right" means the right to receive a payment in cash or in Stock or a combination thereof in an amount equal to the excess of the Fair Market Value of the Stock at the time of exercise over the Fair Market Value of the Stock at the time of grant. (v) "Successor" means the legal representative of the estate of a deceased Participant or the person or persons who may acquire the right to exercise an Option or to receive Shares issuable in satisfaction of an Award, by bequest or inheritance. (w) "Term" means the period during which an Option or Stock Appreciation Right may be exercised or the period during which the restrictions placed on a Restricted Share Right or Restricted Stock are in effect. 2.2 GENDER AND NUMBER. Except when otherwise indicated by context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural. 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have exclusive power to determine when and to whom Awards will be granted, the form of each Award, the amount of each Award, and any other terms or conditions of each Award. The Committee's interpretation of the Plan and of any Awards made under the Plan shall be final and binding on all persons with an interest therein. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt and revise rules and regulations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. 4. SHARES AVAILABLE UNDER THE PLAN; LIMITATION ON AWARDS. The maximum number of Shares that may be issued under this Plan on and after April 27, 1999 (in addition to Shares which prior to April 27, 1999 were subject to Awards) -3- shall not exceed the sum of (i) the number of Shares available for, but not yet subject to, an Award as of April 27, 1999, plus (ii) 40,000,000 Shares. These Shares may consist, in whole or in part, of authorized but unissued Stock or treasury Stock not reserved for any other purpose. Any Shares subject to the terms and conditions of an Award under this Plan which are forfeited or not issued because the terms and conditions of the Award are not met or for which payment is not made in Stock and any Shares which are used for full or partial payment of the purchase price of Shares with respect to which an Option is exercised may again be used for an Award under the Plan. No Employee may be awarded in any calendar year Options or Stock Appreciation Rights covering an aggregate of more than 7,000,000 Shares. On and after the date referred to in clause (i) above, no more than five percent of the sum of the numbers of Shares described in clauses (i) and (ii) above shall be issued pursuant to Awards of unrestricted Stock not granted in lieu of salary, cash bonus or other cash compensation, Awards of Performance Shares or Performance Units earned over a Performance Cycle of less than three years, and Awards of Restricted Stock or Restricted Share Rights having Terms of less than three years at the time of grant. 5. PARTICIPATION. Participation in the Plan shall be limited to key Employees of the Company or an Affiliate selected by the Committee. Participation is entirely at the discretion of the Committee, and is not automatically continued after an initial period of participation. 6. PERFORMANCE SHARES AND PERFORMANCE UNITS. An Award of Performance Shares or Performance Units under the Plan shall entitle the Participant to future payments or Shares or a combination thereof based upon the achievement of pre-established performance targets. 6.1 AMOUNT OF AWARD. The Committee shall establish a maximum amount of a Participant's Award, which amount shall be denominated in Shares in the case of Performance Shares or in dollars in the case of Performance Units. 6.2 COMMUNICATION OF AWARD. Written notice of the maximum amount of a Participant's Award and the Performance Cycle determined by the Committee shall be given to a Participant as soon as practicable after approval of the Award by the Committee. 6.3 AMOUNT OF AWARD PAYABLE. The Committee shall establish maximum and minimum performance targets to be achieved during the applicable Performance Cycle. Performance targets established by the Committee shall relate to corporate, group, unit or individual performance and may be established in terms of earnings, growth in earnings, ratios of earnings to equity or assets, or such other measures or standards -4- determined by the Committee. Multiple performance targets may be used and the components of multiple performance targets may be given the same or different weighting in determining the amount of an Award earned, and may relate to absolute performance or relative performance measured against other groups, units, individuals or entities. Achievement of the maximum performance target shall entitle the Participant to payment (subject to Section 6.5) at the full or maximum amount specified with respect to the Award; provided, however, that notwithstanding any other provisions of this Plan, in the case of an Award of Performance Shares the Committee in its discretion may establish an upper limit on the amount payable (whether in cash or Stock) as a result of the achievement of the maximum performance target. The Committee may also establish that a portion of a full or maximum amount of a Participant's Award will be paid (subject to Section 6.5) for performance which exceeds the minimum performance target but falls below the maximum performance target applicable to such Award. 6.4 ADJUSTMENTS. At any time prior to payment of a Performance Share or Performance Unit Award, the Committee may adjust previously established performance targets or other terms and conditions to reflect events such as changes in law, regulation, or accounting practice, or mergers, acquisitions or divestitures. 6.5 PAYMENT OF AWARDS. Following the conclusion of each Performance Cycle, the Committee shall determine the extent to which performance targets have been attained, and the satisfaction of any other terms and conditions with respect to an Award relating to such Performance Cycle. The Committee shall determine what, if any, payment is due with respect to an Award and whether such payment shall be made in cash, Stock or some combination. Payment shall be made in a lump sum or installments, as determined by the Committee, commencing as promptly as practicable following the end of the applicable Performance Cycle, subject to such terms and conditions and in such form as may be prescribed by the Committee. Payment in Stock may be in Restricted Stock or Restricted Share Rights. 6.6 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an Employee before the end of a Performance Cycle by reason of his death, permanent disability or Retirement, the Performance Cycle for such Participant for the purpose of determining the amount of Award payable shall end at the end of the calendar quarter immediately preceding the date on which such Participant ceased to be an Employee. The amount of an Award payable to a Participant to whom the preceding sentence is applicable shall be paid at the end of the Performance Cycle and shall be that -5- fraction of the Award computed pursuant to the preceding sentence the numerator of which is the number of calendar quarters during the Performance Cycle during all of which said Participant was an Employee and the denominator of which is the number of full calendar quarters in the Performance Cycle. Upon any other termination of employment of a Participant during a Performance Cycle, participation in the Plan shall cease and all outstanding Awards of Performance Shares or Performance Units to such Participant shall be cancelled. 7. RESTRICTED STOCK AWARDS. An Award of Restricted Stock under the Plan shall consist of Shares subject to restrictions on transfer, conditions of forfeiture, and such other terms and conditions as the Committee shall determine. 7.1 AWARD TERMS. An Award of Restricted Stock shall be subject to such terms, conditions and restrictions as the Committee shall determine, subject to the provisions of this Plan, including the following: (a) RESTRICTIONS. A statement of the terms, conditions, and restrictions to which the Restricted Stock awarded is subject, including, without limitation, terms requiring forfeiture and imposing restriction on transfer for such Term or Terms as shall be determined by the Committee subject to the provisions of this Plan. The Committee shall have the authority to permit in its discretion an acceleration of the expiration of the applicable Term with respect to any part or all of the Restricted Stock awarded to a Participant in connection with severance arrangements or changes in law, regulation or accounting practice. (b) LAPSE OF RESTRICTIONS. A statement of the terms and any other conditions upon which any restrictions upon Restricted Stock awarded shall lapse, as determined by the Committee subject to the provisions of this Plan. Upon the lapse of the restrictions, Shares free of restrictive legend, if any, shall be issued to the Participant or his Successor. 7.2 TERM. Subject to acceleration of the expiration of the Term as provided in or permitted by this Plan, the minimum Term for Restricted Stock shall be three years unless the lapse of restrictions is conditioned on the achievement of one or more pre-established performance targets, in which case the minimum Term shall be not less than one year, or the Restricted Stock is granted in lieu of salary, cash bonus or other cash compensation, in which case there may be no minimum Term. 7.3 NONTRANSFERABILITY. Restricted Stock awarded, and the right to vote such Restricted Stock and to receive dividends thereon, may not be sold, -6- assigned, transferred, exchanged, pledged, or otherwise encumbered, during the Term applicable to the Award. A Participant with a Restricted Stock Award shall have all the other rights of a stockholder including, but not limited to, the right to receive dividends and the right to vote the Shares. 7.4 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an Employee prior to the lapse of restrictions by reason of his death, permanent disability or Retirement, all restrictions on Shares of Restricted Stock held for his benefit shall immediately lapse. Upon any other termination of employment prior to the lapse of restrictions, participation in the Plan shall cease and all Shares of Restricted Stock held for the benefit of a Participant shall be forfeited by the Participant. 7.5 CERTIFICATES. Each certificate issued in respect to an Award of Restricted Stock shall be deposited with the Company or its designee and may, at the election of the Committee, bear the following legend: "This certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the Long-Term Incentive Compensation Plan and the Restricted Stock Award. Release from such terms and conditions shall obtain only in accordance with the provisions of the Plan and the Award, a copy of each of which is on file in the office of the Secretary of Wells Fargo & Company." 8. STOCK AWARDS. Awards of Stock without restrictions may be made according to terms and conditions established by the Committee. 9. RESTRICTED SHARE RIGHTS. An Award of Restricted Share Rights shall be subject to such terms, conditions and restrictions as the Committee shall determine, subject to the provisions of this Plan, including the following: 9.1 NUMBER AND DIVIDEND EQUIVALENTS. The number of Restricted Share Rights subject to the Award and whether the Award includes dividend equivalents. If the Award includes dividend equivalents, an amount equal to the dividends that would have been paid if the Restricted Share Rights had been issued and outstanding Shares as of the record date for the dividends shall be paid to the Participant in cash subject to applicable withholding taxes. 9.2 RESTRICTIONS. The terms, conditions and restrictions to which the Award is subject, including, without limitation, terms requiring forfeiture and imposing restriction on transfer for such Term or Terms as shall be -7- determined by the Committee subject to the provisions of this Plan. The Committee shall have the authority to permit in its discretion an acceleration of the expiration of the applicable Term with respect to any part or all of the Restricted Share Rights awarded to a Participant in connection with severance arrangements or changes in law, regulation or accounting practice. 9.3 TERM. Subject to acceleration of the expiration of the Term as provided in or permitted by this Plan, the minimum Term for Restricted Share Rights shall be three years unless the lapse of restrictions is conditioned on the achievement of one or more pre-established performance targets, in which case the minimum Term shall be not less than one year, or the Restricted Share Rights are granted in lieu of salary, cash bonus or other cash compensation, in which case there may be no minimum Term. 9.4 LAPSE OF RESTRICTIONS; VESTING. Upon the lapse of the restrictions, the Restricted Share Rights shall vest and Shares shall be issued to the Participant in accordance with the terms of the Award as determined by the Committee. Shares subject to Restricted Share Rights shall have no voting rights until issued. 9.5 NONTRANSFERABILITY. Restricted Share Rights, including, if applicable, the right to receive dividend equivalents thereon, may not be sold, assigned, transferred, exchanged, pledged or otherwise encumbered during the Term applicable to the Award. The Participant may, by completing and signing a written beneficiary designation form which is delivered to and accepted by the Company, designate a beneficiary to receive payment of any outstanding Restricted Share Rights upon the Participant's death. If at the time of the Participant's death there is not on file a fully effective beneficiary designation form, or if the designated beneficiary did not survive the Participant, the legal representative of the Participant's estate shall have the right to receive payment. 9.6 TERMINATION OF EMPLOYMENT. (a) DUE TO DEATH, DISABILITY, OR RETIREMENT. If a Participant ceases to be an Employee by reason of the Participant's death, permanent disability or Retirement, all restrictions on the Restricted Share Rights of the Participant shall lapse in accordance with the terms of the Award as determined by the Committee. (b) DUE TO REASONS OTHER THAN DEATH, DISABILITY, OR RETIREMENT. If a Participant ceases to be an Employee for any reason other than death, permanent disability or Retirement, all Restricted Share Rights of the Participant and all rights to receive dividend equivalents thereon -8- shall immediately terminate without notice of any kind and shall be forfeited by the Participant. 10. STOCK OPTIONS. 10.1 AWARD TERMS. An Award of an Option shall be subject to such terms, conditions and restrictions as the Committee shall determine, subject to the provisions of this Plan, including the following: (a) TYPE OF OPTION; NUMBER OF SHARES. A statement identifying the Option represented thereby as an Incentive Stock Option or Non-Qualified Stock Option, as the case may be, and the number of Shares to which the Option applies. (b) OPTION PRICE. A statement of the purchase price of the Stock subject to Option which shall not be less than the Fair Market Value, and in any event not less than the par value, of the Stock on the date the Option is granted. (c) EXERCISE TERM. A statement of the Term of each Option granted as established by the Committee, provided that no Option shall be exercisable after ten years from the date of grant. The Committee shall have the authority to permit an acceleration of previously established Terms, at its discretion. (d) PAYMENT FOR SHARES. A statement that the purchase price of the Shares with respect to which an Option is exercised shall be payable at the time of exercise in accordance with procedures established by the Company. The purchase price may be payable in cash, in Stock having a Fair Market Value on the date the Option is exercised equal to the Option price of the Stock being purchased pursuant to the Option, or a combination thereof, as the Committee shall determine. The Committee may, either at the time the Option is granted or any time before it is exercised, subject to such limitations as the Committee may determine, authorize payment of the purchase price of the Option by delivery to the Company of irrevocable instructions to a broker, or some other communication acceptable to the Company, requiring prompt delivery to the Company of the amount of sale proceeds to pay the Option purchase price and all applicable withholding taxes resulting from such exercise. (e) NONTRANSFERABILITY. An Option is not transferable other than by will, the laws of descent and distribution or by the Participant designating a beneficiary in accordance with this Section 10.1(e). During the lifetime of the Participant, Options may be exercised only by the -9- Participant or by the Participant's legal representative. The Participant may, by completing and signing a written beneficiary designation form which is delivered to and accepted by the Company, designate a beneficiary to exercise and receive any outstanding Options (and all outstanding Stock Appreciation Rights granted in conjunction with Options) upon the Participant's death. If at the time of the Participant's death there is not on file a fully effective beneficiary designation form, or if the designated beneficiary did not survive the Participant, the legal representative of the Participant's estate shall have the right to exercise the Option. (f) INCENTIVE STOCK OPTIONS. In the case of an Incentive Stock Option, each Option shall be subject to any terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify the Option as an Incentive Stock Option (within the meaning of Section 422A of the Internal Revenue Code of 1986, or any amendment or regulation pertaining to it) or any other law or regulation providing special tax treatment for stock options and related stock. Provided, however, that the aggregate Fair Market Value (as determined at the effective date of the grant) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year shall not exceed $100,000. 10.2 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. (a) If a Participant ceases to be an Employee by reason of his death, permanent disability or Retirement, each outstanding Option shall become exercisable to the extent and for such period or periods determined by the Committee but not beyond the expiration date of said Option. If a Participant dies before exercising all outstanding Options, the outstanding Options shall be exercisable by the Participant's beneficiary determined in accordance with Section 10.1(e). (b) If a Participant ceases to be an Employee by reason of his death, permanent disability or Retirement, each outstanding Stock Appreciation Right granted in conjunction with an Option shall become exercisable to the extent and for such period or periods determined by the Committee but not beyond the expiration date of said Stock Appreciation Right. If a Participant dies before exercising all outstanding Stock Appreciation Rights granted in conjunction with Options, said outstanding Stock Appreciation Rights shall be exercisable by the Participant's beneficiary determined in accordance with Section 10.1(e). -10- 10.3 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH, DISABILITY, OR RETIREMENT. Except as otherwise determined by the Committee, in the event a Participant ceases to be an Employee for any reason other than his death, permanent disability or Retirement, all rights of the Participant under this Plan shall immediately terminate without notice of any kind. 11. STOCK APPRECIATION RIGHTS. An Award of a Stock Appreciation Right shall entitle the Participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares at the time of exercise over (ii) a specified price which shall not be less than 100% of the Fair Market Value of the Shares at the time of grant. Stock Appreciation Rights may be granted in connection with a previously or contemporaneously granted Option, or independent of any Option. If issued in connection with an Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels the Option with which it is connected. A Stock Appreciation Right may not be exercised at any time when the Fair Market Value of the Shares of Stock to which it relates does not exceed the exercise price of the Option associated with those Shares. 11.1 TERM. An Award of a Stock Appreciation Right shall include a statement of the Term within which the Stock Appreciation Right may be exercised subject to terms and conditions prescribed by the Committee, provided that no Stock Appreciation Right shall be exercisable after ten years from the date of grant. The Committee shall have the authority to permit an acceleration of previously established exercise Terms. 11.2 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. If a Participant ceases to be an Employee by reason of his death, permanent disability or Retirement, each Stock Appreciation Right then outstanding which was granted independent of any Option shall become exercisable to the extent and for such period or periods determined by the Committee but not beyond the expiration date of said Stock Appreciation Right. 11.3 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH, DISABILITY, OR RETIREMENT. Except as otherwise determined by the Committee, in the event a Participant ceases to be an Employee for any reason other than his death, permanent disability or Retirement, all rights of the Participant under this Plan shall immediately terminate without notice of any kind. 11.4 PAYMENT. Upon exercise of a Stock Appreciation Right, payment shall be made in the form of cash or Stock or some combination thereof as -11- determined by the Committee. However, notwithstanding any other provisions of this Plan, in no event may the payment (whether in cash or Stock) upon exercise of a Stock Appreciation Right exceed an amount equal to 100% of the Fair Market Value of the Shares at the time of grant. 12. NONTRANSFERABILITY OF RIGHTS. Except as otherwise set forth in this Plan, no rights under any Award will be transferable other than by will or the laws of descent and distribution, and the rights and the benefits of any Award may be exercised and received during the lifetime of the Participant only by the Participant or by the Participant's legal representative. 13. TERMINATION OF EMPLOYMENT. 13.1 Transfers of employment between the Company and an Affiliate, or between Affiliates, will not constitute termination of employment for purposes of any Award. 13.2 The Committee may specify whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Award and the Plan. 14. REORGANIZATION. If substantially all of the assets of the Company are acquired by another corporation or in case of a reorganization of the Company involving the acquisition of the Company by another entity, then as to each Participant who is an Employee immediately prior to the consummation of the transaction: (a) All outstanding Options and Stock Appreciation Rights shall become exercisable immediately prior to the consummation of the transaction. (b) All restrictions with respect to Restricted Stock and Restricted Share Rights shall lapse immediately prior to the consummation of the transaction, and Shares free of restrictive legend shall be delivered to the Participant. (c) All Performance Cycles for the purpose of determining the amounts of Awards of Performance Shares and Performance Units payable shall end at the end of the calendar quarter immediately preceding the consummation of the transaction. The amount of an Award payable shall be that fraction of the Award computed pursuant to the preceding sentence the numerator of which is the number of calendar quarters completed in the Performance Cycle through the end of the calendar quarter immediately preceding the consummation of the transaction and the denominator of which is the number of full calendar quarters in the -12- Performance Cycle. The amount of an Award payable shall be paid within sixty days after consummation of the transaction. The Committee shall take such action as in their discretion may be necessary or advisable to carry out the provisions of this Section. 15. BOARD CHANGES. On the date that a majority of the Board shall be persons other than persons (a) for whose election proxies shall have been solicited by the Board or (b) who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships, then as to any Participant who is an Employee immediately prior to said date and who ceases to be an Employee within six months after said date for any reason other than as a result of death, permanent disability or Retirement: (i) All outstanding Options and Stock Appreciation Rights shall become immediately exercisable and may be exercised at any time within six months after the Participant ceases to be an Employee. (ii) All restrictions with respect to Restricted Stock and Restricted Share Rights shall lapse and Shares free of restrictive legend shall be delivered to the Participant. (iii) All Performance Cycles for the purpose of determining the amounts of Awards of Performance Shares and Performance Units payable shall end at the end of the calendar quarter immediately preceding the date on which said Participant ceased to be an Employee. The amount of an Award payable to said Participant shall be that fraction of the Award computed pursuant to the preceding sentence the numerator of which is the number of calendar quarters during the Performance Cycle during all of which said Participant was an Employee and the denominator of which is the number of full calendar quarters in the Performance Cycle. The amount of an Award payable shall be paid within sixty days after said Participant ceases to be an Employee. The Committee shall take such action as in their discretion may be necessary or advisable to carry out the provisions of this Section. 16. EFFECTIVE DATE OF THE PLAN. 16.1 EFFECTIVE DATE. The Plan shall become effective as of September 25, 1984 upon the approval and ratification of the Plan by the affirmative vote of the holders of a majority of the outstanding Shares of Stock present or represented and entitled to vote in person or by proxy at a meeting of the stockholders of the Company. -13- 16.2 DURATION OF THE PLAN. The Plan shall remain in effect until all Stock subject to it shall be distributed, until the Term of all Options or Stock Appreciation Rights granted under this Plan shall expire, until all restrictions on Restricted Stock or Restricted Share Rights granted under this Plan shall lapse, or until the Performance Cycle for any Performance Shares or Performance Units awarded under this Plan shall end. 17. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan shall confer upon any Participant the right to continue in the employment of the Company or any Affiliate or affect any right which the Company or any Affiliate may have to terminate employment of the Participant. 18. WITHHOLDING TAXES. The Company and its Affiliates shall have the right to deduct from all payments under this Plan, whether in cash or in Stock, an amount necessary to satisfy any federal, state or local withholding tax requirements. 19. DEFERRAL OF PAYMENTS. The Committee may, from time to time, establish rules and conditions under which a Participant may defer the payment of Awards. 20. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board or Committee may at any time terminate, suspend or modify the Plan, except that the Board or Committee will not, without authorization of the stockholders of the Company, effect any change (other than through adjustment for changes in capitalization as provided in Section 21) which will: (a) Increase the total amount of Stock which may be awarded under the Plan. (b) Change the class of Employees eligible to participate in the Plan. (c) Withdraw the administration of the Plan from the Committee. (d) Permit any person, while a member of the Committee, to be eligible to participate in the Plan. (e) Extend the duration of the Plan. No termination, suspension, or modification of the Plan will adversely affect any right acquired by any Participant or any Successor under an Award granted before the date of termination, suspension, or modification, unless otherwise agreed to by the Participant; but it will be conclusively presumed that any adjustment for changes in capitalization provided for in Section 21 does not adversely affect any right. -14- 21. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Any change in the number of outstanding Shares occurring through Stock splits, reverse Stock splits, or Stock dividends after the grant of an Award will be reflected proportionately in the aggregate number of Shares then available for Awards and in the number of Shares subject to Awards then outstanding; and a proportionate change will be made in the per share Option price as to any outstanding Options. Any fractional Shares resulting from adjustments will be rounded to the nearest whole Share. -15- FORM OF AWARD TERM SHEET FOR STAGGERED VESTING RESTRICTED SHARE RIGHTS AWARD TERM SHEET EXECUTIVE: __________________ SOCIAL SECURITY NO.: ________________ GRANT DATE: __________________ VESTING DATES: ________________ RSRS: __________________ GRANT DATE FMV: $_______________ 1. AWARD. Wells Fargo & Company has awarded you the number of Restricted Share Rights indicated above. Each Restricted Share Right entitles you to receive one share of Common Stock of the Company upon the terms and subject to the conditions set forth in the Company's Long-Term Incentive Compensation Plan and this Award Term Sheet. 2. VESTING. Except as otherwise provided in this Award Term Sheet, the Restricted Share Rights will vest in five equal installments on July 1, beginning on the July 1 next following the grant date. The number of shares of Common Stock issued on each vesting date will be net of shares withheld by the Company to satisfy federal, state and local withholding obligations. 3. TERMINATION. (a) If prior to the vesting date indicated above you cease to be an Employee due to your death, permanent disability or Retirement, any then unvested Restricted Share Rights awarded hereby will vest as of the July 1 next following the date of termination of your employment and shares of Common Stock will be issued to you or, in case of your death, your beneficiary designated in accordance with the Plan. If at the time of your death, there is not on file an effective beneficiary designation or you are not survived by your designated beneficiary, the shares will be issued to the legal representative of your estate. (b) If prior to the vesting date indicated above you cease to be an Employee for any reason other than your death, permanent disability or Retirement, all then unvested Restricted Share Rights (including dividend equivalents thereon) awarded hereby shall immediately terminate without notice to you and shall be forfeited. 4. DIVIDEND EQUIVALENTS. During the period beginning on the grant date as indicated above and ending on the date that the Restricted Share Right vests or terminates, whichever occurs first, you will receive cash payments based on and payable at approximately the same time as the cash dividend that would have been paid on the Restricted Share Right had the Restricted Share Right been an issued and outstanding share of Common Stock on the record date for the dividend. Cash payments will be net of federal, state and local withholding taxes. 5. TAX WITHHOLDING. The Company will withhold from the number of shares of Common Stock otherwise issuable hereunder a number of shares necessary to satisfy federal, state and local tax withholding obligations. Shares will be valued at their Fair Market Value as of the date of vesting. 6. DEFERRAL. At any time at least six months prior to the applicable vesting date, you may make a one-time election to defer the issuance of the Common Stock issuable with respect to all (but not less than all) of the Restricted Share Rights scheduled to vest on that date until a specified year not less than one year and not more than 10 years beyond the original vesting date. 7. NONTRANSFERABLE. You may not sell, assign, pledge, encumber or otherwise transfer any interest in the Restricted Share Rights or the right to receive dividend equivalents thereon except as permitted by the Plan. 8. OTHER RESTRICTIONS. The issuance of Common Stock hereunder is subject to compliance by the Company and you with all applicable legal requirements applicable thereto, including tax withholding obligations, and with all applicable regulations of any stock exchange on which the Common Stock may be listed at the time of issuance. The Company may delay the issuance of shares of Common Stock hereunder to ensure at the time of issuance there is a registration statement for the shares in effect under the Securities Act of 1933. 9. ADDITIONAL PROVISIONS. This Award Term Sheet is subject to the provisions of the Plan. Capitalized terms not defined in this Award Term Sheet are used as defined in the Plan. If the Plan and this Award Term Sheet are inconsistent, the provisions of the Plan will govern. Interpretations of the Plan and this Award Term Sheet by the Committee are binding on you and the Company. 10. NO EMPLOYMENT AGREEMENT. Neither the award to you of the Restricted Share Rights nor the delivery to you of this Award Term Sheet or any other document relating to the Restricted Share Rights will confer on you the right to continued employment with the Company or any Affiliate. 16 FORM OF AWARD TERM SHEET FOR LUMP SUM VESTING RESTRICTED SHARE RIGHTS AWARD TERM SHEET EXECUTIVE: __________________ SOCIAL SECURITY NO.: ________________ GRANT DATE: __________________ VESTING DATE: ________________ RSRS: __________________ GRANT DATE FMV: $________________ 1. AWARD. Wells Fargo & Company has awarded you the number of Restricted Share Rights indicated above. Each Restricted Share Right entitles you to receive one share of Common Stock of the Company upon the terms and subject to the conditions set forth in the Company's Long-Term Incentive Compensation Plan and this Award Term Sheet. 2. VESTING. Except as otherwise provided in this Award Term Sheet, shares of Common Stock will be issued as of the vesting date indicated above. The number of shares issued will be net of shares withheld by the Company to satisfy federal, state and local withholding obligations. 3. TERMINATION. (a) If prior to the vesting date indicated above you cease to be an Employee due to your death, permanent disability or Retirement, the Restricted Share Rights awarded hereby will vest as of the July 1 next following the date of termination of your employment and shares of Common Stock will be issued to you or, in case of your death, your beneficiary designated in accordance with the Plan. If at the time of your death, there is not on file an effective beneficiary designation or you are not survived by your designated beneficiary, the shares will be issued to the legal representative of your estate. (b) If prior to the vesting date indicated above you cease to be an Employee for any reason other than your death, permanent disability or Retirement, all Restricted Share Rights (including dividend equivalents thereon) awarded hereby shall immediately terminate without notice to you and shall be forfeited. 4. DIVIDEND EQUIVALENTS. During the period beginning on the grant date as indicated above and ending on the date that the Restricted Share Rights vest or terminate, whichever occurs first, you will receive cash payments based on and payable at approximately the same time as the cash dividend that would have been paid on your Restricted Share Rights had each Restricted Share Right been an issued and outstanding share of Common Stock on the record date for the dividend. Cash payments will be net of federal, state and local withholding taxes. 5. TAX WITHHOLDING. The Company will withhold from the number of shares of Common Stock otherwise issuable hereunder a number of shares necessary to satisfy federal, state and local tax withholding obligations. Shares will be valued at their Fair Market Value as of the date of vesting. 6. DEFERRAL. At any time at least six months prior to the vesting date indicated above, you may make a one-time election to defer the issuance of the Common Stock issuable with respect to all (but not less than all) of the Restricted Share Rights until a specified year not less than one year and not more than 10 years beyond the original vesting date. 7. NONTRANSFERABLE. You may not sell, assign, pledge, encumber or otherwise transfer any interest in the Restricted Share Rights or the right to receive dividend equivalents thereon except as permitted by the Plan. 8. OTHER RESTRICTIONS. The issuance of Common Stock hereunder is subject to compliance by the Company and you with all applicable legal requirements applicable thereto, including tax withholding obligations, and with all applicable regulations of any stock exchange on which the Common Stock may be listed at the time of issuance. The Company may delay the issuance of shares of Common Stock hereunder to ensure at the time of issuance there is a registration statement for the shares in effect under the Securities Act of 1933. 9. ADDITIONAL PROVISIONS. This Award Term Sheet is subject to the provisions of the Plan. Capitalized terms not defined in this Award Term Sheet are used as defined in the Plan. If the Plan and this Award Term Sheet are inconsistent, the provisions of the Plan will govern. Interpretations of the Plan and this Award Term Sheet by the Committee are binding on you and the Company. 10. NO EMPLOYMENT AGREEMENT. Neither the award to you of the Restricted Share Rights nor the delivery to you of this Award Term Sheet or any other document relating to the Restricted Share Rights will confer on you the right to continued employment with the Company or any Affiliate. 17 EX-10.D 4 EX-10.D WELLS FARGO & COMPANY PERFORMANCE-BASED COMPENSATION POLICY 1. PURPOSE. The purpose of the "Wells Fargo & Company Performance-Based Compensation Policy " (the "Policy") is to establish one or more performance goals for payment of incentive compensation other than stock options and the maximum amount of such incentive compensation that may be paid to certain executive officers. It is the intention of the Section 162(m) Committee (the "Committee") of the Board of Directors of the Corporation that incentive compensation awarded to each Covered Executive Officer (as defined below) be deductible by the Corporation for federal income tax purposes in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), any regulations promulgated thereunder, and ruling or advisory opinions published by the Internal Revenue Service related thereto (the "Regulations"). 2. COVERED EXECUTIVE OFFICERS. This Policy shall apply to any individual (a "Covered Executive Officer") who, on the last day of a taxable year is (a) the chief executive officer of the Corporation or is acting in such capacity, or (b) is among the four highest compensated executive officers (other than the chief executive officer) of the Corporation. Whether an individual is the chief executive officer or among the four highest compensated executive officers shall be determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934. 3. INCENTIVE COMPENSATION AWARD/ESTABLISHMENT OF PERFORMANCE GOALS. An incentive compensation award to a Covered Executive Officer may be paid in the form of cash, stock, or restricted stock, or any combination thereof. Payment of an incentive compensation award to a Covered Executive Officer will be contingent upon the attainment of the performance goal or goals for the Performance Period established for such Covered Executive Officer by the Committee as provided herein. The Committee shall retain the discretion to reduce the incentive compensation award payable to a Covered Executive Officer, notwithstanding attainment of any performance goal. The Committee shall establish in writing one or more performance goals to be attained (which performance goals may be stated as alternative performance goals) for a Performance Period for each Covered Executive Officer on or before the latest date permitted under Section 162(m) of the Code or the Regulations. Performance goals may be based on any one or more of the following business criteria (as defined in paragraph 4 below) as the Committee may select: - Earnings Per Share - Business Unit Net Earnings - Return on Realized Common Equity. The maximum amount of an incentive compensation award for any Performance Period to any Covered Executive Officer shall be a dollar amount not to exceed eight-tenths of one percent (0.8%) of the Corporation's Net Income (as defined below). 4. DEFINITIONS. For purposes of this Policy and for determining whether a particular performance goal is attained, the following terms shall have the meanings given them below: (a) The term "Business Unit Net Earnings" shall mean the net earnings of the business unit of the Corporation managed by a Covered Executive Officer, as determined in accordance with generally accepted accounting principles, adjusted in accordance with the Corporation's management accounting practices and conventions in effect at the beginning of the Performance Period, and as further adjusted in the same manner as provided below for Net Income. (b) The term "Earnings Per Share" shall mean the Corporation's diluted earnings per share as reported in the Corporation's consolidated financial statements for the Performance Period, adjusted in the same manner as provided below for Net Income. (c) The term "Net Income" shall mean the Corporation's net income for the applicable Performance Period as reported in the Corporation's consolidated financial statements, adjusted to eliminate the effect of (1) restatements of prior periods' financial results relating to an acquisition accounted for as a pooling of interests; (2) losses resulting from discontinued operations; (3) extraordinary gains or losses; (4) the cumulative effect of changes in generally accepted accounting principles; and (5) any other unusual, non-recurring gain or loss which is separately identified and quantified in the Corporation's financial statements. (d) The term "Performance Period" shall mean a calendar year, commencing January 1 and ending December 31. A-2 (e) The term "Return on Realized Common Equity" shall mean the Net Income of the Corporation on an annualized basis less dividends accrued on outstanding preferred stock, divided by the Corporation's average total common equity excluding average accumulated comprehensive income as reported in the Corporation's consolidated financial statements for the Performance Period. 5. APPLICABILITY OF CERTAIN PROVISIONS OF THE LONG-TERM INCENTIVE COMPENSATION PLAN AND THE EMPLOYEES' DEFERRED COMPENSATION PLAN TO INCENTIVE COMPENSATION AWARDS. An incentive compensation award paid in stock or restricted stock pursuant to this Policy shall be governed by the provisions (other than provisions with respect to the computation of such award) of the Corporation's Long-Term Incentive Compensation Plan. Deferral of an incentive compensation award paid in cash under this Policy shall be made pursuant to the provisions of the Corporation's Employees' Deferred Compensation Plan. 6. EFFECTIVE DATE; AMENDMENT AND TERMINATION. This Policy shall be effective as of January 1, 1998; provided, however, that no incentive compensation award shall be paid pursuant to this Policy, unless this Policy has been approved by the stockholders of the Corporation. The Committee may at any time terminate, suspend, amend or modify this Policy except that stockholder approval shall be required for any amendment or modification to this Policy that, in the opinion of counsel, would be required by Section 162(m) of the Code or the Regulations. A-3 EX-10.(H) 5 EX-10.(H) WELLS FARGO & COMPANY DEFERRED COMPENSATION PLAN (As Amended and Restated January 1, 2000) 1. PURPOSE OF THE PLAN. On July 27, 1993, the Board of Directors of Norwest Corporation, a Delaware corporation now known as "Wells Fargo & Company" (the "Company"), authorized the creation of a nonqualified, unfunded, elective deferral plan known as the "Norwest Corporation Employees' Deferred Compensation Plan" (the "Plan") for the purpose of allowing a select group of management and highly compensated employees of the Company and its subsidiaries to defer the receipt of compensation which would otherwise be paid to those employees. Effective July 1, 1999, the name of the Plan was changed to the "Wells Fargo & Company Deferred Compensation Plan." The Company reserved the power to amend and terminate the Plan by action of the Human Resources Committee of the Company's Board of Directors. The Human Resources Committee desires to exercise that reserved power of amendment by the adoption of this amended and restated Plan document effective January 1, 2000. 2. DEFINITIONS. When the following terms are used herein with initial capital letters, they shall have the following meanings: (A) CD OPTION. An earnings option based on Norwest Bank Minnesota, N.A. one-year certificate of deposits as determined from time to time by the Plan Administrator. (B) COMMON STOCK. Shares of Wells Fargo & Company common stock. (C) COMMON STOCK EARNINGS OPTION. An earnings option based on shares of Common Stock. (D) COMPENSATION. Salaries, bonuses and commissions earned by the Eligible Employee during the Deferral Year for services rendered to the Company or the Company's subsidiaries and payable no later than March 31 of the following Deferral Year. (E) DEFERRAL ACCOUNT. A bookkeeping account maintained for each Participant to which is credited the amounts deferred under a Deferral Election and a Stock Option Gain Deferral Election, together with any increase or decrease thereon based on the earnings options selected by the Participant or mandated by the Plan. (F) DEFERRAL ELECTION. An irrevocable election made by an Eligible Employee during an enrollment period specified by the Plan Administrator to defer the receipt of Compensation for a given Deferral Year. (G) DEFERRAL YEAR. The Plan Year following the year in which a Deferral Election is made. (H) ELIGIBLE EMPLOYEE. Each employee of the Company or any of its subsidiaries who has been selected for participation in this Plan for a given Plan Year pursuant to Section 3 of the Plan. (I) FUND OPTIONS. An earnings option based on a selection of registered investment companies chosen from time to time by the Plan Administrator. (J) PARTICIPANT. Each Eligible Employee who has entered into a Deferral Election or Stock Option Gain Deferral Election for a given Deferral Year and each employee who has a Transferred Account set up under the Plan shall be considered a Participant. An employee who has become a Participant shall be considered to continue as a Participant in the Plan until the date of the Participant's death or, if earlier, the date the Participant no longer has any Deferral Accounts under the Plan. (K) PLAN ADMINISTRATOR. For purposes of Section 3(16)(A) of the Employee Retirement Income Security Act of 1974, as amended, the Human Resources Committee of the Company's Board of Directors has designated that the Plan Administrator shall be the Company's Executive Vice President Human Resources. (L) PLAN YEAR. The twelve month period beginning on any January 1 and ending the following December 31. (M) STOCK OPTION GAIN COMPENSATION. Certain gains derived from specified Common Stock option grants under the Company's Long-Term Incentive Compensation Plan and any other stock option plan approved by the Plan Administrator. (N) STOCK OPTION GAIN DEFERRAL ELECTION. An irrevocable election made by an Eligible Employee to defer the receipt of Stock Option Gain Compensation. (O) TRANSFERRED ACCOUNT. The bookkeeping account maintained for each Participant to which is credited the Participant's interest in any nonqualified deferred compensation plan transferred to this Plan, together with any increase or decrease thereon based on the earnings options selected by the Participant or mandated by the Plan 3. ELIGIBILITY. Each regular and part-time highly compensated Eligible Employee of the Company or any of its subsidiaries who has been selected for participation in this Plan by the Plan Administrator or by such officers of the Company to which the Plan Administrator has delegated its authority, shall be eligible to participate in the Plan for a given Plan Year. 4. TRANSFERRED ACCOUNTS. Any employee who had an account under the Wells Fargo & Company Benefit Restoration Program ("BRP") on June 30, 1999 that transferred into this Plan on July 1, 1999, shall be deemed a Participant with respect to their transferred BRP accounts subject to the terms of Appendix A to this Plan. Effective January 1, 2000, the Norwest Corporation Elective Deferred Compensation Plan for Mortgage Banking Executives, Norwest Mortgage Banking Incentive Compensation and Deferral Plan and Norwest Mortgage Banking Deferral Plan (the "Mortgage Plans") shall merge into this Plan. All accounts under the Mortgage Plans on December 31, 1999 shall be transferred to this Plan effective January 1, 2000. Any employee or former employee who has an account under the Mortgage Plans on December 31, 1999 shall be deemed a Participant in this Plan on January 1, 2000 with respect to their transferred Mortgage Plans' accounts subject to the terms of Appendix A to this Plan. Effective January 1, 2000, the Wells Fargo & Company 1997 Bonus Deferral Plan ("Bonus Deferral Plan") employee accounts shall merge into this Plan. Employee accounts under the Bonus Deferral Plan on December 31, 1999 shall be transferred to this Plan effective January 1, 2000. Any employee on January 1, 2000 who had an account under the Bonus Deferral Plan on December 31, 1999 shall be deemed a Participant in this Plan on January 1, 2000 with respect to their transferred Bonus Deferral Plan accounts subject to the terms of Appendix A to this Plan. 5. DEFERRAL OF COMPENSATION. An Eligible Employee may elect to defer a portion of the Compensation that the Eligible Employee may earn from the Company or its subsidiaries during the Deferral Year following the year in which the Deferral Election is made. FICA taxes and certain other payroll deductions elected by the Eligible Employee shall be made before any deferrals are made under this Plan. Such Deferral Election shall be made as described in Section 6(A)(2). An Eligible Employee may also defer certain Stock Option Gain Compensation by completing a separate Stock Option Gain Deferral Election as described in Section 6(B)(2). 2 6. ELECTION TO PARTICIPATE AND DEFER COMPENSATION AND STOCK OPTION GAIN. (A) DEFERRAL OF COMPENSATION. (1) PARTICIPATION. Except as provided in Section 6(A)(3) as to new Eligible Employees, an Eligible Employee becomes a Participant in the Plan by filing, during an enrollment period specified by the Plan Administrator but no later than December 31 of the year preceding the Deferral Year, an irrevocable Deferral Election. An Eligible Employee who has made a Deferral Election for any Deferral Year and has a Deferral Account is a Participant. The Deferral Election shall be effective only for the Deferral Year specified. A new Deferral Election must be filed for each Deferral Year. Amounts deferred under a Deferral Election shall be credited to a Deferral Account established under the Plan for the Eligible Employee. (2) DEFERRAL ELECTION. The Deferral Election shall consist of the Eligible Employee's election to defer Compensation, election of earnings option(s) as described in Section 7(A), and election of the timing and form of distribution of amounts deferred as described in Section 8. An Eligible Employee may elect to defer (subject to any limitations on Compensation imposed by the Plan Administrator for the Deferral Year), in any combination, all or a part of the Eligible Employee's (a) base salary earned and paid on a periodic basis throughout the Deferral Year, (b) incentive pay earned throughout the Deferral Year and paid after the end of the Deferral Year, and (c) commissions and other periodic incentive payments paid during the Deferral Year. The Eligible Employee shall specify for each Compensation category an amount to be deferred per pay period, expressed either as a percentage or a dollar amount. (3) INITIAL DEFERRAL ELECTION OR INITIAL ELIGIBILITY. A new Eligible Employee must make a Deferral Election within thirty (30) days of the date the Eligible Employee receives notification of eligibility to participate in the Plan in order to defer Compensation earned in the current Deferral Year. (B)DEFERRAL OF STOCK OPTION GAINS (1) PARTICIPATION. An Eligible Employee may file at least twelve (12) months prior to exercise, an irrevocable Stock Option Gain Deferral Election. Stock Option Gain Deferral Elections become effective immediately. An Eligible Employee who has made a Stock Option Gain Deferral Election is a Participant. Amounts deferred under a Stock Option Gain Deferral Election shall be credited to a Deferral Account established under the Plan for the Eligible Employee. (2) DEFERRAL ELECTION. A Stock Option Gain Deferral Election shall consist of the Eligible Employee's election to defer all of the eligible Stock Option Gain Compensation derived from a specific stock option grant. Eligible Stock Option Gain Compensation consists of only stock option gains realized using the stock-for-stock swap ("stock swap") method of exercise. Stock option gains derived from either a cash exercise or a same day sale will not be eligible Stock Option Gain Compensation. Therefore, if an Eligible Employee elects to defer the stock option gain derived from a specific stock option grant, the Eligible Employee must agree to use the stock swap method under the terms and conditions of such grant. Stock option gains from stock swaps will be allocated solely to the Common Stock Earnings Option. The Stock Option Gain Deferral Election must also specify the timing and form of distribution of the amount deferred as described in Section 8. (3) EFFECT ON STOCK OPTIONS. The filing of a Stock Option Gain Deferral Election prohibits the Participant from exercising the stock option for at least twelve (12) months. Termination of 3 employment for any reason prior to exercise will void the Stock Option Gain Deferral Election. 7. DEFERRAL ACCOUNT VALUATION. (A) EARNINGS OPTIONS. The earnings options available for selection on the Deferral Election are as follows: (1) Common Stock Earnings Option (2) CD Option (3) Fund Options A Participant must choose to allocate amounts credited to the Participant's Deferral Account among the earnings options in increments of one (1) percent. Except as to new Eligible Employees, the initial election of earnings options must be made by the Participant in advance of each Deferral Year. A Participant's Stock Option Gain Deferral Election will automatically be allocated to the Common Stock Earnings Option. In addition, twenty (20) percent of the amount of Compensation deferred during a Deferral Year will automatically be allocated to the Common Stock Earnings Option. Except with respect to the portion of the Deferral Account allocated to the Common Stock Earnings Option, after the initial election of earnings options, a Participant shall be entitled to change the earnings options for the Participant's entire Deferral Account each January 1 by filing an irrevocable earnings option election with the Plan Administrator as of a date selected by the Plan Administrator which is prior to the January 1 effective date. (B) PERIODIC CREDITS OF DEFERRAL AMOUNTS. The Participant's Deferral Account shall be credited with the amount of the deferred Compensation on the day such deferred Compensation would otherwise be paid to a Participant. All periodic credits to a Participant's Deferral Account under the Common Stock Earnings Option shall be in share equivalents of Common Stock. The number of share equivalents of Common Stock credited to a Participant's Deferral Accounts for Compensation deferrals under the Common Stock Earnings Option shall be determined by dividing the amount of each periodic credit by the closing price per share of Common Stock reported on the consolidated tape of the New York Stock Exchange on the last day of each month (or, if the New York Stock Exchange is closed on that date, on the next preceding date on which it is open). When a stock option covered by a Stock Option Gain Deferral Election is exercised using a stock swap, the Participant's Deferral Account will be credited on the stock option exercise date. The amount of each credit shall be equal to the amount deferred from the Participant's Compensation and/or Stock Option Gain Compensation. In the case of Compensation, each credit shall be accounted for based on the earnings options selected by the Participant on the Compensation Deferral Election. In the case of Stock Option Gain Compensation, the credit shall be based on the fair market value as of the stock option exercise date as defined by the stock option plan. (C) INCREASE OR DECREASE TO DEFERRAL ACCOUNTS. A Participant's Deferral Account will be increased or decreased monthly in accordance with the Participant's earnings option election as follows: (1) CD OPTION. The amount of the increase or decrease for the CD Option is calculated by multiplying the average monthly balance by an earnings factor based on the interest rate for a Norwest Bank Minnesota, N.A. one-year certificate of deposit. (2) FUND OPTIONS. The amount of the increase or decrease for the Fund Options is calculated by multiplying the average monthly balance by an earnings factor based on the reported performance for the selected Fund Options. 4 (3) COMMON STOCK EARNINGS OPTION. Common Stock dividend equivalents will be credited under the Common Stock Earnings Option at the same time and same rate as dividends are paid on shares of Common Stock. 8. DISTRIBUTIONS. Payment of Deferral Accounts shall be made in accordance to the Participant's Deferral Elections, subject to the following: (A) LUMP SUM OR INSTALLMENT DISTRIBUTIONS. A Participant must elect to receive distribution of the Participant's Deferral Accounts in either a lump sum or in annual installments over a period of years up to ten. (B) TIMING OF DISTRIBUTION. A Participant must designate on the Deferral Election the year that distribution from the Participant's Deferral Account shall be made. For purposes of Stock Option Gain Deferral Elections, the Participant may not elect to receive the distribution earlier than twelve (12) months after the date on which the option is exercised. In all events, however, distribution shall commence as soon as practicable after the March 1 immediately following the date the Participant ceases to be employed by the Company or an affiliate of the Company. (C) ACCOUNTS LESS THAN $25,000. Notwithstanding the foregoing, if the aggregate value of the Participant's Deferral Accounts attributable to (a) Deferral Elections made for Deferral Years commencing on or after January 1, 2000, (b) Deferral Elections made on July 1, 1999 by transferred BRP Participants, and (c) any Prior Deferral Elections that became subject to the terms of this Plan in accordance with Section 8 (E), is less than $25,000 at the end of the month in which the Participant's employment terminates, such Deferral Accounts shall be paid in a lump sum as soon as practicable after the March 1 immediately following the Participant's termination date. (D) UPON DEATH. If a Participant dies before receiving all payments under the Plan, payment of the balance in the Participant's Deferral Accounts shall be made to the Participant's designated beneficiary in the forms of distribution elected by the Participant on the Participant's Deferral Elections as soon as practicable after the March 1 following the date of the Participant's death. To be valid, a beneficiary designation must be in writing and the written designation must have been delivered to and accepted by the Plan Administrator prior to the Participant's death. If at the time of the Participant's death there is not on file a fully effective beneficiary designation form, or if the designated beneficiary did not survive the Participant, the person or persons surviving at the time of the Participant's death in the first of the following classes of beneficiaries in which there is a survivor, shall be entitled to receive the balance of the Participant's Deferral Accounts. If a person in the class surviving dies before receiving the balance (or the person's share of the balance in case of more than one person in the class) of the Participant's Deferral Accounts, that person's right to receive the Participant's Deferral Accounts will lapse and the determination of who will be entitled to receive the Participant's Deferral Accounts will be determined as if that person predeceased the Participant. (a) Participant's surviving spouse; (b) Equally to the Participant's children, except that if any of the Participant's children predecease the Participant but leave descendants surviving, such descendants shall take by right of representation the share their parent would have taken if living; (c) Participant's surviving parents equally; (d) Participant's surviving brothers and sisters equally; or 5 (e) Representative of the Participant's estate. (E) TRANSITIONAL RULE. Notwithstanding the foregoing distribution rules contained in this Section 8, a Participant who is employed by the Company on January 1, 2000 and who has entered into a Deferral Election for a Deferral Year prior to January 1, 2000 or has a Transferred Account (collectively "Prior Deferral Elections") and who has not commenced distribution of such Prior Deferral Election, shall have a one-time opportunity effective January 1, 2000 to elect to change the method of distribution (lump sum versus installments) or to postpone the distribution commencement date for that Prior Deferral Election for a period of at least one year from the original distribution commencement date selected on the Prior Deferral Election. To be effective, such change must be submitted to the Plan Administrator on a form provided by the Plan Administrator by December 31, 1999 or if earlier, a date required by the Plan Administrator. If the change is not submitted by December 31, 1999, the method and timing of distribution elected on the Prior Deferral Election will remain in effect. If the Participant elects to make a change to a Prior Deferral Election, the amount deferred under the Prior Deferral Election and all earnings attributable to that Prior Deferral Election shall become subject to the distribution rules in this Section 8 and the timing and form of distribution selected on the Prior Deferral Election shall no longer be applicable with respect to distributions on account of termination of employment, retirement or disability. For purposes of a Prior Deferral Election made under this Plan, "retirement" shall mean the Participant's termination of employment with the Company after the Participant's attainment of regular or early retirement as defined in Section 6.1 or 6.2 of the Norwest Corporation Pension Plan in effect on June 30, 1999. Also, for purposes of Prior Deferral Elections made under this Plan, "disability" shall mean the Participant's total disability as described in the Wells Fargo & Company Long-Term Disability Plan, as amended from time to time. (F) FORM OF DISTRIBUTIONS. All distributions from Deferral Accounts shall be payable as follows: (1) In cash for all Deferral Accounts in an earnings option other than the Common Stock Earnings Option; or (2) In shares of Common Stock for the portion of the Deferral Accounts in the Common Stock Earnings Option. (G) VALUATION OF DEFERRAL ACCOUNTS FOR DISTRIBUTION. (1) The amount of the distribution in cash and/or Common Stock shall be determined based on the Participant's Deferral Account balance (and, if applicable, the price of Common Stock) as of the March 1 of the year of distribution (or the next preceding business day if March 1 is not a business day). The amount of the distribution in cash and/or Common Stock as of any other date on which a distribution is made shall be determined based on the Participant's Deferral Account balance (and, if applicable, the price of Common Stock) as of the end of the month in which the event which triggers distribution occurs. Earnings adjustments to amounts that have been valued for distribution shall cease as of the date used to value such amounts. (2) The amount of each installment payment will be based on the value of the Participant's Deferral Account as of the March 1 of the year of the installment payment (or the next preceding business day if March 1 is not a business day) and the number of the installments remaining. The balance remaining in the Deferral Account shall continue to be adjusted based on the earnings options selected by the Participant in the Deferral Election until the valuation date used to determine the amount of the last payment. All installment payments will be made by pro rata withdrawals from each earnings option elected by the Participant. 6 (H) EARLY WITHDRAWAL. A Participant or beneficiary who wishes to receive payment of all or part of the Participant's Deferral Account on a date earlier than that specified in the Deferral Election or in the case of a beneficiary in accordance with Section 8(D), may do so by filing with the Plan Administrator a request for early withdrawal. Such payment will be made from the earliest Deferral Year(s) in which the Participant has participated in the Plan. Partial withdrawals of a given Deferral Year's deferral are not permitted. Deferral Accounts will be distributed in the order in which the accounts were established. Stock Option Gain Compensation deferrals will be distributed in the order in which the accounts were established following the distribution of all funds from the Compensation Deferrals. For the appropriate Deferral Year(s), Account accruals to date shall be disbursed completely, less a 10% early withdrawal penalty on the amount distributed. The 10% penalty assessed for early withdrawal will be permanently forfeited by the Participant and will be credited to the account of the Company. Further, the Participant shall forfeit eligibility to defer Compensation or Stock Option Gain Compensation during the two Deferral Years following the year in which the early withdrawal is made, but in no case shall an early withdrawal cause a current Deferral Election (either of Compensation or Stock Option Gain Compensation) to be suspended or canceled. In no case may a Participant or beneficiary make more than one early withdrawal per calendar year. 9. NONASSIGNABILITY. No Participant or beneficiary shall have any interest in any Accounts under this Plan that can be transferred, nor shall any Participant or beneficiary have any power to anticipate, alienate, dispose of, pledge or encumber the same while in the possession or control of the Company, nor shall the Company recognize any assignment thereof, either in whole or in part, nor shall any Account be subject to attachment, garnishment, execution following judgment or other legal process while in the possession or control of the Company. The designation of a beneficiary by a Participant does not constitute a transfer. 10. WITHHOLDING OF TAXES. Distributions under this Plan shall be subject to the deduction of the amount of any federal, state, or local income taxes, Social Security tax, Medicare tax, or other taxes required to be withheld from such payments by applicable laws and regulations. 11. UNSECURED OBLIGATION. The obligation of the Company to make payments under this Plan constitutes only the unsecured (but legally enforceable) promise of the Company to make such payments. The Participant shall have no lien, prior claim or other security interest in any property of the Company. The Company is not required to establish or maintain any fund, trust or account (other than a bookkeeping account or reserve) for the purpose of funding or paying the benefits promised under this Plan. If such a fund is established, the property therein shall remain the sole and exclusive property of the Company. The Company will pay the cost of this Plan out of its general assets. All references to accounts, accruals, gains, losses, income, expenses, payments, custodial funds and the like are included merely for the purpose of measuring the Company's obligation to Participants in this Plan and shall not be construed to impose on the Company the obligation to create any separate fund for purposes of this Plan. 12. TRUST FUND. If the Company chooses to fund credits to Participant's Deferral Accounts, all cash contributed for such funding shall be held and administered in trust in accordance with the terms and provisions of a trust agreement between the Company and the appointed trustee or any duly appointed successor trustee. All Common Stock or other funds in the trust shall be held on a commingled basis and shall be subject to the claims of the general creditors of the Company. Plan Accounts shall be for bookkeeping purposes only, and the establishment of Plan Accounts shall not require segregation of trust assets. 13. NO GUARANTEE OF EMPLOYMENT. Participation in this Plan does not constitute a guarantee or contract of employment with the Company or any of the Company's affiliates. Such participation shall in no way interfere with any right of the Company or any affiliate to determine the duration of a Participant's employment or the terms and conditions of such employment. 14. ADMINISTRATION. The Plan Administrator or its delegatee shall have the exclusive authority and responsibility for all matters in connection with the operation and administration of the Plan. The Plan Administrator's powers and duties shall include, but shall not be limited to, the following: (a) responsibility for the 7 compilation and maintenance of all records necessary in connection with the Plan; (b) discretionary authority to interpret the terms of the Plan; (c) authorizing the payment of all benefits and expenses of the Plan as they become payable under the Plan; (d) authority to engage such legal, accounting and other professional services as it may deem necessary; (e) authority to adopt procedures for implementing the Plan; (f) discretionary authority to determine Participants' eligibility for benefits under the Plan; (g) set limits on the percentage or amount of Compensation that may be deferred in a Deferral Year; and (h) to resolve all issues of fact and law in connection with such determinations. 15. COMMON STOCK. Subject to adjustment below, the maximum number of shares of Common Stock that may be credited under the Plan is 5,000,000. If the Company shall at any time increase or decrease the number of its outstanding shares of Common Stock or change in any way the rights and privileges of such shares by means of the payment of a stock dividend or any other distribution upon such shares payable in Common Stock, or through a stock split, subdivision, consolidation, combination, reclassification, or recapitalization involving the Common Stock, then the numbers, rights, and privileges of the shares issuable under the Plan shall be increased, decreased, or changed in like manner as if such shares had been issued and outstanding, fully paid, and nonassessable at the time of such occurrence. 16. CLAIMS PROCEDURE. The Company shall establish a claims procedure consistent with the requirements of ERISA. Such claims procedure shall provide adequate notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the claimant and shall afford a reasonable opportunity to a claimant whose claim for benefits has been denied for a full and fair review by the Company of the decision denying the claim. 17. CONSTRUCTION AND APPLICABLE LAW. This Plan is intended to be construed and administered as an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as provided under ERISA. The Plan shall be construed and administered according to the laws of the State of Minnesota to the extent that such laws are not preempted by ERISA. 18. AGENT FOR LEGAL PROCESS. The Company shall be agent for service of legal process with respect to any matter concerning the Plan, unless and until the Company designates some other person as such agent. 19. AMENDMENT AND TERMINATION. The Board of Directors of the Company or the Human Resources Committee of the Company's Board of Directors may at any time terminate, suspend, or amend this Plan in any manner; provided, however, that if necessary to maintain the availability of the exemption contained in Rule 16b-3, or any successor regulation, under the Securities Exchange Act of 1934, as amended, for transactions pursuant to this Plan, the provisions of this Plan relating to the amount, price and timing of awards pursuant to this Plan may not be amended more than once in every six months other than to comport with changes in the Internal Revenue Code or ERISA, or the rules thereunder. 8 APPENDIX A WELLS FARGO & COMPANY DEFERRED COMPENSATION PLAN SECTION 1. THE WELLS FARGO & COMPANY BENEFIT RESTORATION PROGRAM. The Wells Fargo & Company Benefit Restoration Program ("BRP") merged into this Plan effective July 1, 1999. The transferred BRP accounts are held in a "Transferred Account" set up under this Plan for each participant in BRP who had a BRP account as of June 30, 1999. Each BRP participant who has a Transferred Account set up under this Plan is considered a Participant in this Plan effective July 1, 1999 but will not be able to enter into Deferral Elections unless the Participant is also an Eligible Employee as provided in this Plan. If the Participant is not an employee of the Company on January 1, 2000, the Participant's Transferred Account as of the first day of a quarter (less any distributions made from the Transferred Account during the quarter) shall be adjusted with interest for that quarter. Interest on the Transferred Account will be calculated quarterly at an annual rate equal to the sum of the average annual rate for 3-year Treasury Notes for the immediately preceding calendar year plus two percent. If the Participant is an employee of the Company on January 1, 2000, the Participant must elect earnings options for the Transferred Account in accordance with Section 7 of the Plan. If the Participant does not elect earnings options, the Participant's Transferred Account shall be treated as having been allocated to the "Balanced Fund" Fund Option. Distribution of the Participant's Transferred Account will be made in either a lump sum or in ten annual installments as elected by the Participant under BRP. If the Participant elected a lump sum payment, payment will be made as soon as feasible after the Participant terminates employment. If the Participant elected installments, installments will begin in January following the calendar year in which the Participant terminates employment. If, however, the Transferred Account balance is less than $5,000 at the time of the Participant terminates employment, distribution will be made in a lump sum as soon as administratively feasible after the Participant terminates employment. The transitional rules under Section 8(E) of the Plan apply to the Transferred Account. In the event the Participant dies before distribution of his or her entire Transferred Account, the remaining balance shall be paid pursuant to Section 8(D) of the Plan. SECTION 2. MORTGAGE PLANS. The Norwest Corporation Elective Deferred Compensation Plan for Mortgage Banking Executives, the Norwest Mortgage Banking Incentive Compensation and Deferral Plan and the Norwest Mortgage Banking Deferral Plan (collectively the "Mortgage Plans") are merged into this Plan effective as of January 1, 2000. The transferred Mortgage Plans accounts shall be held in a "Transferred Account" set up under this Plan for each participant in the Mortgage Plans who had an account as of December 31, 1999. Each Mortgage Plans participant who has a Transferred Account set up under this Plan shall be considered a Participant in this Plan effective January 1 , 2000 but will not be able to enter into Deferral Elections unless the Participant is also an Eligible Employee as provided in this Plan. A Participant's Transferred Account shall be subject to the rules of this Plan including the transitional rules in Section 8(E) of this Plan. In the event the Participant dies before distribution of his or her entire Transferred Account, the remaining balance shall be paid pursuant to Section 8(D) of this Plan. SECTION 3. THE WELLS FARGO & COMPANY 1997 BONUS DEFERRAL PLAN. The Wells Fargo & Company 1997 Bonus Deferral Plan ("Bonus Deferral Plan") is merged into this Plan effective as of January 1, 2000 with respect to participants in the Bonus Deferral Plan who are employed by the Company on January 1, 2000. The transferred Bonus Deferral Plan accounts shall be held in a "Transferred Account" set up under this Plan for each participant in the Bonus Deferral Plan who had an account as of December 31, 1999 and was employed by the Company on January 1, 2000. Each Bonus Deferral Plan participant who has a Transferred Account set up under this Plan shall be considered a Participant in this Plan effective January 1, 2000 but will not be able to enter into Deferral Elections unless the Participant is also an Eligible Employee as provided in this Plan. A Participant's Transferred Account shall be subject to the rules of this Plan including the transitional rules in Section 8(E) of this Plan. In the event the Participant dies before distribution of his or her entire Transferred Account, the remaining balance shall be paid pursuant to Section 8(D) of this Plan. 9 EX-10.Q 6 EX-10.(Q) WELLS FARGO & COMPANY 1999 DEFERRAL PLAN FOR DIRECTORS I. PURPOSE The purpose of the Wells Fargo & Company 1999 Deferral Plan for Directors is to provide an opportunity to non-employee members of the Board of Directors of the Company to defer receipt of all or a portion of their compensation received in consideration for personal services rendered in their capacity as directors of the Company. This Plan is effective as of January 1, 1999 and is applicable to compensation earned after that date. II. DEFINITIONS When used in this Plan, the following capitalized terms shall have the meanings indicated below: BOARD The Board of Directors of the Company. CASH COMPENSATION The annual retainer fees and Board meeting fees. COMMON STOCK Common Stock of the Company, $1-2/3 par value. COMPANY Wells Fargo & Company. DEFERRAL ELECTION An irrevocable election to defer receipt of all or a part of Eligible Compensation. ELIGIBLE COMPENSATION Eligible compensation includes Cash Compensation, Formula Stock Awards, Stock Option Gains, Retirement Conversion Amounts or any other compensation deemed eligible by the Board. FAIR MARKET VALUE The closing price per share of the Common Stock reported on the consolidated tape of the New York Stock Exchange as of the trading day immediately preceding the transaction and/or grant date. FORMULA STOCK AWARD Any Award made pursuant to the Wells Fargo & Company Directors Formula Stock Award Plan. INTEREST The average annual rate for 3-Year Treasury Notes for the immediately preceding calendar year plus 2%. NON-EMPLOYEE DIRECTOR Any member of the Board who is not an employee of the Company or of a subsidiary of the Company. 1 PARTICIPANT Any Non-Employee Director who elects to defer Eligible Compensation under the Plan. DEFERRAL YEAR January 1 through December 31 of the year in which Eligible Compensation is earned. PLAN Wells Fargo & Company 1999 Deferral Plan for Directors. PLAN ADMINISTRATOR The Director of Human Resources of the Company. RETIREMENT CONVERSION A dollar amount equal to the accrued AMOUNT benefits under the former Wells Fargo & Company Directors' Retirement Plan or the Norwest Corporation Retirement Plan for Non-Employee Directors, calculated as if the Director's service on the Board had ended as of November 2, 1998. STOCK OPTION GAIN The difference between the stock option exercise price and the Fair Market Value of the Common Stock on the exercise date when the option is exercised using the stock swap method. III. ELIGIBILITY Any non-employee members of the Board of Directors of the Company are eligible to participate in the Plan. An eligible Non-Employee Director becomes a Participant in the Plan by filing a Deferral Election to 1) defer receipt of all or a part of Eligible Compensation, 2) designate the year in which distributions will commence, and 3) designate the form of distribution (which may be made in either a lump sum or in up to 10 annual installments). A Deferral Election, once made, will be irrevocable and will apply to the Deferral Year for which it was made. An eligible Non-Employee Director who becomes a Participant continues as a Participant until the date of the last distribution provided in Section VII. IV. COMPENSATION ELIGIBLE FOR DEFERRAL Forms of compensation eligible for irrevocable deferral include the following: A. CASH COMPENSATION. Directors may elect to defer receipt of all or a portion of their Cash Compensation into either cash or stock deferral accounts. B. FORMULA STOCK AWARDS. Directors may elect to defer all or a portion of Formula Stock Awards into deferred stock accounts. C. STOCK OPTION GAINS. Directors may elect to defer receipt of Stock Option Gains realized by exercising stock options using the stock swap method. Stock option gain deferrals will be credited to the deferred stock accounts. 2 Gains realized from any other method of exercising stock options are not eligible for deferral. D. RETIREMENT CONVERSION AMOUNT. Directors may elect to defer the entire Retirement Conversion Amount into a deferred stock account. E. OTHER. Directors may elect to defer any other compensation deemed to be Eligible Compensation by the Board. V. DEFERRAL ELECTIONS A. CASH COMPENSATION AND FORMULA STOCK AWARD DEFERRAL ELECTIONS. Deferral Elections must be filed with the Company prior to the beginning of the year in which Eligible Compensation is earned. New Directors must make Deferral Elections within thirty days of being notified of eligibility to participate in the Plan in order to defer Eligible Compensation earned in the year they are deemed eligible. New Deferral Elections must be filed for each Deferral Year. Notwithstanding the foregoing, a Deferral Election for Cash Compensation in 1999 or for a Formula Stock Award to be issued in the year 2000 may be filed with the Company no later than March 31, 1999. B. STOCK OPTION GAINS DEFERRAL ELECTION. Deferral Elections may be filed with the Company at any time following the stock option grant date and at least one year before the stock options are exercised. A new Deferral Election must be filed for each stock option grant. The Deferral Election applies to all gains associated with a specific grant even if options are exercised on different dates. C. RETIREMENT CONVERSION AWARD. A Deferral Election must be filed no later than June 30, 1999. D. DESIGNATION OF BENEFICIARY. A Participant may, from time to time, designate and/or revoke his or her beneficiary designation and file a new beneficiary designation with the Company. The Designation of Beneficiary will apply to all of the Participant's Deferred Account balances. VI. DEFERRED ACCOUNTS A. DEFERRED CASH ACCOUNT. Any Cash Compensation deferred into the Deferred Cash Account will be credited to the account on the date the Cash Compensation would have otherwise been paid. B. DEFERRED STOCK ACCOUNT. Any Cash Compensation, Formula Stock awards, Stock Option Gains, or Retirement Conversion Amounts that are deferred into the Deferred Stock Account will receive a credit to the Deferred Stock Account on the date the Cash Compensation, Formula Stock Award, Retirement Conversion Amount, or Stock Option Gain would have otherwise been paid or realized. Cash amounts will be converted into shares of Common Stock in the Deferred Stock Account based on 3 the Fair Market Value of the Common Stock as of the day the compensation would have otherwise been paid or realized. C. INTEREST. Deferred Cash Accounts will earn Interest. Interest will be compounded annually and will be credited on the last day of each calendar quarter until all funds in the Deferred Cash Account have been distributed in accordance with Section VII.A. D. DIVIDEND EQUIVALENTS. Deferred Stock Accounts will receive dividend credits each time dividends are paid on the Common Stock. The Deferred Accounts of each Participant will be divided into a series of sub-accounts, one for each type of Eligible Compensation and one for each year Eligible Compensation is deferred. Each Stock Option Gain which is deferred will be accounted for in a separate sub-account. All Common Stock share calculations will be rounded to the third decimal place. Each Participant will, at all times, have a fully vested and non-forfeitable right to all amounts properly credited to his or her Deferred Accounts. VII. DISTRIBUTION OF DEFERRED ACCOUNTS A. DISTRIBUTION FROM THE DEFERRED CASH ACCOUNT. A Participant's deferred cash sub-accounts will be distributed in cash. Distributions will be made in a lump sum or in up to 10 annual installments, as specified in Participant's Deferral Election, as of: 1) March 1 of the first calendar year following termination of a Participant's service as a Non-Employee Director, or 2) March 1 of any other year elected by the Participant which begins at least 12 months following the year in which the deferred compensation would otherwise have been received, or 3) July 1 of the calendar year in which a Participant's service as a Non-Employee Director terminates if such termination occurs on or before June 30; provided, however, that if July 1 installments are elected, subsequent annual installments shall be payable as of March 1 of each year thereafter. The amount of each installment distribution will be equal to the total amount of the account divided by the number of installments remaining to be made, including the current installment. B. DISTRIBUTION FROM THE DEFERRED STOCK ACCOUNT. A Participant's deferred stock sub-accounts will be distributed in whole shares of Common Stock. Distributions will be made in a lump sum or in up to 10 annual installments, as specified in Participant's Deferral Election, as of: 1) March 1 of the first calendar year following termination of a Participant's service as a Non-Employee Director, or 2) March 1 of any other year elected by the Participant which begins at least 12 months following the year in which the deferred compensation would otherwise have been received, or 3) July 1 of the calendar year in which a Participant's service as a Non-Employee Director terminates if such termination occurs on or before June 30; provided, however, that if July 1 installments are elected, subsequent annual installments shall be payable as of March 1 of each year thereafter. The amount of each installment distribution will be equal to the total amount of the account divided by the number of installments remaining to be made, including the current installment, rounded up to the nearest whole share and the whole number of shares so distributed shall be 4 deducted from the total amount of the account. The final distribution will be rounded up to the nearest whole share. C. IN THE EVENT OF DEATH. If a Participant dies before receiving all distributions to which he or she is entitled under the Plan, all remaining distributions will be made in one lump sum. Such distribution will be made in accordance with the Participant's Designation of Beneficiary form. In the absence of a valid designation, or if the designated beneficiary does not survive the Participant, the distribution will be made to the Participant's estate. If any beneficiary dies after becoming entitled to receive Plan distributions, the remaining distribution will be made to the beneficiary's estate. VIII. PLAN ADMINISTRATOR The Plan Administrator is the Company's Director of Human Resources. The Plan Administrator's responsibilities include, but are not limited to, the following: - To adopt rules for administration of the Plan. - To interpret and implement the provisions of the Plan. - To resolve all questions regarding the administration, interpretation and application of the Plan. - To have all other powers as may be necessary to discharge responsibilities under the Plan. The Plan Administrator's determinations will be conclusive and binding on all Participants. IX. TRUST FUND Shares of Common Stock credited to Deferred Stock Account under this Plan may, in the sole discretion of the Company, be held and administered in trust ("Trust Fund") in accordance with the terms of this Plan. The Trust Fund will be held under a trust agreement between the Company and Norwest Bank Minnesota, N.A., as Trustee, or any duly appointed successor trustee. All Common Stock in the Trust Fund will be held on a commingled basis and will be subject to the claims of general creditors of the Company. The Trustee, in its discretion, will vote shares of Common Stock held in any Trust Fund under this Plan. X. UNSECURED OBLIGATION All amounts deferred pursuant to this Plan and credited to a Deferred Account will be unsecured obligations of the Company. Each Participant's right will be as an unsecured general creditor of the Company. XI. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION The Plan may be amended, modified, suspended or terminated by action of the Board or the Board Affairs Committee, or any successor committee, of the Board; provided however, that if 5 at the time of any such proposed amendment, modification, suspension or termination, any member of such committee does not satisfy the requirements applicable to committee approval contained in regulations of the Securities and Exchange Commission promulgated under Section 16 of the Securities Exchange Act of 1934, and applicable interpretations thereof, any such amendment, modification, suspension or termination must be approved by the Board. No termination, suspension or modification of the Plan will adversely affect any benefits to which a Participant would have been entitled under the Plan if termination of the Participant's service as a Non-Employee Director had occurred on the day prior to the date such action was taken, unless agreed to by the Participant. XII. NO GUARANTEE OF SERVICE Participation in this Plan does not constitute a guarantee or contract of service as a Non-Employee Director of the Company. XIII. NON-ASSIGNABILITY No right to receive distributions under this Plan will be assignable or transferable by a Participant except: - - By will or the laws of descent and distribution. - - Pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, Title I of the Employee Retirement Income Security Act, or rules thereunder. The designation of a beneficiary by a Participant as provided in Section V.D. does not constitute a transfer. XIV. CHANGE OF CONTROL At the time of a Deferral Election, a Participant may also elect to have all amounts deferred pursuant to this Plan become payable immediately if (i) a third person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial owner, directly or indirectly, of 25% or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of the directors of the Company, or (ii) individuals who constitute the Board of the Company as of January 1, 1999 (Incumbent Board) cease for any reason to constitute at least two-thirds thereof, provided that any person becoming a director subsequent to said date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board shall be, for purposes of this clause (ii), considered as though such person were a member of the Incumbent Board. The value of a Participant's Deferred Stock Account, Deferred Formula Stock Award Account and Deferred Stock Option Gain Account for purposes of a distribution under this Section XIV shall be the Fair Market Value of the Common Stock for a day selected by the Plan Administrator which occurs not more than seven days prior to the date payment is made to the Participant pursuant to this Section XIV. 6 XV. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by and construed in accordance with the law of the State of Delaware. 1999 Deferral Plan for Directors 1/26/99 3/8/00 7 EX-10.(Y) 7 EX-10.(Y) WELLS FARGO BANK TO: Dennis J. Mooradian DATE: October 7, 1998 FROM: Clyde Ostler RE: Compensation Agreement A memo dated March 27, 1998 documented our agreement regarding your compensation and minimum severance. This memo in turn documents our new agreement reflecting your new responsibilities post the merger with Norwest. Specifically, the purpose of this document is to summarize our agreement regarding your minimum compensation levels, assuming you continue in active employment, for 1998, 1999, and 2000, and minimum severance compensation in the event the bank terminates you other than for illegal acts or gross negligence within this time period. Your minimum annual total compensation will be $1.45 million. This will include cash compensation and long term compensation, calculated using Black Scholes in the case of options and the face value for restricted stock. Cash compensation composed of a base salary and annual cash bonus will be at least $1 million. In particular, your (final) bonus for 1998 paid in early 1999 will be at least $250,000, bringing your cash comp for 1998 to $1 million. Similarly, for 1999 and 2000 you will continue to receive salary and bonus payments totaling $750,000 during the year and be guaranteed a supplemental cash bonus, received early in the subsequent year, of no less than $250,000. If during your employment with Wells Fargo you are terminated other than for illegal acts or gross negligence, you will be entitled to the more favorable of either the separation pay plan in place at the time, or the following: - - a paid separation leave of 24 months duration. (During the paid leave regular employee benefits, except Executive Long Term Disability, will continue, including Restricted Share Rights and option vesting.) - - monthly payments totaling $2.0 million over the 24 month period. - - The option to accelerate the payment of the unpaid balance at any time. However, you should note that electing to lump sum terminates employment. Stock options are governed by their individual grant for specific terms. We also agreed to pay for a club membership (or memberships) and that your office will remain on the 12th floor. Employees join the company voluntarily and are free to resign at any time. Similarly Wells Fargo is free to end an employment relationship when it is in the company's best interest, including reorganization due to economic reasons. While we hope our relationship will be long and mutually beneficial, neither employees nor we have entered into any expressed or implied contract of employment that would alter your "at will" employment status. Dated as of May 7, 1999 Mr. Mark Oman Norwest Mortgage, Inc. 7000 Vista Drive West Des Moines, IA 50266 Dear Mark: This letter documents the arrangement between you and Wells Fargo & Company regarding your retirement benefits. We acknowledge that we erroneously informed you that the Transition Benefit Comparison described below would apply to you as an employee who will be age 45 with at least 5 years of credited service as of October 1, 1999, and that date was subsequently changed to July 1, 1999. As you know, effective July 1, 1999, the Norwest Pension Plan will become the Wells Fargo & Company Cash Balance Plan (the "Cash Balance Plan"). To protect those classes of participants who could be adversely impacted by Wells Fargo's decision to go from a final average pay defined benefit pension plan to a cash balance defined benefit pension plan, the Cash Balance Plan provides a transition benefit comparison (the "Transition Benefit Comparison") for certain participants. The Transition Benefit Comparison is available to participants in the Norwest Pension Plan who are age 45 with at least 5 years of Credited Service on June 30, 1999 who become active participants in the Cash Balance Plan on July 1, 1999. According to our records, you will not be eligible for the Transition Benefit Comparison because you will not reach age 45 until September of 1999. Although Wells Fargo cannot alter the terms of the Cash Balance Plan (a qualified plan) to make you eligible for the Transition Benefit Comparison, because of the error referred to above the Company has agreed to make you whole through a nonqualified "make-up" arrangement outside of the Cash Balance Plan. We will provide you with an aggregate benefit from the qualified Cash Balance Plan and a nonqualified "make-up" arrangement that is comparable to what your Cash Balance and Supplemental Cash Balance Plan benefits would have been if you had been eligible for the Transition Benefit Comparison. If you have any questions, please do not hesitate to call me at 612/667-8334. Thank you. Sincerely, Paula Roe Senior Vice President/Director Corporate Compensation & Benefits October 25, 1999 Daniel W. Porter 9 Palace Gate, Flat 3 Kensington, London W8 5LS Dear Dan: I am very pleased to confirm our offer of employment to you as Chairman and CEO of Norwest Financial Services, Inc. You would also be an officer of Wells Fargo & Co., and a member of its Management Committee. Your starting base salary will be $31,250 per month ($375,000 annually). You will be eligible to participate in our Executive Incentive Compensation Plan, the annual bonus plan for Senior Management. Awards under this plan are target driven and must be approved by the Human Resource Committee of the Board of Directors; however, we are prepared to guarantee that your bonus for work performed during 2000 will not be less than $625,000. Bonuses under this plan are typically paid in the month of March, following the close of the annual performance period. You will be eligible to receive a bonus each year with a target award of 150% of your base salary and a maximum award of 250%. Salary reviews are conducted annually, and any increase is based on an increase in the market pricing for your job. We would also like to offer you: - - A hiring bonus of $1,000,000. This bonus would be paid to you after you have begun work at NFI, on or before January 31, 2000. - - $2,000,000 worth of Restricted Share Rights. These share rights would be awarded on the first day of the month following your start date with the number of shares calculated based on the prior day's closing stock price. These rights would vest over five years at 20% per year. You would receive dividend payments on the stock during the vesting period. In addition, on November 23, 1999 we will present to our Human Resources Committee of the Board for approval a $1,500,000 long-term incentive stock option award. The number of option shares will be determined at the time of grant based on a Black-Scholes value of Wells Fargo stock. (A rough share estimate can be obtained by dividing the dollar grant value by 1/3 of the current stock price). Once awarded, the option will become exercisable in 1/3 increments over a three-year period and will be exercisable at the fair market value on the date of grant for up to 10 years. You will receive detailed information once the award has been approved by the Human Resources Committee of the Board of Directors. Under the terms of our Long Term Incentive Plan, in the case of death or disability, unvested options vest and all options have the original term period to exercise. Daniel W. Porter October 25, 1999 Page 2 Additionally you will be eligible to receive long term incentive awards each year beginning in February of 2000. Your first grant recommendation in February 2000, will be for approximately $800,000 in Black-Scholes value. Annual grants would be targeted at 200% of your base salary or higher. As a member of the Management Committee you will receive the following benefits: - - Wells Fargo will provide you with a personal financial planning benefit. Under this program, the Company will pay the full cost of the AYCO financial planning program, or reimburse gross expenses up to $10,000 per calendar year for covered financial planning and/or tax preparation fees. - - You will also be entitled to an auto allowance of $940 per month and paid parking. - - You will also be eligible to participate in the Norwest Financial Deferred Compensation Plan. Under this plan you may elect to defer both base salary and bonus compensation into a variety of investment vehicles. Norwest Financial also offers a comprehensive and competitive benefits package including health and retirement plans. A brochure describing these benefits is included. Wells Fargo will relocate you to Des Moines. The relocation assistance will include the shipment of your household goods from your principal residence in London and the movement of goods from a site in the US where you may have things stored. It will also include a home search trip, and reimbursement for home purchase closing costs. You can talk to our Relocation Manager, Fran Gingras when you are ready. She can be reached at 612-667-9053. If you are involuntarily terminated for any reason, other than cause, within one year from your date of hire, the Company will pay you a cash severance payment equal to two times your annual base salary plus your target bonus. This payment would be in lieu of any other severance plan that might be in place at the time. This amount would be paid over a two-year period, or, if greater, over a period of time which would end at 36 months from your date of hire. If you are involuntarily terminated after one year from your date of hire, the Company will pay you one times your annual base salary plus your target bonus or, if greater, an amount that may be available under the terms of a Wells Fargo severance plan which may be in effect at that time. This amount would be paid over a one-year period, or, if greater, over a period of time which would end at 36 months from your date of hire. You would be on a paid leave of absence during any severance period for purposes of restricted stock and option vesting. For purposes of the initial restricted stock grant, vesting would be accelerated in the case of an involuntary termination where the severance period ended 36 months or longer from the date of hire. Any severance payments would be conditioned on your agreement to a non-compete, non-solicit, and confidentiality agreement as well as a general release of claims which is reasonable and customary. For purposes of this letter, "cause" shall Daniel W. Porter October 25, 1999 Page 3 mean your willful failure to perform substantially your duties hereunder which results in demonstrable material injury and damage to the Company, or your engagement in an act of dishonesty or moral turpitude which materially injures or damages the company. As part of our normal business procedures, a background investigation will be done by a consumer-reporting agency. In accordance with consumer credit regulations, you will receive a copy of the report. We also require prospective employees to show proof of identity and authorization to be employed in the United States. Acceptable documents are outlined in the enclosed IRCA required documents List. Included are the Applications for Employment and Disclosure forms, which you should complete and return as soon as possible. Also included is a copy of the Wells Fargo Code of Ethics and Business Conduct, which outlines some of our basic operating principles. Should you have any questions about any of our policies or the terms of our offer, please contact me directly or feel free to contact Pat Callahan at 415-396-0855. Dan, I hope you will consider the above as our sincere desire to have you as a key member of our management team. Sincerely, /s/ Richard M. Kovacevich Richard M. Kovacevich President and Chief Executive Officer I accept Wells Fargo Bank's offer of employment as outlined above. /s/ Daniel W. Porter 10/25/99 - ---------------------------------------- ----------------- Daniel W. Porter Date cc: Pat Callahan EX-10.(DD) 8 EX-10.(DD) DESCRIPTION OF RELOCATION PROGRAM FOR DESIGNATED HIGH-COST AREAS The Company offers a relocation program (the "Relocation Program") for employees who relocate at the Company's request to designated high cost areas. The Company believes this program is an attractive incentive to retain key employees. The Relocation Program provides a relocating employee who is eligible for benefits under the Program with financial assistance, both in purchasing a residence in a designated high cost area, and in selling his or her existing home. Under the Relocation Program, an employee who relocates to a designated high-cost area is eligible to receive a first mortgage loan (subject to applicable lending guidelines) from Norwest Mortgage, Inc., and a 30-year, interest-free second mortgage down payment loan in an amount up to 100% of his or her annual base salary to purchase a new primary residence. The Company may also provide a mortgage interest subsidy on the first mortgage loan of up to 25% of the employee's annual base salary, payable over a period not less than the first three years of the first mortgage loan. The second mortgage loan must be repaid in full if the employee terminates employment with the Company or retires, or if the employee sells the residence or refinances the mortgage loans. In addition to first mortgage and down payment loan assistance, the Company may provide a transfer bonus of up to 30% of the eligible relocating employee's base salary and will generally pay all related home purchase closing costs and moving expenses for the relocating employee. With the exception of expenses paid to or on behalf of the employee to move household goods, the benefits described above (other than the mortgage loans) are treated as taxable income to the employee. The Relocation Program also includes, as an additional benefit, reimbursement of the amount of taxes paid on the taxable portion of amounts received by the employee under the Relocation Program. The Relocation Program also assists employees relocating to a designated high cost area in defraying costs associated with selling their current residences. Available benefits may include payment of selling costs customarily incurred by a seller of residential real estate (such as real estate commissions, title and appraisal fees, and other routine closing costs), purchase of the relocating employee's home at its appraised market value by a third party relocation company using Company funds, and certain cash incentives to employees who locate buyers for their homes directly. The Company has designated the San Francisco Bay area and Los Angeles County, California as high-cost areas, among others, under the Relocation Program. EX-10.(EE) 9 EXHIBIT 10.(EE) DESCRIPTION OF EXECUTIVE FINANCIAL PLANNING PROGRAM Wells Fargo & Company provides certain senior level officers with a personal financial planning benefit to aid them in their financial, estate and tax planning. Under this program, the Company will pay the annual cost of the AYCO financial planning program or will reimburse expenses up to $10,000 per calendar year for covered financial planning and/or tax preparation fees. EX-12.(A) 10 EX-12(A) EXHIBIT 12(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 5,948 $3,293 $4,193 $3,767 $3,201 Fixed charges 5,145 5,218 5,149 4,816 4,000 ------- ------ ------ ------ ------ $11,093 $8,511 $9,342 $8,583 $7,201 ======= ====== ====== ====== ====== Fixed charges (1): Interest expense $ 5,020 $5,065 $4,954 $4,619 $3,879 Estimated interest component of net rental expense 125 153 195 197 121 ------- ------ ------ ------ ------ $ 5,145 $5,218 $5,149 $4,816 $4,000 ======= ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 2.16 1.63 1.81 1.78 1.80 ======= ====== ====== ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 5,948 $3,293 $4,193 $3,767 $3,201 Fixed charges 2,388 2,107 1,999 1,905 1,847 ------- ------ ------ ------ ------ $ 8,336 $5,400 $6,192 $5,672 $5,048 ======= ====== ====== ====== ====== Fixed charges: Interest expense $ 5,020 $5,065 $4,954 $4,619 $3,879 Less interest on deposits 2,757 3,111 3,150 2,911 2,153 Estimated interest component of net rental expense 125 153 195 197 121 ------- ------ ------ ------ ------ $ 2,388 $2,107 $1,999 $1,905 $1,847 ======= ====== ====== ====== ====== Ratio of earnings to fixed charges (2) 3.49 2.56 3.10 2.98 2.73 ======= ====== ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-12.(B) 11 EXHIBIT 12(B) EXHIBIT 12(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- ----------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 5,948 $3,293 $4,193 $3,767 $3,201 Fixed charges 5,145 5,218 5,149 4,816 4,000 ------- ------ ------ ------ ------ $11,093 $8,511 $9,342 $8,583 $7,201 ======= ====== ====== ====== ====== Preferred dividend requirement $ 35 $ 35 $ 43 $ 85 $ 83 Ratio of income before income tax expense to net income 1.59 1.69 1.68 1.69 1.61 ------- ------ ------ ------ ------ Preferred dividends (2) $ 56 $ 59 $ 72 $ 144 $ 134 ------- ------ ------ ------ ------ Fixed charges (1): Interest expense 5,020 5,065 4,954 4,619 3,879 Estimated interest component of net rental expense 125 153 195 197 121 ------- ------ ------ ------ ------ 5,145 5,218 5,149 4,816 4,000 ------- ------ ------ ------ ------ Fixed charges and preferred dividends $ 5,201 $5,277 $5,221 $4,960 $4,134 ======= ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 2.13 1.61 1.79 1.73 1.74 ======= ====== ====== ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 5,948 $3,293 $4,193 $3,767 $3,201 Fixed charges 2,388 2,107 1,999 1,905 1,847 ------- ------ ------ ------ ------ $ 8,336 $5,400 $6,192 $5,672 $5,048 ======= ====== ====== ====== ====== Preferred dividends (2) $ 56 $ 59 $ 72 $ 144 $ 134 ------- ------ ------ ------ ------ Fixed charges: Interest expense 5,020 5,065 4,954 4,619 3,879 Less interest on deposits 2,757 3,111 3,150 2,911 2,153 Estimated interest component of net rental expense 125 153 195 197 121 ------- ------ ------ ------ ------ 2,388 2,107 1,999 1,905 1,847 ------- ------ ------ ------ ------ Fixed charges and preferred dividends $ 2,444 $2,166 $2,071 $2,049 $1,981 ======= ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 3.41 2.49 2.99 2.77 2.55 ======= ====== ====== ====== ====== - -----------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-13 12 EXHIBIT 13 TABLE OF CONTENTS
FINANCIAL REVIEW Overview..............................................................................................34 Factors that May Affect Future Results................................................................35 Operating Segment Results.............................................................................38 Earnings Performance..................................................................................39 Net Interest Income................................................................................39 Noninterest Income.................................................................................39 Noninterest Expense................................................................................42 Earnings/Ratios Excluding Goodwill and Nonqualifying Core Deposit Intangible.......................43 Balance Sheet Analysis................................................................................44 Securities Available for Sale......................................................................44 (table on page 63) Loan Portfolio.....................................................................................45 (table on page 64) Nonaccrual and Restructured Loans and Other Assets.................................................45 Allowance for Loan Losses..........................................................................47 (table on page 66) Deposits...........................................................................................47 Market Risk........................................................................................48 Derivative Financial Instruments...................................................................49 Liquidity and Capital Management...................................................................49 Comparison of 1998 to 1997............................................................................51 Additional Information................................................................................51 FINANCIAL STATEMENTS Consolidated Statement of Income......................................................................52 Consolidated Balance Sheet............................................................................53 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income....................54 Consolidated Statement of Cash Flows..................................................................55 Notes to Financial Statements.........................................................................56 (index on page 100) INDEPENDENT AUDITORS' REPORT...................................................................................97 QUARTERLY FINANCIAL DATA.......................................................................................98 INDEX.........................................................................................................100
[PHOTO] 33 FINANCIAL REVIEW OVERVIEW Wells Fargo & Company is a $218 billion diversified financial services company providing banking, mortgage and consumer finance through about 5,300 stores, the Internet and other distribution channels throughout North America, including all 50 states, and elsewhere internationally. It ranks seventh in assets at December 31, 1999 among U.S. bank holding companies. In this Annual Report, Wells Fargo & Company together with its subsidiaries is referred to as the Company and Wells Fargo & Company alone is referred to as the Parent. On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo & Company (the Merger) was completed. Norwest Corporation changed its name to "Wells Fargo & Company" and the former Wells Fargo & Company (the former Wells Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest Corporation as it was before the Merger is referred to as the former Norwest. The Merger was accounted for as a pooling of interests and, accordingly, the information included in the financial review presents the combined results as if the Merger had been in effect for all periods presented. Certain amounts in the financial review for prior years have been reclassified to conform with the current financial statement presentation. Net income in 1999 was $3,747 million, compared with $1,950 million in 1998, an increase of 92%. Diluted earnings per common share were $2.23, compared with $1.17 in 1998, an increase of 91%. Return on average assets (ROA) was 1.85% and return on average common equity (ROE) was 17.66% in 1999, compared with 1.04% and 9.86%, respectively, in 1998. Diluted earnings before the amortization of goodwill and nonqualifying core deposit intangible (CDI) ("cash" earnings) were $2.56 per share in 1999, compared with $1.50 per share in 1998. On the same basis, ROA was 2.22% and ROE was 34.08% in 1999, compared with 1.39% and 23.15%, respectively, in 1998. Net interest income on a taxable-equivalent basis was $9,419 million in 1999, compared with $9,049 million a year ago. The Company's net interest margin was 5.66% for 1999, compared with 5.79% in 1998. Noninterest income increased to $7,420 million in 1999 from $6,427 million in 1998, an increase of 15%. The increase was primarily due to higher net venture capital gains, partly offset by a loss on the sale of investment securities. Noninterest expense totaled $9,782 million in 1999, compared with $10,579 million in 1998. The decrease was primarily due to fourth quarter 1998 Merger-related and other charges. The provision for loan losses was $1,045 million in 1999, compared with $1,545 million in 1998. During 1999, net charge-offs were $1,049 million, or .94% of average total loans, compared with $1,617 million, or 1.52%, during 1998. The allowance for loan losses was $3,170 million, or 2.65% of total loans, at December 31, 1999, compared with $3,134 million, or 2.90%, at December 31, 1998. At December 31, 1999, total nonaccrual and restructured loans were $669 million, or .6% of total loans, compared with $710 million, or .7%, at December 31, 1998. Foreclosed assets were $153 million at December 31, 1999, compared with $148 million at December 31, 1998. The ratio of common stockholders' equity to total assets was 10.02% at both December 31, 1999 and 1998. The Company's total risk-based capital (RBC) ratio at December 31, 1999 was 10.50% and its Tier 1 RBC ratio was 8.07%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's RBC ratios at December 31, 1998 were 10.90% and 8.08%, respectively. The Company's leverage ratios were 6.77% and 6.58% at December 31, 1999 and 1998, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies. RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (FAS 133), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In July 1999, the FASB issued Statement No. 137, DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, that deferred the effective date of FAS 133 to no later than January 1, 2001 for the Company's financial statements. FAS 133 requires companies to record derivatives on the balance sheet at fair value. Changes in the fair values of those derivatives would be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value of assets or liabilities or cash flows from forecasted transactions. The Company does not expect to implement FAS 133 before January 1, 2001 and has not completed the complex analysis required to determine the impact on the financial statements. 34 Table 1 RATIOS AND PER COMMON SHARE DATA
- ---------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------- ($ in millions, except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS Net income to average total assets (ROA) 1.85% 1.04% 1.37% Net income applicable to common stock to average common stockholders' equity (ROE) 17.66 9.86 12.81 Net income to average stockholders' equity 17.45 9.81 12.67 EFFICIENCY RATIO (1) 58.3% 68.5% 62.8% NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE (CDI) AMORTIZATION AND BALANCES ("CASH") (2) Net income applicable to common stock $4,269 $2,465 $3,031 Earnings per common share 2.59 1.52 1.85 Diluted earnings per common share 2.56 1.50 1.83 ROA 2.22% 1.39% 1.78% ROE 34.08 23.15 30.49 Efficiency ratio 54.6 64.3 57.8 CAPITAL RATIOS At year end: Common stockholders' equity to assets 10.02% 10.02% 10.40% Stockholders' equity to assets 10.15 10.25 10.65 Risk-based capital (3) Tier 1 capital 8.07 8.08 8.16 Total capital 10.50 10.90 11.20 Leverage (3) 6.77 6.58 6.72 Average balances: Common stockholders' equity to assets 10.37 10.31 10.52 Stockholders' equity to assets 10.60 10.56 10.82 PER COMMON SHARE DATA Dividend payout (4) 35% 59% 41% Book value $13.44 $12.35 $11.92 Market prices (5): High $49.94 $43.88 $39.50 Low 32.13 27.50 21.38 Year end 40.44 39.94 38.75 - ----------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income). (2) Nonqualifying core deposit intangible (acquired after regulatory rule changes in 1992) amortization and average balance excluded from these calculations are, with the exception of the efficiency and ROA ratios, net of applicable taxes. The pretax amount for the average balance of nonqualifying CDI was $1,323 million for the year ended December 31, 1999. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $111 million and $820 million, respectively, for the year ended December 31, 1999. Goodwill amortization and average balance (which are not tax effected) were $447 million and $7,666 million, respectively, for the year ended December 31, 1999. See page 43 for additional information. (3) See Note 22 to Financial Statements for additional information. (4) Dividends declared per common share as a percentage of earnings per common share. (5) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System. FACTORS THAT MAY AFFECT FUTURE RESULTS This document and other documents filed by the Company with the Securities and Exchange Commission (SEC) have forward-looking statements. In addition, the Company's senior management may make forward-looking statements orally to analysts, investors, the media and others. Those forward-looking statements might include one or more of the following: - - Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; - - Descriptions of plans or objectives of management for future operations, products or services; - - Forecasts of future economic performance; and - - Descriptions of assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements give the Company's expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors--many of which are beyond the Company's control--that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate, Year 2000 and other risks, are described elsewhere in this report. Factors relating to the regulation and supervision of the Company are also described or incorporated in the Company's Annual Report on Form 10-K filed with the SEC. There are other factors besides those described or incorporated in this report or in the Form 10-K that could cause actual conditions, events or results to differ from those in the forward-looking statements. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. 35 Table 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------ % Change Five-year (in millions, 1999/ compound except per share amounts) 1999 1998 1997 1996 1995 1994 1998 growth rate - ------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT Net interest income $ 9,355 $ 8,990 $ 8,648 $ 8,222 $ 5,923 $ 5,414 4% 12% Provision for loan losses 1,045 1,545 1,140 500 312 365 (32) 23 Noninterest income 7,420 6,427 5,675 4,769 3,179 2,813 15 21 Noninterest expense 9,782 10,579 8,990 8,724 5,589 5,225 (8) 13 Net income 3,747 1,950 2,499 2,228 1,988 1,642 92 18 Earnings per common share $ 2.26 $ 1.18 $ 1.50 $ 1.38 $ 1.66 $ 1.40 92 10 Diluted earnings per common share 2.23 1.17 1.48 1.36 1.62 1.36 91 10 Dividends declared per common share .785 .70 .615 .525 .45 .383 12 15 BALANCE SHEET (at year end) Securities available for sale $ 38,518 $ 31,997 $ 27,872 $ 29,752 $ 24,163 $ 25,949 20% 8% Loans 119,464 107,994 106,311 105,760 70,780 66,575 11 12 Allowance for loan losses 3,170 3,134 3,062 3,059 2,711 2,872 1 2 Goodwill 7,702 7,664 8,062 8,200 1,212 574 -- 68 Assets 218,102 202,475 185,685 188,633 122,200 112,674 8 14 Core deposits 126,198 132,289 122,327 128,178 77,355 72,738 (5) 12 Long-term debt 23,375 19,709 17,335 18,142 16,726 12,039 19 14 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 785 1,299 1,150 -- -- -- -- Common stockholders' equity 21,860 20,296 19,315 19,262 8,448 6,628 8 27 Stockholders' equity 22,131 20,759 19,778 20,051 9,239 7,629 7 24 - ------------------------------------------------------------------------------------------------------------------------------
BUSINESS AND ECONOMIC CONDITIONS. The Company's business and earnings are sensitive to general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy, in general, and the local economies in which the Company conducts business. Should any of these conditions worsen in the United States or abroad, the Company's business and earnings could be adversely affected. For example, an economic downturn or higher interest rates could decrease the demand for loans and other products and services offered by the Company and/or increase the number of customers and counterparties who become delinquent or who default on their loans or other obligations to the Company. An increase in the number of delinquencies or defaults would result in a higher level of charge-offs and a higher level of loan loss provision, which could adversely affect the Company's earnings. Higher interest rates would also increase the Company's cost to borrow funds and may increase the rate paid on deposits, which could more than offset, in the net interest margin, the increase in rates earned by the Company on new or floating rate loans or short-term investments. See "Market Risk" for more information on interest rate risk. COMPETITION. The Company operates in a highly competitive environment both in terms of the products and services the Company offers and the geographic markets in which the Company conducts business. The Company expects this environment to become even more competitive in the future as a result of legislative, regulatory and technological changes and the continued trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in an increasing number of traditional banking businesses such as syndicated lending and consumer banking. Many of the Company's competitors enjoy the benefits of advanced technology, fewer regulatory constraints and lower cost structures. The financial services industry is likely to become even more competitive as technological advances enable more companies to provide financial services. The Company expects that the consolidation of the financial services industry will result in larger, better capitalized companies offering a wide array of financial services and products. Furthermore, recent legislative changes (see "Legislation" below) will increase competition in the financial services industry. 36 FISCAL AND MONETARY POLICIES. The Company's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies directly and indirectly influence the rate of interest that commercial banks pay on their interest-bearing deposits and can also affect the value of financial instruments held by the Company. Those policies also determine to a significant extent the cost to the Company of funds for lending and investing. Changes in those policies are beyond the Company's control and hard to predict. Federal Reserve Board policies can also affect the Company's customers and counterparties, potentially increasing the risk that such customers and counterparties may become delinquent or default on their obligations to the Company. DISINTERMEDIATION. "Disintermediation" is the process of eliminating the role of the mediator (or middleman) in completing a transaction. For the financial services industry, this means eliminating or significantly reducing the role of banks and other depository institutions in completing transactions that have traditionally involved banks at one end or both ends of the transaction. For example, technological advances now allow parties to pay bills and transfer funds directly without the involvement of banks. Important consequences of this disintermediation include the loss of customer deposits (and the income generated from those deposits) and decreases in transactions that generate fee income. LEGISLATION. The Gramm-Leach-Bliley Act (the Act) permits, effective March 2000, affiliation among banks, securities firms and insurance companies by creating a new type of financial services company called a "financial holding company". Financial holding companies may offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company may acquire banks and other financial institutions. The Act significantly changes the competitive environment in which the Company conducts business. MERGER INVOLVING THE FORMER NORWEST AND THE FORMER WELLS FARGO. One or more factors relating to the Merger could adversely impact the Company's business and earnings and in particular reduce the expected benefits of the Merger to the Company. These factors include the following: - - expected cost savings and/or potential revenue enhancements from the Merger might not be fully realized or realized within the expected time frame; - - deposit attrition (run-off), customer loss and/or revenue loss following the Merger might be greater than expected; and - - costs or difficulties related to the integration of the businesses of the two companies might be greater than expected. OTHER MERGERS AND ACQUISITIONS. The Company expands its business in part by acquiring banks and other companies engaged in financial services. The Company continues to explore opportunities to acquire banking institutions and other companies. Discussions are continually being carried on related to such acquisitions. Generally, management of the Company does not comment on such discussions or possible acquisitions until a definitive agreement has been signed. A number of factors related to past and future acquisitions could adversely affect the Company's business and earnings, including those described above for the Norwest/Wells Fargo merger. In addition, the Company's acquisitions generally are subject to approval by federal and, in some cases, state regulatory agencies. The failure to receive required regulatory approvals within the time frame or on the conditions expected by management could also adversely affect the Company's business and earnings. 37 OPERATING SEGMENT RESULTS COMMUNITY BANKING'S net income was $2,864 million in 1999, compared with $1,376 million in 1998, an increase of 108%. This increase resulted from Merger-related charges in 1998, as well as significant growth in noninterest income in 1999, reflecting increased fee-based revenue and venture capital gains. Growth in consumer checking accounts also contributed to the increase in noninterest income. Net interest income increased by $361 million, or 6%, compared with 1998. A significant portion of the increase was due to growth in business and construction loans to small businesses. The provision for loan losses decreased by $105 million from 1998. Noninterest expense decreased by $971 million from 1998, primarily due to the 1998 Merger-related charges, including irrevocable commitments to the Company's Foundation in connection with the Merger. WHOLESALE BANKING'S net income was $850 million in 1999, compared with $780 million in 1998, an increase of 9%. Net interest income increased $84 million, or 6%, from 1998, due to growth in loan volumes. Commercial loan balances increased $2,185 million, or 7%, from 1998. Noninterest income increased by $157 million, or 15%, compared with 1998, predominantly due to increased institutional trust and investment fees, foreign exchange and other fees. Noninterest expense increased by $116 million, or 11%, from 1998, partially due to contract services and professional fee expenses from Merger-related integration activities. NORWEST MORTGAGE earned $277 million in 1999, a 28% increase over the $217 million earned in 1998. Mortgage originations were $82 billion in 1999, compared with $109 billion in 1998. The percentage of originations attributed to mortgage loan refinancings was approximately 37% in 1999, compared with 52% in 1998. The servicing portfolio increased to $280 billion at December 31, 1999 from $245 billion at December 31, 1998. The weighted average coupon of loans in the servicing portfolio was 7.33% at December 31, 1999, compared with 7.42% a year earlier. Total capitalized mortgage servicing rights amounted to $4.5 billion, or 1.6%, of the servicing portfolio at December 31, 1999. Amortization of capitalized mortgage servicing rights was $683 million in 1999, compared with $786 million in 1998. Combined gains on sales of mortgages and servicing rights were $186 million in 1999, compared with $303 million in 1998. NORWEST FINANCIAL reported net income of $247 million in 1999, compared with a $19 million net loss in 1998. Results in 1998 included a $351 million charge to the provision for loan losses that included losses at Island Finance reflecting a review of the loan portfolio and realignment of charge-off policies in other operating units. Net interest income increased by $11 million from 1998, due to growth in average loans, substantially offset by a decrease in the net interest margin. 38 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable-equivalent basis was $9,419 million in 1999, compared with $9,049 million in 1998. The increase in net interest income for 1999 compared with 1998 was primarily due to an increase in earning assets. Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. For 1999, the net interest margin was 5.66%, compared with 5.79% in 1998. The decrease in the net interest margin for 1999 compared with 1998 was primarily due to higher balances of lower yielding investment securities and lower yields on consumer loans. During the fourth quarter of 1999, the Company restructured its debt securities available for sale portfolio by selling a portion of the portfolio and subsequently purchasing debt securities with comparatively higher yields. The Company expects that the positive effect on the net interest margin of that restructuring will begin to be realized in the first quarter of 2000. Table 4 presents the individual components of net interest income and the net interest margin. Interest income included hedging income of $169 million in 1999, compared with $93 million in 1998. Interest expense was offset by hedging income of $105 million in 1999, compared with an offset of $94 million in 1998. NONINTEREST INCOME Table 3 shows the major components of noninterest income. Table 3 NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------- % Change Year ended December 31, ----------------- ------------------------------------- 1999/ 1998/ (in millions) 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $1,492 $1,357 $1,244 10% 9% Trust and investment fees: Asset management and custody fees 749 676 603 11 12 Mutual fund and annuity sales fees 415 300 273 38 10 All other 92 92 78 -- 18 ------ ------ ------ Total trust and investment fees 1,256 1,068 954 18 12 Credit card fees 538 520 448 3 16 Other fees: Cash network fees 275 229 176 20 30 Charges and fees on loans 313 290 254 8 14 All other 442 427 396 4 8 ------ ------ ------ Total other fees 1,030 946 826 9 15 Mortgage banking: Origination and other closing fees 380 530 314 (28) 69 Servicing fees, net of amortization 410 19 324 -- (94) Net gains (losses) on sales of mortgage servicing rights -- 16 (8) (100) -- Net gains on sales of mortgages 221 296 120 (25) 147 All other 228 245 177 (7) 38 ------ ------ ------ Total mortgage banking 1,239 1,106 927 12 19 Insurance 383 348 336 10 4 Net venture capital gains 1,008 113 191 792 (41) Net (losses) gains on securities available for sale (241) 169 99 -- 71 Income from equity investments accounted for by the: Cost method 138 151 157 (9) (4) Equity method 86 47 57 83 (18) Net gains on sales of loans 32 61 30 (48) 103 Net gains on dispositions of operations 107 100 15 7 567 All other 352 441 391 (20) 13 ------ ------ ------ Total $7,420 $6,427 $5,675 15% 13% ====== ====== ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
39 Table 4 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
- ------------------------------------------------------------------------------------------------------------------------- 1999 1998 --------------------------- --------------------------- Interest Interest Average Yields/ income/ Average Yields/ income/ (in millions) balance rates expense balance rates expense - ------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,390 5.01% $ 70 $ 1,652 5.58% $ 92 Securities available for sale (3): Securities of U.S. Treasury and federal agencies 5,611 5.45 316 4,868 5.94 287 Securities of U.S. states and political subdivisions 1,796 8.33 145 1,528 8.50 124 Mortgage-backed securities: Federal agencies 19,961 6.83 1,366 17,194 7.05 1,187 Private collateralized mortgage obligations 3,048 6.85 211 2,841 6.74 190 -------- ------ -------- ------ Total mortgage-backed securities 23,009 6.84 1,577 20,035 7.01 1,377 Other securities 3,653 6.59 192 1,783 5.06 103 -------- ------ -------- ------ Total securities available for sale 34,069 6.65 2,230 28,214 6.80 1,891 Securities held to maturity -- -- -- -- -- -- -------- ------ -------- ------ Total securities 34,069 6.65 2,230 28,214 6.80 1,891 Loans held for sale (3) 5,080 7.33 372 4,804 7.71 371 Mortgages held for sale (3) 12,088 7.00 853 12,978 6.92 898 Loans: Commercial 36,023 8.75 3,153 33,271 8.93 2,971 Real estate 1-4 family first mortgage 12,203 7.66 934 12,932 7.75 1,003 Other real estate mortgage 17,297 8.76 1,515 16,257 9.37 1,523 Real estate construction 4,189 9.29 389 3,601 9.39 338 Consumer: Real estate 1-4 family junior lien mortgage 11,646 9.95 1,159 10,703 10.42 1,115 Credit card 5,373 13.71 737 6,012 14.96 900 Other revolving credit and monthly payment 16,131 12.51 2,018 16,497 12.78 2,109 -------- ------ -------- ------ Total consumer 33,150 11.81 3,914 33,212 12.42 4,124 Lease financing 6,997 7.80 546 5,608 8.22 461 Foreign 1,515 21.02 318 1,324 20.96 277 -------- ------ -------- ------ Total loans (4)(5) 111,374 9.67 10,769 106,205 10.07 10,697 Other 2,958 4.90 145 2,853 5.82 166 -------- ------ -------- ------ Total earning assets $166,959 8.67 14,439 $156,706 9.03 14,115 ======== ------ ======== ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 2,754 .95 26 $ 2,699 1.31 35 Market rate and other savings 56,123 2.27 1,274 52,431 2.61 1,367 Savings certificates 25,693 4.76 1,222 27,749 5.22 1,448 Other time deposits 3,473 4.98 173 4,040 5.49 222 Deposits in foreign offices 1,326 4.68 62 801 4.82 39 -------- ------ -------- ------ Total interest-bearing deposits 89,369 3.09 2,757 87,720 3.55 3,111 Short-term borrowings 18,356 5.04 924 14,454 5.37 777 Long-term debt 21,718 5.89 1,279 17,411 6.30 1,097 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 7.58 60 1,010 8.06 81 -------- ------ -------- ------ Total interest-bearing liabilities 130,228 3.85 5,020 120,595 4.20 5,066 Portion of noninterest-bearing funding sources 36,731 -- -- 36,111 -- -- -------- ------ -------- ------ Total funding sources $166,959 3.01 5,020 $156,706 3.24 5,066 ======== ------ ======== ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.66% $9,419 5.79% $9,049 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 11,435 $ 10,669 Goodwill 7,666 7,865 Other 16,563 13,115 -------- -------- Total noninterest-earning assets $ 35,664 $ 31,649 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 42,661 $ 40,922 Other liabilities 8,260 6,958 Preferred stockholders' equity 461 463 Common stockholders' equity 21,013 19,417 Noninterest-bearing funding sources used to fund earning assets (36,731) (36,111) -------- -------- Net noninterest-bearing funding sources $ 35,664 $ 31,649 ======== ======== TOTAL ASSETS $202,623 $188,355 ======== ======== - -----------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 8.00%, 8.35%, 8.44%, 8.27% and 8.83% for 1999, 1998, 1997, 1996 and 1995, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.42%, 5.56%, 5.74%, 5.51% and 6.04% for the same years, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. 40
- -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------ --------------------------------- Interest Interest Average Yields/ income/ Average Yields/ income/ balance rates expense balance rates expense - -------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,131 5.39% $ 61 $ 1,596 5.46% $ 87 Securities available for sale (3): Securities of U.S. Treasury and federal agencies 5,078 6.16 312 3,730 5.95 221 Securities of U.S. states and political subdivisions 1,352 8.49 112 907 8.89 79 Mortgage-backed securities: Federal agencies 19,844 7.13 1,403 20,199 6.98 1,410 Private collateralized mortgage obligations 3,024 6.81 206 2,852 6.51 187 -------- ------- -------- ------- Total mortgage-backed securities 22,868 7.09 1,609 23,051 6.92 1,597 Other securities 1,373 4.72 67 1,567 5.03 77 -------- ------- -------- ------- Total securities available for sale 30,671 6.88 2,100 29,255 6.76 1,974 Securities held to maturity -- -- -- -- -- -- -------- ------- -------- ------- Total securities 30,671 6.88 2,100 29,255 6.76 1,974 Loans held for sale (3) 3,849 8.11 312 3,560 9.22 328 Mortgages held for sale (3) 6,741 7.27 490 6,889 7.68 529 Loans: Commercial 29,951 9.18 2,748 27,547 9.15 2,520 Real estate 1-4 family first mortgage 15,866 8.75 1,341 15,522 8.64 1,301 Other real estate mortgage 16,205 9.58 1,552 15,612 9.21 1,438 Real estate construction 3,298 9.92 327 2,940 10.25 301 Consumer: Real estate 1-4 family junior lien mortgage 9,880 9.39 949 8,995 9.11 844 Credit card 6,663 14.53 968 6,505 15.03 979 Other revolving credit and monthly payment 16,947 12.42 2,105 16,505 12.25 2,022 -------- ------- -------- ------- Total consumer 33,490 12.28 4,022 32,005 12.24 3,845 Lease financing 4,285 8.38 359 3,347 8.15 272 Foreign 1,042 20.31 212 950 20.52 195 -------- ------- -------- ------- Total loans (4)(5) 104,137 10.14 10,561 97,923 10.08 9,872 Other 2,273 5.93 134 1,696 5.51 94 -------- ------- -------- ------- Total earning assets $148,802 9.19 13,658 $140,919 9.15 12,884 ======== ------- ======== ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 3,016 1.66 50 $ 6,749 1.38 93 Market rate and other savings 51,182 2.58 1,322 45,049 2.68 1,207 Savings certificates 28,581 5.27 1,506 26,853 5.17 1,390 Other time deposits 3,708 5.64 209 3,245 5.77 187 Deposits in foreign offices 1,287 4.85 62 719 4.76 34 -------- ------- -------- ------- Total interest-bearing deposits 87,774 3.59 3,149 82,615 3.52 2,911 Short-term borrowings 11,362 5.37 610 10,692 5.25 562 Long-term debt 17,149 6.38 1,093 18,283 6.24 1,140 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,287 7.82 101 82 7.81 6 -------- ------- -------- ------- Total interest-bearing liabilities 117,572 4.21 4,953 111,672 4.14 4,619 Portion of noninterest-bearing funding sources 31,230 -- -- 29,247 -- -- -------- ------- -------- ------- Total funding sources $148,802 3.33 4,953 $140,919 3.28 4,619 ======== ------- ======== ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.86% $ 8,705 5.87% $ 8,265 ====== ======= ====== ======= NONINTEREST-EARNING ASSETS Cash and due from banks $ 11,609 $ 11,442 Goodwill 8,186 6,477 Other 13,653 11,051 -------- -------- Total noninterest-earning assets $ 33,448 $ 28,970 ======== -------- NONINTEREST-BEARING FUNDING SOURCES Deposits $ 37,710 $ 34,952 Other liabilities 7,243 5,466 Preferred stockholders' equity 554 968 Common stockholders' equity 19,171 16,831 Noninterest-bearing funding sources used to fund earning assets (31,230) (29,247) -------- -------- Net noninterest-bearing funding sources $ 33,448 $ 28,970 ======== ======== TOTAL ASSETS $182,250 $169,889 ======== ======== - -------------------------------------------------------------------------------------------------------------------------------- 1995 ------------------------------ Interest Average Yields/ income/ Balance rates expense - ----------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 645 5.83% $ 38 Securities available for sale (3): Securities of U.S. Treasury and federal agencies 1,604 6.60 105 Securities of U.S. states and political subdivisions 124 20.80 9 Mortgage-backed securities: Federal agencies 13,897 7.27 1,017 Private collateralized mortgage obligations 1,252 6.39 82 -------- ------ Total mortgage-backed securities 15,149 7.19 1,099 Other securities 750 12.06 50 -------- ------ Total securities available for sale 17,627 7.48 1,263 Securities held to maturity 7,666 5.40 477 -------- ------ Total securities 25,293 5.40 1,740 Loans held for sale (3) 2,557 8.88 227 Mortgages held for sale (3) 4,996 7.86 393 Loans: Commercial 17,773 9.67 1,718 Real estate 1-4 family first mortgage 11,883 8.51 976 Other real estate mortgage 11,742 9.40 1,104 Real estate construction 1,833 10.06 184 Consumer: Real estate 1-4 family junior lien mortgage 7,512 8.64 678 Credit card 5,939 15.54 923 Other revolving credit and monthly payment 10,887 13.26 1,444 -------- ------ Total consumer 24,338 13.16 3,045 Lease financing 2,284 8.51 194 Foreign 704 23.01 162 -------- ------ Total loans (4)(5) 70,557 10.47 7,383 Other 940 5.87 55 -------- ------ Total earning assets $104,988 9.36 9,836 ======== ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 6,423 1.24 80 Market rate and other savings 28,622 2.78 796 Savings certificates 18,889 5.33 1,007 Other time deposits 2,244 5.81 131 Deposits in foreign offices 2,381 5.86 139 -------- ------ Total interest-bearing deposits 58,559 3.68 2,153 Short-term borrowings 12,682 5.88 746 Long-term debt 14,996 6.53 980 Guaranteed preferred beneficial interests in Company's subordinated debentures -- -- -- -------- ------ Total interest-bearing liabilities 86,237 4.50 3,879 Portion of noninterest-bearing funding sources 18,751 -- -- -------- ------ Total funding sources $104,988 3.69 3,879 ======== ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.67% $5,957 ==== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 5,858 Goodwill 895 Other 5,273 -------- Total noninterest-earning assets $ 12,026 ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 19,070 Other liabilities 3,246 Preferred stockholders' equity 942 Common stockholders' equity 7,519 Noninterest-bearing funding sources used to fund earning assets (18,751) -------- Net noninterest-bearing funding sources $ 12,026 ======== TOTAL ASSETS $117,014 ======== - -------------------------------------------------------------------
(4) Interest income includes loan fees, net of deferred costs, of approximately $177 million, $120 million, $103 million, $86 million and $40 million in 1999, 1998, 1997, 1996 and 1995, respectively. (5) Nonaccrual loans and related income are included in their respective loan categories. (6) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all years presented. 41 The increase in mortgage banking was due to higher servicing revenue, including lower amortization of mortgage servicing rights, partially offset by a decrease in loan origination and closing fees. The decrease in amortization was largely due to rising interest rates, which decreased the prepayment speeds in the servicing portfolio. A major portion of the increase in trust and investment fees for 1999 was due to an overall increase in mutual fund management fees, reflecting the growth in mutual fund assets and an increase in transaction fees associated with mutual funds and annuity sales. The Company managed mutual funds with $60.0 billion of assets at December 31, 1999, compared with $51.4 billion at December 31, 1998. The Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $427.7 billion and $366.9 billion at December 31, 1999 and 1998, respectively. The increase in net venture capital gains was primarily due to a gain of about $560 million that was recognized on the Company's venture capital investment in Cerent Corporation. Gains on sales of venture capital securities are generally dependent on the timing of holdings becoming publicly traded and subsequent market conditions, causing venture capital gains to be unpredictable in nature. The net losses on securities available for sale in 1999 were due to the restructuring of the securities available for sale investment portfolio in the fourth quarter of 1999. Net gains on dispositions of operations in 1999 were due to required divestitures of stores in Arizona and Nevada. NONINTEREST EXPENSE Table 5 shows the major components of noninterest expense. Table 5 NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------ % Change Year ended December 31, --------------- ------------------------------------- 1999/ 1998/ (in millions) 1999 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Salaries $3,053 $ 3,103 $2,712 (2)% 14% Incentive compensation 522 572 400 (9) 43 Employee benefits 821 741 699 11 6 Equipment 840 900 739 (7) 22 Net occupancy 764 764 719 -- 6 Goodwill 447 421 433 6 (3) Core deposit intangible: Nonqualifying (1) 179 217 240 (18) (10) Qualifying 20 26 33 (23) (21) Net (gains) losses on dispositions of premises and equipment (16) 325 76 -- 328 Contract services 465 342 271 36 26 Outside professional services 372 391 262 (5) 49 Outside data processing 279 250 217 12 15 Telecommunications 261 252 241 4 5 Travel and entertainment 249 212 188 17 13 Advertising and promotion 238 237 202 -- 17 Postage 223 228 210 (2) 9 Stationery and supplies 171 178 182 (4) (2) Insurance 151 132 122 14 8 Operating losses 140 152 374 (8) (59) Security 88 84 87 5 (3) All other 515 1,052 583 (51) 80 ------ ------- ------ Total $9,782 $10,579 $8,990 (8)% 18% ====== ======= ====== === === - ------------------------------------------------------------------------------------------------------------------
(1) Represents amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The net losses on dispositions of premises and equipment in 1998 were mostly due to Merger-related costs from the 1998 restructuring charge for the disposition of owned and leased premises. A significant portion of the increase in contract services was due to expenses related to various Merger-related projects. A significant portion of the decrease in the "All other" category of noninterest expense was due to the 1998 accrual of $208 million of irrevocable commitments to the Company's Foundation in connection with the Merger. 42 During 1999, the Company completed its enterprise-wide project to prepare and maintain the Company's systems for Year 2000 compliance. The Year 2000 compliance issue pertains to computer systems that use two digits rather than four to define the applicable year and whether such systems would properly process information when the year changed to 2000. In addition, since the year 2000 is a leap year, some programs may not recognize and properly process "February 29, 2000". "Systems" include hardware, networks, in-house and commercial "off the shelf" software, and embedded technology such as date impacted processors in automated systems such as elevators, telephone systems, security systems, vault systems, heating and cooling systems and others. The Company incurred approximately $320 million in total costs for the Year 2000 project, including approximately $118 million in 1999. The Company does not expect to incur additional significant charges for the Year 2000 project. The Company experienced no significant Year 2000 issues as of January 18, 2000, and does not anticipate that significant Year 2000 issues will arise in the future associated with the year change or with the February 29, 2000 leap year event. However, it is too early to conclude that there will be no significant issues associated with the Year 2000, and that all of the Company's customers, vendors, counterparties and other third parties have effectively addressed their Year 2000 issues. Year 2000 issues, if they do arise, could expose the Company to a number of risks, including the possibility that, to the extent certain third parties fail to adequately address Year 2000 issues, they may not be able to meet their contractual obligations to the Company. The forward-looking statements made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The forward-looking statements in the foregoing Year 2000 discussion should be read with the cautionary statements included in the section, "Factors That May Affect Future Results". EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE Table 6 reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible amortization ("cash" earnings) for the year ended December 31, 1999. Table 7 presents the calculation of the ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and balances for the year ended December 31, 1999. These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows and Note 3 to Financial Statements for other information regarding funds available for use by management. Table 6 EARNINGS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- ------------------------------------------------------------------------------------------------------------------- Year ended (in millions, except per share amounts) December 31, 1999 - ------------------------------------------------------------------------------------------------------------------- Amortization ------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense $5,948 $447 $179 $6,574 Income tax expense 2,201 -- 69 2,270 ------ ---- ---- ------ Net income 3,747 447 110 4,304 Preferred stock dividends 35 -- -- 35 ------ ---- ---- ------ Net income applicable to common stock $3,712 $447 $110 $4,269 ====== ==== ==== ====== Earnings per common share $ 2.26 $.27 $.06 $ 2.59 ====== ==== ==== ====== Diluted earnings per common share $ 2.23 $.27 $.06 $ 2.56 ====== ==== ==== ====== - -------------------------------------------------------------------------------------------------------------------
Table 7 RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI
- ----------------------------------------------------------------------------------------------------------------- Year ended (in millions) December 31, 1999 - ----------------------------------------------------------------------------------------------------------------- ROA: A / (C-E-F) = 2.22% ROE: B / (D-E-G) = 34.08% Efficiency: (H-I) / J = 54.6% Net income $ 4,304 (A) Net income applicable to common stock 4,269 (B) Average total assets 202,623 (C) Average common stockholders' equity 21,013 (D) Average goodwill 7,666 (E) Average pretax nonqualifying core deposit intangible 1,323 (F) Average after-tax nonqualifying core deposit intangible 820 (G) Noninterest expense 9,782 (H) Amortization expense for goodwill and nonqualifying core deposit intangible 626 (I) Net interest income plus noninterest income 16,775 (J) - -----------------------------------------------------------------------------------------------------------------
43 BALANCE SHEET ANALYSIS A comparison between the year-end 1999 and 1998 balance sheets is presented below. SECURITIES AVAILABLE FOR SALE Total securities available for sale averaged $34.1 billion in 1999, a 21% increase from $28.2 billion in 1998. Total securities available for sale were $38.5 billion at December 31, 1999, a 20% increase from $32.0 billion at December 31, 1998. The increase from 1998 was due to additional holdings of securities of U.S. Treasury and Federal agencies and marketable equity securities. Table 8 provides the components of the estimated unrealized net gain on securities available for sale. Table 8 ESTIMATED UNREALIZED GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------ December 31, ----------------------------- (in millions) 1999 1998 - ------------------------------------------------------------------------------------------ Estimated unrealized gross gains $2,174 $919 Estimated unrealized gross losses (885) (89) ------ ---- Estimated unrealized net gain $1,289 $830 ====== ==== - ------------------------------------------------------------------------------------------
The unrealized net loss of $668 million in the debt securities portion of the securities available for sale portfolio at December 31, 1999 was attributable to an increase in market interest rates in 1999. The unrealized net gain of $1,957 million in the marketable equity securities portion of the securities available for sale portfolio at December 31, 1999 was due to equity securities held within the Company's venture capital portfolio that benefited from favorable market conditions. The Company may decide to sell certain of the securities available for sale to manage the level of earning assets (for example, to offset loan growth that exceeds expected maturities and prepayments of securities). (See Note 4 to Financial Statements for securities available for sale by security type.) The unrealized net gain on securities available for sale is reported on an after-tax basis as a component of cumulative other comprehensive income. At December 31, 1999, the unrealized net after-tax gain was $902 million, compared with an unrealized net after-tax gain of $477 million at December 31, 1998. At December 31, 1999, mortgage-backed securities, including collateralized mortgage obligations (CMOs), were $25.4 billion, or 66% of the Company's securities available for sale portfolio. As an indication of interest rate risk, the Company has estimated the effect of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on that rate scenario, mortgage-backed securities would decrease in fair value from $25.4 billion to $22.9 billion and the expected remaining maturity of these securities would increase from 7 years and 9 months to 9 years and 2 months. 44 LOAN PORTFOLIO A comparative schedule of average loan balances is presented in Table 4; year-end balances are presented in Note 5 to Financial Statements. Loans averaged $111.4 billion in 1999, compared with $106.2 billion in 1998, an increase of 5%. Total loans at December 31, 1999 were $119.5 billion, compared with $108.0 billion at year-end 1998, an increase of 11%. The Company's total unfunded loan commitments increased to $74.6 billion at December 31, 1999, from $71.5 billion at December 31, 1998. Real estate 1-4 family junior lien mortgage loans grew 16% to $12.9 billion at December 31, 1999, from $11.1 billion at December 31, 1998. NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS Table 9, below, presents comparative data for nonaccrual and restructured loans and other assets. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Table 9 excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. This information is presented in Table 10. Notwithstanding, real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 120 days of becoming past due and are shown in Table 9. (Note 1 to Financial Statements describes the Company's accounting policy relating to nonaccrual and restructured loans.) Table 9 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------ December 31, -------------------------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial (1) $344 $282 $209 $ 280 $179 Real estate 1-4 family first mortgage 127 124 164 142 110 Other real estate mortgage (2) 112 199 259 381 342 Real estate construction 7 17 27 30 48 Consumer: Real estate 1-4 family junior lien mortgage 17 17 17 15 8 Other revolving credit and monthly payment 27 41 18 5 6 ---- ---- ---- ------ ---- Total consumer 44 58 35 20 14 Lease financing 22 12 12 18 12 Foreign 9 17 -- -- -- ---- ---- ---- ------ ---- Total nonaccrual loans (3) 665 709 706 871 705 Restructured loans (4) 4 1 9 10 16 ---- ---- ---- ------ ---- Nonaccrual and restructured loans 669 710 715 881 721 As a percentage of total loans .6% .7% .7% .8% 1.0% Foreclosed assets 153 148 208 262 223 Real estate investments (5) 33 1 4 4 12 ---- ---- ---- ------ ---- Total nonaccrual and restructured loans and other assets $855 $859 $927 $1,147 $956 ==== ==== ==== ====== ==== - -----------------------------------------------------------------------------------------------------------------
(1) Includes commercial agricultural loans of $40 million, $32 million, $24 million, $25 million and $13 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (2) Includes agricultural loans secured by real estate of $16 million, $12 million, $18 million, $13 million and $5 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (3) Of the total nonaccrual loans, $358 million, $388 million, $411 million, $587 million and $508 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively, were considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. (4) In addition to originated loans that were subsequently restructured, there were loans of $50 million at December 31, 1995 that were purchased at a steep discount whose contractual terms were modified after acquisition. Those loans were restructured to yield a rate that was equal to or greater than the rate charged for new loans with comparable risk and thus were not required to be reported as impaired in the year following the restructuring. Those loans were not impaired based on the terms specified by the restructuring agreement. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were recorded as loans. Real estate investments totaled $89 million, $128 million, $172 million, $154 million and $96 million at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. 45 The Company anticipates changes in the amount of nonaccrual loans that result from increases in lending activity or from resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be affected by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on the Company's policies. The Company generally identifies loans to be evaluated for impairment under FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, rather than the contractual terms specified by the restructuring agreement. Consequently, not all impaired loans are necessarily placed on nonaccrual status. That is, loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the Company will estimate the amount of impairment using discounted cash flows, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of estimating impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan results in a value that is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. If interest that was due on the book balances of all nonaccrual and restructured loans (including loans that were but are no longer on nonaccrual or were restructured at year end) had been accrued under their original terms, $56 million of interest would have been recorded in 1999, compared with $17 million actually recorded. Foreclosed assets at December 31, 1999 were $153 million, compared with $148 million at December 31, 1998. Substantially all of the foreclosed assets at December 31, 1999 have been in the portfolio three years or less. 46 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 10 shows loans that are contractually past due 90 days or more as to interest or principal, but are not included in Table 9, Nonaccrual and Restructured Loans and Other Assets. Table 10 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
- --------------------------------------------------------------------------------------------------------------------------- December 31, ----------------------------------------------------------------- (in millions) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Commercial $ 24 $ 29 $ 34 $ 83 $ 20 Real estate 1-4 family first mortgage 39 40 54 53 12 Other real estate mortgage 15 17 16 67 28 Real estate construction 4 6 13 10 3 Consumer: (1) Real estate 1-4 family junior lien mortgage 35 64 74 55 30 Credit card 99 140 160 146 120 Other revolving credit and monthly payment 185 160 206 180 150 ---- ---- ---- ---- ---- Total consumer 319 364 440 381 300 ---- ---- ---- ---- ---- Total $401 $456 $557 $594 $363 ==== ==== ==== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------
(1) Consumer loans at December 31, 1998, 1997, 1996 and 1995 have been revised to include Norwest Financial loans of $114 million, $160 million, $150 million and $127 million, respectively. ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is presented in Note 5 to Financial Statements. At December 31, 1999, the allowance for loan losses was $3,170 million, or 2.65% of total loans, compared with $3,134 million, or 2.90%, at December 31, 1998 and $3,062 million, or 2.88%, at December 31, 1997. The provision for loan losses totaled $1,045 million in 1999, $1,545 million in 1998 and $1,140 million in 1997. The provision for loan losses in 1999 approximated net charge-offs, and the Company anticipates that it will continue to make a provision in 2000 that will approximate the level of actual net charge-offs. Net charge-offs in 1999 were $1,049 million, or .94% of average total loans, compared with $1,617 million, or 1.52%, in 1998 and $1,305 million, or 1.25%, in 1997. Loan loss recoveries were $436 million in 1999, compared with $427 million in 1998 and $426 million in 1997. Any loan that is past due as to principal or interest and that is not both well-secured and in the process of collection is generally charged off (to the extent that it exceeds the fair value of any related collateral) after a predetermined period of time that is based on loan category. Additionally, loans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. The Company considers the allowance for loan losses of $3,170 million adequate to cover losses inherent in loans, commitments to extend credit and standby and other letters of credit at December 31, 1999. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of the factors then prevailing, including economic conditions and the ongoing examination process by the Company and its regulators, will not require significant increases in the allowance for loan losses. For discussion of the process by which the Company determines the adequacy of the allowance for loan losses, see Note 5 to Financial Statements. DEPOSITS Comparative detail of average deposit balances is presented in Table 4. Average core deposits funded 63% and 66% of the Company's average total assets in 1999 and 1998, respectively. Year-end deposit balances are presented in Table 11. Table 11 DEPOSITS
- --------------------------------------------------------------------------------------------------------------- December 31, --------------------------------- % (in millions) 1999 1998 Change - --------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 42,916 $ 46,732 (8)% Interest-bearing checking 3,083 2,908 6 Market rate and other savings 55,791 55,152 1 Savings certificates 24,408 27,497 (11) -------- -------- Core deposits 126,198 132,289 (5) Other time deposits 3,255 3,753 (13) Deposits in foreign offices 3,255 746 336 -------- -------- Total deposits $132,708 $136,788 (3)% ======== ======== === - ---------------------------------------------------------------------------------------------------------------
47 MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. The majority of the Company's interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available for sale, deposit liabilities, short-term borrowings, long-term debt and derivative financial instruments used for asset/liability management. Interest rate risk occurs when assets and liabilities reprice at different times as market interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk" . There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk"; it is a significant source of interest rate risk for the Company and is more difficult to quantify and manage than term structure risk. Two primary components of basis risk for the Company are (1) the spread between prime-based loans and market rate account (MRA) savings deposits and (2) the rate paid on savings and interest-bearing checking accounts as compared to LIBOR-based loans. Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage the sensitivity of net interest spreads and net income to potential changes in interest rates and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating-rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of option pricing models, in the case of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The simulation model is used to measure the impact on net income, relative to a base case scenario, of interest rates increasing or decreasing 100 basis points over the next 12 months. The simulation showing the largest drop in net income relative to the base case scenario over the next twelve months is a 100 basis point increase in rates that will result in a decrease in net income of $38 million. In the simulation that was run at December 31, 1998, the largest drop in net income relative to the base case scenario over the next twelve months was a 100 basis point increase in rates that was projected to result in a decrease in net income of $26 million. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures indicated by the net income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. For example, the Company uses interest rate futures to shorten the rate maturity of MRA savings deposits and better match the maturity of prime-based loans. The Company also purchases interest rate floors to protect against the loss in interest income on LIBOR-based loans during a declining interest rate environment. Additionally, receive-fixed rate swaps are used to convert floating-rate loans into fixed rates to better match the liabilities that fund the loans. The Company also uses derivatives including floors, futures contracts and options on futures contracts to hedge the Company's mortgage servicing rights as well as forwards, futures and options on futures and forwards to hedge the Company's 1-4 family real estate first mortgage loan commitments and mortgage loans held for sale. 48 Looking toward managing interest rate risk in 2000, the Company will continue to face term structure risk and basis risk and may be confronted with several risk scenarios. If interest rates rise, net income may actually increase if deposit rates lag increases in market rates (e.g., prime, LIBOR). The Company could, however, experience downward pressure on net income in that scenario if deposits are aggressively repriced as market rates increase. A declining interest rate environment might result in a decrease in loan rates, while deposit rates remain relatively stable, as they did between 1994 and 1996. This rate scenario could also create significant risk to net income. The Company has partially hedged against that risk with interest rate floors, receive-fixed rate swap contracts and fixed-rate mortgage backed securities. As mentioned above, the Company has also partially hedged its mortgage servicing rights against that rate scenario using primarily floors, futures contracts and options on futures contracts. Based on its current and projected balance sheet, the Company does not expect that a change in interest rates would significantly affect its liquidity position. The Company considers the fair values and the potential near term losses to future earnings related to its customer accommodation derivative financial instruments to be immaterial. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate derivative financial instruments as asset/liability management tools to hedge the Company's exposure to interest rate fluctuations. The Company also offers contracts to accommodate its customers, but hedges such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. Table 12 reconciles the beginning and ending notional or contractual amounts of derivative financial instruments used for asset/liability management purposes for 1999 and shows the expected remaining maturity at year-end 1999. For a further discussion of derivative financial instruments, refer to Note 23 to Financial Statements. Table 12 DERIVATIVE ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 ----------------------------------------------------------------------------------------- Weighted average expected Amortization remaining Beginning and Ending maturity (in (in millions) balance Additions maturities Terminations balance yrs.-mos.) - ---------------------------------------------------------------------------------------------------------------------------- Interest rate contracts: Swaps $24,429 $ 13,594 $ 5,087 $ 1,366 $31,570 2-10 Futures 62,348 98,611 23,119 87,115 50,725 3-6 Floors and caps 33,598 18,554 9,010 2,000 41,142 3-0 Options 25,822 155,380 58,287 110,975 11,940 0-11 Forwards 41,283 485,677 -- 504,432 22,528 0-1 Foreign exchange contracts: Forwards 168 552 582 -- 138 0-3 - ----------------------------------------------------------------------------------------------------------------------------
Net deferred losses related to interest rate futures contracts were $310 million at December 31, 1999, most of which will be fully amortized within seven years. Net deferred losses on terminated derivative financial instruments were $210 million at December 31, 1999, compared with net deferred gains of $412 million at December 31, 1998. LIQUIDITY AND CAPITAL MANAGEMENT The Company manages its liquidity and capital at both the parent and subsidiary levels. In addition to the immediately liquid resources of cash and due from banks and federal funds sold and securities purchased under resale agreements, asset liquidity is provided by the Company's securities available for sale portfolio. The weighted average expected remaining maturity of the debt securities within this portfolio was 8 years and 2 months at December 31, 1999. Of the $35.2 billion of debt securities in this portfolio at December 31, 1999, $4.7 billion, or 13%, is expected to mature or be prepaid in 2000 and an additional $3.0 billion, or 9%, is expected to mature or be prepaid in 2001. Asset liquidity is further enhanced by the Company's ability to securitize assets such as mortgage loans. Core deposits have historically provided the Company with a sizeable source of relatively stable and low-cost funds. The Company's average core deposits and stockholders' equity funded 73% and 76% of its average total assets in 1999 and 1998, respectively. 49 The remaining funding of average total assets was mostly provided by long-term debt, deposits in foreign offices, short-term borrowings (federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Short-term borrowings averaged $18.4 billion and $14.4 billion in 1999 and 1998, respectively. Long-term debt averaged $21.7 billion and $17.4 billion in 1999 and 1998, respectively. Trust preferred securities averaged $.8 billion and $1.0 billion in 1999 and 1998, respectively. Liquidity for the Company is provided by interest income, deposit-raising activities, potential disposition of readily marketable assets and through its ability to raise funds in a variety of domestic and international money and capital markets. The Company accesses the capital markets for long-term funding through the issuance of registered debt. In June 1999, the Parent filed a shelf registration statement with the SEC under which the Company may issue up to $10 billion in debt and equity securities, excluding common stock, except for common stock issuable upon the exercise or conversion of debt and equity securities. That registration statement, together with the $150 million issuance authority remaining on the Company's registration statements filed in 1993 and 1995, permits the Company to issue an aggregate of $10.15 billion in such debt and equity securities. Under those registration statements, the Company had issued a total of $3 billion in debt securities as of December 31, 1999 and had established a program to issue, from time to time, additional debt securities in the form of Medium-Term Notes, Series A and Subordinated Medium-Term Notes, Series B in the aggregate principal amount of up to $7.15 billion. Proceeds from the issuance of the debt securities listed above were, and with respect to any such securities issued in the future, are expected to be used for general corporate purposes. In April 1999, Norwest Financial, Inc. (NFI) filed a shelf registration statement with the SEC, under which NFI may issue up to $2 billion in senior or subordinated debt securities. As of December 31, 1999, NFI had issued a total of $1.1 billion in debt securities under that registration statement. Also in 1999, a subsidiary of NFI filed a shelf registration statement with the Canadian provincial securities authorities for the issuance of up to $1 billion (Canadian) in debt securities, and had issued $390 million (Canadian) in debt securities from that registration statement as of December 31, 1999. To accommodate future growth and current business needs, the Company has a capital expenditure program. Capital expenditures for 2000 are estimated to be approximately $500 million for equipment for stores, relocation and remodeling of Company facilities and routine replacement of furniture and equipment. The Company will fund these expenditures from various sources, including retained earnings of the Company and borrowings of various maturities. The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the Office of the Comptroller of the Currency. RBC guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. (See Note 22 to Financial Statements for additional information.) The Company repurchases common shares in the open market under a systematic plan to meet the common stock issuance requirements of the Company's benefit plans and for other common stock issuance requirements, including acquisitions accounted for as purchases. In February of 2000, the Board of Directors authorized the repurchase of up to 81 million additional shares of the Company's outstanding common stock. At the time of that authorization, approximately 35 million shares remained to be purchased under the September 1999 common stock purchase authority, substantially all of which are expected to be acquired for announced acquisitions. 50 COMPARISON OF 1998 TO 1997 Net interest income increased $342 million in 1998 compared to 1997. The increase in net interest income was due to an increase in earning assets, which included the effects of a significantly higher volume of mortgage origination activity during 1998. Net income in 1998 was $1,950 million, compared with $2,499 million in 1997, a decrease of 22%. Diluted earnings per common share were $1.17 in 1998, compared with $1.48 in 1997, a decrease of 21%. ROA was 1.04% and ROE was 9.86% in 1998, compared with 1.37% and 12.81%, respectively, in 1997. Diluted earnings before the amortization of goodwill and CDI ("cash" earnings) were $1.50 per share in 1998, compared with $1.83 in 1997. On the same basis, ROA was 1.39% and ROE was 23.15% in 1998, compared with 1.78% and 30.49%, respectively, in 1997. Net interest income on a taxable-equivalent basis was $9,049 million in 1998, compared with $8,705 million in 1997. The Company's net interest margin was 5.79% for 1998, compared with 5.86% in 1997. Noninterest income in 1998 was $6,427 million, compared with $5,675 million in 1997, an increase of 13%. The increase in noninterest income was primarily due to higher fee-based revenues and increased earnings from mortgage banking activities. Noninterest expense in 1998 was $10,579 million, compared with $8,990 million in 1997. The increase was due to Merger-related charges recorded in the fourth quarter of 1998. The provision for loan losses was $1,545 million in 1998, compared with $1,140 million in 1997. Net charge-offs in 1998 were $1,617 million, or 1.52% of average total loans, compared with $1,305 million, or 1.25%, in 1997. The allowance for loan losses was 2.90% of total loans at December 31, 1998, compared with 2.88% at December 31, 1997. Total nonaccrual and restructured loans were $710 million, or .7% of total loans, at December 31, 1998, compared with $715 million, or .7%, at December 31, 1997. Foreclosed assets were $148 million at December 31, 1998, compared with $208 million at December 31, 1997. ADDITIONAL INFORMATION Common stock of the Company is traded on the New York Stock Exchange and the Chicago Stock Exchange. The high, low and end-of-period annual and quarterly prices of the Company's common stock as reported on the New York Stock Exchange Composite Transaction Reporting System are presented in the graphs. The number of holders of record of the Company's common stock was 90,277 as of January 31, 2000. [Stock prices for bar graph]
- --------------------------------------------------- 1997 1998 1999 ---------------------------- High $39.50 $43.88 $49.94 Low 21.38 27.50 32.13 End of period 38.75 39.94 40.44 - ---------------------------------------------------
- ------------------------------------------------------------------------------------------------------------ 1998 1999 ------------------------------------------ ------------------------------------------ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q ------------------------------------------ ------------------------------------------ High $43.88 $43.75 $39.75 $40.88 $40.44 $44.88 $45.31 $49.94 Low 34.75 34.00 27.50 30.19 32.13 34.38 36.44 38.38 End of period 41.56 37.50 36.00 39.94 35.06 42.75 39.63 40.44 - ------------------------------------------------------------------------------------------------------------
51 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------ (in millions, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Securities available for sale $ 2,176 $ 1,844 $ 2,063 Mortgages held for sale 853 898 490 Loans held for sale 372 371 312 Loans 10,761 10,685 10,539 Other interest income 213 257 198 -------- -------- -------- Total interest income 14,375 14,055 13,602 -------- -------- -------- INTEREST EXPENSE Deposits 2,757 3,111 3,150 Short-term borrowings 924 777 610 Long-term debt 1,279 1,097 1,093 Guaranteed preferred beneficial interests in Company's subordinated debentures 60 80 101 -------- -------- -------- Total interest expense 5,020 5,065 4,954 -------- -------- -------- NET INTEREST INCOME 9,355 8,990 8,648 Provision for loan losses 1,045 1,545 1,140 -------- -------- -------- Net interest income after provision for loan losses 8,310 7,445 7,508 -------- -------- -------- NONINTEREST INCOME Service charges on deposit accounts 1,492 1,357 1,244 Trust and investment fees 1,256 1,068 954 Credit card fees 538 520 448 Other fees 1,030 946 826 Mortgage banking 1,239 1,106 927 Insurance 383 348 336 Net venture capital gains 1,008 113 191 Net (losses) gains on securities available for sale (241) 169 99 Other 715 800 650 -------- -------- -------- Total noninterest income 7,420 6,427 5,675 -------- -------- -------- NONINTEREST EXPENSE Salaries 3,053 3,103 2,712 Incentive compensation 522 572 400 Employee benefits 821 741 699 Equipment 840 900 739 Net occupancy 764 764 719 Goodwill 447 421 433 Core deposit intangible 199 243 273 Net (gains) losses on dispositions of premises and equipment (16) 325 76 Other 3,152 3,510 2,939 -------- -------- -------- Total noninterest expense 9,782 10,579 8,990 -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 5,948 3,293 4,193 Income tax expense 2,201 1,343 1,694 -------- -------- -------- NET INCOME $ 3,747 $ 1,950 $ 2,499 ======== ======== ======== NET INCOME APPLICABLE TO COMMON STOCK $ 3,712 $ 1,915 $ 2,456 ======== ======== ======== EARNINGS PER COMMON SHARE $ 2.26 $ 1.18 $ 1.50 ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $ 2.23 $ 1.17 $ 1.48 ======== ======== ======== DIVIDENDS DECLARED PER COMMON SHARE $ .785 $ .70 $ .615 ======== ======== ======== Average common shares outstanding 1,645.6 1,621.5 1,634.6 ======== ======== ======== Diluted average common shares outstanding 1,665.2 1,641.8 1,657.8 ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 52 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------ December 31, ---------------------------------- (in millions, except shares) 1999 1998 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 13,250 $ 12,731 Federal funds sold and securities purchased under resale agreements 1,554 1,517 Securities available for sale 38,518 31,997 Mortgages held for sale 11,707 19,770 Loans held for sale 4,975 5,322 Loans 119,464 107,994 Allowance for loan losses 3,170 3,134 -------- -------- Net loans 116,294 104,860 -------- -------- Mortgage servicing rights 4,483 3,080 Premises and equipment, net 2,985 3,130 Core deposit intangible 1,286 1,510 Goodwill 7,702 7,664 Interest receivable and other assets 15,348 10,894 -------- -------- Total assets $218,102 $202,475 ======== ======== LIABILITIES Noninterest-bearing deposits $ 42,916 $ 46,732 Interest-bearing deposits 89,792 90,056 -------- -------- Total deposits 132,708 136,788 Short-term borrowings 27,995 15,897 Accrued expenses and other liabilities 11,108 8,537 Long-term debt 23,375 19,709 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 785 STOCKHOLDERS' EQUITY Preferred stock 344 547 Unearned ESOP shares (73) (84) -------- -------- Total preferred stock 271 463 Common stock - $1 2/3 par value, authorized 4,000,000,000 shares; issued 1,666,095,265 shares and 1,661,392,590 shares 2,777 2,769 Additional paid-in capital 8,786 8,673 Retained earnings 11,196 9,045 Cumulative other comprehensive income 892 463 Notes receivable from ESOP (1) (3) Treasury stock - 39,245,724 shares and 17,334,787 shares (1,790) (651) -------- -------- Total stockholders' equity 22,131 20,759 -------- -------- Total liabilities and stockholders' equity $218,102 $202,475 ======== ======== - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 53 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------- Unearned Additional Number of Preferred ESOP Common paid-in (in millions, except shares) shares stock shares stock capital - ---------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 $850 $(61) $2,149 $10,170 ---- ---- ------ ------- Comprehensive income Net income-1997 Other comprehensive income, net of tax: Translation adjustments Net unrealized gains (losses) on securities available for sale arising during the year Reclassification of net (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 18,793,327 10 155 Common stock issued for acquisitions 23,835,535 21 20 Preferred stock repurchased 1,100,000 (325) Common stock repurchased 74,627,681 (97) (1,591) Preferred stock issued to ESOP 51,700 52 (54) 2 Preferred stock released to ESOP 35 (1) Preferred stock (34,074) converted to common shares 1,212,871 (34) 6 Preferred stock dividends Common stock dividends Cash payments received on notes receivable from ESOP Stock split 635 (635) ---- ---- ------ ------- Net change (307) (19) 569 (2,044) ---- ---- ------ ------- BALANCE DECEMBER 31, 1997 543 (80) 2,718 8,126 ---- ---- ------ ------- Comprehensive income Net income-1998 Other comprehensive income, net of tax: Translation adjustments Net unrealized gains (losses) on securities available for sale arising during the year Reclassification of net (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 39,048,384 49 910 Common stock issued for acquisitions 16,743,233 24 38 Common stock repurchased 32,676,277 (22) (407) Preferred stock issued to ESOP 35 (37) 2 Preferred stock released to ESOP 33 (1) Preferred stock (31,043) converted to common shares 799,216 (31) 3 Preferred stock dividends Common stock dividends Cash payments received on notes receivable from ESOP 2 Increase in Rabbi trust assets (classified as treasury stock) ---- ---- ----- ------- Net change 4 (4) 51 547 ---- ---- ------ ------- BALANCE DECEMBER 31, 1998 547 (84) 2,769 8,673 ---- ---- ------ ------- Comprehensive income Net income-1999 Other comprehensive income, net of tax: Translation adjustments Net unrealized gains (losses) on securities available for sale arising during the year Reclassification of net (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 21,279,905 101 Common stock issued for acquisitions 8,040,491 8 12 Common stock repurchased 48,720,466 Preferred stock redeemed (191) Preferred stock issued to ESOP 75 (80) 5 Preferred stock released to ESOP 91 (5) Preferred stock (86,141) converted to common shares 2,191,808 (87) Preferred stock dividends Common stock dividends Cash payments received on notes receivable from ESOP Increase in Rabbi trust assets (classified as treasury stock) ---- ---- ------ ------- Net change (203) 11 8 113 ---- ---- ------ ------- BALANCE DECEMBER 31, 1999 $344 $(73) $2,777 $ 8,786 ==== ==== ====== ======= - ---------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Notes Cumulative receivable other Total Retained from Treasury comprehensive stockholders' (in millions, except shares) earnings ESOP stock Income equity - ------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 $ 6,871 $(11) $ (233) $ 316 $20,051 Comprehensive income ------ ------- ------- ------- ------- Net income-1997 2,499 2,499 Other comprehensive income, net of tax: Translation adjustments 1 1 Net unrealized gains (losses) on securities available for sale arising during the year 206 206 Reclassification of net (gains) losses on securities available for sale included in net income (59) (59) ------- Total comprehensive income 2,647 Common stock issued (151) 282 296 Common stock issued for acquisitions 41 131 213 Preferred stock repurchased (325) Common stock repurchased (483) (2,171) Preferred stock issued to ESOP -- Preferred stock released to ESOP 34 Preferred stock (34,074) converted to common shares 28 -- Preferred stock dividends (43) (43) Common stock dividends (925) (925) Cash payments received on notes receivable from ESOP 1 1 Stock split -- ------- ---- ------- ----- ------- Net change 1,421 1 (42) 148 (273) ------- ---- ------- ----- ------- BALANCE DECEMBER 31, 1997 8,292 (10) (275) 464 19,778 ------- ---- ------- ----- ------- Comprehensive income Net income-1998 1,950 1,950 Other comprehensive income, net of tax: Translation adjustments (4) (4) Net unrealized gains (losses) on securities available for sale arising during the year 104 104 Reclassification of net (gains) losses on securities available for sale included in net income (101) (101) ------- Total comprehensive income 1,949 Common stock issued (191) 319 1,087 Common stock issued for acquisitions 11 84 157 Common stock repurchased (741) (1,170) Preferred stock issued to ESOP -- Preferred stock released to ESOP 32 Preferred stock (31,043) converted to common shares 28 -- Preferred stock dividends (35) (35) Common stock dividends (982) (982) Cash payments received on notes receivable from ESOP 7 9 Increase in Rabbi trust assets (classified as treasury stock) (66) (66) ------- ---- ------- ----- ------- Net change 753 7 (376) (1) 981 ------- ---- ------- ----- ------- BALANCE DECEMBER 31, 1998 9,045 (3) (651) 463 20,759 ------- ---- ------- ----- ------- Comprehensive income Net income-1999 3,747 3,747 Other comprehensive income, net of tax: Translation adjustments 4 4 Net unrealized gains (losses) on securities available for sale arising during the year 276 276 Reclassification of net (gains) losses on securities available for sale included in net income 149 149 ------- Total comprehensive income 4,176 Common stock issued (270) 781 612 Common stock issued for acquisitions 2 133 155 Common stock repurchased (2,122) (2,122) Preferred stock redeemed (191) Preferred stock issued to ESOP -- Preferred stock released to ESOP 86 Preferred stock (86,141) converted to common shares 87 -- Preferred stock dividends (35) (35) Common stock dividends (1,293) (1,293) Cash payments received on notes receivable from ESOP 2 2 Increase in Rabbi trust assets (classified as treasury stock) (18) (18) ------- ---- ------- ----- ------- Net change 2,151 2 (1,139) 429 1,372 ------- ---- ------- ----- ------- BALANCE DECEMBER 31, 1999 $11,196 $ (1) $(1,790) $ 892 $22,131 ======= ==== ======= ===== ======= - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 54 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------- (in millions) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,747 $ 1,950 $ 2,499 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,045 1,545 1,140 Depreciation and amortization 1,893 2,168 1,734 Securities available for sale losses (gains) 241 (169) (99) Gains on sales of mortgages held for sale (221) (296) (120) Gains on sales of loans (32) (61) (30) Gains on disposition of operations (107) (100) (15) Release of preferred shares to ESOP 86 32 34 Net (increase) decrease in trading assets (775) 542 (711) Deferred income tax expense (benefit) 1,506 (129) 173 Net (increase) decrease in accrued interest receivable (107) (5) 96 Net (decrease) increase in accrued interest payable (35) (9) 43 Originations of mortgages held for sale (82,846) (111,262) (56,297) Proceeds from sales of mortgages held for sale 91,146 101,371 53,252 Net increase in loans held for sale (874) (822) (846) Other assets, net (2,531) 424 1,746 Other accrued expenses and liabilities, net 1,314 624 (120) ------- --------- -------- Net cash provided (used) by operating activities 13,450 (4,197) 2,479 ------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 14,033 11,073 9,798 Proceeds from prepayments and maturities 7,464 10,354 6,998 Purchases (26,547) (24,650) (13,140) Net cash paid for acquisitions (95) (286) (67) Net (increase) decrease in banking subsidiaries' loans resulting from originations and collections (6,707) (1,383) 843 Proceeds from sales (including participations) of banking subsidiaries' loans 1,908 1,648 437 Purchases (including participations) of banking subsidiaries' loans (1,246) (135) (314) Principal collected on nonbank subsidiaries' loans 4,844 7,788 8,456 Nonbank subsidiaries' loans originated (9,002) (8,962) (8,748) Cash (paid for) proceeds from dispositions of operations (731) 484 16 Proceeds from sales of foreclosed assets 234 279 278 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (37) (468) 415 Net increase in mortgage servicing rights (2,094) (913) (627) Other, net (2,274) (2,826) (221) -------- --------- -------- Net cash (used) provided by investing activities (20,250) (7,997) 4,124 -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (5,124) 6,749 (7,273) Net increase in short-term borrowings 11,952 2,414 2,838 Proceeds from issuance of long-term debt 11,957 7,970 4,003 Repayment of long-term debt (8,309) (5,642) (5,394) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures -- -- 149 Proceeds from issuance of common stock 517 1,087 238 Redemption of preferred stock (191) -- (325) Repurchases of common stock (2,122) (1,170) (2,171) Net decrease in notes receivable from ESOP 2 9 1 Payment of cash dividends on preferred and common stock (1,328) (1,017) (968) Other, net (35) 1,444 (1,213) -------- --------- -------- Net cash provided (used) by financing activities 7,319 11,844 (10,115) -------- --------- -------- NET CHANGE IN CASH AND DUE FROM BANKS 519 (350) (3,512) Cash and due from banks at beginning of year 12,731 13,081 16,593 -------- --------- -------- CASH AND DUE FROM BANKS AT END OF YEAR $ 13,250 $ 12,731 $ 13,081 ======== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 5,055 $ 5,074 $ 4,911 Income taxes $ 1,005 $ 1,289 $ 1,238 Noncash investing and financing activities: Transfers from loans to foreclosed assets $ 220 $ 223 $ 162 - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 55 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Wells Fargo & Company (Parent) is a bank holding company. Wells Fargo & Company and Subsidiaries (Company) is a diversified financial services company providing banking, mortgage and consumer finance through about 5,300 stores, the Internet and other distribution channels throughout North America, including all 50 states, and elsewhere internationally. The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP) and prevailing practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the financial statements for prior years have been reclassified to conform with the current financial statement presentation. On November 2, 1998, the merger involving Norwest Corporation and Wells Fargo & Company (the Merger) was completed. Norwest Corporation changed its name to "Wells Fargo & Company" and the former Wells Fargo & Company (the former Wells Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest Corporation as it was before the Merger is referred to as the former Norwest. The Merger was accounted for as a pooling of interests and, accordingly, the information included in the financial statements presents the combined results as if the Merger had been in effect for all periods presented. The following is a description of the significant accounting policies of the Company. CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Parent, and its majority-owned subsidiaries, which are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other subsidiaries and affiliates in which there is at least 20% ownership are generally accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost. Investments that are accounted for by either the equity or cost method are included in other assets. SECURITIES Securities are accounted for according to their purpose and holding period. SECURITIES AVAILABLE FOR SALE Debt securities that may not be held until maturity and marketable equity securities are classified as securities available for sale and are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a component of cumulative other comprehensive income. The estimated fair value of a security is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income as a loss on securities available for sale. Realized gains and losses are recorded in noninterest income using the identified certificate method. For certain debt securities (for example, Government National Mortgage Association securities), the Company anticipates prepayments of principal in the calculation of the effective yield. TRADING SECURITIES Securities acquired for short-term appreciation or other trading purposes are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in noninterest income. NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities include the venture capital equity securities that are not publicly traded and securities acquired for various purposes, such as troubled debt restructurings and as a regulatory requirement (for example, Federal Reserve Bank stock). These securities are generally accounted for at cost. The asset value is reduced when declines in value are considered to be other than temporary and the estimated loss is recorded in noninterest income as a loss from equity investments along with income recognized on these assets. MORTGAGES HELD FOR SALE Mortgages held for sale are stated at the lower of aggregate cost or market value. The determination of market value includes consideration of all open positions, outstanding commitments from investors, related fees paid and related hedging gains and losses. Gains and losses on sales of mortgages are recognized at settlement dates and are determined by the difference between sales proceeds and the carrying value of the mortgages. Gains and losses are recorded in noninterest income. 56 LOANS HELD FOR SALE Loans held for sale include those student loans which are classified as held for sale because the Company does not intend to hold these loans until maturity or sales of the loans are pending. Such loans are carried at the lower of aggregate cost or market value. Gains and losses are recorded in noninterest income, based on the difference between sales proceeds and carrying value. LOANS Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the contractual life of the loan using an interest method or the straight-line method if it is not materially different. NONACCRUAL LOANS Generally, loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. Generally, consumer loans not secured by real estate are placed on nonaccrual status only when a portion of the principal has been charged off. Such loans are entirely charged off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, industry practice, country, terms and other factors. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection and collectibility is no longer doubtful. IMPAIRED LOANS Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. This assessment for impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired loans in the calendar years subsequent to the restructuring if they are not impaired based on the modified terms. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation allowance for probable losses inherent in the portfolio as of the balance sheet date. The Company's determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. The Company considers the allowance for loan losses adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit. 57 TRANSFERS AND SERVICING OF FINANCIAL ASSETS A transfer of financial assets is accounted for as a sale when control is surrendered over the assets transferred. Servicing rights and other retained interests in the assets sold are recorded by allocating the previous recorded investment between the asset sold and the interest retained based on their relative fair values, if practicable to determine, at the date of transfer. The Company recognizes as assets the rights to service mortgage loans for others, whether the servicing rights are acquired through purchases or retained upon sales of loan originations. For purposes of evaluating and measuring impairment of mortgage servicing rights, the Company stratifies its portfolio on the basis of certain risk characteristics including loan type and note rate. Based upon current fair values and considering derivative financial instruments used as hedges, mortgage servicing rights are periodically assessed for impairment. Impairment is recognized during the period in which impairment occurs. Mortgage servicing rights are amortized over the period of estimated net servicing income and take into account appropriate prepayment assumptions. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment at the capitalized amount less accumulated amortization. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for furniture and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases, which generally range from 20 to 35 years. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from purchase acquisitions made by the Company. Substantially all of the Company's goodwill is being amortized using the straight-line method over 25 years. Core deposit intangibles are amortized on an accelerated basis based on an estimated useful life of 10 to 15 years. Certain identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over an original life of 10 to 15 years. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. INCOME TAXES The Company files a consolidated federal income tax return. Federal income tax is generally allocated to individual subsidiaries as if each had filed a separate return. Combined state tax returns are filed in certain states. State taxes are also allocated to individual subsidiaries. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Foreign taxes paid are applied as credits to reduce federal income taxes payable. EARNINGS PER COMMON SHARE Earnings per common share are presented under two formats: earnings per common share and diluted earnings per common share. Earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year. Diluted earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year, plus the impact of those common stock equivalents (i.e., stock options, restricted share rights and convertible subordinated debentures) that are dilutive. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE DERIVATIVES The Company uses interest rate derivative financial instruments (futures contracts, forward contracts, swaps, caps, floors and options) primarily to hedge mismatches in the rate maturity of loans and their funding sources and the price risk of interest-rate sensitive assets. These instruments serve to reduce rather than increase the Company's exposure to movements in interest rates. At the inception of the hedge, the Company identifies an individual asset or liability, or an identifiable group of essentially similar assets or liabilities, that expose the Company to interest rate risk at the consolidated or enterprise level. Interest rate derivatives are accounted for by the deferral or accrual method only if they are designated as hedges and are expected to be and are effective in substantially reducing the risk arising from the asset or liability identified as exposing the Company to risk. Futures contracts must meet specific high correlation tests. For caps, floors and swaps that are used to hedge mismatches between interest-bearing assets and liabilities, their notional amount, interest rate index and life must closely match the related terms of the hedged asset or liability. Floors, swaps and options that hedge mortgage servicing rights must correlate based on certain duration and convexity parameters. For futures contracts, if the underlying financial instrument differs from the hedged asset or liability, there must 58 be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates that the derivatives no longer provide an effective hedge, hedge accounting is discontinued; previously unrecognized hedge results and the net settlement upon close-out or termination that offset changes in value of the hedged asset or liability are deferred and amortized over the life of the asset or liability with excess amounts recognized in noninterest income or noninterest expense. Gains and losses on futures contracts, which result from the daily settlement of their open positions, and on forward contracts are deferred and classified on the balance sheet consistent with the hedge strategy. They are recognized in income along with and when the effects of the related changes of the hedged asset or liability are recognized. Amounts payable or receivable for swaps, caps and floors are accrued with the passage of time, the effect of which is included in income along with and when the effects of the related changes of the hedged asset or liability are recognized. Gains and losses on options are recognized as a component of the income reported on the hedged asset or liability. Fees associated with these financial contracts are included on the balance sheet at the time that the fee is paid and are classified consistent with the hedge strategy. These fees are fully recognized by the end of their contractual life. If a hedged asset or liability settles before maturity of the hedging interest rate derivatives, the derivatives are closed out or settled, or are redesignated as hedges of other assets or liabilities. For those contracts that are closed out or settled, previously unrecognized hedge results and the net settlement upon close-out or termination are accounted for as part of the gains and losses on the hedged asset or liability. If interest rate derivatives used in an effective hedge are closed out or terminated before the hedged item settles, previously unrecognized hedge results and the net settlement upon close-out or termination are deferred and amortized over the life of the hedged asset or liability. Cash flows resulting from interest rate derivatives (including any related fees) that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows from the items being hedged and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Interest rate derivatives entered into as an accommodation to customers, interest rate derivatives used to offset the interest rate risk of those contracts and positions taken based on the Company's market expectations or to benefit from price differentials between financial instruments and markets are carried at fair value with unrealized gains and losses recorded in noninterest income. Losses are recognized currently on put options written when the fair value of the underlying security falls below the contractual price at which the security may be put to the Company plus the premium received. Premiums received on covered call options written are deferred until the option terminates. If the fair value of the underlying asset is greater than the contractual price at which the Company must sell the asset, the option should be exercised, at which time the premium will be recorded as an adjustment of the gain or loss recognized on the underlying asset. If the option expires, the premium is recognized in other noninterest income. The fair value of interest rate derivative financial instruments with an unrealized gain is included in trading assets (i.e., within other assets) while the fair value of instruments with an unrealized loss is included in other liabilities. Cash flows resulting from instruments carried at fair value are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Credit risk related to interest rate derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. FOREIGN EXCHANGE DERIVATIVES The Company enters into foreign exchange derivative financial instruments (forward and spot contracts and options) primarily as an accommodation to customers and offsets the related foreign exchange risk with other foreign exchange derivatives. Those contracts are carried at fair value, with unrealized gains and losses recorded in noninterest income. Cash flows resulting from foreign exchange derivatives are classified in the cash flow statement as operating cash flows and are reflected in that statement when the cash receipts or payments due under the terms of the foreign exchange derivatives are collected, paid or settled. The Company also uses forward foreign exchange contracts to hedge uncertainties in funding costs related to specific liabilities denominated in foreign currencies. Gains and losses on those contracts are recognized in income and classified on the balance sheet consistent with the hedged item. Cash flows resulting from these foreign exchange derivatives (including any related fees) are classified in the cash flow statement in the same category as the cash flows from the item being hedged and are reflected in that statement when the cash receipts or payments due under the terms of the instruments are collected, paid or settled. Credit risk related to all foreign exchange derivatives is considered and, if material, provided for separately from the allowance for loan losses. FOREIGN CURRENCY TRANSLATION The accounts of the Company's foreign consumer finance subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated into United States dollars at period-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are excluded from net income and included as a component of cumulative other comprehensive income. 59 2. BUSINESS COMBINATIONS The Company regularly explores opportunities to acquire financial institutions and related businesses. Generally, management of the Company does not make a public announcement about an acquisition opportunity until a definitive agreement is signed. Excluding the Merger involving Norwest Corporation and Wells Fargo & Company, the table below includes transactions completed in the years ended December 31, 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------------ Date Assets Method of accounting (in millions) - ------------------------------------------------------------------------------------------------------------------ 1999 Mid-Penn Consumer Discount Company, Philadelphia, Pennsylvania January 21 $ 11 Purchase Century Business Credit Corporation, New York, New York February 1 342 Purchase Metropolitan Bancshares, Inc., Aurora, Colorado February 23 64 Purchase Mercantile Financial Enterprises, Inc., Brownsville, Texas February 26 779 Pooling of interests* Riverton State Bank Holding Company, Riverton, Wyoming March 12 81 Purchase Greater Midwest Leasing Company, Minneapolis, Minnesota June 3 24 Purchase Mustang Financial Corporation, Rio Vista, Texas June 25 254 Purchase Eastern Heights Bank, St. Paul, Minnesota July 1 453 Purchase Goodson Insurance Agency, Denver, Colorado August 1 -- Purchase SB Insurance Company, Marshall, Minnesota October 15 -- Purchase Allied Leasing Company, Burnsville, Minnesota November 1 17 Purchase Eastdil Realty Company, L.L.C., New York, New York November 16 9 Purchase Texas Bancshares, Inc., San Antonio, Texas December 16 370 Purchase ------ $2,404 ====== 1998 Finvercon S.A. Compania, Financiera, Argentina January 8 $ 57 Purchase Fidelity Bancshares, Inc., Fort Worth, Texas January 13 111 Purchase Heritage Trust Company, Grand Junction, Colorado February 20 2 Purchase Founders Trust Company, Dallas, Texas March 2 2 Purchase The T. Eaton Acceptance Company Limited and National Retail Credit Services Limited, Don Mills, Ontario, Canada April 21 370 Purchase WMC Mortgage Corporation, Woodland Hills, California April 30 5 Purchase First Bank, Katy, Texas May 22 310 Pooling of interests* First Bank of Grants, Grants, New Mexico May 28 45 Purchase Spring Mountain Escrow Corporation, Irvine, California May 29 1 Purchase Emjay Corporation, Milwaukee, Wisconsin June 15 6 Purchase Six affiliated bank holding companies and related entities, located in Minnesota, Wisconsin, New Mexico, Arizona and Colorado, including MidAmerica July 2,23 1,317 Pooling of interests* First Bancshares of Valley City, Inc., Valley City, North Dakota July 31 96 Purchase Peoples Insurance Agency, Inc., Valley City, North Dakota July 31 -- Purchase Star Bancshares, Inc., Austin, Texas August 31 582 Pooling of interests* Freedom Trailer Leasing, Inc., Chesterfield, Missouri August 31 5 Purchase Little Mountain Bancshares, Inc., Monticello, Minnesota September 8 82 Purchase First National Bank of Missouri City, Missouri City, Texas October 30 91 Purchase Franklin Bancshares, Inc., Franklin, Texas December 1 72 Purchase ------ $3,154 ====== 60 - ------------------------------------------------------------------------------------------------------------------ Date Assets Method of accounting (in millions) - ------------------------------------------------------------------------------------------------------------------ 1997 Franklin Federal Bancorp., F.S.B., Austin, Texas January 1 $ 621 Purchase of assets Central Bancorporation, Inc., Fort Worth, Texas January 28 1,105 Pooling of interests* Reliable Financial Services, Inc., San Juan, Puerto Rico February 21 39 Pooling of interests* Statewide Mortgage Company, Birmingham, Alabama February 26 28 Purchase The United Group, Inc., Charlotte, North Carolina March 21 41 Purchase Farmers National Bancorp, Inc., Geneseo, Illinois March 24 198 Purchase The First National Bankshares, Inc., Tucumcari, New Mexico June 17 90 Purchase Tennessee Credit Corporation, Nashville, Tennessee July 18 13 Purchase Western National Trust Company, National Association, Odessa, Texas July 31 -- Purchase Fidelity Acceptance Corporation, St. Louis, Missouri August 31 1,135 Purchase The Bank of the Southwest, National Association, Pagosa Springs, Colorado September 2 85 Purchase International Bancorporation, Inc., Golden Valley, Minnesota October 21 483 Pooling of interests* Subsidiaries of Cityside Holding L.L.C., Eden Prairie, Minnesota October 30 104 Purchase J.L.J. Financial Services Corporation, Montvale, New Jersey October 31 26 Purchase Myers Bancshares Inc., Dallas, Texas November 14 135 Purchase Packers Management Company, Inc., Omaha, Nebraska November 25 162 Purchase First Valley Bank Group, Inc., Los Fresnos, Texas December 1 519 Pooling of interests* ------ $4,784 ====== - ------------------------------------------------------------------------------------------------------------------
* Pooling of interests transaction was not material to the Company's consolidated financial statements; accordingly, previously reported results were not restated. In connection with the foregoing transactions, the Company paid cash in the aggregate amount of $541 million, $330 million and $486 million in 1999, 1998 and 1997, respectively, and issued aggregate common shares of 8.0 million, 16.7 million and 23.8 million in 1999, 1998 and 1997, respectively. At December 31, 1999, the Company had announced 7 pending transactions with total assets of approximately $6.9 billion and anticipated that approximately 48 million common shares will be issued upon consummation of these transactions. These pending acquisitions, subject to approval by regulatory agencies, are expected to be completed by mid-2000. MERGER INVOLVING NORWEST AND WELLS FARGO On November 2, 1998, the Merger involving Norwest Corporation and Wells Fargo & Company was completed. Under the terms of the Merger agreement, stockholders of the former Wells Fargo received 10 shares of common stock of the Company for each share of common stock owned. Each share of former Wells Fargo preferred stock was converted into one share of the Company's preferred stock. These shares rank on parity with the Company's preferred stock as to dividends and upon liquidation. Each outstanding and unexercised option granted by the former Wells Fargo was converted into an option to purchase common stock of the Company based on the agreed-upon exchange ratio. As a condition to the Merger, the Company was required by regulatory agencies to divest stores in Arizona and Nevada having aggregate deposits of approximately $1 billion. As a result of these sales, which were completed in 1999, $104 million of pretax gains were included in noninterest income as net gains on dispositions of operations. In connection with the Merger, the Company recorded approximately $600 million of restructuring charges in the fourth quarter of 1998. The restructuring plans are evaluated on a regular basis during the integration process. The charges included a severance-related reserve of $280 million associated with the elimination into 2000 of about 5% of the Company's positions. This reserve was determined based on the Company's existing severance plans for involuntary terminations. The charges also included approximately $250 million related to dispositions of owned and leased premises held for sale or remarketing, which is expected to be used by mid-2000, and $70 million of other costs associated with exiting activities due to the Merger. The following table presents the 1999 activity in these restructuring reserves:
- ------------------------------------------------------------------------------------------------------------ Severance- related (in millions) costs Premises Other Total - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $280 (1) $ 250 (2) $ 70 $ 600 Utilization (95) (131) (64) (290) Changes in estimates -- (31) -- (31) ---- ----- ---- ----- Balance, December 31, 1999 $185 $ 88 (3) $ 6 $ 279 ==== ===== ==== ===== - ------------------------------------------------------------------------------------------------------------
(1) The 1998 charges recorded for severance-related costs were classified on the income statement as salaries. (2) The 1998 charges recorded for premises were classified on the income statement as net losses on dispositions of premises and equipment. (3) Includes $38 million of owned premises. 61 Total utilization included approximately $97 million of cash payments, $68 million of legal obligations as of December 31, 1999 and $125 million of write-downs. Approximately 1,730 employees had entered the severance process through December 31, 1999. A majority of the changes in estimates resulted from a reassessment of the economics and space requirements at a leased Colorado office building complex. The reassessment indicated that the complex could be reconfigured to meet the Company's needs. The changes in estimates were recorded on the income statement as an adjustment to net (gains) losses on dispositions of premises and equipment. The suspension of depreciation on assets held for disposition reduced net occupancy and equipment expense by a total of $15 million in 1999. 3. CASH, LOAN AND DIVIDEND RESTRICTIONS Federal Reserve Board (FRB) regulations require reserve balances on deposits to be maintained by each of the banking subsidiaries with the Federal Reserve Banks. The average required reserve balance was $2.0 billion and $2.2 billion in 1999 and 1998, respectively. Federal law prevents the Company and its nonbank subsidiaries from borrowing from its subsidiary banks unless the loans are secured by specified collateral. Such secured loans by any subsidiary bank are generally limited to 10% of the subsidiary bank's capital and surplus (as defined, which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) and aggregate loans to the Company and its nonbank subsidiaries are limited to 20% of the subsidiary bank's capital and surplus. (For further discussion of risk-based capital, see Note 22 to Financial Statements.) The payment of dividends to the Parent by subsidiary banks is subject to various federal and state regulatory limitations. Dividends payable by a national bank to the Parent without the express approval of the Office of the Comptroller of the Currency (OCC) are limited to that bank's retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits are defined by the OCC as net income, less dividends declared during the period, both of which are based on regulatory accounting principles. The Company also has state-chartered subsidiary banks that are subject to state regulations that limit dividends. Under these provisions and except for Wells Fargo Bank, N.A. (WFB, N.A.), the Company's national and state-chartered subsidiary banks could have declared dividends of $1,061 million and $687 million in 1999 and 1998, respectively, without obtaining prior regulatory approval. With the express approval of the OCC, WFB, N.A. declared dividends in 1999 and 1998 of $500 million in excess of its net income of $1,876 million for those years. (The total dividends declared by WFB, N.A. in 1999, 1998 and 1997 were $900 million, $1,476 million and $2,019 million, respectively.) Therefore, before it can declare dividends in 2000 without the approval of the OCC, WFB, N.A. must have net income of $500 million plus an amount greater than the dividends declared in 2000. Since it is not expected to have net income of $500 million plus an amount greater than the dividends expected to be declared in 2000, WFB, N.A. will again need to obtain the approval of the OCC before any dividends are declared in 2000. In addition, the Company's non-bank subsidiaries could have declared dividends of $1,195 million and $1,205 million at December 31, 1999 and 1998, respectively. 62 4. SECURITIES AVAILABLE FOR SALE The following table provides the cost and fair value for the major components of securities available for sale carried at fair value. There were no securities classified as held to maturity at the end of 1999 or 1998.
- ----------------------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------- ------------------------------------------- Estimated Estimated Estimated Estimated unrealized unrealized Estimated unrealized unrealized Estimated gross gross fair gross gross fair (in millions) Cost gains losses value Cost gains losses value - ----------------------------------------------------------------------------- ------------------------------------------- Securities of U.S. Treasury and federal agencies $ 5,956 $ 13 $338 $ 5,631 $ 3,260 $ 45 $18 $ 3,287 Securities of U.S. states and political subdivisions 2,041 48 28 2,061 1,683 115 4 1,794 Mortgage-backed securities: Federal agencies 22,774 109 336 22,547 20,539 293 28 20,804 Private collateralized mortgage obligations (1) 2,855 12 63 2,804 3,420 29 9 3,440 ------- ------ ---- ------- ------- ---- --- ------- Total mortgage-backed securities 25,629 121 399 25,351 23,959 322 37 24,244 Other 2,289 8 93 2,204 1,879 41 21 1,899 ------- ------ ---- ------- ------- ---- --- ------- Total debt securities 35,915 190 858 35,247 30,781 523 80 31,224 Marketable equity securities 1,314 1,984 27 3,271 386 396 9 773 ------- ------ ---- ------- ------- ---- --- ------- Total $37,229 $2,174 $885 $38,518 $31,167 $919 $89 $31,997 ======= ====== ==== ======= ======= ==== === ======= - -----------------------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. At December 31, 1999, the Company held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of stockholders' equity. Securities pledged primarily to secure trust and public deposits and for other purposes as required or permitted by law were $15.5 billion and $11.2 billion at December 31, 1999 and 1998, respectively. The table on the right provides the components of the realized net (loss) gain on securities from the securities available for sale portfolio. (Realized gains on marketable equity securities from venture capital investments are reported as net venture capital gains.)
- --------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------ (in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Realized gross gains $ 76 $209 $168 Realized gross losses (317) (40) (69) ----- ---- ---- Realized net (loss) gain $(241) $169 $ 99 ===== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------
The table below provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties.
- ------------------------------------------------------------------------------------------------------------- December 31, 1999 ----------------------------------------------------------------- Weighted Total average amount yield Remaining contractual principal maturity ----------------------------------------------------------------- After one year Within one year through five years ------------------ -------------------- (in millions) Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------- Securities of U.S. Treasury and federal agencies $ 5,631 5.71% $ 626 6.38% $1,123 6.39% Securities of U.S. states and political subdivisions 2,061 8.28 104 7.97 338 7.88 Mortgage-backed securities: Federal agencies 22,547 7.11 650 6.55 1,837 7.01 Private collateralized mortgage obligations 2,804 6.51 76 6.32 317 6.40 ------- ------ ------ Total mortgage-backed securities 25,351 7.04 726 6.52 2,154 6.92 Other 2,204 5.28 80 5.03 538 3.98 ------- ------ ------ ESTIMATED FAIR VALUE OF DEBT SECURITIES (1) $35,247 6.79% $1,536 6.48% $4,153 6.47% ======= ==== ====== ==== ====== ==== TOTAL COST OF DEBT SECURITIES $35,915 $1,581 $4,259 ======= ====== ====== - ------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- December 31, 1999 ---------------------------------------- Remaining contractual principal maturity ---------------------------------------- After five years through ten years After ten years -------------------- -------------------- (in millions) Amount Yield Amount Yield - --------------------------------------------------------------------------------------- Securities of U.S. Treasury and federal agencies $3,065 5.33% $ 817 5.72% Securities of U.S. states and political subdivisions 187 7.35 1,432 8.52 Mortgage-backed securities: Federal agencies 2,453 7.18 17,607 7.13 Private collateralized mortgage obligations 446 6.46 1,965 6.55 ------ ------- Total mortgage-backed securities 2,899 7.07 19,572 7.07 Other 989 5.75 597 5.70 ------ ------- ESTIMATED FAIR VALUE OF DEBT SECURITIES (1) $7,140 6.14% $22,418 7.08% ====== ==== ======= ==== TOTAL COST OF DEBT SECURITIES $7,388 $22,687 ====== ======= - ---------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of debt securities available for sale. 63 5. LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of the major categories of loans outstanding and related unfunded commitments is shown in the following table. Unfunded commitments are defined as all legally binding agreements to extend credit, net of all funds lent, and all standby and commercial letters of credit issued under the terms of those commitments. At December 31, 1999 and 1998, the commercial loan category and related unfunded commitments did not have an industry concentration that exceeded 10% of total loans and unfunded commitments. At December 31, 1999 and 1998, the real estate 1-4 family first mortgage and junior lien mortgage categories and related unfunded commitments did not have a concentration in any state that exceeded 10% of total loans and unfunded commitments.
- ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, -------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- COMMITMENTS Commitments TO EXTEND to extend OUTSTANDING CREDIT Outstanding credit - ------------------------------------------------------------------------------------------------------------------- Commercial $ 38,688 $39,793 $ 35,450 $34,892 Real estate 1-4 family first mortgage 12,398 1,425 11,496 1,311 Other real estate mortgage 19,178 1,438 16,668 1,302 Real estate construction 4,711 2,710 3,790 3,007 Consumer: Real estate 1-4 family junior lien mortgage 12,938 5,432 11,128 5,792 Credit card 5,472 19,023 5,795 18,874 Other revolving credit and monthly payment 16,656 4,646 15,809 6,236 -------- ------- -------- ------- Total consumer 35,066 29,101 32,732 30,902 Lease financing 7,850 -- 6,380 -- Foreign 1,573 115 1,478 53 -------- ------- -------- ------- Total loans (1) $119,464 $74,582 $107,994 $71,467 ======== ======= ======== ======= - -------------------------------------------------------------------------------------------------------------------
(1) Outstanding loan balances at December 31, 1999 and 1998 are net of unearned income, including net deferred loan fees, of $3,200 million and $2,967 million, respectively. In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment). A commitment to extend credit is a legally binding agreement to lend funds to a customer usually at a stated interest rate and for a specified purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit shown in the table above because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its related credit activities. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses. Standby letters of credit totaled $4,355 million and $3,332 million at December 31, 1999 and 1998, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The liquidity risk to the Company arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing standby letters of credit and the Company's management of that credit risk is considered in management's determination of the allowance for loan losses. Standby letters of credit are net of participations sold to other institutions of $1,256 million in 1999 and $837 million in 1998. 64 Included in standby letters of credit are those that back financial instruments (financial guarantees). The Company had issued or purchased participations in financial guarantees of approximately $2,607 million and $2,188 million at December 31, 1999 and 1998, respectively. The Company also had commitments for commercial and similar letters of credit of $745 million and $691 million at December 31, 1999 and 1998, respectively. Substantially all fees received from the issuance of financial guarantees are deferred and amortized on a straight-line basis over the term of the guarantee. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to Statement of Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis. The determination of allocated reserves for portfolios of larger commercial and commercial real estate loans involves a review of individual higher-risk transactions, focusing on the accuracy of loan grading, assessments of specific loss content, and, in some cases, strategies for resolving problem credits. These considerations supplement the application of loss factors delineated by individual loan grade to the existing distribution of risk exposures, thus framing an assessment of inherent losses across the entire wholesale lending portfolio segment which is responsive to shifts in portfolio risk content. The loss factors used for this analysis have been derived from migration models which track actual portfolio movements from problem asset loan grades to loss over a 5 to 10 year period. In the case of pass loan grades, the loss factors are derived from analogous loss experience in public debt markets, calibrated to the long-term average loss experience of the Company's portfolios. The loan loss reserve allocations arrived at through this factor methodology are adjusted by management's judgment concerning the effect of recent economic events on portfolio performance. In the case of more homogeneous portfolios, such as consumer loans and leases, residential mortgage loans, and some segments of small business lending, the determination of allocated reserves is conducted at a more aggregate, or pooled, level. For portfolios of this nature, the risk assessment process emphasizes the development of rigorous forecasting models, which focus on recent delinquency and loss trends in different portfolio segments to project relevant risk metrics over an intermediate-term horizon. Such analyses are updated frequently to capture the most recent behavioral characteristics of the subject portfolios, as well as any changes in management's loss mitigation or customer solicitation strategies, in order to reduce the differences between estimated and observed losses. A reserve which approximates one year of projected net losses is provided as the baseline allocation for most homogeneous portfolios, to which management will add certain adjustments to ensure that a prudent amount of conservatism is present in the specific assumptions underlying that forecast. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans and leases), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. At December 31, 1999, the unallocated portion amounted to 44% of the total allowance, compared with 37% at December 31, 1998. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its examinations to executive management and the Board of Directors. Such reviews also assist management in establishing the level of the allowance. Like all national banks, subsidiary national banks continue to be subject to examination by their primary regulator, the Office of the Comptroller of the Currency (OCC), and some have OCC examiners in residence. These examinations occur throughout the year and target various activities of the subsidiary national banks, including specific segments of the loan portfolio (for example, commercial real estate and shared national credits). In addition to the subsidiary national banks being examined by the OCC, the Parent and its nonbank subsidiaries are examined by the FRB. The Company considers the allowance for loan losses of $3,170 million adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit at December 31, 1999. 65 Changes in the allowance for loan losses were as follows:
- ------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 3,134 $ 3,062 $ 3,059 Allowances related to business combinations, net 40 144 168 Provision for loan losses 1,045 1,545 1,140 Loan charge-offs: Commercial (382) (261) (357) Real estate 1-4 family first mortgage (12) (26) (26) Other real estate mortgage (28) (54) (26) Real estate construction (2) (3) (5) Consumer: Real estate 1-4 family junior lien mortgage (33) (31) (37) Credit card (388) (535) (579) Other revolving credit and monthly payment (512) (1,002) (618) ------- ------- ------ Total consumer (933) (1,568) (1,234) Lease financing (38) (48) (46) Foreign (90) (84) (37) ------- ------- ------ Total loan charge-offs (1,485) (2,044) (1,731) ------- ------- ------ Loan recoveries: Commercial 86 82 105 Real estate 1-4 family first mortgage 6 11 9 Other real estate mortgage 37 78 62 Real estate construction 5 4 12 Consumer: Real estate 1-4 family junior lien mortgage 15 7 10 Credit card 46 56 61 Other revolving credit and monthly payment 214 163 144 ------- ------- ------ Total consumer 275 226 215 Lease financing 12 12 13 Foreign 15 14 10 ------- ------- ------ Total loan recoveries 436 427 426 ------- ------- ------ Total net loan charge-offs (1,049) (1,617) (1,305) ------- ------- ------ BALANCE, END OF YEAR $ 3,170 $ 3,134 $ 3,062 ======= ======= ======= Total net loan charge-offs as a percentage of average total loans .94% 1.52% 1.25% ======= ======= ======= Allowance as a percentage of total loans 2.65% 2.90% 2.88% ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------
In accordance with FAS 114, the table below shows the recorded investment in impaired loans by methodology used to measure impairment at December 31, 1999 and 1998:
- ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, --------------------------- 1999 1998 Impairment measurement based on: Collateral value method $174 $229 Discounted cash flow method 74 70 Historical loss factors 114 89 ---- ---- Total (1) $362 $388 ==== ==== - -------------------------------------------------------------------------------------------------------------------
(1) Includes $196 million and $155 million of impaired loans with a related FAS 114 allowance of $43 million and $37 million at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans during 1999, 1998 and 1997 was $371 million, $456 million and $513 million, respectively. Total interest income recognized on impaired loans during 1999, 1998 and 1997 was $7 million, $13 million and $15 million, respectively, which was primarily recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. 66 6. PREMISES, EQUIPMENT, LEASE COMMITMENTS, INTEREST RECEIVABLE AND OTHER ASSETS The following table presents comparative data for premises and equipment:
- ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ------------------------------- 1999 1998 Land $ 358 $ 357 Buildings 2,242 2,135 Furniture and equipment 2,480 2,688 Leasehold improvements 719 732 Premises leased under capital leases 76 80 ------ ------ Total 5,875 5,992 Less accumulated depreciation and amortization 2,890 2,862 ------ ------ Net book value $2,985 $3,130 ====== ====== - -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense was $484 million, $491 million and $457 million in 1999, 1998 and 1997, respectively. The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms, including renewal options, up to 100 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. The following table shows future minimum payments under noncancelable operating leases and capital leases, net of sublease rentals, with terms in excess of one year as of December 31, 1999:
- -------------------------------------------------------------------------------------------------------------- (in millions) Operating leases Capital leases - -------------------------------------------------------------------------------------------------------------- Year ended December 31, 2000 $ 402 $ 6 2001 334 5 2002 269 4 2003 197 3 2004 162 2 Thereafter 848 17 ------ --- Total minimum lease payments $2,212 37 ====== Executory costs (2) Amounts representing interest (5) --- Present value of net minimum lease payments $30 === - --------------------------------------------------------------------------------------------------------------
Rental expense, net of rental income, for all operating leases was $377 million, $473 million and $441 million in 1999, 1998 and 1997, respectively. The components of interest receivable and other assets at December 31, 1999 and 1998 were as follows:
- ------------------------------------------------------------------------------------------------------------- (in millions) December 31, - ------------------------------------------------------------------------------------------------------------- 1999 1998 Nonmarketable equity investments $ 3,347 $ 2,392 Trading assets 2,667 760 Government National Mortgage Association (GNMA) pool buy outs 1,516 1,624 Interest receivable 1,169 1,062 Certain identifiable intangible assets 230 212 Interest-earning deposits 196 113 Foreclosed assets 153 148 Due from customers on acceptances 103 128 Other 5,967 4,455 ------- ------- Total interest receivable and other assets $15,348 $10,894 ======= ======= - -------------------------------------------------------------------------------------------------------------
Noninterest income from nonmarketable equity investments accounted for using the cost method was $138 million, $151 million and $157 million in 1999, 1998 and 1997, respectively. GNMA pool buy outs are advances made to GNMA mortgage pools that are guaranteed by the Federal Housing Administration or by the Department of Veterans Affairs (collectively, "the guarantors"). These advances are made to buy out government agency-guaranteed delinquent loans, pursuant to the Company's servicing agreements. The Company, on behalf of the guarantors, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances, by the guarantors. Trading assets consist predominantly of securities, including corporate debt and U.S. government agency obligations. A major portion of the increase at December 31, 1999, compared with December 31, 1998 was due to an increase in U.S. Treasury securities. Interest income from trading assets was $70 million, $99 million and $76 million in 1999, 1998 and 1997, respectively. Noninterest income from trading assets was $103 million, $206 million and $151 million in 1999, 1998 and 1997, respectively. Amortization expense for certain identifiable intangible assets included in other assets was $46 million, $79 million and $74 million in 1999, 1998 and 1997, respectively. 67 7. DEPOSITS The aggregate amount of time certificates of deposit and other time deposits issued by domestic offices was $27,670 million and $31,252 million at December 31, 1999 and 1998, respectively. Substantially all of those deposits were interest bearing. The contractual maturities of those deposits are shown in the following table.
- ------------------------------------------------------------------------------------- (in millions) December 31, 1999 2000 $22,249 2001 3,400 2002 1,100 2003 396 2004 287 Thereafter 238 ------- Total $27,670 ======= - -------------------------------------------------------------------------------------
Of the total above, the amount of time deposits with a denomination of $100,000 or more was $7,970 million and $8,053 million at December 31, 1999 and 1998, respectively. The contractual maturities of these deposits are shown in the following table.
- ------------------------------------------------------------------------------------ (in millions) December 31, 1999 Three months or less $2,977 After three months through six months 2,129 After six months through twelve months 1,924 After twelve months 940 ------ Total $7,970 ====== - ------------------------------------------------------------------------------------
Time certificates of deposit and other time deposits issued by foreign offices with a denomination of $100,000 or more represent substantially all of the foreign deposit liabilities of $3,255 million and $746 million at December 31, 1999 and 1998, respectively. Demand deposit overdrafts that have been reclassified as loan balances were $868 million and $678 million at December 31, 1999 and 1998, respectively. 8. SHORT-TERM BORROWINGS The table below shows selected information for short-term borrowings. These borrowings generally mature in less than 30 days.
- --------------------------------------------------------------------------------------------------------------- 1999 1998 1997 (in millions) ----------------- ----------------- ------------------ AMOUNT RATE Amount Rate Amount Rate - --------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, Commercial paper and other short-term borrowings $17,211 6.06% $ 9,553 5.26% $ 6,456 5.73% Federal funds purchased and securities sold under agreements to repurchase 10,784 4.51 6,344 4.18 6,925 5.59 ------- ------- ------- Total $27,995 5.46 $15,897 4.83 $13,381 5.65 ======= ======= ======= YEAR ENDED DECEMBER 31, AVERAGE DAILY BALANCE Commercial paper and other short-term borrowings $10,242 5.40% $ 7,676 5.60% $ 5,473 5.59% Federal funds purchased and securities sold under agreements to repurchase 8,114 4.57 6,778 5.11 5,889 5.17 ------- ------- ------- Total $18,356 5.04 $14,454 5.37 $11,362 5.37 ======= ======= ======= MAXIMUM MONTH-END BALANCE Commercial paper and other short-term borrowings (1) $17,211 NA $10,236 NA $ 6,456 NA Federal funds purchased and securities sold under agreements to repurchase (2) 10,784 NA 10,364 NA 8,722 NA NA-Not applicable. - ---------------------------------------------------------------------------------------------------------------
(1) Highest month-end balance in each of the last three years appeared in December 1999, October 1998 and December 1997, respectively. (2) Highest month-end balance in each of the last three years appeared in December 1999, April 1998 and June 1997, respectively. At December 31, 1999, the Company had available lines of credit totaling $4.0 billion, of which $2.2 billion was obtained by a subsidiary, Norwest Financial. The remaining $1.8 billion was in the form of a revolving credit facility. A portion of these financing arrangements require the maintenance of compensating balances or payment of fees, which are not material. 68 9. LONG-TERM DEBT The following is a summary of long-term debt (reflecting unamortized debt discounts and premiums, where applicable) owed by the Parent and its subsidiaries:
- ---------------------------------------------------------------------------------------------------------------------- Maturity Interest (in millions) date rate(s) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- WELLS FARGO & COMPANY (PARENT ONLY) SENIOR Global Notes (1) 2002 - 2004 6.5% - 6.625% $ 2,243 $ -- Global Notes 2001 Various 747 -- Medium-Term Notes (1) 2000 - 2006 5.225% - 8.15% 3,993 3,275 Medium-Term Notes 2000 - 2027 6.75% - 7.75% 820 1,125 Floating-Rate Medium-Term Notes 2000 Various 2,100 700 Floating-Rate Euro Medium-Term Notes 2001 Various 300 300 Notes (1) 2004 6.00% 1 2 Notes (1) 2000 6.00% 200 202 ESOP Notes 1999 8.52% -- 4 ------- ------- Total senior debt - Parent 10,404 5,608 ------- ------- SUBORDINATED Notes 2003 6.625% 199 200 Debentures 2023 6.65% 198 200 Other notes (1) 2000 - 2003 6.58% - 6.75% 3 2 ------- ------- Total subordinated debt - Parent 400 402 ------- ------- Total long-term debt - Parent 10,804 6,010 ------- ------- WFC HOLDINGS CORPORATION SENIOR Floating-Rate Medium-Term Notes 1999 Various -- 150 Medium-Term Notes (1)(2) 2001 - 2002 6.875% - 10.83% 221 228 Medium-Term Notes 2001 - 2002 9.04% - 10.9% 15 15 Notes payable by subsidiaries 51 51 Other notes and debentures 2003 8.5% 4 4 Obligations of subsidiaries under capital leases (Note 6) 15 20 ------- ------- Total senior debt - WFC Holdings 306 468 ------- ------- SUBORDINATED Floating-Rate Notes (3) 2000 Various 118 118 Capital Notes (4) 1999 8.625% -- 183 Notes 2002 8.75% 195 195 Notes 2002 8.375% 138 138 Notes 2003 6.875% 150 150 Notes 2003 6.125% 249 249 Notes (1)(2) 2004 9.125% 133 136 Notes (1)(2) 2004 9.0% -- 127 Notes (1) 2006 6.875% 499 499 Notes (1) 2006 7.125% 299 299 Notes 2008 6.25% 199 199 Medium-Term Notes (1) 2001 9.9% - 11.25% 127 127 Medium-Term Notes 2002 9.375% 30 30 Medium-Term Notes (1) 2013 6.50% - 6.63% 50 50 ------- ------- Total subordinated debt - WFC Holdings 2,187 2,500 ------- ------- Total long-term debt - WFC Holdings 2,493 2,968 ------- ------- NORWEST FINANCIAL, INC. AND ITS SUBSIDIARIES (NFI) SENIOR Notes 2000 - 2009 5.125% - 8.65% 4,511 4,341 Floating-Rate Notes 2000 Various 550 -- Floating-Rate Medium-Term Notes 2001 Various 21 -- Medium-Term Notes 2000 - 2008 4.9% - 6.54% 832 932 ------- ------- Total long-term debt - NFI 5,914 5,273 ------- ------- OTHER CONSOLIDATED SUBSIDIARIES SENIOR Federal Home Loan Bank (FHLB) Notes and Advances (5) 2000 - 2027 3.15% - 8.38% 345 2,768 Floating-Rate FHLB Advances (5) 2000 - 2011 6.391% - 6.47% 3,775 2,655 Notes 2000 12.25% 1 1 Other notes and debentures 2000 - 2015 3.00% - 10.00% 28 18 Capital lease obligations (Note 6) 15 16 ------- ------- Total long-term debt - other consolidated subsidiaries 4,164 5,458 ------- ------- Total consolidated long-term debt $23,375 $19,709 ======= ======= - ----------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially all of these Notes, whereby the Company receives fixed-rate interest payments approximately equal to interest on the Notes and makes interest payments based on an average three-month or six-month LIBOR rate. (2) The interest rate swap agreement for these Notes is callable by the counterparty prior to the maturity of the Notes. (3) Notes are currently redeemable in whole or in part, at par, or at any time in the event withholding taxes are imposed by the United States. (4) Mandatory Equity Notes. (5) The maturities of the FHLB advances are determined quarterly, based on the outstanding balance, the then current LIBOR rate, and the maximum life of the advance. Advances maturing within the next year are expected to be refinanced, extending the maturity of such borrowings beyond one year. 69 At December 31, 1999, the principal payments, including sinking fund payments, on long-term debt are due as noted in the following table.
------------------------------------------------- (in millions) Parent Company ------------------------------------------------- 2000 $ 4,400 $ 8,988 2001 1,550 2,595 2002 1,275 2,637 2003 390 1,819 2004 1,501 2,615 Thereafter 1,688 4,721 ------- ------- Total $10,804 $23,375 ======= ======= -------------------------------------------------
The interest rates on floating-rate notes are determined periodically by formulas based on certain money market rates, subject, on certain notes, to minimum or maximum interest rates. Certain of the agreements under which debt has been issued contain provisions that may limit the merger or sale of certain subsidiary banks and the issuance of capital stock or convertible securities by certain subsidiary banks. The Company was in compliance with the provisions of those borrowing agreements at December 31, 1999. 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The Company established special purpose trusts in 1996 and 1997 for the purpose of issuing trust preferred securities. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested in junior subordinated deferrable interest debentures (debentures) of WFC Holdings Corporation (WFC Holdings). Concurrent with the issuance of the preferred securities by the trusts, WFC Holdings issued guarantees for the benefit of the security holders. These trust preferred securities provide the Company with a more cost-effective means of obtaining Tier 1 capital for regulatory purposes than if the Company itself were to issue additional preferred stock because the Company is allowed to deduct, for income tax purposes, distributions to the holders of the trust preferred securities. The sole assets of these special purpose trusts are the debentures. WFC Holdings owns all of the common securities of the five trusts. Those common securities and debentures, along with the related income effects, are eliminated within the consolidated financial statements. The preferred securities issued by the trusts rank senior to the common securities. The obligations of WFC Holdings under the debentures, the indentures, the relevant trust agreements and the guarantees, in the aggregate, constitute a full and unconditional guarantee by WFC Holdings of the obligations of the trusts under the trust preferred securities and rank subordinate and junior in right of payment to all other liabilities of WFC Holdings. The Parent guarantees the obligations of WFC Holdings. The trust preferred securities are subject to mandatory redemption at the stated maturity date of the debentures, upon repayment of the debentures, or earlier, pursuant to the terms of the Trust Agreement. The table on the next page summarizes the outstanding preferred securities issued by each special purpose trust and the debentures issued by WFC Holdings to each trust as of December 31, 1999: 70
- -------------------------------------------------------------------------------------------------------------------------------- (in millions) Trust preferred securities and debentures Interest Trust preferred securities Principal ----------------------------------------- payable/ -------------------------- balance of Stated Annualized distribution Trust name Issuance date Amount debentures maturity coupon rate dates (1) - -------------------------------------------------------------------------------------------------------------------------------- Wells Fargo Capital A November 1996 $ 85 $ 94 December 1, 2026 8.13% Semi-annual - June 1 and December 1 Wells Fargo Capital B November 1996 153 159 December 1, 2026 7.95% Semi-annual - June 1 and December 1 Wells Fargo Capital C November 1996 186 194 December 1, 2026 7.73% Semi-annual - June 1 and December 1 Wells Fargo Capital I December 1996 212 224 December 15, 2026 7.96% Semi-annual - June 15 and December 15 Wells Fargo Capital II January 1997 149 (2) 155 January 30, 2027 LIBOR + .5% Quarterly - ---- January 30, April 30, July 30 and October 30 Total $785 ==== - ------------------------------------------------------------------------------------------------------------------------------------
(1) All distributions are cumulative. (2) Net of discount of $1 million. On or after December 2006 for Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I and on or after January 2007 for Wells Fargo Capital II, each of the series of trust preferred securities may be redeemed and the corresponding debentures may be prepaid at the option of WFC Holdings, subject to FRB approval, at declining redemption prices. Prior to December 2006 for Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C and Wells Fargo Capital I and prior to January 2007 for Wells Fargo Capital II, the securities may be redeemed at the option of WFC Holdings on the occurrence of certain events that result in a negative tax impact, negative regulatory impact on the trust preferred securities of WFC Holdings or negative legal or regulatory impact on the appropriate special purpose trust which would define it as an investment company. In addition, WFC Holdings has the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities for up to five years. 71 11. PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of preferred stock and 4,000,000 shares of preference stock, both without par value. All preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. No preference shares have been issued under this authorization. The following table is a summary of preferred stock:
- ---------------------------------------------------------------------------------------------------------------------------------- Shares issued Carrying amount Dividends declared and outstanding (in millions) (in millions) ---------------------- ---------------- Adjustable ---------------------- December 31, December 31, dividend rate Year ended December 31, ---------------------- ---------------- ------------------ ---------------------- 1999 1998 1999 1998 Minimum Maximum 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Adjustable-Rate Cumulative, Series B (Liquidation preference $50) 1,500,000 1,500,000 $ 75 $ 75 5.5% 10.5% $ 4 $ 4 $ 4 8-7/8% Cumulative, Series D -- -- -- -- -- -- -- 3 (Liquidation preference $500) (1) 9% Cumulative, Series G -- -- -- -- -- -- -- -- 5 (Liquidation preference $200) (2) 6.59%/Adjustable-Rate Noncumulative Preferred Stock, Series H (Liquidation preference $50) (3) 4,000,000 4,000,000 200 200 7.0 13.0 13 13 13 Cumulative Tracking (4) (Liquidation preference $200) -- 980,000 -- 196 -- -- 18 18 18 1999 ESOP Cumulative Convertible (Liquidation preference $1,000) 22,263 -- 22 -- 10.30 11.30 -- -- -- 1998 ESOP Cumulative Convertible (Liquidation preference $1,000) 8,386 8,740 8 9 10.75 11.75 -- -- -- 1997 ESOP Cumulative Convertible (Liquidation preference $1,000) 10,839 19,698 11 20 9.50 10.50 -- -- -- 1996 ESOP Cumulative Convertible (Liquidation preference $1,000) 12,011 22,068 12 22 8.50 9.50 -- -- -- 1995 ESOP Cumulative Convertible (Liquidation preference $1,000) 11,990 20,130 12 20 10.0 10.0 -- -- -- ESOP Cumulative Convertible (Liquidation preference $1,000) 3,732 9,726 4 10 9.0 9.0 -- -- -- Unearned ESOP shares (5) -- -- (73) (84) -- -- -- -- -- Less: Cumulative Tracking held by subsidiary (Liquidation preference $200) -- 25,000 -- 5 -- -- -- -- -- --------- ---------- ---- ---- --- --- --- Total 5,569,221 6,535,362 $271 $463 $35 $35 $43 ========= ========== ==== ==== === === === - ------------------------------------------------------------------------------------------------------------------------------------
(1) In March 1997, the Company redeemed all $175 million (350,000 shares) of its Series D preferred stock. (2) In May 1997, the Company redeemed all $150 million (750,000 shares) of its Series G preferred stock. (3) Annualized dividend rate is 6.59% through October 1, 2001, after which the rate will become adjustable, subject to the minimum and maximum rates disclosed. (4) In December 1999, the Company redeemed all $196 million (980,000 shares) of its Cumulative Tracking preferred stock. (5) In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS, the Company recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released. For information on dividends declared, see Note 12. 72 ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares are redeemable at the option of the Company at $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of February, May, August and November. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The average dividend rate was 5.5% during 1999, 1998 and 1997. 6.59%/ADJUSTABLE-RATE NONCUMULATIVE PREFERRED STOCK, SERIES H These shares are redeemable at the option of the Company on or after October 1, 2001 at a price of $50 per share plus accrued and unpaid dividends. Dividends are noncumulative and payable on the first day of each calendar quarter at an annualized rate of 6.59% through October 1, 2001. The dividend rate after October 1, 2001 will be equal to .44% plus the highest of the Treasury bill discount rate, the 10-year constant maturity rate and the 30-year constant maturity rate, as determined in advance of such dividend period, limited to a minimum of 7% and a maximum of 13%. ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of the Company's 1999, 1998, 1997, 1996 and 1995 ESOP Cumulative Convertible Preferred Stock and ESOP Cumulative Convertible Preferred Stock (collectively, ESOP Preferred Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan (formerly known as the Norwest Corporation Savings Investment Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of initial issuance and are payable quarterly at annual rates ranging from 8.50 percent to 11.75 percent, depending upon the year of issuance. Each share of ESOP Preferred Stock released from the unallocated reserve of the Plan is converted into shares of common stock of the Company based on the stated value of the ESOP Preferred Stock and the then current market price of the Company's common stock. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. The ESOP Preferred Stock may be redeemed at any time, in whole or in part, at the option of the Company at a redemption price per share equal to the higher of (a) $1,000 per share plus accrued and unpaid dividends and (b) the fair market value, as defined in the Certificates of Designation of the ESOP Preferred Stock. 73 12. COMMON STOCK AND STOCK PLANS COMMON STOCK The table below summarizes common stock reserved, issued and authorized as of December 31, 1999:
- -------------------------------------------------------------------------------------------------- Number of shares - -------------------------------------------------------------------------------------------------- Convertible subordinated debentures and warrants (1) 19,956,960 Dividend reinvestment and common stock purchased plans 1,903,252 Director plans 1,699,335 Employee stock plans 222,736,432 -------------- Total shares reserved 246,295,979 Shares issued 1,666,095,265 Shares not reserved 2,087,608,756 ------------- Total shares authorized 4,000,000,000 ============= - --------------------------------------------------------------------------------------------------
(1) Includes warrants issued by the Company to subsidiaries to purchase shares of the Company's common stock as follows: 8,928,172 shares at $42.50 per share in 1996 and 11,000,176 shares at $37.50 per share in 1995. Each share of the Company's common stock includes one preferred share purchase right. These rights will become exercisable only if a person or group acquires or announces an offer to acquire 15 percent or more of the Company's common stock. When exercisable, each right will entitle the holder to buy one one-thousandth of a share of a new series of junior participating preferred stock at a price of $160 for each one one-thousandth of a preferred share. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's common stock or shares in an "acquiring entity" at one-half of the then current market value. The Company will generally be entitled to redeem the rights at one cent per right at any time before they become exercisable. The rights will expire on November 23, 2008, unless extended, previously redeemed or exercised. The Company has reserved 1.7 million shares of preferred stock for issuance upon exercise of the rights. DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLANS The Company's dividend reinvestment and common stock direct purchase plans permit participants to purchase at fair market value shares of the Company's common stock by reinvestment of dividends and/or optional cash payments, subject to the terms of the plan. DIRECTOR PLANS Under the Company's director plans, non-employee directors receive stock as part of their annual retainer. Another plan provides for annual grants of options to purchase common stock to each non-employee director elected or re-elected at the annual meeting of stockholders. Options granted become exercisable after six months and may be exercised until the tenth anniversary of the date of grant. Compensation expense for the options is measured as the quoted market price of the stock at the date of grant less the exercise price and is accrued over the vesting period. EMPLOYEE STOCK PLANS LONG-TERM INCENTIVE PLANS The Company's stock incentive plans provide for awards of incentive and nonqualified stock options, stock appreciation rights, restricted shares, restricted share rights, performance awards and stock awards without restrictions. Employee stock options can be granted with exercise prices at or above the fair market value (as defined in the plan) of the stock at the date of grant and with terms of up to ten years. The options generally become fully exercisable over three years from the date of grant. Except as otherwise permitted under the plan, upon termination of employment for reasons other than retirement, permanent disability or death, the option period is reduced or the options are canceled. Options also may include the right to acquire a "reload" stock option. If an option contains the reload 74 feature and if a participant pays all or part of the exercise price of the option with shares of stock purchased in the market or held by the participant for at least six months, upon exercise of the option, the participant is granted a reload option to purchase, at the fair market value of the stock as of the date of the reload, the number of shares of stock equal to the sum of the number of shares used in payment of the exercise price and a number of shares with respect to taxes. No compensation expense was recorded for the options granted under the plans, as the exercise price was equal to the quoted market price of the stock at the date of grant. The total number of shares of common stock available for grant under the plans as of December 31, 1999 was 86,332,969. Holders of restricted shares and restricted share rights are entitled at no cost to the related shares of common stock generally over three to five years after the restricted shares or restricted share rights were granted. Upon grant of the restricted shares or restricted share rights, holders generally are entitled to receive quarterly cash payments equal to the cash dividends that would be paid on common stock equal to the number of restricted shares or restricted share rights. Except in limited circumstances, restricted shares and restricted share rights are canceled upon termination of employment. In 1999, 1998 and 1997, 204,868, 371,560 and 280,020 restricted shares and restricted share rights were granted, respectively, with a weighted-average grant-date fair value of $43.24, $37.72 and $30.89, respectively. As of December 31, 1999, 1998 and 1997, there were 2,423,999, 3,086,500 and 2,084,540 restricted shares and restricted share rights outstanding, respectively. The compensation expense for the restricted shares and restricted share rights equals the quoted market price of the related stock at the date of grant and is accrued over the vesting period. The total compensation expense recognized for the restricted shares and restricted share rights was $21 million, $9 million and $11 million in 1999, 1998 and 1997, respectively. In connection with various acquisitions and mergers since 1992, the Company converted employee and director stock options of acquired or merged companies into stock options to purchase the Company's common stock based on the original stock option plan and the agreed-upon exchange ratio. BROAD-BASED PLANS In 1996, the Company adopted the Best Practices PARTNERSHARES-Registered Trademark- Plan, a broad-based employee stock option plan covering full-and part-time employees who were not participants in the long-term incentive plans described above. The total number of shares of common stock issuable under the plan as of December 31, 1999, was 62,000,000, including 23,410,400 shares available for grant. Options granted under the PARTNERSHARES Plan have an exercise date that generally is the earlier of five years after the date of grant or when the quoted market price of the stock reaches a predetermined price. Those options generally expire ten years after the date of grant. No compensation expense has been recorded for the oustanding options, as the exercise prices were equal to or higher than the quoted market price of the Company's common stock at the respective dates of grant. 75 The following table summarizes the Company's stock option activity and related information for the three years ended December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------- Director Plans Long-Term Incentive Plans Broad-Based Plans (5) ------------------------- --------------------------- ------------------------- Number Weighted- Number Weighted- Number Weighted- average average average exercise exercise exercise price price price - ------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1996 444,620 $13.01 49,102,252 $12.59 10,774,060 $17.42 -------- ----------- ---------- 1997: Granted 103,890 (1) 23.49 29,985,212 (2)(3) 30.31 23,678,530 (4) 30.11 Canceled -- -- (1,356,735) 22.89 (3,935,110) 17.93 Exercised (29,230) 9.87 (14,801,394) 10.30 (5,275,570) 17.57 -------- ----------- ---------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1997 519,280 15.28 62,929,335 21.34 25,241,910 29.21 -------- ----------- ---------- 1998: Granted 84,860 (1) 34.38 9,695,931 (2)(3) 36.25 21,295,860 (4) 37.29 Canceled -- -- (1,521,074) 27.08 (2,866,310) 31.22 Exercised (102,610) 11.72 (10,330,783) 15.50 (1,865,480) 21.40 -------- ----------- ---------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1998 501,530 19.24 60,773,409 24.58 41,805,980 33.60 -------- ----------- ---------- 1999: Granted 38,253 (1) 42.60 16,817,089 (2)(3) 38.61 -- -- Canceled -- -- (2,158,873) 27.70 (7,836,842) 34.76 Exercised (75,390) 16.32 (12,360,988) 19.77 (1,454,838) 24.40 -------- ------------ ---------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1999 464,393 $21.64 63,070,637 $29.15 32,514,300 $33.72 ======== ====== =========== ====== ========== ====== Outstanding options exercisable as of: December 31, 1997 417,920 $13.23 33,930,575 $14.12 3,315,200 $ 16.90 December 31, 1998 434,020 17.29 35,990,530 19.57 3,255,200 22.05 DECEMBER 31, 1999 463,300 21.60 37,361,257 24.92 1,646,500 17.64 - -------------------------------------------------------------------------------------------------------------------
(1) The weighted-average per share fair value of options granted was $12.09, $11.85 and $10.26 for 1999, 1998 and 1997, respectively. (2) The weighted-average per share fair value of options granted was $9.50, $7.40 and $5.08 for 1999, 1998 and 1997, respectively. (3) Includes 2,285,910, 2,094,111 and 2,687,762 reload grants at December 31, 1999, 1998 and 1997, respectively. (4) The weighted-average per share fair value of options granted was $5.42 and $4.92 for 1998 and 1997, respectively. (5) Activity for broad-based plans in 1999, 1998 and 1997 includes the options related to the Employee Stock Purchase Plan, which was discontinued in 1999. 76 The following table is a summary of selected information for the Company's stock option plans described on the preceding page:
- ----------------------------------------------------------------------------------------------------- December 31, 1999 ------------------------------------------------------ Weighted- average Weighted- remaining average contractual exercise life (in yrs.) Number price - ----------------------------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES DIRECTOR PLANS $.10 Options outstanding/exercisable 2.9 19,910 $ .10 $4.46-$7.83 Options outstanding/exercisable 1.8 50,000 6.94 $7.84-$13.48 Options outstanding/exercisable 3.0 54,890 10.62 $13.49-$16.00 Options outstanding/exercisable 5.2 89,210 15.07 $16.01-$25.04 Options outstanding/exercisable 6.6 82,510 23.70 $25.05-$38.29 Options outstanding/exercisable 7.8 129,620 32.31 $38.30-$51.00 Options outstanding 9.3 38,253 42.60 Options exercisable 37,160 42.69 LONG-TERM INCENTIVE PLANS $2.24-$3.36 Options outstanding/exercisable 1.5 73,330 2.49 $3.37-$5.06 Options outstanding/exercisable 6.5 117,564 4.36 $5.07-$7.60 Options outstanding 2.1 2,124,574 7.30 Options exercisable 2,115,774 7.30 $7.61-$11.41 Options outstanding/exercisable 2.9 1,895,482 10.61 $11.42-$17.13 Options outstanding 4.1 7,959,825 13.90 Options exercisable 7,791,391 13.86 $17.14-$25.71 Options outstanding 5.1 3,532,869 20.36 Options exercisable 3,510,439 20.34 $25.72-$38.58 Options outstanding 8.0 43,369,877 33.42 Options exercisable 18,949,401 31.30 $38.59-$57.89 Options outstanding 7.5 3,997,116 42.66 Options exercisable 2,907,876 42.09 BROAD-BASED PLANS $16.56-$24.84 Options outstanding/exercisable 6.6 1,542,500 16.56 $24.85-$37.81 Options outstanding 8.3 30,971,800 34.58 Options excercisable 104,000 33.61 - -----------------------------------------------------------------------------------------------------
In accordance with FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to continue applying the provisions of Accounting Principles Board Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for the stock plans described above. Had compensation cost for those stock plans been determined based on the (optional) fair value method established by FAS 123, the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below.
- ----------------------------------------------------------------------------- Year ended December 31, (in millions, except per ------------------------------- common share amounts) 1999 1998 1997 - ----------------------------------------------------------------------------- Net income As reported $3,747 $1,950 $2,499 Pro forma (1) 3,650 1,867 2,448 Earnings per common share As reported $ 2.26 $ 1.18 $ 1.50 Pro forma (1) 2.20 1.13 1.43 Diluted earnings per common share As reported $ 2.23 $ 1.17 $ 1.48 Pro forma (1) 2.17 1.12 1.42 - -----------------------------------------------------------------------------
(1) The pro forma amounts noted above only reflect the effects of stock-based compensation grants made after 1994. Because stock options may be granted each year and generally vest over three years, these pro forma amounts may not reflect the full effect of applying the (optional) fair value method established by FAS 123 that would be expected if all outstanding stock option grants were accounted for under this method. The fair value of each option grant is estimated based on the date of grant using an option-pricing model. The following weighted-average assumptions were used in 1999, 1998 and 1997: expected dividend yield ranging from 1.4% to 2.2%; expected volatility ranging from 20.0% to 29.0%; risk-free interest rates ranging from 5.3% to 7.8% and expected life ranging from 1 to 5.4 years. 77 EMPLOYEE STOCK OWNERSHIP PLAN The 401(k) Plan (formerly known as the Savings Investment Plan (SIP)), is a defined contribution employee stock ownership plan (ESOP) under which the 401(k) Plan may borrow money to purchase the Company's common or preferred stock. Beginning in 1994, the Company has loaned money to the 401(k) Plan which has been used to purchase shares of the Company's ESOP Preferred Stock. As ESOP Preferred Stock is released and converted into common shares, compensation expense is recorded equal to the current market price of the common shares. Dividends on the common shares allocated as a result of the release and conversion of the ESOP Preferred Stock are recorded as a reduction of retained earnings and the shares are considered outstanding for purposes of earnings per share computations. Dividends on the unallocated ESOP Preferred Stock are not recorded as a reduction of retained earnings, and the shares are not considered to be common stock equivalents for purposes of earnings per share computations. Loan principal and interest payments are made from the Company's contributions to the 401(k) Plan, along with dividends paid on the ESOP Preferred Stock. With each principal and interest payment, a portion of the ESOP Preferred Stock is released and, after conversion of the ESOP Preferred Stock into common shares, allocated to the 401(k) Plan participants. In 1989, the Company loaned money to the 401(k) Plan which was used to purchase shares of the Company's common stock (the 1989 ESOP shares). The Company accounts for the 1989 ESOP shares in accordance with AICPA Statement of Position 76-3, ACCOUNTING PRACTICES FOR CERTAIN EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the Company's ESOP loan to the 401(k) Plan related to the purchase of the 1989 ESOP shares was recorded as a reduction of stockholders' equity, and compensation expense based on the cost of the shares was recorded as shares were released and allocated to participants' accounts. The loan from the Company to the 401(k) Plan was repaid in 1999. Interest income on all of these loans was $.1 million in 1999 and $1 million in 1998 and 1997 and was recorded as a reduction in employee benefits expense. The 1989 ESOP shares are considered outstanding for purposes of earnings per share computations and dividends on the shares are recorded as a reduction to retained earnings. The Company issued Series A and B ESOP Notes in the market place in connection with the purchase of common shares. Series B ESOP matured April 26, 1999 and Series A matured in 1996. Total interest expense on the Series B ESOP Notes was $.1 million in 1999 and $1 million in 1998 and 1997. Total dividends paid to the 401(k) Plan on ESOP shares were as follows:
- ------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------ 1999 1998 1997 - ------------------------------------------------------------------- ESOP Preferred Stock: Common dividends $ 7 $ 6 $ 4 Preferred dividends 11 9 4 1989 ESOP shares: Common dividends 11 11 11 --- --- --- Total $29 $26 $19 === === === - ----------------------------------------------------------------------
The ESOP shares as of December 31, 1999, 1998 and 1997 were as follows:
- -------------------------------------------------------------------------------------- December 31, ----------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- ESOP Preferred Stock: Allocated shares (common) 10,784,773 8,592,898 7,793,681 Unreleased shares (preferred) 69,221 80,362 76,405 1989 ESOP shares: Allocated shares 13,016,033 15,018,861 15,555,673 Unreleased shares 76,070 320,285 1,053,925 Fair value of unearned ESOP shares (in millions) $ 69 $ 80 $ 76 - --------------------------------------------------------------------------------------
78 13. EMPLOYEE BENEFITS AND OTHER EXPENSES EMPLOYEE BENEFITS The Company provides a noncontributory defined benefit retirement cash balance plan (the Cash Balance Plan) that covers eligible employees. On July 1, 1999, the Norwest Corporation Pension Plan was converted to the Cash Balance Plan. At the same time, the First Interstate Bancorp Retirement Plan was merged into the Cash Balance Plan. Under the Cash Balance Plan, eligible employees' Cash Balance Plan accounts receive a compensation credit based on a certain percentage of their certified compensation. The compensation credit percentage is based on age and years of service. In addition, participants receive investment credits on their accumulated balances. Employees become vested in their Cash Balance Plan accounts after completion of five years of vesting service. Pension benefits accrued prior to the conversion to the Cash Balance Plan are guaranteed. In addition, certain employees are eligible for a special transition benefit. Effective July 1, 1999, the SIP was renamed the Wells Fargo & Company 401(k) Plan (the 401(k) Plan) and the former Wells Fargo Tax Advantage and Retirement Plan merged into the 401(k) Plan. Under the 401(k) Plan, eligible employees who have completed one month of service are eligible to contribute up to 18% of their pretax certified compensation, although a lower limit may be applied to certain employees in order to maintain the qualified status of the 401(k) Plan. Eligible employees who complete one year of service are eligible for matching company contributions, which are generally a dollar for dollar match up to 6% of an employee's certified compensation. The Company's matching contributions are generally subject to a four-year vesting schedule. As of June 30, 1999, eligible employees from the former Wells Fargo were 100% vested in the matching contributions under the 401(k) Plan. The Company provides health care and life insurance benefits for certain retired employees and reserves the right to terminate or amend any of the benefits described above at any time. The following table shows the changes in the benefit obligation and the fair value of plan assets during 1999 and 1998 and the amounts included in the Company's Consolidated Balance Sheet as of December 31, 1999 and 1998 for the Company's defined benefit pension and other postretirement benefit plans:
- ----------------------------------------------------------------------------------------------------------------- (in millions) December 31, ---------------------------------------------------- 1999 1998 ----------------------- ---------------------- PENSION OTHER Pension Other BENEFITS BENEFITS benefits benefits - ----------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $2,487 $ 536 $2,141 $ 457 Service cost 110 24 67 18 Interest cost 132 34 151 33 Plan participants' contributions -- 6 -- 5 Amendments 17 (3) 1 -- Plan mergers 7 -- -- -- Actuarial loss (297) (6) 231 58 Acquisitions -- -- 5 -- Benefits paid (105) (37) (109) (35) ------ ---- ------ ----- Benefit obligation at end of year $2,351 $ 554 $2,487 $ 536 ====== ==== ====== ===== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $2,548 $ 218 $2,521 $ 140 Actual return on plan assets 224 5 115 12 Plan mergers 12 -- -- -- Acquisitions -- -- 4 -- Employer contribution 24 17 17 96 Plan participants' contributions -- 6 -- 5 Benefits paid (105) (37) (109) (35) ------ ----- ------ ----- Fair value of plan assets at end of year $2,703 $ 209 $2,548 $ 218 ====== ===== ====== ===== Funded status $ 352 $(345) $ 61 $ (318) Unrecognized net actuarial gain (382) -- (48) (5) Unrecognized net transition asset (2) 1 (7) -- Unrecognized prior service cost 17 (2) 7 1 ------ ----- ------ ------ Prepaid (accrued) benefit cost $ (15) $(346) $ 13 $ (322) ====== ===== ======= ====== - -----------------------------------------------------------------------------------------------------------------
79 The weighted-average assumptions used in calculating the amounts above were:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------ ------------------------ ------------------------- PENSION OTHER Pension Other Pension Other BENEFITS BENEFITS benefits benefits benefits benefits - ------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.5% 6.5% 6.5% 7.0% 6.9 - 7.0% Expected return on plan assets 9.0% 9.0% 8.5 - 9.0% 9.0% 8.5 - 9.0% 5.4% Rate of compensation increase 5.0% --% 5.0% --% 5.0% --% - -------------------------------------------------------------------------------------------------------------------
The following table sets forth the components of net periodic benefit cost for 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, ----------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- ------------------- PENSION OTHER Pension Other Pension Other BENEFITS BENEFITS benefits benefits benefits benefits - ------------------------------------------------------------------------------------------------------------------- Service cost $ 110 $24 $ 67 $ 18 $ 49 $ 14 Interest cost 132 34 151 33 141 29 Expected return on plan assets (186) (6) (205) (11) (174) (10) Recognized net actuarial (gain) loss (1) (3) (8) 21 (1) 13 (9) Amortization of prior service cost 2 -- 1 -- 1 -- Amortization of unrecognized transition asset (2) -- (2) -- (2) -- ----- --- ----- ---- ----- ----- Net periodic benefit cost $ 53 $44 $ 33 $ 39 $ 28 $ 24 ===== === ===== ==== ===== ===== - -------------------------------------------------------------------------------------------------------------------
(1) Net actual (gain) loss is generally amortized over five years. Accounting for the postretirement health care plans uses a health care cost trend rate to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. Average annual increases of 8.5% to 9.3% for HMOs and 8.5% for all other types of coverage in the per capita cost of covered health care benefits were assumed for 2000. By 2006 and thereafter, rates were assumed at 5.5% for HMOs and for all other types of coverage. Increasing the assumed health care trend by one percentage point in each year would increase the benefit obligation as of December 31, 1999 by $34.0 million and the aggregate of the interest cost and service cost components of the net periodic benefit cost for 1999 by $2.6 million. Decreasing the assumed health care trend by one percentage point in each year would decrease the benefit obligation as of December 31, 1999 by $31.7 million and the aggregate of the interest cost and service cost components of the net periodic benefit cost for 1999 by $2.4 million. Expenses for defined contribution retirement plans were $150 million, $174 million and $174 million in 1999, 1998 and 1997, respectively. OTHER EXPENSES The table below shows expenses which exceeded 1% of total interest income and noninterest income and which are not otherwise shown separately in the financial statements or notes thereto.
- ------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Contract services $465 $342 $271 Outside professional services 372 391 262 Outside data processing 279 250 217 Telecommunications 261 252 241 Travel and entertainment 249 212 188 Advertising and promotion 238 237 202 Postage 223 228 210 Donations 48 257 44 - -------------------------------------------------------------------------------
80 14. INCOME TAXES The following is a summary of the components of income tax expense applicable to income before income taxes:
- ---------------------------------------------------------------------- (in millions) Year ended December 31, --------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------- Current: Federal $ 599 $1,201 $1,242 State and local 43 272 246 Foreign 53 (1) 33 ------ ------ ------ 695 1,472 1,521 ------ ------ ------ Deferred: Federal 1,324 (82) 147 State and local 182 (32) 37 Foreign -- (15) (11) ------ ------ ------ 1,506 (129) 173 ------ ------ ------ Total $2,201 $1,343 $1,694 ====== ====== ====== - ----------------------------------------------------------------------
The Company's tax benefit related to the exercise of employee stock options that were allocated to stockholders' equity was $79 million, $90 million and $93 million for 1999, 1998 and 1997, respectively. The Company had a net deferred tax liability of $1,943 million and $177 million at December 31, 1999 and 1998, respectively. The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 1999 and 1998 are presented below:
- -------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------ 1999 1998 - -------------------------------------------------------------------- DEFERRED TAX ASSETS Allowance for loan losses $ 1,311 $1,143 Net tax-deferred expenses 788 1,325 Other 126 271 ------- ------ Total deferred tax assets 2,225 2,739 ------- ------ DEFERRED TAX LIABILITIES Core deposit intangible 428 498 Leasing 976 878 Mark to market 800 201 Mortgage servicing 1,237 871 FAS 115 adjustment 447 278 Other 280 190 ------- ------ Total deferred tax liabilities 4,168 2,916 ------- ------ NET DEFERRED TAX LIABILITY $(1,943) $ (177) ======= ====== - -------------------------------------------------------------------
The Company has determined that it is not required to establish a valuation reserve for any of the deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income and tax planning strategies. The Company's conclusion that it is "more likely than not" that the deferred tax assets will be realized is based on federal taxable income in excess of $3.5 billion in the carryback period, substantial state taxable income in the carryback period, as well as a history of growth in earnings and the prospects for continued growth. The deferred tax liability related to unrealized gains and losses on securities available for sale had no impact on 1999, 1998 or 1997 income tax expense as these gains and losses, net of taxes, were recorded in cumulative other comprehensive income. 81 The following table is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
- ---------------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, -------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- ------------------ AMOUNT % Amount % Amount % - ---------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax expense and rate $2,082 35.0% $1,153 35.0% $1,468 35.0% Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 146 2.5 156 4.7 162 3.8 Amortization of goodwill not deductible for tax return purposes 128 2.1 125 3.8 151 3.6 Tax exempt income (65) (1.1) (57) (1.7) (37) (.9) Other (90) (1.5) (34) (1.0) (50) (1.1) ------ ---- ------ ---- ------ ---- Effective income tax expense and rate $2,201 37.0% $1,343 40.8% $1,694 40.4% ====== ==== ====== ==== ====== ==== - ----------------------------------------------------------------------------------------------------------------------------
The Company has not recognized a federal deferred tax liability of $36 million on $102 million of undistributed earnings of a foreign subsidiary because such earnings are indefinitely reinvested in the subsidiary and are not taxable under current law. A deferred tax liability would be recognized to the extent the Company changed its intent to not indefinitely reinvest a portion or all of such undistributed earnings. In addition, a current tax liability would be recognized if the Company recovered those undistributed earnings in a taxable manner, such as through the receipt of dividends or sale of the entity, or if the tax law changed. 15. EARNINGS PER COMMON SHARE The table below shows dual presentation of earnings per common share and diluted earnings per common share and a reconciliation of the numerator and denominator of both earnings per common share calculations.
- ------------------------------------------------------------------------------------------------------------------ (in millions, except per share amounts) Year ended December 31, ------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Net income $ 3,747 $ 1,950 $ 2,499 Less: Preferred stock dividends 35 35 43 -------- -------- -------- Net income applicable to common stock $ 3,712 $ 1,915 $ 2,456 ======== ======== ======== EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 3,712 $ 1,915 $ 2,456 ======== ======== ======== Average common shares outstanding (denominator) 1,645.6 1,621.5 1,634.6 ======== ======== ======== Per share $ 2.26 $ 1.18 $ 1.50 ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 3,712 $ 1,915 $ 2,456 ======== ======== ======== Average common shares outstanding 1,645.6 1,621.5 1,634.6 Add: Stock options 18.0 18.3 20.6 Restricted share rights 1.6 2.0 2.6 -------- -------- -------- Diluted average common shares outstanding (denominator) 1,665.2 1,641.8 1,657.8 ======== ======== ======== Per share $ 2.23 $ 1.17 $ 1.48 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------
82 16. COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effect allocated to each component:
- ------------------------------------------------------------------------------------------------------------------ (in millions) Before Tax Net of tax effect tax amount - ------------------------------------------------------------------------------------------------------------------ 1997: Translation adjustments $ 1 $ -- $ 1 ----- ---- ---- Net unrealized gains on securities available for sale arising during the year 339 133 206 Reclassification of net losses (gains) on securities available for sale included in net income (99) (40) (59) ----- ---- ---- Net unrealized gains arising during the year 240 93 147 ----- ---- ---- Other comprehensive income $ 241 $ 93 $148 ===== ==== ==== 1998: Translation adjustments $ (6) $ (2) $ (4) ----- ---- ---- Net unrealized gains on securities available for sale arising during the year 172 68 104 Reclassification of net losses (gains) on securities available for sale included in net income (169) (68) (101) ----- ---- ---- Net unrealized gains arising during the year 3 -- 3 ----- ---- ---- Other comprehensive income $ (3) $ (2) $ (1) ===== ==== ==== 1999: Translation adjustments $ 6 $ 2 $ 4 ----- ---- ---- Net unrealized gains on securities available for sale arising during the year 445 169 276 Reclassification of net losses (gains) on securities available for sale included in net income 241 92 149 ----- ---- ---- Net unrealized gains arising during the year 686 261 425 ----- ---- ---- Other comprehensive income $ 692 $263 $429 ===== ==== ==== - ------------------------------------------------------------------------------------------------------------------
The following table presents cumulative other comprehensive income balances:
- --------------------------------------------------------------------------------------- (in millions) Cumulative Translation Net unrealized other adjustments gains on comprehensive securities income - --------------------------------------------------------------------------------------- Balance, December 31, 1996 $(11) $327 $316 ---- ---- ---- Net change 1 147 148 ---- ---- ---- Balance, December 31, 1997 (10) 474 464 ---- ---- ---- Net change (4) 3 (1) ---- ---- ---- Balance, December 31, 1998 (14) 477 463 ---- ---- ---- NET CHANGE 4 425 429 ---- ---- ---- BALANCE, DECEMBER 31, 1999 $(10) $902 $892 ==== ==== ==== - ---------------------------------------------------------------------------------------
83 17. OPERATING SEGMENTS The Company has identified four lines of business for the purposes of management reporting: Community Banking, Wholesale Banking, Norwest Mortgage and Norwest Financial. The results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and somewhat subjective. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company's operating segments are defined by product type and customer segments. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated to allow comparability. THE COMMUNITY BANKING GROUP offers a complete line of diversified financial products and services to individual consumers and small businesses with annual sales up to $10 million in which the owner is also the principal financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, insurance and securities brokerage through affiliates and venture capital financing. This includes WELLS FARGO FUNDS-SM-, a family of mutual funds, as well as personal trust, employee benefit trust and agency assets. Loan products include lines of credit, equipment and transportation (auto, recreational vehicle, marine) loans as well as equity lines and loans. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, cash management, payroll services, retirement plans, medical savings accounts and credit and debit card processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs) and time deposits. Community Banking provides access to customers through a wide range of channels, which encompass a network of traditional banking stores, banking centers, in-store banking centers, business centers and ATMs. Additionally, 24- hour telephone service is provided by PHONEBANK-SM- centers and the National Business Banking Center. Online banking services include the Wells Fargo Internet Services Group and BUSINESS GATEWAY-Registered Trademark-, a personal computer banking service exclusively for the small business customer. THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of $10 million and maintains relationships with major corporations throughout the United States. Wholesale Banking provides a complete line of commercial and corporate banking services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, foreign exchange services, cash management, investment management and electronic products. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications, real estate brokerage services and commercial real estate loan servicing. NORWEST MORTGAGE'S activities include the origination and purchase of residential mortgage loans for sale to various investors as well as providing servicing of mortgage loans for others. 84 NORWEST FINANCIAL includes consumer finance and auto finance operations. Consumer finance operations make direct loans to consumers and purchase sales finance contracts from retail merchants from offices throughout the United States and Canada and in the Caribbean and Latin America. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles in the United States and Puerto Rico. Credit cards are issued to consumer finance customers through two credit card banks. Norwest Financial also provides lease and other commercial financing and provides information services to the consumer finance industry. THE RECONCILIATION COLUMN includes goodwill and nonqualifying CDI, the net impact of transfer pricing loan and deposit balances, the cost of external debt, and any residual effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage interest rate sensitivity at the consolidated level.
- -------------------------------------------------------------------------------------------------------------------- (income/expense in millions, Community Wholesale Norwest Norwest Reconcilation Consolidated average balances in billions) Banking Banking Mortgage Financial Column(4) Company 1999 NET INTEREST INCOME (1) $6,516 $1,429 $ 168 $1,314 $ (72) $9,355 PROVISION FOR LOAN LOSSES 651 103 4 288 (1) 1,045 NONINTEREST INCOME 4,587 1,172 1,240 311 110 7,420 NONINTEREST EXPENSE 6,120 1,142 958 947 615 9,782 ------ ------ ------ ------ ----- ------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 4,332 1,356 446 390 (576) 5,948 INCOME TAX EXPENSE (BENEFIT) (2) 1,468 506 169 143 (85) 2,201 ------ ------ ------ ------ ----- ------ NET INCOME (LOSS) $2,864 $ 850 $ 277 $ 247 $(491) $3,747 ====== ====== ====== ====== ===== ====== 1998 Net interest income (1) $6,155 $1,345 $ 254 $1,303 $ (67) $8,990 Provision for loan losses 756 33 4 752 -- 1,545 Noninterest income 3,883 1,015 1,078 303 148 6,427 Noninterest expense 7,091 1,026 986 878 598 10,579 ------ ------ ------ ------ ----- ------ Income (loss) before income tax expense (benefit) 2,191 1,301 342 (24) (517) 3,293 Income tax expense (benefit) (2) 815 521 125 (5) (113) 1,343 ------ ------ ------ ------ ----- ------ Net income (loss) $1,376 $ 780 $ 217 $ (19) $(404) $1,950 ====== ====== ====== ====== ===== ====== 1997 Net interest income (1) $6,193 $1,281 $ 69 $1,167 $ (62) $8,648 Provision for loan losses 972 (6) 18 332 (176) 1,140 Noninterest income 3,135 1,086 961 303 190 5,675 Noninterest expense 5,792 1,055 774 758 611 8,990 ------ ------ ------ ------ ----- ------ Income (loss) before income tax expense (benefit) 2,564 1,318 238 380 (307) 4,193 Income tax expense (benefit) (2) 966 534 87 138 (31) 1,694 ------ ------ ------ ------ ----- ------ Net income (loss) $1,598 $ 784 $ 151 $ 242 $(276) $2,499 ====== ====== ====== ====== ===== ====== 1999 AVERAGE LOANS $ 66 $ 34 $ 1 $ 10 $ -- $ 111 AVERAGE ASSETS 118 42 23 11 9 203 AVERAGE CORE DEPOSITS 114 9 5 -- (1) 127 RETURN ON EQUITY (3) 21% 24% 20% 15% -- % 18% 1998 Average loans $ 64 $ 32 $ 1 $ 9 $ -- $ 106 Average assets 107 38 23 11 9 188 Average core deposits 110 9 5 -- -- 124 Return on equity (3) 11% 23% 16% --% -- % 10% - -------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the primary source of income for most of the operating segments. Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Community Banking and Wholesale Banking are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (Norwest Mortgage's net interest income was composed of interest revenue of $902 million, $1,023 million and $549 million for 1999, 1998 and 1997, respectively, and interest expense of $734 million, $769 million and $480 million for 1999, 1998 and 1997, respectively.) (2) Taxes vary by geographic concentration of revenue generation. Taxes as presented are also higher than the consolidated Company's effective tax rate as a result of taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The offsets for these adjustments are found in the reconciliation column. (3) Equity is allocated to the operating segments based on an assessment of the inherent risk associated with each business so that the returns on allocated equity are on a risk-adjusted basis and comparable across operating segments. (4) The material items in the reconciliation column related to revenue (i.e., net interest income plus noninterest income) and net income consist of Treasury activities and unallocated items. Revenue includes Treasury activities of $83 million, $125 million and $153 million; and unallocated items of $(45) million, $(44) million, and $(25) million for 1999, 1998 and 1997, respectively. Net income includes Treasury activities of $50 million, $72 million and $88 million; and unallocated items of $(541) million, $(476) million and $(364) million for 1999, 1998 and 1997, respectively. The material items in the reconciliation column related to noninterest expense include goodwill and nonqualifying CDI amortization of $499 million, $522 million and $531 million for 1999, 1998 and 1997, respectively. The material items in the reconciliation column related to average assets include goodwill and nonqualifying CDI of $8 billion for both 1999 and 1998. 85 18. MORTGAGE BANKING ACTIVITIES Mortgage banking activities include Norwest Mortgage and mortgage banking activities in other operating segments. The following table presents the components of mortgage banking noninterest income:
- ------------------------------------------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Origination and other closing fees $ 380 $ 530 $314 Servicing fees, net of amortization 410 19 324 Net gains (losses) on sales of servicing rights -- 16 (8) Net gains on sales of mortgages 221 296 120 All other 228 245 177 ------ ------ --- Total mortgage banking noninterest income $1,239 $1,106 $927 ====== ====== ==== - ------------------------------------------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the Company's Consolidated Balance Sheet. The outstanding balances of serviced loans were $290 billion, $250 billion and $230 billion at December 31, 1999, 1998 and 1997, respectively. The following table summarizes the changes in capitalized mortgage loan servicing rights:
- ------------------------------------------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Balance, beginning of year $3,144 $3,112 $2,957 Originations 889 756 361 Purchases 695 720 462 Sales -- (346) (34) Amortization (691) (816) (513) Other (principally hedge activity) 446 (282) (121) ------ ------ ------ 4,483 3,144 3,112 Less valuation allowance -- 64 64 ------ ------ ------ Balance, end of year $4,483 $3,080 $3,048 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------
The fair value of capitalized mortgage servicing rights included in the consolidated balance sheet at December 31, 1999 was approximately $5 billion, calculated using discount rates ranging from 500 to 700 basis points over the ten-year U.S. Treasury rate. 86 19. PARENT COMPANY Condensed financial information of the Parent follows. For information regarding the Parent's long-term debt, see Note 9. CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ INCOME Dividends from subsidiaries: Bank $2,270 $1,354 $1,282 Nonbank 153 403 343 Interest income from subsidiaries 616 459 388 Service fees from subsidiaries 104 127 118 Noninterest income 95 21 152 ------ ------ ------ Total income 3,238 2,364 2,283 ------ ------ ------ EXPENSE Interest on: Short-term borrowings 350 275 153 Long-term debt 514 341 364 Noninterest expense 380 379 177 ------ ------ ------ Total expense 1,244 995 694 ------ ------ ------ Income before income tax benefit and undistributed income of subsidiaries 1,994 1,369 1,589 Income tax (expense) benefit (161) 105 16 Equity in undistributed income of subsidiaries 1,914 476 894 ------ ------ ------ NET INCOME $3,747 $1,950 $2,499 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ----------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and noninterest-bearing balances due from: Subsidiary banks $ 83 $ -- Non-affiliates 9 5 Interest-bearing balances due from subsidiary banks 6,028 678 Securities available for sale 1,765 1,541 Loans and advances to subsidiaries: Bank -- 10 Nonbank 8,114 9,431 Investment in subsidiaries (1): Bank 19,969 19,642 Nonbank 4,922 1,862 Other assets 1,558 1,603 ------- ------- Total assets $42,448 $34,772 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 7,274 $ 5,418 Other liabilities 1,737 1,279 Long-term debt 10,804 6,010 Indebtedness to subsidiaries 499 1,296 Stockholders' equity 22,134 20,769 ------- ------- Total liabilities and stockholders' equity $42,448 $34,772 ======= ======== - -------------------------------------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's total equity investment in subsidiaries to its total stockholders' equity, was 112% and 104% at December 31, 1999 and 1998, respectively. 87 CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------ (in millions) Year ended December 31, ------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,747 $ 1,950 $2,499 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (1,914) (476) (894) Depreciation and amortization 26 10 19 Securities available for sale gains -- (3) (6) Release of preferred shares to ESOP 86 33 34 Other assets, net 114 (401) (798) Accrued expenses and other liabilities 536 618 304 ------- ------- ------ Net cash provided by operating activities 2,595 1,731 1,158 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 348 185 164 Proceeds from prepayments and maturities 120 665 299 Purchases (872) (1,273) (326) Net advances to non-bank subsidiaries 724 (1,210) (140) Principal collected on notes/loans of subsidiaries 1,108 89 46 Capital notes and term loans made to subsidiaries (505) (1,158) (113) Net increase in investment in subsidiaries (1,003) (295) (384) ------- ------- ------ Net cash used by investing activities (80) (2,997) (454) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short-term borrowings and indebtedness to subsidiaries 1,059 2,773 1,709 Proceeds from issuance of long-term debt 6,574 500 403 Repayment of long-term debt (1,780) (295) (981) Proceeds from issuance of common stock 517 171 150 Repurchases of common stock (2,122) (742) (483) Net decrease in ESOP loans 2 9 1 Payment of cash dividends (1,328) (1,017) (968) ------- ------- ------ Net cash provided (used) by financing activities 2,922 1,399 (169) ------- ------- ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 5,437 133 535 Cash and cash equivalents at beginning of year 683 550 15 ------- ------- ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,120 $ 683 $ 550 ======= ======= ====== - -------------------------------------------------------------------------------------------------------------------
88 20. WFC HOLDINGS CORPORATION WFC Holdings is a wholly owned subsidiary of the Parent and is the sole stockholder of Wells Fargo Bank, N.A. The Parent guarantees the debt obligations of WFC Holdings. In view of this, the summarized assets, liabilities and results of operations of WFC Holdings are presented below. Prior year amounts have been restated due to certain legal reorganizations within the Company. SUMMARIZED CONSOLIDATED INCOME STATEMENT
- ------------------------------------------------------------------------------------------------------------------- (in millions) Year ended December 31, ------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Interest income $6,829 $7,085 $7,271 Interest expense 2,270 2,508 2,670 Provision for loan losses 655 728 624 Noninterest income 4,301 3,925 3,575 Noninterest expense 6,239 5,923 5,346 ------ ------ ------ Income before income tax expense 1,966 1,851 2,206 Income tax expense 889 892 1,017 ------ ------ ------ Net income $1,077 $ 959 $1,189 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- SUMMARIZED CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------- (in millions) December 31, ------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 7,899 $ 7,668 Securities available for sale 12,452 11,128 Mortgages held for sale 1,511 2,843 Loans, net 65,547 63,763 Mortgage servicing rights 4,492 3,222 Other assets 20,381 23,003 -------- -------- Total assets $112,282 $111,627 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Short-term borrowings $ 4,306 $ 5,219 Long-term debt 4,148 5,691 Other liabilities 88,729 85,522 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 785 Stockholder's equity 14,314 14,410 -------- -------- Total liabilities and stockholder's equity $112,282 $111,627 ======== ======== - -------------------------------------------------------------------------------------------------------------------
89 21. LEGAL ACTIONS In the normal course of business, the Company is at all times subject to numerous pending and threatened legal actions, some for which the relief or damages sought are substantial. After reviewing pending and threatened actions with counsel, management believes that the outcome of such actions will not have a material adverse effect on stockholders' equity of the Company. The Company is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and its relationship to the future results of operations are not known. 22. RISK-BASED CAPITAL The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC, respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and each of the subsidiary banks maintain minimum ratios (set forth in the table on the following page) of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on securities available for sale carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, subordinated debt, the allowance for loan losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments and derivative financial instruments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. (See Notes 5 and 23 for further discussion of off-balance sheet items.) The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 1999, the Company and each of the significant subsidiary banks met all capital adequacy requirements to which they are subject. 90 Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the OCC categorized each of the significant subsidiary banks as well capitalized. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the risk-based capital category of any of the significant subsidiary banks.
- --------------------------------------------------------------------------------------------------------------------------- (in billions) To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions ----------------- -------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 1999: Total capital (to risk-weighted assets) Wells Fargo & Company $17.6 10.50% > = $13.4 > = 8.00% Norwest Bank Minnesota, N.A. 2.1 10.63 > = 1.6 > = 8.00 > = $2.0 > =10.00% Wells Fargo Bank, N.A. 9.3 11.24 > = 6.6 > = 8.00 > = 8.2 > =10.00 Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $13.5 8.07% > = $ 6.7 > = 4.00% Norwest Bank Minnesota, N.A. 1.9 9.61 > = .8 > = 4.00 > = $1.2 > =6.00% Wells Fargo Bank, N.A. 6.4 7.82 > = 3.3 > = 4.00 > = 4.9 > =6.00 Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $13.5 6.77% > = $ 8.0 > = 4.00% (1) Norwest Bank Minnesota, N.A. 1.9 5.64 > = 1.4 > = 4.00 (1) > = $1.7 > =5.00% Wells Fargo Bank, N.A. 6.4 7.23 > = 3.6 > = 4.00 (1) > = 4.5 > =5.00 - ---------------------------------------------------------------------------------------------------------------------------
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations. 23. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps, options and interest rate swap agreements. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Because the contract or notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. The Company is primarily an end-user of these instruments. The Company also offers such contracts to its customers but offsets such contracts by purchasing other financial contracts or uses the contracts for asset/liability management. To a lesser extent, the Company takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company controls the credit risk of its financial contracts except for contracts for which credit risk is DE MINIMUS through credit approvals, limits and monitoring procedures. Credit risk related to derivative financial instruments is considered and, if material, provided for separately from the allowance for loan losses. As the Company generally enters into transactions only with high quality counterparties, losses associated with counterparty nonperformance on derivative financial instruments have been immaterial. Further, the Company obtains collateral where appropriate and uses master netting arrangements in accordance with FASB Interpretation No. 39, OFFSETTING OF AMOUNTS RELATED TO CERTAIN CONTRACTS, as amended by FASB Interpretation No. 41, OFFSETTING OF AMOUNTS RELATED TO CERTAIN REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. 91 The following table summarizes the aggregate notional or contractual amounts, credit risk amount and estimated net fair value for the Company's derivative financial instruments at December 31, 1999 and 1998.
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, --------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK NET FAIR contractual risk net fair AMOUNT AMOUNT(3) VALUE amount amount(3) value - --------------------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $31,570 $ 93 $(243) $24,429 $735 $686 Futures 50,725 -- -- 62,348 -- -- Floors and caps (1) 41,142 110 110 33,598 504 504 Options (1) (2) 11,940 22 43 25,822 112 101 Forwards (1) 22,528 108 43 41,283 11 (58) Foreign exchange contracts: Forwards (1) 138 1 -- 168 -- (1) CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 21,702 158 (10) 7,795 81 10 Futures 22,839 -- -- 8,440 -- -- Floors and caps purchased (1) 6,130 51 51 5,619 42 42 Floors and caps written 5,804 -- (53) 5,717 -- (42) Options purchased (1) 741 30 30 -- -- -- Options written 1,101 -- (51) -- -- -- Forwards (1) 164 6 1 850 24 4 Commodity contracts: Swaps (1) 116 10 -- 78 4 -- Floors and caps purchased (1) 30 2 2 4 -- -- Floors and caps written 30 -- (2) 4 -- -- Foreign exchange contracts: Forwards (1) 4,234 62 28 3,524 37 2 Options purchased (1) 41 -- -- 44 2 2 Options written 42 -- (1) 43 -- (2) - ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these contracts or the underlying financial instruments. (2) At December 31, 1999, a majority of the purchased option contracts were options on futures contracts, which are exchange traded for which the exchange assumes counterparty risk. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. 92 Interest rate futures and forward contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific financial instrument at a predetermined price or yield. These contracts may be settled either in cash or by delivery of the underlying financial instrument. Futures contracts are standardized and are traded on exchanges. Gains and losses on futures contracts are settled daily with the exchange based on a notional principal value. The exchange assumes the risk that a counterparty will not pay and generally requires margin payments to minimize such risk. Market risks arise from movements in interest rates and security values. The Company uses 90- to 120-day futures contracts on Eurodollar deposits and U.S. Treasury notes to shorten the interest rate maturity of deposits ($5 billion at December 31, 1999) and to reduce the price risk of interest-sensitive assets ($46 billion at December 31, 1999), primarily mortgage servicing rights. Initial margin requirements on futures contracts are provided by investment securities pledged as collateral. Interest rate floors and caps are interest rate protection instruments that involve the payment from the seller to the buyer of an interest differential. This differential represents the difference between a short-term rate (e.g., three-month LIBOR) and an agreed-upon rate (the strike rate) applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential by a counterparty, should the current short-term rate fall below the strike level of the agreement. The Company generally receives cash quarterly on purchased floors (when the current interest rate falls below the strike rate) and purchased caps (when the current interest rate exceeds the strike rate). The primary risk associated with purchased floors and caps is the ability of the counterparties to meet the terms of the contract. Of the total purchased floors and caps for asset/liability management of $41 billion at December 31, 1999, the Company had $9 billion of floors to protect variable-rate loans from a drop in interest rates. The Company also had purchased floors of $13 billion at December 31, 1999 to hedge mortgage servicing rights. Cash flows from the floors offset lost future servicing revenue caused by increased levels of loan prepayments associated with lower interest rates. The remaining purchased floors and caps of $19 billion at December 31, 1999 were used to hedge interest rate risk of various other specific assets and liabilities. Interest rate swap contracts are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a notional principal amount. Payments related to the Company's swap contracts are made either monthly, quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The primary risk associated with all swaps is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. At December 31, 1999, the Company had $32 billion of interest rate swaps outstanding for interest rate risk management purposes on which the Company receives payments based on fixed interest rates and makes payments based on variable rates (e.g., three-month LIBOR). Included in this amount, $18 billion was used to convert floating-rate loans into fixed-rate assets. The remaining swap contracts used for interest rate risk management of $14 billion at December 31, 1999 were used to hedge interest rate risk of various other specific assets and liabilities. Options are contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the underlying financial instrument at a set price during a period or at a specified date in the future. The writer of the option is obligated to purchase or sell the underlying financial instrument, if the purchaser chooses to exercise the option. The writer of the option receives a premium when the option is entered into and bears the risk of an unfavorable change in the price of the underlying financial instrument. Of the total options for asset/liability management of $12 billion at December 31, 1999, the Company had $6 billion of options on futures contracts hedging mortgage servicing rights. The futures exchange assumes the risk that a counterparty will not pay. Market risks arise from movements in interest rates and/or security values. The remaining options used for interest rate risk management of $6 billion at December 31, 1999 were used to hedge interest rate risk of various other specific assets. The Company has entered into futures contracts and mandatory and standby forward contracts, including options on futures and forward contracts, to reduce interest rate risk on certain mortgage loans held for sale and other commitments. For forward contracts, the primary risk is the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The net unrealized loss on these futures and forward contracts at December 31, 1999 and 1998 was $109 million and $12 million, respectively. These contracts mature within 180 days. 93 24. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions set forth below for the Company's financial instruments are made solely to comply with the requirements of this Statement and should be read in conjunction with the financial statements and notes in this Annual Report. The carrying amounts in the table are recorded in the Consolidated Balance Sheet under the indicated captions, except for the derivative financial instruments, which are recorded in the specific asset or liability balance being hedged or in other assets if the derivative financial instrument is a customer accommodation. Fair values are based on estimates or calculations using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit, credit card and trust customers, since these intangibles are not financial instruments. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. The following table presents a summary of the Company's financial instruments, as defined by FAS 107:
- ------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------ 1999 1998 -------------------------- ----------------------- CARRYING ESTIMATED Carrying Estimated (in millions) AMOUNT FAIR VALUE amount fair value - ------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Mortgages held for sale $ 11,707 $ 11,885 $ 19,770 $ 20,015 Loans, net (1) 116,147 113,695 104,714 105,253 Nonmarketable equity investments 3,347 3,676 2,392 2,719 FINANCIAL LIABILITIES Deposits $132,708 $132,461 $136,788 $136,719 Long-term debt (2) 23,345 23,076 19,673 19,948 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 730 785 874 DERIVATIVE FINANCIAL INSTRUMENTS (3) Interest rate contracts: Floors and caps purchased $ 273 $ 161 $ 189 $ 546 Floors and caps written (64) (53) (42) (42) Options purchased 83 76 154 161 Options written (55) (55) (62) (60) Swaps (50) (253) (24) 696 Forwards 44 44 (54) (54) Foreign exchange contracts 27 27 1 1 - -------------------------------------------------------------------------------------------------------------------
(1) Loans are net of deferred fees on loan commitments and standby letters of credit of $147 million and $146 million at December 31, 1999 and 1998, respectively. (2) The carrying amount and fair value exclude obligations under capital leases of $30 million and $36 million at December 31, 1999 and 1998, respectively. (3) The carrying amounts include unamortized fees paid or received and gains or losses on derivative financial instruments receiving mark-to-market treatment. 94 FINANCIAL ASSETS SHORT-TERM FINANCIAL ASSETS Short-term financial assets include cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 1999 and 1998 are set forth in Note 4. LOANS The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. The fair value of commercial loans, other real estate mortgage loans and real estate construction loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates, using discount rates based on current industry pricing for loans of similar size, type, remaining maturity and repricing characteristics. For credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. For other consumer loans, the fair value is calculated by discounting the contractual cash flows, adjusted for prepayment estimates, based on the current rates offered by the Company for loans with similar characteristics. For auto lease financing, the fair value is calculated by discounting the contractual cash flows at the Company's current pricing for items with similar remaining terms, not including tax benefits. Commitments, standby letters of credit and commercial and similar letters of credit not included in the previous table have contractual values of $74,582 million, $4,355 million and $745 million, respectively, at December 31, 1999, and $71,467 million, $3,332 million and $691 million, respectively, at December 31, 1998. These instruments generate ongoing fees at the Company's current pricing levels. Of the commitments at December 31, 1999, 60% mature within one year. NONMARKETABLE EQUITY INVESTMENTS There are restrictions on the sale and/or liquidation of the Company's nonmarketable equity investments, which are generally in the form of limited partnerships; and the Company has no direct control over the investment decisions of the limited partnerships. To estimate fair value, a significant portion of the underlying limited partnerships' investments are valued based on market quotes. FINANCIAL LIABILITIES DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and market rate and other savings, is equal to the amount payable on demand at the measurement date. Although the FASB's requirement for these categories is not consistent with the market practice of using prevailing interest rates to value these amounts, the amount included for these deposits in the previous table is their carrying value at December 31, 1999 and 1998. The fair value of other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. SHORT-TERM FINANCIAL LIABILITIES Short-term financial liabilities include federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. 95 LONG-TERM DEBT The fair value of the Company's underwritten long-term debt is estimated based on the quoted market prices of the instruments. The fair value of the medium-term note programs, which are part of long-term debt, is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remaining maturities. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The fair value of the Company's trust preferred securities is estimated based on the quoted market prices of the instruments. DERIVATIVE FINANCIAL INSTRUMENTS The fair value of derivative financial instruments is based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. LIMITATIONS These fair value disclosures are made solely to comply with the requirements of FAS 107. The calculations represent management's best estimates; however, due to the lack of broad markets and the significant items excluded from this disclosure, the calculations do not represent the underlying value of the Company. The information presented is based on fair value calculations and market quotes as of December 31, 1999 and 1998. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. As discussed above, certain of the Company's asset and liability financial instruments are short-term, and therefore, the carrying amounts in the Consolidated Balance Sheet approximate fair value. Other significant assets and liabilities, which are not considered financial assets or liabilities and for which fair values have not been estimated, include premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. 96 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Wells Fargo & Company: We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo & Company and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP San Francisco, California January 18, 2000 97 QUARTERLY FINANCIAL DATA CONDENSED CONSOLIDATED STATEMENT OF INCOME -- QUARTERLY
- ------------------------------------------------------------------------------------------------------------------------------ (in millions, except 1999 1998 per share amounts) QUARTER ENDED Quarter ended ------------------------------------------ ------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30(1) June 30(1) Mar. 31(1) INTEREST INCOME $ 3,749 $ 3,641 $ 3,496 $ 3,488 $ 3,598 $ 3,528 $ 3,490 $3,439 INTEREST EXPENSE 1,354 1,259 1,185 1,222 1,297 1,265 1,258 1,245 ------- ------- ------- ------- ------- ------- ------- ------ NET INTEREST INCOME 2,395 2,382 2,311 2,266 2,301 2,263 2,232 2,194 Provision for loan losses 275 240 260 270 624 307 309 305 ------- ------- ------- ------- ------- ------- ------- ------ Net interest income after provision for loan losses 2,120 2,142 2,051 1,996 1,677 1,956 1,923 1,889 ------- ------- ------- ------- ------- ------- ------- ------ NONINTEREST INCOME Service charges on deposit accounts 396 385 367 344 364 356 332 305 Trust and investment fees 324 317 315 300 274 267 269 259 Credit card fees 142 138 126 132 136 136 128 121 Other fees 268 258 267 238 252 241 232 221 Mortgage banking 270 318 324 327 252 275 303 276 Insurance 84 95 119 85 70 73 111 95 Net venture capital gains (losses) 721 162 13 112 (4) 4 53 59 Net (losses) gains on securities available for sale (260) (2) 23 (2) 8 76 66 19 Other 126 138 260 191 205 193 221 178 ------- ------- ------- ------- ------- ------- ------- ------ Total noninterest income 2,071 1,809 1,814 1,727 1,557 1,621 1,715 1,533 ------- ------- ------- ------- ------- ------- ------- ------ NONINTEREST EXPENSE Salaries 802 776 750 725 971 730 717 684 Incentive compensation 129 124 135 134 123 164 150 135 Employee benefits 197 208 217 199 198 167 187 188 Equipment 274 193 182 191 328 192 196 184 Net occupancy 188 205 185 186 200 188 187 189 Goodwill 132 106 104 104 104 108 104 104 Core deposit intangible 48 49 50 52 60 58 61 63 Net (gains) losses on dispositions of premises and equipment (10) 6 (13) 2 270 7 41 7 Other 897 751 754 749 1,228 733 809 742 ------- ------- ------- ------- ------- ------- ------- ------ Total noninterest expense 2,657 2,418 2,364 2,342 3,482 2,347 2,452 2,296 ------- ------- ------- ------- ------- ------- ------- ------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 1,534 1,533 1,501 1,381 (248) 1,230 1,186 1,126 Income tax expense (benefit) 564 571 570 497 (54) 488 467 442 ------- ------- ------- ------- ------- ------- ------- ------ NET INCOME (LOSS) $ 970 $ 962 $ 931 $ 884 $ (194) $ 742 $ 719 $ 684 ======= ======= ======= ======= ======= ======= ======= ====== NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 961 $ 953 $ 922 $ 875 $ (203) $ 733 $ 710 $ 675 ======= ======= ======= ======= ======= ======= ======= ====== EARNINGS (LOSS) PER COMMON SHARE $ .59 $ .58 $ .56 $ .53 $ (.12) $ .45 $ .44 $ .42 ======= ======= ======= ======= ======= ======= ======= ====== DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .58 $ .57 $ .55 $ .53 $ (.12) $ .45 $ .43 $ .41 ======= ======= ======= ======= ======= ======= ======= ====== DIVIDENDS DECLARED PER COMMON SHARE $ .20 $ .20 $ .20 $ .185 $ .185 $ .185 $ .165 $ .165 ======= ======= ======= ======= ======= ======= ======= ====== Average common shares outstanding 1,635.6 1,648.6 1,651.4 1,647.1 1,642.4 1,617.3 1,610.3 1,615.7 ======= ======= ======= ======= ======= ======= ======= ====== Diluted average common shares outstanding 1,656.0 1,667.1 1,672.3 1,664.2 1,642.4 1,640.7 1,632.2 1,639.1 ======= ======= ======= ======= ======= ======= ======= ====== - ----------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the pooling-of-interests accounting treatment of the Merger. The restated amounts include adjustments to conform the accounting policies of the former Norwest and the former Wells Fargo. In noninterest expense, employee benefits decreased by $2 million in each of the quarters that preceded the fourth quarter of 1998 to conform the accounting treatment for the postretirement transition obligation identified with the implementation of FAS 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. Additionally, equipment expense increased $2 million for the quarter ended June 30, 1998. 98 EX-21 13 EX-21 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following is a list of subsidiaries of the Company as of February 15, 1999. The Company's bank subsidiaries which have the words "National Association" (N.A.), or "National" in their respective titles are organized under the laws of the United States; and all state bank subsidiaries are incorporated under the laws of the state in which each is domiciled. Each non-bank subsidiary is incorporated or organized in the jurisdiction appearing opposite its name. BANK SUBSIDIARIES ARIZONA Norwest Bank Arizona, N.A Wells Fargo Bank (Arizona), N.A. CALIFORNIA North County Bank Wells Fargo Bank, N.A. Wells Fargo Bank, Ltd. Wells Fargo Central Bank Wells Fargo HSBC Trade Bank, N.A. COLORADO Norwest Bank Colorado, N.A. Norwest Bank Grand Junction, N.A. Norwest Bank Grand Junction-Downtown, N.A. ILLINOIS Norwest Bank Illinois, N.A. INDIANA Norwest Bank Indiana, N.A. IOWA Dial National Bank Norwest Bank Iowa, N.A. MINNESOTA Norwest Bank Faribault, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota North, N.A. Norwest Bank Minnesota South, N.A. Norwest Bank Minnesota Southwest, N.A. Norwest Bank Minnesota West, N.A. Norwest Bank Red Wing, N.A. 1 MONTANA Norwest Bank Montana, N.A. NEBRASKA Norwest Bank Nebraska, N.A. NEVADA Wells Fargo Bank Nevada, N.A. NEW MEXICO Capital Bank The First National Bank of Farmington Wells Fargo Bank New Mexico, N.A. NORTH DAKOTA Norwest Bank North Dakota, N.A. OHIO Norwest Bank Ohio, N.A. SOUTH DAKOTA Dial Bank Norwest Bank South Dakota, N.A. TEXAS First National Bank of South Texas Norwest Bank El Paso, N.A. Norwest Bank Texas, N.A. Prime Bank The Bank of South Texas Wells Fargo Bank (Texas), N.A. WISCONSIN Norwest Bank Hudson, N.A. Norwest Bank La Crosse, N.A. Norwest Bank Wisconsin, N.A. WYOMING Norwest Bank Wyoming, N.A. EDGE ACT CORPORATIONS - --------------------- Norwest Bank International 2 NON-BANK SUBSIDIARIES
JURISDICTION OF INCORPORATION OR DIRECTLY OWNED: ORGANIZATION - --------------- ---------------- Bancdata Processing Corporation Minnesota Blackhawk Bancorporation Iowa Central Bancorporation, Inc. Texas Charter Bancorporation, Inc. Arizona Charter Holdings, Inc. Nevada Century Business Credit Corporation New York Credisol, S.A. Costa Rica Emjay Corporation Wisconsin Farmers National Bancorp, Inc. Delaware Fidelity Bancorporation, Inc. Delaware Fidelity National Life Insurance Company Arizona Financiera El Sol, S.A. Panama First Bancshares of Valley City, Inc. North Dakota First Place Financial Corporation New Mexico First Valley Bank Group, Inc. Texas GST Co. Delaware Goldenrod Asset Management Delaware Independent Bancorp of Arizona, Inc. Delaware International Bancorporation, Inc. Minnesota Irene Bancorporation, Inc. South Dakota Island Finance (Aruba) N.V. Aruba Island Finance (Bonaire) N.V. Netherlands Antilles Island Finance (Curacao) N.V. Netherlands Antilles Island Finance (St. Maarten) N.V. Netherlands Antilles Island Finance Puerto Rico, Inc. Delaware Island Finance Virgin Islands, Inc. Delaware Lindeberg Financial Corporation Minnesota Little Mountain Bancshares, Inc. Minnesota Lowry Hill Investment Advisors, Inc. Minnesota Mercantile Financial Enterprises, Inc. Delaware Metropolitan Bancshares, Inc. Colorado MidAmerica Bancshares, Inc. South Dakota Midwest Credit Life Insurance Company Arizona Minnesota Bancshares, Inc. Minnesota Mountain Bancshares, Inc. Colorado Mustang Financial Corporation Texas Myers Bancshares Inc. Texas North County Bancorp California Northern Prairie Indemnity Limited Cayman Islands, BWI Norwest Agricultural Credit, Inc. Minnesota Norwest AMG, Inc. Delaware
3
JURISDICTION OF INCORPORATION OR DIRECTLY OWNED: ORGANIZATION - --------------- ---------------- Norwest Asia Limited Hong Kong Wells Fargo Audit Services, Inc. Minnesota Norwest Auto Receivables Corporation Delaware Wells Fargo Credit, Inc. Minnesota Norwest Escrow Funding, Inc. Delaware Norwest Financial Services, Inc. Delaware Norwest Foundation Minnesota Norwest Home Improvement, Inc. Texas Norwest Insurance, Inc. Minnesota Norwest Investment Services, Inc. Minnesota Norwest Limited, L.L.C. Delaware Wells Fargo Properties, Inc. Minnesota Wells Fargo Services Company Minnesota Norwest Trust Company, Cayman Islands Cayman Islands, BWI Packers Management Company, Inc. Nebraska Peoples Mortgage and Investment Company Iowa Prime Bancshares, Inc. Texas Primrose Asset Management, Inc. Delaware Riverton State Bank Holding Company Wyoming Star Bancshares, Inc. Texas Texas Bancshares, Inc. Texas The Bank of New Mexico Holding Company New Mexico The First National Bankshares, Inc. New Mexico The Foothill Group, Inc. Delaware The Wells Fargo Foundation California Victoria Financial Services, Inc. Delaware WFC Holdings Corporation Delaware Wisconsin Bancshares, Inc. Wisconsin
4
JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION Admiral Life Insurance Company of America Arizona Allied Business Systems, Inc. Iowa AMAN Collection Service 1, Inc. Nevada AMAN Collection Service, Inc. South Dakota American Community Bank Group Service Corporation Minnesota American Securities Company California American Securities Company of Nevada Nevada Americorp Financial, Inc. Nevada ATC Realty Fifteen, Inc. California ATC Realty Nine, Inc. California ATC Realty Sixteen, Inc. California ATI Foreclosure Services, Inc. California ATI Title Agency of Arizona, Inc. Arizona ATI Title Company, LLC Delaware ATI Title Company of California California ATI Title Company of Nevada Nevada Azalea Asset Management, Inc. Delaware Bancshares Insurance Company Vermont Blue Jay Asset Management, Inc. Delaware Blue Spirit Insurance Company Vermont Bluebonnet Asset Management, Inc. Delaware Cardinal Asset Management, Inc. Delaware Central Bancorporation of Delaware, Inc. Delaware Central Pacific Corporation California Century Data Services, Inc. New York Centurion Agencies, Co. Iowa Centurion Agency Nevada, Inc. Nevada Centurion Casualty Company Iowa Centurion Life Insurance Company Missouri CGT Insurance Company Barbados CHM Insurance Company South Dakota Chestnut Asset Management, Inc. Delaware Cityside Insurance Company, Ltd. Turks & Caicos Islands Clinton Street Garage Company, Inc. Indiana Collin Equities, Inc. Texas Columbine Asset Management, Inc. Delaware Commonwealth Leasing Corporation Minnesota Community Casualty Co. Vermont Community Pacific Broadcasting Corporation Nevada Community Credit Co. Minnesota Copper Asset Management, Inc. Delaware Crestone Capital Management, Inc. Colorado Crocker Grande, Inc. California
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JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION Crocker Life Insurance Company California Crocker Properties, Inc. California DAG Management, Inc. Colorado Dial National Community Benefits, Inc. Nevada EZG Associates Limited Partnership Delaware Ellis Advertising, Inc. Iowa Emerald Asset Management, Inc. Maryland Eastdil Realty Company, L.L.C. New York Eastdil Advisors, Inc. Delaware Eastdil Broker Services, Inc. Delaware Eastdil Equities, Inc. Delaware Eastdil, Inc. Delaware Eastdil U.S., Inc. California Falcon Asset Management, Inc. Delaware FCC Holdings Limited California FF Capital Corp. Delaware Fidelity Acceptance Holding, Inc. Nevada Fidelity Bancorporation, Inc. Delaware Fidelity National Life Insurance Company Arizona Finvercon S.A. Compania Financiera Argentina Finvercon USA, Inc. Nevada First City Life Insurance Company Arizona First DialWest Escrow Company, Inc. California First Interstate Bancorporation, Inc. Kansas First Interstate Commercial Mortgage Company Delaware First Interstate Insurance Company Arizona First Interstate Mortgage Holding Company Arizona First Valley Delaware Financial Corporation Delaware Foothill Capital Corporation California Fremont Properties, Inc. Colorado Galliard Capital Management, Inc. Minnesota Garces Water Company, Inc. California Golden Asset Management, Inc. Delaware Golden Pacific Insurance Company Vermont Great Plains Insurance Company Vermont Green Bay Asset Management, Inc. Delaware IBID, Inc. Delaware IntraWest Asset Management, Inc. Delaware IntraWest Insurance Company Arizona Iowa Asset Management, Inc. Delaware Island Finance Credit Services, Inc. New York Island Finance New York, Inc. New York La Crosse Asset Management, Inc. Delaware Las Vegas Building Corporation New Mexico Lilac Asset Management, Inc. Delaware
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JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION - ----------------- ------------ Lily Asset Management, Inc. Delaware Lincoln Building Corporation Colorado Lowry Hill Investment Advisors, Inc. Minnesota Magnolia Asset Management, Inc. Delaware Maier/Hauswirth Investment Advisors, L.L.C. Wisconsin Mail Systems Co. Iowa Marigold Asset Management, Inc. Delaware Mercury Marine Finance, Inc. Iowa MidAmerica Financial Corporation Minnesota Modern Casualty Insurance Agency Arizona Montgomery Estates, Inc. Texas Mulberry Asset Management, Inc. Delaware Mustang Holdings, Inc. Delaware Mustang Life Insurance Company Texas National Letter Service Company Minnesota NISI Nevada Insurance, Inc. Nevada NISI Wyoming Insurance Wyoming North Star Mortgage Guaranty Reinsurance Company Vermont Norwest Asset Acceptance Corporation Delaware Norwest Asset Company Iowa Norwest Asset Securities Corporation Delaware Norwest Auto Finance, Inc. Minnesota Norwest Auto Lease, Inc. Minnesota Wells Fargo Business Credit, Inc. Minnesota Norwest Colorado Community Development Corporation Colorado Norwest do Brasil Servicos LTDA. Brazil Norwest Electronic Tax Service, LLC Delaware Norwest Energy Capital, Inc. Texas Norwest Equity Capital, L.L.C. Minnesota Norwest Escrow Company, LLC Iowa Norwest Financial Alabama, Inc. Alabama Norwest Financial Business Credit, Inc. Iowa Norwest Financial Canada Company Nova Scotia Norwest Financial Canada DE, Inc. Ontario Norwest Financial Capital, Inc. Delaware Norwest Financial Coast, Inc. California Norwest Financial Credit Services, Inc. Florida Norwest Financial Information Services Group, Inc. Iowa Norwest Financial Investment 1, Inc. Nevada Norwest Financial Investment 2, Inc. Nevada Norwest Financial Investment, Inc. Nevada Norwest Financial Leasing, Inc. Iowa Norwest Financial North Carolina 2, Inc. North Carolina Norwest Financial North Carolina 3, Inc. North Carolina Norwest Financial Preferred Capital, Inc. Iowa
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JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION - ----------------- ------------ Norwest Financial Resources, Inc. Iowa Norwest Financial Security Services, Inc. Iowa Norwest Financial South Carolina 1, Inc. North Carolina Norwest Financial, Inc.(1) Iowa Norwest Funding, Inc. Minnesota Norwest Insurance New Mexico, Inc. New Mexico Norwest Insurance Wyoming, Inc. Wyoming Norwest Integrated Structured Assets, Inc. Delaware Norwest International Commercial Services Limited Hong Kong Norwest Investment Management, Inc. Minnesota Norwest Mortgage Asset Management Corporation Minnesota Norwest Mortgage of Massachusetts, Inc. Massachusetts Norwest Mortgage of New Mexico, Inc. New Mexico Norwest Mortgage of New York, Inc. New York Norwest Mortgage Real Estate Funding 1, Inc. Delaware Norwest Mortgage Real Estate Funding 2, Inc. Delaware Norwest Mortgage, Inc. California Wells Fargo Rural Insurance Services, Inc. Minnesota Norwest Venture Capital Management, Inc. Minnesota Norwest Ventures, LLC Delaware Old Henry, Inc. Illinois Osprey Asset Management, Inc. Delaware Peregrine Capital Management, Inc. Minnesota Premium Service/Norwest Financial Coast, Inc. South Carolina Raven Asset Management, Inc. Delaware Regency Insurance Agency, Inc. Minnesota REI Investors, Inc. Delaware Reliable Financial Services, Inc. Puerto Rico RELS Reporting Services, LLC Iowa Residential Home Mortgage Investment, L.L.C. Delaware Residential Home Mortgage, L.L.C. Delaware Robin Asset Management, Inc. Delaware Ruby Asset Management, Inc. Maryland Rural Community Insurance Agency, Inc. Minnesota Rural Community Insurance Company Minnesota Sagebrush Asset Management, Inc. Delaware Saguaro Asset Management, Inc. Delaware - --------------------------
(1) Norwest Financial, Inc. is the parent and directly or indirectly beneficially owns all the voting securities of certain subsidiaries operating as consumer finance companies, using a version of the name Norwest Financial, Community Credit Co. or Fidelity Financial Services, in the United States, Canada, Guam and Saipan. (134 subsidiaries as of February 23, 2000). Such subsidiaries were incorporated or otherwise organized in: Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, Wyoming, Canada, Guam and Saipan. 8
JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION - ----------------- ------------ Sapphire Asset Management, Inc. Maryland Scott Life Insurance Company Arizona Silver Asset Management, Inc. Delaware South Dakota Asset Management, Inc. Delaware Spring Cypress Water Supply Corporation Texas Stagecoach Insurance Agency, Inc. California Star Bancshares of Nevada, Inc. Nevada Statewide Acceptance Corporation Texas Superior Asset Management, Inc. Delaware Superior Guaranty Insurance Company Vermont Superior Health Care Management, Inc. Delaware Superior North Asset Management, Inc. Delaware Superior Red Wing Asset Management, Inc. Delaware Superior South Asset Management, Inc. Delaware Superior Southwest Asset Management, Inc. Delaware Superior West Asset Management, Inc. Delaware Telegraph Hill Capital, LLC Delaware Texas Bancshares Subsidiary Corporation Delaware The United Group, Inc. North Carolina Topaz Asset Management, Inc. Maryland United California Bank Realty Corporation California United New Mexico Financial Corporation New Mexico United New Mexico Real Estate Services, Inc. New Mexico UFS Life Reinsurance Company Arizona Valley Asset Management, Inc. Delaware Wells Capital Management Incorporated California Wells Fargo Bill Presentment Venture Member, LLC Delaware Wells Fargo Capital A California Wells Fargo Capital B California Wells Fargo Capital C California Wells Fargo Capital I California Wells Fargo Capital II California Wells Fargo Card Services, Inc. Iowa Wells Fargo Cash Centers, Inc. Nevada Wells Fargo Corporate Services, Inc. California Wells Fargo Corporation Oregon Wells Fargo Equipment Finance, Inc. Minnesota Wells Fargo Equity Capital, Inc. California Wells Fargo Financing Corporation California Wells Fargo Fleet Services, Inc. Minnesota Wells Fargo Funding III, Inc. Minnesota Wells Fargo Housing Advisors, Inc. California Wells Fargo Insurance Nevada, Inc. Nevada Wells Fargo Insurance New Mexico, Inc. New Mexico Wells Fargo International, Limited Cayman Islands
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JURISDICTION OF INCORPORATION OR INDIRECTLY OWNED: ORGANIZATION - ----------------- ------------ Wells Fargo Leasing Corporation California Wells Fargo Mondex, Inc. Arizona Wells Fargo Securities, Inc. California Wells Fargo Small Business Investment Company, Inc. California Wells Fargo Ventures, Inc. Delaware Wells Fargo, Ltd. Hawaii WFS Insurance Agency, Inc. Montana WFS Insurance Agency, Inc. Nevada WFS Insurance Agency, Inc. Oregon WFS Insurance Agency, Inc. Washington WFS Insurance Agency, Inc. Wyoming Yucca Asset Management, Inc. Delaware
NOTE: Not included in the above list of subsidiaries of the corporation are inactive subsidiaries, certain subsidiaries formed solely for the purpose of reserving a name, joint ventures or limited partnerships. 10 EX-23 14 EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Wells Fargo & Company: We consent to the incorporation by reference in the Registration Statements noted below on Forms S-3, S-4 and S-8 of Wells Fargo & Company of our report dated January 18, 2000, relating to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of Wells Fargo & Company.
Registration Statement Number Form Description - ---------------- ---- ----------- 333-09489 S-3 Dividend Reinvestment and Common Stock Purchase Plan 333-79493 S-3 Universal Registration Statement 1999 333-53219 S-4 Acquisition Registration Statement 333-95617 S-4 Michigan Financial Corporation 333-95625 S-4 Napa National Bancorp 333-96511 S-4 Ragen MacKenzie Group Incorporated 033-10820 S-8 Norwest Financial Employee $20,000,000 Senior Indebtedness Plan 033-42198 S-8 1985 Long-Term Incentive Compensation Plan 033-50307 S-8 Norwest Corporation Employees' Deferred Compensation Plan 033-50309 S-8 1985 Long-Term Incentive Compensation Plan 033-65007 S-8 Invest Norwest Program 033-57904 S-8 Financial Concepts Bancorp, Inc. Stock Option Plan 033-38013 S-8 United Banks of Colorado, Inc. Non-qualified Stock Option Plan 033-54322 S-8 Lincoln Financial Corporation 1988 Stock Option Plan 033-55533 S-8 First National Bank of Kerrville 1991 Stock Option Plan 333-12423 S-8 Long-Term Incentive Compensation Plan 333-02485 S-8 Benson Financial Corporation Stock Option Plan 333-62877 S-8 Long-Term Incentive Compensation Plan 333-63247 S-8 Wells Fargo & Company: 1982 Equity Incentive Plan, 1987 Director Option Plan, 1990 Equity Incentive Plan, 1990 Director Option Plan, Long-Term Incentive Plan, 1996 Employee Stock Purchase Plan, First Interstate Bancorp: 1983 Performance Stock Plan, 1988 Performance Stock Plan, 1991 Director Option Plan, 1991 Performance Stock Plan. 333-74655 S-8 PartnerShares Plan 333-79777 S-8 401(k) Plan
KPMG LLP San Francisco, California March 15, 2000 EX-24 15 EXHIBIT 24 WELLS FARGO & COMPANY Power of Attorney of Director KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of WELLS FARGO & COMPANY, a Delaware corporation, does hereby make, constitute, and appoint PHILIP J. QUIGLEY, a director and Chairman of the Audit and Examination Committee of the Board of Directors, and CYNTHIA H. MILLIGAN, a director and member of the Audit and Examination Committee of the Board of Directors, and each or either of them, the undersigned's true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned's name, place, and stead, to sign and affix the undersigned's name as such director of said Company to an Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and all amendments thereto, to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. under the Securities Exchange Act of 1934, and the rules and regulations of said Commission, and to file the same, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 22nd day of February, 2000. /s/ Leslie S. Biller -------------------------- /s/ Michael R. Bowlin -------------------------- /s/ Edward M. Carson -------------------------- /s/ David A. Christensen -------------------------- /s/ William S. Davila -------------------------- /s/ Susan E. Engel -------------------------- /s/ Paul Hazen -------------------------- /s/ William A. Hodder -------------------------- /s/ Robert L. Joss -------------------------- /s/ Reatha Clark King -------------------------- /s/ Richard M. Kovacevich -------------------------- /s/ Richard D. McCormick -------------------------- /s/ Cynthia H. Milligan -------------------------- /s/ Benjamin F. Montoya -------------------------- /s/ Philip J. Quigley -------------------------- /s/ Donald B. Rice -------------------------- /s/ Ian M. Rolland -------------------------- /s/ Susan G. Swenson -------------------------- /s/ Daniel M. Tellep -------------------------- /s/ Chang-Lin Tien -------------------------- /s/ Michael W. Wright -------------------------- /s/ John A. Young -------------------------- EX-27 16 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 YEAR DEC-31-1999 DEC-31-1999 13,250 0 1,554 2,667 38,518 0 0 119,464 3,170 218,102 132,708 27,995 11,108 24,160 0 271 2,777 19,083 218,102 10,761 2,176 1,438 14,375 2,757 5,020 9,355 1,045 (241) 9,782 5,948 3,747 0 0 3,747 2.26 2.23 5.66 665 401 4 0 3,134 1,485 436 3,170 0 0 1,403
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