-----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, OsKHMmqAjeXlZ3XmnI4tZ6ECDWkvVBiNmB+kK0nketa+niPImYhaW5AK2ZOwhCnP qwaVOw51A/4ig+23eQ19dA== 0000912057-00-024764.txt : 20000516 0000912057-00-024764.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024764 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 001-02979 FILM NUMBER: 634816 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-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-2979 ------------------------ WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware 41-0449260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding April 28, 2000 ------------------- Common stock, $1-2/3 par value 1,611,205,806
FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page Item 1. Financial Statements ---- Consolidated Statement of Income................................................................. 2 Consolidated Balance Sheet....................................................................... 3 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income....................................................................... 4 Consolidated Statement of Cash Flows............................................................. 5 Notes to Financial Statements.................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Summary Financial Data........................................................................... 15 Overview......................................................................................... 16 Factors that May Affect Future Results........................................................... 18 Operating Segment Results........................................................................ 21 Earnings Performance............................................................................. 22 Net Interest Income............................................................................ 22 Noninterest Income............................................................................. 24 Noninterest Expense............................................................................ 26 Income Taxes................................................................................... 26 Earnings/Ratios Excluding Goodwill and Nonqualifying CDI....................................... 27 Balance Sheet Analysis........................................................................... 28 Securities Available for Sale.................................................................. 28 Loan Portfolio................................................................................. 30 Nonaccrual and Restructured Loans and Other Assets............................................. 30 Loans 90 Days Past Due and Still Accruing................................................... 33 Allowance for Loan Losses...................................................................... 34 Interest Receivable and Other Assets........................................................... 35 Deposits....................................................................................... 36 Capital Adequacy/Ratios........................................................................ 36 Derivative Financial Instruments............................................................... 37 Liquidity and Capital Management............................................................... 38 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 40 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................................. 42 SIGNATURE....................................................................................................... 44
1 PART I - FINANCIAL INFORMATION WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ---------------------- (in millions, except per share amounts) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Securities available for sale $ 631 $ 510 Mortgages held for sale 170 258 Loans held for sale 107 99 Loans 2,983 2,579 Other interest income 72 42 -------- -------- Total interest income 3,963 3,488 -------- -------- INTEREST EXPENSE Deposits 757 717 Short-term borrowings 370 208 Long-term debt 381 283 Guaranteed preferred beneficial interests in Company's subordinated debentures 15 14 -------- -------- Total interest expense 1,523 1,222 -------- -------- NET INTEREST INCOME 2,440 2,266 Provision for loan losses 255 270 -------- -------- Net interest income after provision for loan losses 2,185 1,996 -------- -------- NONINTEREST INCOME Service charges on deposit accounts 383 344 Trust and investment fees 360 300 Credit card fees 123 132 Other fees 270 238 Mortgage banking 306 327 Insurance 92 85 Net venture capital gains 885 112 Net losses on securities available for sale (602) (2) Other 94 191 -------- -------- Total noninterest income 1,911 1,727 -------- -------- NONINTEREST EXPENSE Salaries 818 725 Incentive compensation 134 134 Employee benefits 233 199 Equipment 193 191 Net occupancy 224 186 Goodwill 113 104 Core deposit intangible 47 52 Net (gains) losses on dispositions of premises and equipment (33) 2 Other 750 749 -------- -------- Total noninterest expense 2,479 2,342 -------- -------- INCOME BEFORE INCOME TAX EXPENSE 1,617 1,381 Income tax expense 607 497 -------- -------- NET INCOME $ 1,010 $ 884 ======== ======== NET INCOME APPLICABLE TO COMMON STOCK $ 1,006 $ 875 ======== ======== EARNINGS PER COMMON SHARE $ .62 $ .53 ======== ======== DILUTED EARNINGS PER COMMON SHARE $ .61 $ .53 ======== ======== DIVIDENDS DECLARED PER COMMON SHARE $ .22 $ .185 ======== ======== Average common shares outstanding 1,627.1 1,647.1 ======== ======== Diluted average common shares outstanding 1,640.2 1,664.2 ======== ======== - -------------------------------------------------------------------------------------------------------------------
2 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions, except shares) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 12,096 $ 13,250 $ 11,364 Federal funds sold and securities purchased under resale agreements 3,066 1,554 869 Securities available for sale 36,774 38,518 35,801 Mortgages held for sale 6,324 11,707 11,717 Loans held for sale 5,496 4,975 5,630 Loans 124,846 119,464 108,108 Allowance for loan losses 3,237 3,170 3,161 -------- -------- -------- Net loans 121,609 116,294 104,947 -------- -------- -------- Mortgage servicing rights 4,625 4,483 3,627 Premises and equipment, net 2,906 2,985 3,130 Core deposit intangible 1,250 1,286 1,437 Goodwill 8,355 7,702 7,747 Interest receivable and other assets 19,775 15,348 15,161 -------- -------- -------- Total assets $222,276 $218,102 $201,430 ======== ======== ======== LIABILITIES Noninterest-bearing deposits $ 45,836 $ 42,916 $ 42,322 Interest-bearing deposits 95,631 89,792 90,018 -------- -------- -------- Total deposits 141,467 132,708 132,340 Short-term borrowings 21,334 27,995 17,270 Accrued expenses and other liabilities 10,293 11,108 9,396 Long-term debt 24,768 23,375 20,363 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 785 785 STOCKHOLDERS' EQUITY Preferred stock 473 344 604 Unearned ESOP shares (210) (73) (145) -------- -------- -------- Total preferred stock 263 271 459 Common stock - $1-2/3 par value, authorized 4,000,000,000 shares; issued 1,666,095,265 shares, 1,666,095,265 shares and 1,666,095,285 shares 2,777 2,777 2,777 Additional paid-in capital 8,789 8,786 8,733 Retained earnings 11,706 11,196 9,525 Cumulative other comprehensive income 1,723 892 307 Notes receivable from ESOP (1) (1) (3) Treasury stock - 37,415,264 shares, 39,245,724 shares and 13,478,919 shares (1,628) (1,790) (522) -------- -------- -------- Total stockholders' equity 23,629 22,131 21,276 -------- -------- -------- Total liabilities and stockholders' equity $222,276 $218,102 $201,430 ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
3 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------ Unearned Additional Number of Preferred ESOP Common paid-in Retained (in millions, except shares) shares stock shares stock capital earnings - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1998 $547 $ (84) $2,769 $8,673 $ 9,045 ---- ----- ------ ------ ------- Comprehensive income Net income 884 Other comprehensive income, net of tax: Translation adjustments Unrealized gains (losses) on securities available for sale arising during the year Reclassification adjustment for (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 5,277,067 46 (86) Common stock issued for acquisitions 6,114,830 8 11 (5) Common stock repurchased 5,869,971 Preferred stock (75,000) issued to ESOP 75 (80) 5 Preferred stock released to ESOP 19 (1) Preferred stock (17,882) converted to common shares 509,396 (18) (1) Preferred stock dividends (9) Common stock dividends (304) ---- ----- ------ ------ ------- Net change 57 (61) 8 60 480 ---- ----- ------ ------ ------- BALANCE MARCH 31, 1999 $604 $(145) $2,777 $8,733 $ 9,525 ==== ===== ====== ====== ======= BALANCE DECEMBER 31, 1999 $344 $ (73) $2,777 $8,786 $11,196 ---- ----- ------ ------ ------- Comprehensive income Net income 1,010 Other comprehensive income, net of tax: Unrealized gains (losses) on securities available for sale arising during the year Reclassification adjustment for (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 2,774,366 97 (131) Common stock issued for acquisitions 29,539,265 (101) (6) Common stock repurchased 31,484,965 Preferred stock (170,000) issued to ESOP 170 (180) 10 Preferred stock released to ESOP 43 (3) Preferred stock (40,804) converted to common shares 1,001,794 (41) Preferred stock dividends (4) Common stock dividends (359) Increase in Rabbi trust assets (classified as treasury stock) ---- ----- ------ ------ ------- Net change 129 (137) -- 3 510 ---- ----- ------ ------ ------- BALANCE MARCH 31, 2000 $473 $(210) $2,777 $8,789 $11,706 ==== ===== ====== ====== ======= - ----------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Notes Cumulative receivable other Total from Treasury comprehensive stockholders' (in millions, except shares) ESOP stock income equity - -------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1998 $(3) $ (651) $ 463 $20,759 --- ------- ------ ------- Comprehensive income Net income 884 Other comprehensive income, net of tax: Translation adjustments 1 1 Unrealized gains (losses) on securities available for sale arising during the year (158) (158) Reclassification adjustment for (gains) losses on securities available for sale included in net income 1 1 ------- Total comprehensive income 728 Common stock issued 282 242 Common stock issued for acquisitions 49 63 Common stock repurchased (221) (221) Preferred stock (75,000) issued to ESOP -- Preferred stock released to ESOP 18 Preferred stock (17,882) converted to common shares 19 -- Preferred stock dividends (9) Common stock dividends (304) --- ------- ------ ------- Net change -- 129 (156) 517 --- ------- ------ ------- BALANCE MARCH 31, 1999 $(3) $ (522) $ 307 $21,276 === ======= ====== ======= BALANCE DECEMBER 31, 1999 $(1) $(1,790) $ 892 $22,131 --- ------- ------ ------- Comprehensive income Net income 1,010 Other comprehensive income, net of tax: Unrealized gains (losses) on securities available for sale arising during the year 630 630 Reclassification adjustment for (gains) losses on securities available for sale included in net income 201 201 ------- Total comprehensive income 1,841 Common stock issued 117 83 Common stock issued for acquisitions 1,232 1,125 Common stock repurchased (1,229) (1,229) Preferred stock (170,000) issued to ESOP -- Preferred stock released to ESOP 40 Preferred stock (40,804) converted to common shares 41 -- Preferred stock dividends (4) Common stock dividends (359) Increase in Rabbi trust assets (classified as treasury stock) 1 1 --- -------- ------ ------- Net change -- 162 831 1,498 --- -------- ------ ------- BALANCE MARCH 31, 2000 $(1) $(1,628) $1,723 $23,629 === ======= ====== ======= - --------------------------------------------------------------------------------------------------------------
4 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------- Quarter ended March 31, --------------------------------- (in millions) 2000 1999 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,010 $ 884 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 255 270 Depreciation and amortization 401 299 Securities available for sale losses 602 2 Net venture capital gains (885) (112) Gains on sales of mortgages held for sale (56) (200) Net (gains) losses on dispositions of premises and equipment (33) 2 Release of preferred shares to ESOP 40 18 Net decrease (increase) in trading assets 414 (1,079) Net decrease (increase) in accrued interest receivable 20 (78) Net (decrease) increase in accrued interest payable (9) 66 Originations of mortgages held for sale (11,990) (27,799) Proceeds from sales of mortgages held for sale 17,452 36,009 Net increase in loans held for sale (521) (308) Other assets, net (1,383) (957) Other accrued expenses and liabilities, net 274 1,122 -------- -------- Net cash provided by operating activities 5,591 8,139 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 7,537 3,337 Proceeds from prepayments and maturities 776 2,757 Purchases (7,608) (9,788) Net cash acquired from (paid for) acquisitions 229 (213) Net (increase) decrease in banking subsidiaries' loans resulting from originations and collections (2,504) 1,583 Proceeds from sales (including participations) of banking subsidiaries' loans 273 816 Purchases (including participations) of banking subsidiaries' loans (65) (645) Principal collected on nonbank subsidiaries' loans 819 648 Nonbank subsidiaries' loans originated (2,295) (2,087) Proceeds from dispositions of operations 2 -- Proceeds from sales of foreclosed assets 67 51 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (1,084) 648 Net increase in mortgage servicing rights (265) (841) Other, net (1,484) (1,936) -------- -------- Net cash used by investing activities (5,602) (5,670) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 6,236 (5,405) Net (decrease) increase in short-term borrowings (7,111) 1,229 Proceeds from issuance of long-term debt 2,829 5,530 Repayment of long-term debt (1,573) (4,873) Proceeds from issuance of common stock 76 242 Repurchase of common stock (1,229) (221) Payment of cash dividends on preferred and common stock (363) (313) Other, net (8) (25) -------- -------- Net cash used by financing activities (1,143) (3,836) -------- -------- NET CHANGE IN CASH AND DUE FROM BANKS (1,154) (1,367) Cash and due from banks at beginning of quarter 13,250 12,731 -------- -------- CASH AND DUE FROM BANKS AT END OF QUARTER $ 12,096 $ 11,364 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the quarter for: Interest $ 1,532 $ 1,156 Income taxes $ 2 $ 494 Noncash investing and financing activities: Transfers from loans to foreclosed assets $ 52 $ 54 - -----------------------------------------------------------------------------------------------------------------
5 WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. BUSINESS COMBINATIONS On November 2, 1998, the Merger involving Norwest Corporation and Wells Fargo & Company (the Merger) was completed. Norwest Corporation changed its name to "Wells Fargo & Company" and Wells Fargo & Company (the former Wells Fargo) became a wholly-owned subsidiary of Norwest Corporation. Norwest Corporation as it was before the Merger is referred to as the former Norwest. Wells Fargo & Company together with its subsidiaries are referred to as the Company. In connection with the Merger, the Company recorded approximately $600 million of restructuring charges in the fourth quarter of 1998. The restructuring plans are evaluated on a regular basis during the integration process. The charges included a severance-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. Approximately 2,000 employees, totaling $122 million in severance-related benefits, had entered the severance process through March 31, 2000. The charges also included approximately $250 million related to dispositions of owned and leased premises held for sale or remarketing. The remaining balance of this reserve was approximately $65 million at March 31, 2000, comprised of approximately $33 million for owned premises and approximately $32 million for leased premises. Substantially all of the other costs associated with exiting activities due to the Merger, which originally totaled $70 million, have been utilized at March 31, 2000. The Company regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management of the Company does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. Transactions completed in the three months ended March 31, 2000 include:
- ------------------------------------------------------------------------------------------------------------------- Method of (in millions) Date Assets Accounting - ------------------------------------------------------------------------------------------------------------------- First Place Financial Corporation January 18 $ 733 Purchase North County Bancorp January 27 413 Purchase Prime Bancshares, Inc. January 28 1,366 Purchase Ragen MacKenzie Group Incorporated March 16 901 Purchase Napa National Bancorp March 17 188 Purchase Servus Financial Corporation March 17 168 Purchase Michigan Financial Corporation March 30 975 Purchase Bryan, Pendleton, Swats & McAllister, LLC March 31 12 Purchase ------ $4,756 ====== - -------------------------------------------------------------------------------------------------------------------
In connection with the foregoing transactions, the Company paid cash in the aggregate amount of $11 million and issued aggregate common shares of 29.5 million. 6 The Company had announced four pending transactions as of April 10, 2000 with total assets of approximately $29 billion, and anticipates that approximately 112 million common shares will be issued upon consummation of these transactions. The pending transactions include First Security Corporation, a $23 billion bank holding company based in Salt Lake City, Utah. Such transactions are subject to approval by regulatory agencies and are expected to be completed by the end of 2000. 7 2. PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of preferred stock and 4,000,000 shares of preference stock, both without par value. All preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. No preference shares have been issued under this authorization. The table below is a summary of the Company's preferred stock at March 31, 2000, December 31, 1999 and March 31, 1999. A detailed description of the Company's preferred stock is provided in Note 11 to the audited consolidated financial statements included in the Company's 1999 Annual Report on Form 10-K.
- --------------------------------------------------------------------------------------------------------------------------------- Shares issued and outstanding Carrying amount (in millions) Adjustable ----------------------------------- ----------------------------- dividends rate MAR. 31, Dec. 31, Mar. 31, MAR. 31, Dec. 31, Mar. 31, ----------------- 2000 1999 1999 2000 1999 1999 Minimum Maximum --------- --------- --------- ------ ------ ------ ------- ------- Adjustable-Rate Cumulative, Series B (Liquidation preference $50) 1,500,000 1,500,000 1,500,000 $ 75 $ 75 $ 75 5.5% 10.5% 6.59%/Adjustable-Rate Noncumulative Preferred Stock, Series H (Liquidation preference $50)(1) 4,000,000 4,000,000 4,000,000 200 200 200 7.0 13.0 Cumulative Tracking (Liquidation preference $200)(2) -- -- 980,000 -- -- 196 -- -- 2000 ESOP Cumulative Convertible (Liquidation preference $1,000) 129,894 -- -- 130 -- -- 11.5 12.5 1999 ESOP Cumulative Convertible (Liquidation preference $1,000) 21,947 22,263 58,787 22 22 59 10.30 11.30 1998 ESOP Cumulative Convertible (Liquidation preference $1,000) 8,300 8,386 8,740 8 8 9 10.75 11.75 1997 ESOP Cumulative Convertible (Liquidation preference $1,000) 10,739 10,839 18,810 11 11 19 9.50 10.50 1996 ESOP Cumulative Convertible (Liquidation preference $1,000) 11,910 12,011 21,466 12 12 21 8.50 9.50 1995 ESOP Cumulative Convertible (Liquidation preference $1,000) 11,921 11,990 20,016 12 12 20 10.00 10.00 ESOP Cumulative Convertible (Liquidation preference $1,000) 3,706 3,732 9,661 3 4 10 9.0 9.0 Unearned ESOP shares(3) -- -- -- (210) (73) (145) -- -- Less Cumulative Tracking held by subsidiary (Liquidation preference $200) -- -- 25,000 -- -- 5 -- -- --------- --------- --------- ----- ---- ----- Total 5,698,417 5,569,221 6,592,480 $ 263 $271 $ 459 ========= ========= ========= ===== ==== ===== - ---------------------------------------------------------------------------------------------------------------------------------
(1) Annualized dividend rate is 6.59% through October 1, 2001, after which the rate will become adjustable, subject to the minimum and maximum rates disclosed. (2) In December 1999, the Company redeemed all $196 million (980,000 shares) of its Cumulative Tracking preferred stock. (3) In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS, the Company recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released. 8 3. EARNINGS PER COMMON SHARE The table below presents earnings per common share and diluted earnings per common share and a reconciliation of the numerator and denominator of both earnings per common share calculations.
- ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ---------------------------- (in millions, except per share amounts) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Net income $ 1,010 $ 884 Less: Preferred stock dividends 4 9 -------- -------- Net income applicable to common stock $ 1,006 $ 875 ======== ======== EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 1,006 $ 875 ======== ======== Average common shares outstanding (denominator) 1,627.1 1,647.1 ======== ======== Per share $ .62 $ .53 ======== ======== DILUTED EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 1,006 $ 875 ======== ======== Average common shares outstanding 1,627.1 1,647.1 Add: Stock options 11.8 15.4 Restricted share rights 1.3 1.7 -------- -------- Diluted average common shares outstanding (denominator) 1,640.2 1,664.2 ======== ======== Per share $ .61 $ .53 ======== ======== - -------------------------------------------------------------------------------------------------------------------
9 4. OPERATING SEGMENTS The Company has identified four lines of business for the purposes of management reporting: Community Banking, Wholesale Banking, Wells Fargo Home Mortgage (formerly Norwest Mortgage) and 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 Tradmark-, a personal computer banking service exclusively for the small business customer. THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of $10 million and maintains relationships with major corporations throughout the United States. Wholesale Banking provides a complete line of commercial and corporate banking services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, foreign exchange services, treasury management, investment management and electronic products. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade 10 financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications, real estate brokerage services and commercial real estate loan servicing. WELLS FARGO HOME MORTGAGE'S (formerly Norwest Mortgage) activities include the origination and purchase of residential mortgage loans for sale to various investors as well as providing servicing of mortgage loans for others. 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. 11 The following table provides the results for the Company's four major operating segments.
- ---------------------------------------------------------------------------------------------------------------------- (income/expense in millions, average balances in billions) Community Wholesale Wells Fargo Banking Banking Home Mortgage ----------------------------------------------------------------- QUARTER ENDED MARCH 31, 2000 1999 2000 1999 2000 1999 Net interest income (1) $1,689 $1,559 $416 $338 $ 22 $ 68 Provision for loan losses 166 167 12 25 2 3 Noninterest income 1,178 1,013 340 307 304 316 Noninterest expense 1,589 1,480 341 268 217 276 ------ ------ ---- ---- ---- ---- Income (loss) before income tax expense (benefit) 1,112 925 403 352 107 105 Income tax expense (benefit) (2) 391 303 151 130 40 39 ------ ------ ---- ---- ---- ---- Net income (loss) $ 721 $ 622 $252 $222 $ 67 $ 66 ====== ====== ==== ==== ==== ==== Average loans $ 70 $ 64 $ 39 $ 34 $ 2 $ 1 Average assets 130 114 47 40 21 27 Average core deposits 115 114 9 9 4 5 - ----------------------------------------------------------------------------------------------------------------------
(1) Net interest income is the primary source of income for most of the operating segments. Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Community Banking and Wholesale Banking are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (Wells Fargo Home Mortgage's net interest income was composed of interest revenue of $185 million and $265 million for the first quarter of 2000 and 1999, respectively, and interest expense of $163 million and $197 million for the first quarter of 2000 and 1999, respectively.) (2) Taxes vary by geographic concentration of revenue generation. Taxes as presented are also higher than the consolidated Company's effective tax rate as a result of taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The offsets for these adjustments are found in the reconciliation column. 12
- ----------------------------------------------------------------------- Recon- Consoli- Norwest ciliation dated Financial column (3) Company -------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 $342 $324 $(29) $(23) $2,440 $2,266 75 75 -- -- 255 270 73 73 16 18 1,911 1,727 250 238 82 80 2,479 2,342 ---- ---- ---- ---- ------ ------ 90 84 (95) (85) 1,617 1,381 34 30 (9) (5) 607 497 ---- ---- ---- ---- ------ ------ $ 56 $ 54 $(86) $(80) $1,010 $ 884 ==== ==== ==== ==== ====== ====== $ 10 $ 9 $ -- $ -- $ 121 $ 108 12 11 6 7 216 199 -- -- (1) -- 127 128 - -----------------------------------------------------------------------
(3) The material items in the reconciliation column related to revenue (i.e., net interest income plus noninterest income) and net income consist of Treasury activities and unallocated items. Revenue includes Treasury activities of $19 million and $13 million; and unallocated items of $(32) million and $(18) million for the first quarter of 2000 and 1999, respectively. Net income includes Treasury activities of $12 million and $8 million; and unallocated items of $(98) million, and $(88) million for the first quarter of 2000 and 1999, respectively. The material items in the reconciliation column related to noninterest expense include goodwill and nonqualifying CDI amortization of $80 million and $80 million for the first quarter of 2000 and 1999, respectively. The material items in the reconcilation column related to average assets include goodwill and nonqualifying CDI of $6 billion and $7 billion for the first quarter of 2000 and 1999, respectively. 13 5. MORTGAGE BANKING ACTIVITIES Mortgage banking activities include Wells Fargo Home Mortgage and mortgage banking activities in other operating segments. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The outstanding balances of mortgage loans serviced for others were $298 billion at March 31, 2000, $290 billion at December 31, 1999 and $257 billion at March 31, 1999. The following table summarizes the changes in capitalized mortgage loan servicing rights:
- ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------------- (in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Balance, beginning of quarter $4,483 $3,144 Originations 144 265 Purchases 110 249 Amortization (123) (294) Other (principally hedge activity) 11 327 ------ ------ 4,625 3,691 Less valuation allowance -- 64 ------ ------ Balance, end of quarter $4,625 $3,627 ====== ====== - -------------------------------------------------------------------------------------------------------------------
The fair value of capitalized mortgage servicing rights included in the consolidated balance sheet at March 31, 2000 was approximately $5 billion, calculated using discount rates ranging from 500 to 700 basis points over the ten-year U.S. Treasury rate. 14 FINANCIAL REVIEW SUMMARY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------- % Change Quarter ended Mar. 31, 2000 from -------------------------------- -------------------- MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 2000 1999 1999 1999 1999 - ---------------------------------------------------------------------------------------------------------------- FOR THE QUARTER Net income $ 1,010 $ 970 $ 884 4% 14% Net income applicable to common stock 1,006 961 875 5 15 Earnings per common share $ .62 $ .59 $ .53 5 17 Diluted earnings per common share .61 .58 .53 5 15 Dividends declared per common share .22 .20 .185 10 19 Average common shares outstanding 1,627.1 1,635.6 1,647.1 (1) (1) Diluted average common shares outstanding 1,640.2 1,656.0 1,664.2 (1) (1) Profitability ratios (annualized) Net income to average total assets (ROA) 1.88% 1.85% 1.80% 2 4 Net income applicable to common stock to average common stockholders' equity (ROE) 18.24 17.84 17.33 2 5 Total revenue $ 4,351 $ 4,466 $ 3,993 (3) 9 Efficiency ratio (1) 57.0% 59.5% 58.7% (4) (3) Average loans $121,172 $116,301 $107,834 4 12 Average assets 216,458 208,347 198,723 4 9 Average core deposits 127,410 126,493 128,133 1 (1) Net interest margin 5.56% 5.61% 5.58% (1) -- NET INCOME AND RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CORE DEPOSIT INTANGIBLE (CDI) AMORTIZATION AND BALANCES ("CASH") (2) Net income applicable to common stock $ 1,145 $ 1,120 $ 1,008 2 14 Earnings per common share .70 .68 .61 3 15 Diluted earnings per common share .70 .68 .61 3 15 ROA 2.23% 2.24% 2.17% -- 3 ROE 34.15 34.20 34.38 -- (1) Efficiency ratio 53.4 55.6 54.9 (4) (3) AT QUARTER END Securities available for sale $ 36,774 $ 38,518 $ 35,801 (5) 3 Loans 124,846 119,464 108,108 5 15 Allowance for loan losses 3,237 3,170 3,161 2 2 Goodwill 8,355 7,702 7,747 8 8 Assets 222,276 218,102 201,430 2 10 Core deposits 132,480 126,198 127,996 5 4 Common stockholders' equity 23,366 21,860 20,817 7 12 Stockholders' equity 23,629 22,131 21,276 7 11 Tier 1 capital (3) 13,354 13,484 12,765 (1) 5 Total capital (3) 18,277 17,555 17,009 4 7 Capital ratios Common stockholders' equity to assets 10.51% 10.02% 10.33% 5 2 Stockholders' equity to assets 10.63 10.15 10.56 5 1 Risk-based capital (3) Tier 1 capital 7.50 8.07 8.23 (7) (9) Total capital 10.27 10.50 10.97 (2) (6) Leverage (3) 6.50 6.77 6.74 (4) (4) Book value per common share $ 14.35 $ 13.44 $ 12.60 7 14 Staff (active, full-time equivalent) 90,683 89,355 90,711 1 -- COMMON STOCK PRICE High $ 43.75 $ 49.94 $ 40.44 (12) 8 Low 31.00 38.38 32.13 (19) (4) Quarter end 40.75 40.44 35.06 1 16 - ----------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by the total revenue (net interest income and noninterest income). (2) Nonqualifying core deposit intangible (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 $1,215 million for the quarter ended March 31, 2000. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $26 million and $753 million, respectively, for the quarter ended March 31, 2000. Goodwill amortization and average balance (which are not tax effected) were $113 million and $7,932 million, respectively, for the quarter ended March 31, 2000. (3) See the Capital Adequacy/Ratios section for additional information. 15 OVERVIEW Wells Fargo & Company is a $222 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 March 31, 2000 among U.S. bank holding companies. In this Form 10-Q, 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. Certain amounts in the financial review for prior quarters have been reclassified to conform with the current financial statement presentation. Net income for the first quarter of 2000 was $1,010 million, compared with $884 million for the first quarter of 1999. Diluted earnings per common share for the first quarter of 2000 were $.61, compared with $.53 for the first quarter of 1999. Return on average assets (ROA) was 1.88% and return on average common equity (ROE) was 18.24% for the first quarter of 2000, compared with 1.80% and 17.33%, respectively, for the first quarter of 1999. Diluted earnings before the amortization of goodwill and nonqualifying core deposit intangible (CDI) ("cash" earnings) were $.70 per share for the first quarter of 2000, compared with $.61 for the first quarter of 1999. On the same basis, ROA was 2.23% and ROE was 34.15% for the first quarter of 2000, compared with 2.17% and 34.38%, respectively, for the first quarter of 1999. Net interest income on a taxable-equivalent basis was $2,456 million for the first quarter of 2000, compared with $2,281 million for the first quarter of 1999. The Company's net interest margin was 5.56% for the first quarter of 2000, compared with 5.58% for the first quarter of 1999. Noninterest income was $1,911 million for the first quarter of 2000, compared with $1,727 million for the first quarter of 1999, an increase of 11%. The increase was primarily due to net venture capital gains of $885 million, offset by losses of $602 million on the sales of securities that resulted from the continued restructuring of the securities available for sale portfolio and a $160 million write-down of auto lease residuals. 16 Noninterest expense totaled $2,479 million for the first quarter of 2000, compared with $2,342 million for the first quarter of 1999. The efficiency ratio improved to 57.0% for the first quarter of 2000, compared with 58.7% for the same quarter of 1999. On a cash basis, this ratio improved to 53.4%, compared with 54.9% for the same quarter of 1999. The provision for loan losses was $255 million in the first quarter of 2000, compared with $270 million in the first quarter of 1999. During the first quarter of 2000, net charge-offs were $254 million, or .84% of average total loans (annualized), compared with $273 million, or 1.03%, during the first quarter of 1999. The allowance for loan losses was $3,237 million, or 2.59% of total loans, at March 31, 2000, compared with $3,170 million, or 2.65%, at December 31, 1999 and $3,161 million, or 2.92%, at March 31, 1999. At March 31, 2000, total nonaccrual and restructured loans were $744 million, or .6% of total loans, compared with $669 million, or .6%, at December 31, 1999 and $704 million, or .7%, at March 31, 1999. Foreclosed assets amounted to $143 million at March 31, 2000, $153 million at December 31, 1999 and $187 million at March 31, 1999. At March 31, 2000, the ratio of common stockholders' equity to total assets was 10.51%, compared with 10.02% at December 31, 1999 and 10.33% at March 31, 1999. The Company's total risk-based capital (RBC) ratio at March 31, 2000 was 10.27% and its Tier 1 RBC ratio was 7.50%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's ratios at March 31, 1999 were 10.97% and 8.23%, respectively. The Company's leverage ratio was 6.50% at March 31, 2000 and 6.74% at March 31, 1999, exceeding the minimum regulatory guideline of 3% for bank holding companies. RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement 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. In March 2000, the FASB issued an exposure draft of a proposed amendment to FAS 133. 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. 17 FACTORS THAT MAY AFFECT FUTURE RESULTS This document and other documents filed by the Company with the Securities and Exchange Commission (SEC) have forward-looking statements. In addition, the Company's senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements might include one or more of the following: - - Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; - - Descriptions of plans or objectives of management for future operations, products or services, including pending acquisition transactions; - - Forecasts of future economic performance; and - - Descriptions of assumptions underlying or relating to any of the foregoing. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements give the Company's expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors--many of which are beyond the Company's control--that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate, and other risks, are described elsewhere in this report. Factors relating to the regulation and supervision of the Company are also described or incorporated in the Company's Annual Report on Form 10-K filed with the SEC. There are other factors besides those described or incorporated in this report or in the Form 10-K that could cause actual conditions, events or results to differ from those in the forward-looking statements. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. BUSINESS AND ECONOMIC CONDITIONS. The Company's business and earnings are sensitive to general business and economic conditions in the United States and abroad. These conditions 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 18 the United States or abroad, the Company's business and earnings could be adversely affected. For example, an economic downturn or higher interest rates could decrease the demand for loans and other products and services offered by the Company and/or increase the number of customers and counterparties who become delinquent or who default on their loans or other obligations to the Company. An increase in the number of delinquencies or defaults would result in a higher level of charge-offs and a higher level of loan loss provision, which could adversely affect the Company's earnings. Higher interest rates would also increase the Company's cost to borrow funds and may increase the rate paid on deposits, which could more than offset, in the net interest margin, the increase in rates earned by the Company on new or floating rate loans or short-term investments. See "Quantitative and Qualitative Disclosures About Market Risk" for more information on interest rate risk. COMPETITION. The Company operates in a highly competitive environment both in terms of the products and services the Company offers and the geographic markets in which the Company conducts business. The Company expects this environment to become even more competitive in the future as a result of legislative, regulatory and technological changes and the continued trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in an increasing number of traditional banking businesses such as syndicated lending and consumer banking. Many of the Company's competitors enjoy the benefits of fewer regulatory constraints and lower cost structures. The financial services industry is likely to become even more competitive as technological advances enable more companies to provide financial services. The Company expects that the consolidation of the financial services industry will result in larger, better capitalized companies offering a wide array of financial services and products. Furthermore, recent legislative changes (see "Legislation" below) will increase competition in the financial services industry. FISCAL AND MONETARY POLICIES. The Company's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies directly and indirectly influence the rate of interest that commercial banks pay on their interest-bearing deposits and can also affect the value of financial instruments held by the Company. Those policies also determine to a significant extent the cost to the Company of funds for lending and investing. Changes in those policies are beyond the Company's control and hard to predict. Federal Reserve Board policies can also affect the Company's customers and counterparties, potentially increasing the risk that such customers and counterparties may become delinquent or default on their obligations to the Company. 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 19 completing transactions that have traditionally involved banks at one end or both ends of the transaction. For example, technological advances now allow parties to pay bills and transfer funds directly without the involvement of banks. Important consequences of this disintermediation include the loss of customer deposits (and the income generated from those deposits) and decreases in transactions that generate fee income. LEGISLATION. The Gramm-Leach-Bliley Act (the Act) permits affiliation among banks, securities firms and insurance companies by creating a new type of financial services company called a "financial holding company." Financial holding companies may offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company may acquire banks and other financial institutions. The Act significantly changes the competitive environment in which the Company conducts business. MERGER INVOLVING THE FORMER NORWEST AND THE FORMER WELLS FARGO. One or more factors relating to the Merger could adversely impact the Company's business and earnings and in particular reduce the expected benefits of the Merger to the Company. These factors include the following: - - expected cost savings and/or potential revenue enhancements from the Merger might not be fully realized or realized within the expected time frame; - - deposit attrition (run-off), customer loss and/or revenue loss following the Merger might be greater than expected; and - - costs or difficulties related to the integration of the businesses of the two companies might be greater than expected. OTHER MERGERS AND ACQUISITIONS. The Company expands its business in part by acquiring banks and other companies engaged in financial services. The Company continues to explore opportunities to acquire banking institutions and other companies. Discussions are continually being carried on related to such acquisitions. Generally, management of the Company does not comment on such discussions or possible acquisitions until a definitive agreement has been signed. A number of factors related to past and future acquisitions could adversely affect the Company's business and earnings, including those described above for the Norwest/Wells Fargo merger. In addition, the Company's acquisitions generally are subject to approval by federal and, in some cases, state regulatory agencies. The failure to receive required regulatory approvals within the time frame or on the conditions expected by management could also adversely affect the Company's business and earnings. 20 OPERATING SEGMENT RESULTS COMMUNITY BANKING'S net income was $721 million in the first quarter of 2000, compared with $622 million in the first quarter of 1999, an increase of 16%. Net interest income increased by $130 million. A significant portion of the $165 million, or 16%, increase in noninterest income was due to increased fee revenue from growth in consumer checking accounts, mutual funds and annuities. Noninterest income was also affected by net venture capital gains of $885 million, predominantly offset by losses of $602 million on the sales of securities that resulted from the continued restructuring of the securities available for sale portfolio, a $160 million write-down of auto lease residuals, and integration and other expenses. Community Banking also experienced significant growth in assets under management. Total noninterest expense increased by $109 million from 1999, primarily due to increases in occupancy, personnel, external services and marketing expenses. WHOLESALE BANKING'S net income was $252 million in the first quarter of 2000, compared with $222 million in the first quarter of 1999, an increase of 14%. Net interest income increased to $416 million, compared with $338 million in the first quarter of 1999. Average outstanding loan balances grew to $39 billion in the first quarter of 2000 from $34 billion in the first quarter of 1999, an increase of 15%. Noninterest income increased to $340 million from $307 million, primarily due to increases in trust and investment fees, foreign exchange income, loan fees and service charges on deposit accounts. Noninterest expense increased to $341 million from $268 million. A significant portion of the increase in noninterest expense was due to an increase in personnel-related expenses. Integration expenses also contributed to the increase. WELLS FARGO HOME MORTGAGE'S (FORMERLY NORWEST MORTGAGE) net income was $67 million in the first quarter of 2000 compared with $66 million in the first quarter of 1999. Mortgage originations were $12 billion for the first quarter of 2000, compared with $28 billion a year earlier. The servicing portfolio increased to $284 billion at March 31, 2000 from $257 billion at March 31, 1999. The weighted average coupon on loans in the servicing portfolio was 7.37% at March 31, 2000 compared with 7.34% a year earlier. Total capitalized mortgage servicing rights amounted to $4.6 billion, or 1.63%, of the servicing portfolio at March 31, 2000, compared with $3.6 billion, or 1.41%, at March 31, 1999. Amortization of capitalized mortgage servicing rights was $123 million for the first quarter of 2000, compared with $294 million for the first quarter of 1999. Gains on sales of mortgages were $46 million for the first quarter of 2000, compared with $183 million for the first quarter of 1999. NORWEST FINANCIAL'S net income was $56 million in the first quarter of 2000, compared with $54 million in the first quarter of 1999, an increase of 4%. Net interest income increased $18 million, or 6%, substantially due to a 6% increase in average loans, partially offset by a decline in the net interest margin. 21 EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $2,456 million in the first quarter of 2000, compared with $2,281 million in the first quarter of 1999. The Company's net interest margin was 5.56% in the first quarter of 2000, compared with 5.61% in the fourth quarter of 1999 and 5.58% in the first quarter of 1999. The decrease in the margin from the fourth quarter of 1999 was primarily due to the use of higher-costing short-term borrowings that were used to fund a majority of the growth in earning assets, partially offset by the benefit to the margin that resulted from the initial restructuring of the debt securities available for sale portfolio during the fourth quarter of 1999. Interest income was offset by hedging expense of $2 million in the first quarter of 2000, compared with hedging income of $47 million in the first quarter of 1999. Interest expense included hedging expense of $7 million in the first quarter of 2000, compared with hedging income of $26 million in the same quarter of 1999. Individual components of net interest income and the net interest margin are presented in the rate/yield table on the following page. Loans averaged $121.2 billion in the first quarter of 2000, compared with $107.8 billion in the first quarter of 1999. The increase was primarily due to loan growth in the commercial and other real estate mortgage portfolios, which increased by 12% and 17%, respectively, compared with the first quarter of 1999. Investment securities averaged $38.1 billion during the first quarter of 2000, compared with $35.2 billion in the fourth quarter of 1999 and $32.2 billion in the first quarter of 1999. The increase from the fourth quarter of 1999 was primarily due to the manner in which the debt securities available for sale portfolio was restructured during the first quarter of 2000. In order to benefit from market opportunities, the Company's purchases of new debt securities generally occurred before the sales of certain other debt securities. The timing of these purchases, which provide higher yields compared to the securities that were sold, resulted in a temporary increase in the average balance of the investment securities portfolio. Average core deposits were $127.4 billion and $128.1 billion and funded 59% and 64% of the Company's average total assets in the first quarter of 2000 and 1999, respectively. 22 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
- --------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ----------------------------------------------------------- 2000 1999 -------------------------- -------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - --------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,951 5.50% $ 27 $ 1,160 5.01% $ 14 Securities available for sale (3): Securities of U.S. Treasury and federal agencies 4,295 5.73 65 4,716 5.63 65 Securities of U.S. states and political subdivisions 1,826 8.13 38 1,686 8.30 33 Mortgage-backed securities: Federal agencies 23,808 7.30 443 19,655 6.72 326 Private collateralized mortgage obligations 2,168 7.21 41 3,308 6.75 56 -------- ------ -------- ------ Total mortgage-backed securities 25,976 7.29 484 22,963 6.72 382 Other securities 5,969 6.63 57 2,843 6.07 42 -------- ------ -------- ------ Total securities available for sale 38,066 7.08 644 32,208 6.58 522 Loans held for sale (3) 5,303 8.08 107 5,561 7.24 99 Mortgages held for sale (3) 8,888 7.56 170 15,407 6.71 258 Loans: Commercial 39,222 9.16 893 34,875 8.53 735 Real estate 1-4 family first mortgage 12,694 7.83 248 12,089 7.61 231 Other real estate mortgage 19,624 9.27 453 16,731 9.03 373 Real estate construction 4,843 9.38 113 3,902 9.36 90 Consumer: Real estate 1-4 family junior lien mortgage 13,315 10.19 338 10,972 9.89 268 Credit card 5,293 13.70 181 5,549 13.64 189 Other revolving credit and monthly payment 16,770 12.48 523 15,669 12.52 489 -------- ------ -------- ------ Total consumer 35,378 11.80 1,042 32,190 11.81 946 Lease financing 7,825 7.69 150 6,574 7.88 129 Foreign 1,586 21.72 86 1,473 21.05 77 -------- ------ -------- ------ Total loans (4) 121,172 9.89 2,985 107,834 9.65 2,581 Other 3,336 5.68 46 2,420 4.72 30 -------- ------ -------- ------ Total earning assets $178,716 9.01 3,979 $164,590 8.59 3,504 ======== ------ ======== ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 3,052 1.40 11 $ 2,723 .98 7 Market rate and other savings 56,896 2.52 357 55,578 2.37 325 Savings certificates 24,697 4.89 300 27,062 4.90 327 Other time deposits 3,204 5.26 42 3,714 5.13 47 Deposits in foreign offices 3,446 5.54 47 1,047 4.20 11 -------- ------ ------- ----- Total interest-bearing deposits 91,295 3.34 757 90,124 3.23 717 Short-term borrowings 25,507 5.84 370 17,556 4.80 208 Long-term debt 23,830 6.39 381 18,887 6.01 283 Guaranteed preferred beneficial interests in Company's subordinated debentures 785 7.74 15 785 7.53 15 -------- ------ ------- ----- Total interest-bearing liabilities 141,417 4.33 1,523 127,352 3.88 1,223 Portion of noninterest-bearing funding sources 37,299 -- -- 37,238 -- -- -------- ------ ------- ----- Total funding sources $178,716 3.45 1,523 $164,590 3.01 1,223 ======== ------ ======== ----- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (5) 5.56% $2,456 5.58% $2,281 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 11,898 $ 11,239 Goodwill 7,932 7,734 Other 17,912 15,160 -------- -------- Total noninterest-earning assets $ 37,742 $ 34,133 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 42,765 $ 42,770 Other liabilities 9,832 7,652 Preferred stockholders' equity 271 462 Common stockholders' equity 22,173 20,487 Noninterest-bearing funding sources used to fund earning assets (37,299) (37,238) -------- -------- Net noninterest-bearing funding sources $ 37,742 $ 34,133 ======== ======== TOTAL ASSETS $216,458 $198,723 ======== ======== - -----------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 8.69% and 7.75% for the quarters ended March 31, 2000 and 1999, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 6.11% and 5.00% for the quarters ended March 31, 2000 and 1999, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances. (4) Nonaccrual loans and related income are included in their respective loan categories. (5) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for both quarters presented. 23 NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, --------------------- % (in millions) 2000 1999 Change - ------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 383 $ 344 11% Trust and investment fees: Asset management and custody fees 167 150 11 Mutual fund and annuity sales fees 162 124 31 All other 31 26 19 ------ ------ Total trust and investment fees 360 300 20 Credit card fees 123 132 (7) Other fees: Cash network fees 70 58 21 Charges and fees on loans 81 76 7 All other 119 104 14 ------ ------ Total other fees 270 238 13 Mortgage banking: Origination and other closing fees 61 113 (46) Servicing fees, net of amortization 151 (45) -- Net gains on sales of mortgages 56 200 (72) All other 38 59 (36) ------ ------ Total mortgage banking 306 327 (6) Insurance 92 85 8 Net venture capital gains 885 112 690 Net losses on securities available for sale (602) (2) -- Income from equity investments accounted for by the: Cost method 114 33 245 Equity method 38 21 81 Net gains on sales of loans 3 13 (77) Net gains (losses) on dispositions of operations 2 (1) -- All other (63) 125 -- ------ ------ Total $1,911 $1,727 11% ====== ====== === - -------------------------------------------------------------------------------------------------------------------
The increase in trust and investment fees for the first quarter of 2000 was primarily due to higher brokerage commission fees, as well as higher mutual fund fees that were generated from the overall growth in mutual fund assets. The Company managed mutual funds with $63.8 billion of assets at March 31, 2000, compared with $53.3 billion at March 31, 1999. The Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $472 billion and $397 billion at March 31, 2000 and 1999, respectively. The decrease in mortgage banking was due to a decrease in loan origination fees and net gains on sales of mortgages, predominantly offset by higher net servicing revenue as a result of lower amortization of mortgage servicing rights. The decrease in amortization was largely due to rising interest rates, which decreased the prepayment speeds in the servicing portfolio. The increase in net venture capital gains was predominantly due to a gain of about $560 million that was recognized on the Company's venture capital investment in Siara Systems. 24 Gains from 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 the first quarter of 2000 resulted from the continued restructuring of the securities available for sale portfolio. The increase in income from equity investments accounted for by the cost method was due to gains on certain nonmarketable equity investments. "All other" noninterest income in the first quarter of 2000 included a $160 million write-down of auto lease residuals due to continued deterioration in the used car market. 25 NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, --------------------- % (in millions) 2000 1999 Change - ------------------------------------------------------------------------------------------------------------------- Salaries $ 818 $ 725 13% Incentive compensation 134 134 -- Employee benefits 233 199 17 Equipment 193 191 1 Net occupancy 224 186 20 Goodwill 113 104 9 Core deposit intangible: Nonqualifying (1) 42 46 (9) Qualifying 5 6 (17) Net (gains) losses on dispositions of premises and equipment (33) 2 -- Contract services 107 90 19 Outside professional services 87 73 19 Outside data processing 71 76 (7) Telecommunications 62 61 2 Travel and entertainment 55 55 -- Advertising and promotion 58 50 16 Postage 56 57 (2) Stationery and supplies 46 39 18 Insurance 42 36 17 Operating losses 35 29 21 Security 21 21 -- All other 110 162 (32) ------ ------ Total $2,479 $2,342 6% ====== ====== === - -------------------------------------------------------------------------------------------------------------------
(1) Represents amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The increase in net occupancy expense was primarily due to a significant data network wiring project associated with merger-related integration activities. INCOME TAXES The Company's effective income tax rate was 38% for the first quarter of 2000, compared with 36% for the first quarter of 1999. The lower effective rate in the first quarter of 1999 was largely due to charitable donations of appreciated securities. 26 EARNINGS/RATIOS EXCLUDING GOODWILL AND NONQUALIFYING CDI The following table reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible amortization ("cash" earnings) for the quarter ended March 31, 2000.
- ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions, except per share amounts) March 31, 2000 - ------------------------------------------------------------------------------------------------------------------- Amortization ------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense $1,617 $113 $42 $1,772 Income tax expense 607 -- 16 623 ------ ---- --- ------ Net income 1,010 113 26 1,149 Preferred stock dividends 4 -- -- 4 ------ ---- --- ------ Net income applicable to common stock $1,006 $113 $26 $1,145 ====== ==== === ====== Earnings per common share $ .62 $ .70 ====== ====== Diluted earnings per common share $ .61 $ .70 ====== ====== - -------------------------------------------------------------------------------------------------------------------
The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and related balances for the quarter ended March 31, 2000 were calculated as follows:
- ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions) March 31, 2000 - ------------------------------------------------------------------------------------------------------------------- ROA: A / (C-E-F) = 2.23% ROE: B / (D-E-G) = 34.15% Efficiency: (H-I) / J = 53.4% Net income $ 1,149 (A) Net income applicable to common stock 1,145 (B) Average total assets 216,458 (C) Average common stockholders' equity 22,173 (D) Average goodwill 7,932 (E) Average pretax nonqualifying core deposit intangible 1,215 (F) Average after-tax nonqualifying core deposit intangible 753 (G) Noninterest expense 2,479 (H) Amortization expense for goodwill and nonqualifying core deposit intangible 155 (I) Net interest income plus noninterest income 4,351 (J) - -------------------------------------------------------------------------------------------------------------------
These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows for other information regarding funds available for use by management. 27 BALANCE SHEET ANALYSIS SECURITIES AVAILABLE FOR SALE The following table provides the cost and fair value for the major components of securities available for sale carried at fair value. There were no securities classified as held to maturity at the end of the periods presented.
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, 2000 1999 1999 ------------------- -------------------- ------------------ ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ------------------------------------------------------------------------------------------------------------------- Securities of U.S. Treasury and federal agencies $ 2,506 $ 2,486 $ 5,956 $ 5,631 $ 7,629 $ 7,582 Securities of U.S. states and political subdivisions 2,116 2,104 2,041 2,061 1,867 1,968 Mortgage-backed securities: Federal agencies 22,763 22,454 22,774 22,547 20,085 20,314 Private collateralized mortgage obligations (1) 2,158 2,068 2,855 2,804 3,313 3,313 ------- ------- ------- -------- ------- ------- Total mortgage-backed securities 24,921 24,522 25,629 25,351 23,398 23,627 Other 2,559 2,439 2,289 2,204 1,929 1,922 ------- ------- ------- -------- ------- ------- Total debt securities 32,102 31,551 35,915 35,247 34,823 35,099 Marketable equity securities 2,023 5,223 1,314 3,271 393 702 ------- ------- ------- -------- ------- ------- Total $34,125 $36,774 $37,229 $ 38,518 $35,216 $35,801 ======= ======= ======= ======== ======= ======= - ----------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. The following table provides the components of the estimated unrealized net gain on securities available for sale. The estimated unrealized net gain on securities available for sale is reported on an after-tax basis as a component of cumulative other comprehensive income.
- ------------------------------------------------------------------------------------------------------------ MARCH 31, Dec. 31, March 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------ Estimated unrealized gross gains $3,524 $2,174 $ 798 Estimated unrealized gross losses (875) (885) (213) ------ ------ ----- Estimated unrealized net gain $2,649 $1,289 $ 585 ====== ====== ===== - ------------------------------------------------------------------------------------------------------------
The following table provides the components of the realized net loss on the sales of securities from the securities available for sale portfolio. (Realized gains on marketable equity securities from venture capital investments are reported as net venture capital gains.) 28
- ------------------------------------------------------------------------------------------------------------- Quarter ended March 31, --------------------- (in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------- Realized gross gains $ 14 $ 15 Realized gross losses (616) (17) ----- ---- Realized net loss $(602) $ (2) ===== ==== - -------------------------------------------------------------------------------------------------------------
The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 7 years and 6 months at March 31, 2000. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At March 31, 2000, mortgage-backed securities, including collateralized mortgage obligations (CMOs), were $24.5 billion, or 67% 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 this rate scenario, mortgage-backed securities would decrease in fair value from $24.5 billion to $21.8 billion and the expected remaining maturity of these securities would increase from 8 years and 2 months to 9 years and 2 months. 29 LOAN PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------- % Change Mar. 31, 2000 from ------------------ MAR. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, (in millions) 2000 1999 1999 1999 1999 - ----------------------------------------------------------------------------------------------------------------------- Commercial (1) $ 40,907 $ 38,688 $ 35,232 6% 16% Real estate 1-4 family first mortgage 13,934 12,398 12,186 12 14 Other real estate mortgage (2) 20,310 19,178 16,903 6 20 Real estate construction 4,906 4,711 3,942 4 24 Consumer: Real estate 1-4 family junior lien mortgage 13,815 12,938 10,987 7 26 Credit card 5,207 5,472 5,394 (5) (3) Other revolving credit and monthly payment 16,634 16,656 15,333 -- 8 -------- -------- -------- Total consumer 35,656 35,066 31,714 2 12 Lease financing 7,530 7,850 6,645 (4) 13 Foreign 1,603 1,573 1,486 2 8 -------- -------- -------- Total loans (net of unearned income, including net deferred loan fees, of $3,177, $3,200 and $2,951) $124,846 $119,464 $108,108 5% 15% ======== ======== ======== == == - ----------------------------------------------------------------------------------------------------------------------
(1) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $2,918 million, $3,103 million and $2,754 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. (2) Includes agricultural loans that are secured by real estate of $1,123 million, $1,061 million and $925 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
- ------------------------------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2) $423 $344 $333 Real estate 1-4 family first mortgage 119 127 135 Other real estate mortgage (3) 106 112 127 Real estate construction 16 7 18 Consumer: Real estate 1-4 family junior lien mortgage 11 17 18 Other revolving credit and monthly payment 23 27 35 ---- ---- ---- Total consumer 34 44 53 Lease financing 34 22 15 Foreign 11 9 22 ---- ---- ---- Total nonaccrual loans (4) 743 665 703 Restructured loans 1 4 1 ---- ---- ---- Nonaccrual and restructured loans 744 669 704 As a percentage of total loans .6% .6% .7% Foreclosed assets 143 153 187 Real estate investments (5) 32 33 1 ---- ---- ---- Total nonaccrual and restructured loans and other assets $919 $855 $892 ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------
(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes commercial agricultural loans of $28 million, $40 million and $29 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. (3) Includes agricultural loans secured by real estate of $11 million, $16 million and $14 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. (4) Of the total nonaccrual loans, $380 million, $358 million and $357 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively, were considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were recorded as loans. Real estate investments totaled $85 million, $89 million and $130 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. 30 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. 31 In accordance with FAS 114, the table below shows the recorded investment in impaired loans and the related methodology used to measure impairment for the periods presented:
- ------------------------------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Impairment measurement based on: Collateral value method $163 $174 $191 Discounted cash flow method 81 74 60 Historical loss factors 137 114 107 ---- ---- ---- Total (1) $381 $362 $358 ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------
(1) Includes $205 million, $196 million and $165 million of impaired loans with a related FAS 114 allowance of $76 million, $43 million and $64 million at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. The average recorded investment in impaired loans was $367 million and $366 million during the first three months of 2000 and 1999, respectively. Total interest income recognized on impaired loans was $2 million during the first three months of 2000 and 1999, most of which was recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates changes in the amount of nonaccrual loans that result from increases in lending activity and reductions due to resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be affected by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company may acquire loans from other financial institutions that may be classified as nonaccrual based on the Company's policies. 32 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 120 days of becoming past due and such nonaccrual loans are excluded from the following table.
- ------------------------------------------------------------------------------------------------------------------- MAR. 31, Dec. 31, Mar. 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Commercial $ 68 $ 24 $ 41 Real estate 1-4 family first mortgage 33 39 31 Other real estate mortgage 16 15 27 Real estate construction 15 4 8 Consumer: (1) Real estate 1-4 family junior lien mortgage 34 35 35 Credit card 94 99 118 Other revolving credit and monthly payment 201 185 151 ---- ---- ---- Total consumer 329 319 304 ---- ---- ---- Total $461 $401 $411 ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------
(1) Consumer loans for all periods presented include Norwest Financial loans. Amounts previously reported at March 31, 1999 have been revised to include Norwest Financial loans of $111 million. 33
ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ---------------------- (in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF QUARTER $3,170 $3,134 Allowances related to business combinations, net 66 30 Provision for loan losses 255 270 Loan charge-offs: Commercial (101) (81) Real estate 1-4 family first mortgage (6) (1) Other real estate mortgage (3) (8) Real estate construction (1) -- Consumer: Real estate 1-4 family junior lien mortgage (11) (9) Credit card (82) (110) Other revolving credit and monthly payment (131) (127) ------ ------ Total consumer (224) (246) Lease financing (13) (11) Foreign (24) (15) ------ ------ Total loan charge-offs (372) (362) ------ ------ Loan recoveries: Commercial 32 13 Real estate 1-4 family first mortgage 1 1 Other real estate mortgage 3 17 Real estate construction 1 -- Consumer: Real estate 1-4 family junior lien mortgage 4 3 Credit card 9 13 Other revolving credit and monthly payment 49 36 ------ ------ Total consumer 62 52 Lease financing 3 3 Foreign 16 3 ------ ------ Total loan recoveries 118 89 ------ ------ Total net loan charge-offs (254) (273) ------ ------ BALANCE, END OF QUARTER $3,237 $3,161 ====== ====== Total net loan charge-offs as a percentage of average total loans (annualized) .84% 1.03% ====== ====== Allowance as a percentage of total loans 2.59% 2.92% ====== ====== - --------------------------------------------------------------------------------------------------------------------
The Company considers the allowance for loan losses of $3,237 million adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit at March 31, 2000. The Company's determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including general economic conditions, loan 34 portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. INTEREST RECEIVABLE AND OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Nonmarketable equity investments $ 3,679 $ 3,347 $ 2,426 Trading assets 2,253 2,667 1,839 Government National Mortgage Association (GNMA) pool buy outs 1,445 1,516 2,074 Interest receivable 1,149 1,169 1,140 Certain identifiable intangible assets 241 230 241 Interest-earning deposits 153 196 131 Foreclosed assets 143 153 212 Due from customers on acceptances 111 103 133 Other 10,601 5,967 6,965 ------- ------- ------- Total interest receivable and other assets $19,775 $15,348 $15,161 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------
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 largely of securities, including corporate debt and U.S. government agency obligations. Interest income from trading assets was $22 million and $11 million in the first quarter of 2000 and 1999, respectively. Noninterest income from trading assets was $48 million and $38 million in the first quarter of 2000 and 1999, respectively. Amortization expense for certain identifiable intangible assets included in other assets was $11 million and $12 million in the first quarter of 2000 and 1999, respectively. The increase in "other" was predominantly due to an increase in broker receivables related to sales of investment securities near the end of the quarter. 35 DEPOSITS
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 45,836 $ 42,916 $ 42,322 Interest-bearing checking 3,664 3,083 3,265 Market rate and other savings 58,090 55,791 55,754 Savings certificates 24,890 24,408 26,655 -------- -------- -------- Core deposits 132,480 126,198 127,996 Other time deposits 3,537 3,255 3,758 Deposits in foreign offices 5,450 3,255 586 -------- -------- -------- Total deposits $141,467 $132,708 $132,340 ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the Office of the Comptroller of the Currency. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
- ------------------------------------------------------------------------------------------------------------------- To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions ------------------ ------------------- ------------------- (in billions) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------- -------- ----- ------- ------ ------ ------- As of March 31, 2000: Total capital (to risk-weighted assets) Wells Fargo & Company $18.3 10.27% > $14.2 > 8.00% - - Norwest Bank Minnesota, N.A. 2.1 10.40 > 1.6 > 8.00 > $2.1 > 10.00% - - - - Wells Fargo Bank, N.A. 10.2 11.79 > 6.9 > 8.00 > 8.6 > 10.00 - - - - Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $13.4 7.50% > $ 7.1 > 4.00% - - Norwest Bank Minnesota, N.A. 1.9 9.47 > .8 > 4.00 > $1.2 > 6.00% - - - - Wells Fargo Bank, N.A. 6.6 7.70 > 3.5 > 4.00 > 5.2 > 6.00 - - - - Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $13.4 6.50% > $ 8.2 > 4.00%(1) - - Norwest Bank Minnesota, N.A. 1.9 5.44 > 1.4 > 4.00 (1) > $1.8 > 5.00% - - - - Wells Fargo Bank, N.A. 6.6 7.39 > 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. 36 DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the aggregate notional or contractual amounts, credit risk amount and net fair value of the Company's derivative financial instruments at March 31, 2000 and December 31, 1999.
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, 2000 December 31, 1999 ------------------------------------------- -------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK NET FAIR contractual risk net fair (in millions) AMOUNT AMOUNT (3) VALUE amount amount (3) value - ------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $30,653 $ 56 $(364) $31,570 $ 93 $(243) Futures 46,107 -- -- 50,725 -- -- Floors and caps (1) 19,815 64 64 41,142 110 110 Options (1)(2) 11,077 11 33 11,940 22 43 Forwards (1) 25,661 36 (40) 22,528 108 43 Foreign exchange contracts: Forwards (1) 136 3 3 138 1 -- CUSTOMER ACCOMMODATIONS Interest rate contracts: Swaps (1) 28,026 179 (18) 21,702 158 (10) Futures 21,900 -- -- 22,839 -- -- Floors and caps purchased (1) 15,203 83 83 6,130 51 51 Floors and caps written 15,105 -- (85) 5,804 -- (53) Options purchased (1) 725 16 16 741 30 30 Options written 1,692 -- (7) 1,101 -- (51) Forwards (1) 100 3 -- 164 6 1 Commodity contracts: Swaps (1) 115 18 1 116 10 -- Floors and caps purchased (1) 32 2 2 30 2 2 Floors and caps written 32 -- (2) 30 -- (2) Foreign exchange contracts: Forwards (1) 5,063 102 44 4,234 62 28 Options purchased (1) 76 1 1 41 -- -- Options written 3 -- -- 42 -- (1) - --------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these or the underlying financial instruments. (2) At March 31, 2000, a majority of purchased option contracts were options on futures contracts, which are exchange traded and for which the exchange assumes counterparty risk. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. The Company enters into a variety of financial contracts, which include interest rate futures and forward contracts, interest rate floors and caps, options and interest rate swap agreements. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Because the contract or notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. The Company is primarily an end-user of these instruments. The Company also offers such 37 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. LIQUIDITY AND CAPITAL MANAGEMENT The Company manages its liquidity and capital at both the parent and subsidiary levels. In addition to the immediately liquid resources of cash and due from banks and federal funds sold and securities purchased under resale agreements, asset liquidity is provided by the Company's securities available for sale portfolio. Liquidity for the Company is provided by interest income, deposit-raising activities, potential disposition of readily marketable assets and through its ability to raise funds in a variety of domestic and international money and capital markets. The Company accesses the capital markets for long-term funding through the issuance of registered debt and private placements. In June 1999, the Parent filed a shelf registration statement with the SEC under which the Company may issue up to $10 billion in debt and equity securities, excluding common stock, except for common stock issuable upon the exercise or conversion of debt and equity securities. That registration statement, together with the $150 million issuance authority remaining on the Company's registration statements filed in 1993 and 1995, permits the Company to issue an aggregate of $10.15 billion in such debt and equity securities. Under those registration statements, the Company had issued a total of $3.0 billion in debt securities as of March 31, 2000 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. 38 In April 2000, the Parent issued an additional $2.0 billion in debt securities. This transaction reduced the remaining issuance authorization level under the 1999 shelf registration statement and the aggregate issuance level of the Medium-Term Note Series A and B programs to $5.15 billion. 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 March 31, 2000, 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 $490 million (Canadian) in debt securities from that registration statement as of March 31, 2000. In March 2000, NFI filed a shelf registration statement with the SEC, under which NFI may issue up to $3 billion in debt securities. This registration statement was declared effective on April 18, 2000. In March 2000, Wells Fargo Bank, N.A. issued $750 million Floating Rate Subordinated Notes. This issuance was completed as a private placement and is not registered with the SEC. The Company repurchases common shares in the open market under a systematic plan to meet the common stock issuance requirements of the Company's benefit plans and for other common stock issuance requirements, including acquisitions accounted for as purchases. In February of 2000, the Board of Directors authorized the repurchase of up to 81 million additional shares of the Company's outstanding common stock. In January 2000, the Board of Directors approved an increase in the Company's quarterly common stock dividend to 22 cents per share from 20 cents, representing a 10% increase in the quarterly dividend rate. 39 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. The majority of the Company's interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available for sale, deposit liabilities, short-term borrowings, long-term debt and derivative financial instruments used for asset/liability management. Interest rate risk occurs when assets and liabilities reprice at different times as market interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk"; it is a significant source of interest rate risk for the Company and is more difficult to quantify and manage than term structure risk. Two primary components of basis risk for the Company are (1) the spread between prime-based loans and market rate account (MRA) savings deposits and (2) the rate paid on savings and interest-bearing checking accounts as compared to LIBOR-based loans. Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage the sensitivity of net interest spreads and net income to potential changes in interest rates and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of option pricing models, in the case of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The simulation model is used to measure the impact on net income, relative to a base case scenario, of interest rates increasing or decreasing 100 basis points over the next 12 months. At March 31, 2000, the simulation showing the largest drop in net income relative to the base case scenario over the next twelve months is a 100 basis point increase in rates that is projected to result in a decrease in net income of $46 million. In the simulation that was run at December 31, 40 1999, the largest drop in net income relative to the base case scenario over the next twelve months was a 100 basis point increase in rates that was projected to result in a decrease in net income of $38 million. The Company uses interest rate derivative financial instruments as asset/liability management tools to hedge mismatches in interest rate exposures indicated by the net interest income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between loan yields and the rates on their funding sources. For example, the Company uses interest rate futures to shorten the rate maturity of MRA savings deposits and better match the maturity of prime-based loans. The Company also purchases interest rate floors to protect against the loss in interest income on LIBOR-based loans during a declining interest rate environment. Additionally, receive-fixed rate swaps are used to convert floating-rate loans into fixed rates to better match the liabilities that fund the loans. The Company also uses derivatives including floors, futures contracts and options on futures contracts to hedge the Company's mortgage servicing rights as well as forwards, futures and options on futures and forwards to hedge the Company's 1-4 family real estate first mortgage loan commitments and mortgage loans held for sale . The Company considers the fair values and the potential near term losses to future earnings related to its customer accommodation derivative financial instruments to be immaterial. 41 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company's Current Report on Form 8-K dated June 28, 1993. Certificates of Amendment of Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated July 3, 1995 (authorizing preference stock), and Exhibits 3(b) and 3(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (changing the Company's name and increasing authorized common and preferred stock, respectively) (b) Certificate of Change of Location of Registered Office and Change of Registered Agent, incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (c) Certificate of Designations for the Company's ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (d) Certificate of Designations for the Company's 1995 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (e) Certificate Eliminating the Certificate of Designations for the Company's Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated November 1, 1995 (f) Certificate Eliminating the Certificate of Designations for the Company's 10.24% Cumulative Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 20, 1996 (g) Certificate of Designations for the Company's 1996 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 26, 1996 (h) Certificate of Designations for the Company's 1997 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 14, 1997 42 3(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 of Designations for the Company's 2000 ESOP Cumulative Convertible 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 4(a) See Exhibits 3(a) through 3(p) (b) Rights Agreement, dated as of October 21, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated October 21, 1998 (c) The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. 27 Financial Data Schedule 43 99(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 2.04 and 2.10 for the quarters ended March 31, 2000 and 1999, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 3.04 and 3.58 for the quarters ended March 31, 2000 and 1999, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 2.03 and 2.08 for the quarters ended March 31, 2000 and 1999, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 3.01 and 3.49 for the quarters ended March 31, 2000 and 1999, respectively. (b) The Company filed the following reports on Form 8-K during the first quarter of 2000: (1) January 18, 2000 under Item 5, containing the Company's financial results for the quarter and year ended December 31, 1999 (2) January 26, 2000 under Item 5, containing the Press Release announcing the retirement of Rodney L. Jacobs as Vice Chairman and Chief Financial Officer of the Company and the appointment of Deputy Chief Financial Officer Ross J. Kari as Executive Vice President and Chief Financial Officer of the Company SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2000. WELLS FARGO & COMPANY By: /s/ LES L. QUOCK ------------------------------------ Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) 44 EX-3.(O) 2 EXHIBIT 3(O) WELLS FARGO & COMPANY ---------------------------------------- CERTIFICATE OF DESIGNATIONS Pursuant to Section 151 of the General Corporation Law of the State of Delaware ---------------------------------------- 2000 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK (Without Par Value) ---------------------------------------- WELLS FARGO & COMPANY, a corporation organized and existing under the laws of the State of Delaware (the "Company"), HEREBY CERTIFIES that, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the provisions of the Restated Certificate of Incorporation of the Company, as amended, which authorizes the issuance of not more than 20,000,000 shares of Preferred Stock, without par value (the "Preferred Stock"), and pursuant to authority conferred upon the ESOP Preferred Stock Committee I of the Board (the "ESOP Committee") in accordance with Section 141(c) of the General Corporation Law of the State of Delaware (the "General Corporation Law") and by the resolutions of the Board set forth herein, the following resolutions were duly adopted by the Board at a meeting of the Board duly held on January 25, 2000, and by the ESOP Committee pursuant to the written consent of the ESOP Committee duly adopted on March 27, 2000, in accordance with Section 141(f) of the General Corporation Law: 1. On January 25, 2000, the Board adopted the following resolutions (the "ESOP Board Resolutions") appointing the ESOP Committee and delegating to the ESOP Committee the full powers of the Board, subject to the ESOP Board Resolutions, in all matters relating to issuance of one or more series of Preferred Stock ("ESOP Preferred Stock") to the trustee on behalf of the Company's 401(k) Plan hereinafter referred to: RESOLVED that a committee of one member of the Board of the Company is hereby appointed by the Board as the ESOP Preferred Stock Committee I (the "First Committee"), which shall have and may exercise the full powers of the Board, subject to these resolutions, to issue from time to time one or more series of ESOP Preferred Stock, including any shares of Company common stock ($1 2/3 par value) issuable upon conversion of ESOP Preferred Stock, and in connection therewith, to fix the designations, voting powers, preferences, and all other rights, qualifications and restrictions of such ESOP Preferred Stock, to sell such ESOP Preferred Stock to the Plan on such terms and conditions and for such purchase price as the First Committee in its discretion shall approve, and to take any and all actions as the First Committee shall deem necessary or appropriate. 1 RESOLVED that Richard M. Kovacevich is designated to serve as the sole member of the First Committee until his successor is duly elected and qualified. * * * * RESOLVED that any series of ESOP Preferred Stock authorized for issuance by the First Committee . . . shall have the voting rights set forth in Appendix A to these resolutions. APPENDIX A - VOTING RIGHTS No series of the Preferred Stock, except as hereinafter set forth in this resolution or as otherwise from time to time required by law, shall have voting rights. Whenever, at any time or times, dividends payable on any shares of a designated series of the Preferred Stock (such shares of such designated series of Preferred Stock being hereinafter referred to as the "Shares of such series") shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding Shares of such series shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Shares of such series, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company's next annual meeting of stockholders and at each subsequent annual meeting of stockholders. At elections for such directors, each holder of the Shares of such series shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them). Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding Shares of such series (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth. The right of such holders of such Shares of such series (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect members of the Board as aforesaid shall continue until such time as all dividends accumulated on such Shares of such series shall have been paid in full, at which time such right with respect to such Shares of such series shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately. If the office 2 of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-Laws of the Company irrespective of any increase made pursuant to the provisions of this resolution. So long as any Shares of such series remain outstanding, the consent of the holders of the outstanding Shares of such series and outstanding shares of all other series of Preferred Stock ranking on a parity with such Shares of such series either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding Shares of such series and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (a) the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to the Shares of such series with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or (b) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designation for the Shares of such series designating the Shares of such series and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the Shares of such series or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the Shares of such series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Shares of such series shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. 3 2. On March 27, 2000, pursuant to authority conferred upon it by the Board in the ESOP Board Resolutions, the ESOP Committee adopted the following resolutions by written consent in accordance with Section 141(f) of the General Corporation Law: RESOLVED that the issuance of a series of Preferred Stock, without par value, of the Company is hereby authorized and the designation, voting powers, preferences, and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions thereof, in addition to those set forth in the Restated Certificate of Incorporation of the Company, as amended, are hereby fixed as follows: 2000 ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK 1. DESIGNATION AND NUMBER OF SHARES; RESTRICTED ISSUE. (a) The designation of the series of Preferred Stock, without par value, provided for herein shall be "2000 ESOP Cumulative Convertible Preferred Stock" (hereinafter referred to as the "2000 ESOP Preferred Stock") and the number of authorized shares constituting the 2000 ESOP Preferred Stock is 170,000, based on an offering price for the 2000 ESOP Preferred Stock of $1,065.00 per share. Each share of 2000 ESOP Preferred Stock shall have a stated value of $1,000.00 per share. The number of authorized shares of 2000 ESOP Preferred Stock may be reduced by further resolution duly adopted by the Board or the Securities Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, provided, however, that the authorized number of shares of 2000 ESOP Preferred Stock shall not be decreased below the then outstanding number of such shares, and provided further that the number of authorized shares of 2000 ESOP Preferred Stock shall not be increased. All shares of the 2000 ESOP Preferred Stock purchased, redeemed, or converted by the Company shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued, but not as shares of 2000 ESOP Preferred Stock. (b) Shares of 2000 ESOP Preferred Stock shall be issued only to a trustee (the "Trustee") acting on behalf of the Wells Fargo & Company 401(k) Plan, or any successor to such plan (the "Plan"). All references to the holder of shares of 2000 ESOP Preferred Stock shall mean the Trustee or any company with which or into which the Trustee may merge or any successor trustee under the trust agreement with respect to the Plan. In the event of any transfer of record ownership of shares of 2000 ESOP Preferred Stock to any person other than any successor trustee under the Plan, the shares of 2000 ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Company or the holder thereof, shall be automatically converted into shares of the common stock, par value $1-2/3 per share, of the Company (the "Common Stock") on the terms otherwise provided for the conversion of the shares of 2000 ESOP Preferred Stock into shares of Common Stock pursuant to paragraph (a) of Section 4 hereof, and no such transferee shall have any of the voting powers, preferences, and relative, participating, optional or special rights ascribed to shares of 2000 ESOP Preferred Stock hereunder but, 4 rather, only the powers and rights pertaining to the Common Stock into which such shares of 2000 ESOP Preferred Stock shall be so converted. In the event of such a conversion, the transferee of the shares of 2000 ESOP Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of 2000 ESOP Preferred Stock have been automatically converted as of the date of such transfer. Shares of 2000 ESOP Preferred Stock may be certificated or uncertificated, at the Company's option. Certificates representing shares of 2000 ESOP Preferred Stock shall bear a legend to reflect the foregoing provisions. In the case of uncertificated 2000 ESOP Preferred Stock, the transfer agent for the 2000 ESOP Preferred Stock shall note the foregoing provisions on each 2000 ESOP Preferred Stock book entry account. The Company may require that, as a condition to transferring record ownership of any uncertificated 2000 ESOP Preferred Stock, the proposed transferee acknowledge in writing that the shares of 2000 ESOP Preferred Stock are subject to the foregoing provisions. Notwithstanding the foregoing provisions of this paragraph (b) of Section 1, shares of 2000 ESOP Preferred Stock (i)(A) shall be converted into shares of Common Stock as provided in paragraph (a) of Section 4 hereof, and (B) may be converted into shares of Common Stock as provided by paragraph (b) of Section 4 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Company upon the terms and conditions provided in Sections 5 and 6(c) hereof. 2. VOTING RIGHTS. No shares of 2000 ESOP Preferred Stock shall have voting rights except such voting rights as may from time to time be required by law and as set forth in this Section 2, as follows: (a) Whenever, at any time or times, dividends payable on shares of 2000 ESOP Preferred Stock shall be in arrears for such number of dividend periods which shall in the aggregate contain not less than 540 days, the holders of the outstanding shares of 2000 ESOP Preferred Stock shall have the exclusive right, voting together as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the shares of 2000 ESOP Preferred Stock, either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up, and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Company at the Company's next annual meeting of stockholders and at each subsequent annual meeting of stockholders. At elections for such directors, each holder of the shares of 2000 ESOP Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity being entitled to such number of votes, if any, for each share of Preferred Stock held as may be granted to them). Upon the vesting of such right of such holders, the maximum authorized number of members of the Board shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of such outstanding shares of 2000 ESOP Preferred Stock (together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) as herein set forth. The right of such holders of such shares of 2000 ESOP Preferred Stock (voting together as a class with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and upon which like voting rights have been conferred and are exercisable) to elect 5 members of the Board as aforesaid shall continue until such time as all dividends accumulated on such shares of 2000 ESOP Preferred Stock shall have been paid in full, at which time such right with respect to such shares of 2000 ESOP Preferred Stock shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. (b) Upon any termination of the right of the holders of all shares of Preferred Stock entitled to vote for directors as herein provided, the term of office of all directors then in office elected by such holders voting as a class shall terminate immediately. If the office of any director elected by such holders voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by such holders may choose a successor to fill such vacancy, which such successor shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by such holders voting as a class shall end and the special voting powers vested in such holders as provided in this resolution shall have expired, the number of directors shall be such number as may be provided for in the By-laws of the Company irrespective of any increase made pursuant to the provisions of this resolution. (c) So long as any shares of 2000 ESOP Preferred Stock remain outstanding, the consent of the holders of the outstanding shares of 2000 ESOP Preferred Stock and outstanding shares of all other series of Preferred Stock ranking on a parity with such shares of 2000 ESOP Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, by a vote of at least two-thirds of all such outstanding shares of 2000 ESOP Preferred Stock and such other series of Preferred Stock voting together as a class, given in person or by proxy, either in writing or at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance, or any increase in the authorized or issued amount, of any class or series of stock ranking prior to shares of 2000 ESOP Preferred Stock with respect to payment of dividends or the distribution of assets on liquidation, dissolution or winding up, or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Restated Certificate of Incorporation or of the resolutions set forth in a Certificate of Designations designating shares of 2000 ESOP Preferred Stock and the preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof which would materially and adversely affect any right, preference, privilege or voting power of the shares of 2000 ESOP Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Preferred Stock, or the creation and issuance of other series of Preferred Stock, or any increase in the amount of authorized shares of any series of Preferred Stock, in each case ranking on a parity with or junior to the shares of 2000 ESOP Preferred Stock with respect to the payment of 6 dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (d) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 2000 ESOP Preferred Stock shall have been redeemed or sufficient funds shall have been deposited in trust to effect such redemption. 3. DIVIDENDS. (a)(i) Holders of shares of 2000 ESOP Preferred Stock will be entitled to receive, when and as declared by the Board or a duly authorized committee thereof, out of assets of the Company legally available for payment, an annual cash dividend of $115.00 (the "Base Dividend") per share, which Base Dividend shall be subject to adjustment from time to time as provided in this Section 3. (ii) The Base Dividend shall be adjusted, effective on December 1, 2001 and on each December 1 thereafter until December 1, 2010, as follows: (1) If the Current Market Price (as hereinafter defined) of one share of Common Stock on November 30 (or the next preceding Trading Day (as hereinafter defined) if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the First Target Price but less than the Second Target Price shown opposite that year in such table, then holders of shares of the 2000 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $120.00 per share (the "First Adjusted Dividend"). (2) If the Current Market Price of one share of Common Stock on November 30 (or the next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is equal to or greater than the Second Target Price shown opposite that year in such table, then holders of shares of 2000 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to $125.00 per share (the "Second Adjusted Dividend"). (3) If the Current Market Price of one share of Common Stock on November 30 (or next preceding Trading Day if November 30 is not a Trading Day) of any year listed in the Dividend Adjustment Table below is less than the First Target Price shown opposite that year in such table, then the holders of shares of 2000 ESOP Preferred Stock will be entitled to receive a cash dividend for the immediately following twelve month period equal to the Base Dividend. 7 DIVIDEND ADJUSTMENT TABLE CLOSING PRICE ON 11/30 FIRST TARGET PRICE SECOND TARGET PRICE ---------------------- ------------------ ------------------- 2001 47.097 49.842 2002 52.278 58.814 2003 58.028 69.400 2004 64.411 81.892 2005 71.496 96.633 2006 79.361 114.027 2007 88.091 134.552 2008 97.781 158.771 2009 108.537 187.350 2010 120.476 221.073 (4) As an example of the adjustments described in subparagraphs (1) through (3) above, if on November 30, 2003, the Current Market Price of one share of Common Stock is $65.00, then the cash dividend payable for the immediately following twelve month period per share of 2000 ESOP Preferred Stock would equal $120.00, with the first quarterly payment of such $120.00 dividend to be made on March 1, 2004. If on November 30, 2004, the Current Market Price of one share of Common Stock is $85.00, then the cash dividend payable for the immediately following twelve month period per share of 2000 ESOP Preferred Stock would equal $125.00, with the first quarterly payment of such $125.00 dividend to be made on March 1, 2005. If on November 30, 2005, the Current Market Price of one share of Common Stock is $65.00, then the cash dividend payable for the immediately following twelve month period per share of 2000 ESOP Preferred Stock would equal $115.00, with the first quarterly payment of such $115.00 dividend to be made on March 1, 2006. (5) For purposes of this Section 3, the terms "First Adjusted Dividend" and "Second Adjusted Dividend" are sometimes referred to as an "Adjusted Dividend;" the term "Current Market Price" shall have the meaning given to it in Section 4(c)(iv); and the term "Trading Day" shall have the meaning given to it in Section 4(c)(vi). (iv) If one share of Common Stock in any year listed in the Dividend Adjustment Table shall be changed into a different number of shares or a different class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the First Target Price and the Second Target Price listed in such table for that year and each subsequent year will be appropriately and proportionately adjusted. (v) Dividends payable on shares of the 2000 ESOP Preferred Stock (whether such dividends are equal to the Base Dividend or to an Adjusted Dividend) shall be payable quarterly on March 1, June 1, September 1, and December 1 8 of each year, commencing June 1, 2000. Dividends on shares of the 2000 ESOP Preferred Stock will be cumulative from the date of initial issuance of such shares of 2000 ESOP Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Company on such record dates, not more than 30 days nor less than 15 days preceding the payment dates thereof, as shall be fixed by the Board or a duly authorized committee thereof. The amount of dividends payable per share for each dividend period shall be computed by dividing by four the Base Dividend or the Adjusted Dividend, whichever is then applicable. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of actual days elapsed in a 360-day year of twelve 30-day months. (b)(i) No full dividends shall be declared or paid or set apart for payment on any stock of the Company ranking, as to dividends, on a parity with or junior to the 2000 ESOP Preferred Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on shares of 2000 ESOP Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full, as aforesaid, upon the shares of 2000 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2000 ESOP Preferred Stock, all dividends declared upon shares of 2000 ESOP Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with 2000 ESOP Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on 2000 ESOP Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of 2000 ESOP Preferred Stock and such other series of Preferred Stock bear to each other. Holders of shares of 2000 ESOP Preferred Stock shall not be entitled to any dividend, whether payable in cash, property, or stock, in excess of full cumulative dividends, as herein provided, on 2000 ESOP Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 2000 ESOP Preferred Stock which may be in arrears. (ii) So long as any shares of 2000 ESOP Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants, or rights to subscribe for or purchase shares of, Common Stock or any other stock ranking junior to 2000 ESOP Preferred Stock as to dividends or upon liquidation and other than as provided in paragraph (b)(i) of this Section 3) shall be declared or paid or set aside for payment or other distribution declared or made upon Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2000 ESOP Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with 2000 ESOP Preferred Stock as to dividends or upon liquidation be redeemed, purchased, or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to 2000 ESOP Preferred Stock as to dividends or upon liquidation), unless, in each 9 case, the full cumulative dividends on all outstanding shares of 2000 ESOP Preferred Stock shall have been paid or declared and set aside for payment of the then current dividend payment period and all past dividend payment periods. 4. CONVERSION. Shares of 2000 ESOP Preferred Stock are convertible from time to time hereafter pursuant to the provisions of paragraphs (a) or (b) of this Section 4 into that number of shares of Common Stock determined by dividing the stated value of each share of 2000 ESOP Preferred Stock by the then applicable Conversion Price, (as determined in accordance with the provisions of paragraph (c)(iii) of this Section 4), as follows: (a) Each share of 2000 ESOP Preferred Stock released from the unallocated reserve of the Plan in accordance with the terms thereof shall be automatically converted, without any further action by the Company or the holder thereof, as of the date such release occurs (the "Release Date"), into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for the 2000 ESOP Preferred Stock provided for in paragraph (c) of this Section 4. (b) Subject to and upon compliance with the provisions of this Section 4, a holder of 2000 ESOP Preferred Stock shall be entitled at any time, prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 5 or 6 hereof, to cause any or all of the shares of 2000 ESOP Preferred Stock held by such holder to be converted into fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price for 2000 ESOP Preferred Stock provided for in paragraph (c) of this Section 4. (c) For purposes of these resolutions, the following terms shall have the meanings set forth below: (i) The "Average Current Market Price" per share of Common Stock on any date shall be deemed to be the average of the Current Market Price for one share of Common Stock for the twenty (20) consecutive Trading Days ending on the Trading Day occurring prior to the date the "Purchase Offer" is made (as that term is defined in Section 6(d) hereof). (ii) A "Business Day" means each day that is not a Saturday, Sunday, or a day on which state or federally chartered banking institutions in the State of New York are not required to be open. (iii) (A) For purposes of a mandatory conversion of shares of 2000 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (a) of this Section 4, the "Conversion Price" for such shares of 2000 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the relevant Release Date. 10 (B) For purposes of an optional conversion of shares of 2000 ESOP Preferred Stock into shares of Common Stock pursuant to the provisions of paragraph (b) of this Section 4, the "Conversion Price" for such shares of 2000 ESOP Preferred Stock shall be the Current Market Price of one share of Common Stock on the date the Conversion Notice (as that term is defined in paragraph (d) of this Section 4) is received by the Company, by the transfer agent for the 2000 ESOP Preferred Stock or by any agent for conversion of the 2000 ESOP Preferred Stock designated as such pursuant to paragraph (d) of this Section 4. (C) For purposes of a conversion of shares of 2000 ESOP Preferred Stock into shares of Common Stock in connection with a "Purchase Offer" (as defined in Section 6(d) hereof), the "Conversion Price" for such shares of 2000 ESOP Preferred Stock shall be the Average Current Market Price of one share of Common Stock. Each share of 2000 ESOP Preferred Stock shall be valued at its stated value of $1,000.00 for purposes of computing, based on the applicable Conversion Price, the number of shares of Common Stock into which the shares of 2000 ESOP Preferred Stock will be converted. (iv) The "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Company or any other issuer for any day shall mean the reported last sale price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for the Common Stock on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof or, if no such quotations are available, the fair market value of the Common Stock as determined by a New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board or a committee thereof. (v) "Common Stock" shall mean the Common Stock of the Company as the same exists at the date of this Certificate of Designations or as such stock may be constituted from time to time. (vi) "Trading Day" with respect to Common Stock means (x) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or 11 such other national securities exchange is open for business or (y) if the Common Stock is quoted on the National Market System of NASDAQ, a day on which trades may be made on such National Market System or (z) otherwise, any Business Day. (d) In connection with any conversion of 2000 ESOP Preferred Stock pursuant to this Section 4, a written notice of conversion (the "Conversion Notice") shall be delivered to the Company at its principal executive office or the offices of the transfer agent for the 2000 ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the 2000 ESOP Preferred Stock by the Company or the transfer agent for the 2000 ESOP Preferred Stock, which notice shall be accompanied by (a) in the case of certificated 2000 ESOP Preferred Stock, the certificate or certificates representing the shares of 2000 ESOP Preferred Stock being converted pursuant to this Section 4, duly assigned or endorsed for transfer to the Company (or accompanied by duly executed stock powers relating thereto) or (b) in the case of uncertificated 2000 ESOP Preferred Stock, duly executed assignment and transfer documents for the shares of 2000 ESOP Preferred Stock being converted pursuant to this Section 4. Each Conversion Notice shall specify (i)(y) in the case of a mandatory conversion pursuant to paragraph (a) of this Section 4, the number of shares of 2000 ESOP Preferred Stock released from the unallocated reserve of the Plan on the Release Date or (z) in the case of an optional conversion pursuant to paragraph (b) of this Section 4, the number of shares of 2000 ESOP Preferred Stock being converted, and (ii) in connection with any conversion hereunder, (x) the name or names in which such holder wishes the certificate or certificates for Common Stock and, in the case of certificated 2000 ESOP Preferred Stock, for any shares of 2000 ESOP Preferred Stock not to be so converted to be issued, (y) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion, and (z) such other information as the Company or its agents may reasonably request. (e) Upon delivery to the Company or the transfer agent for the 2000 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4, the Company shall issue and send by hand delivery, by courier or by first-class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. If there shall have been surrendered a certificate or certificates representing shares of 2000 ESOP Preferred Stock only part of which are to be converted, the Company shall issue and deliver to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of 2000 ESOP Preferred Stock which shall not have been converted. (f) The issuance by the Company of shares of Common Stock upon a conversion of shares of 2000 ESOP Preferred Stock into shares of Common Stock made pursuant to this Section 4 shall be effective (i) in the case of a mandatory conversion of shares of 2000 ESOP Preferred Stock pursuant to paragraph (a) of this Section 4, as of the Release Date; and (ii) in the case of an optional conversion of such shares pursuant to 12 paragraph (b) of this Section 4, as of the earlier of (A) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (B) the commencement of business on the second Business Day after the delivery to the Company or the transfer agent for the 2000 ESOP Preferred Stock of the Conversion Notice and all other documentation and certificates required to effect the conversion, as provided in paragraph (d) of this Section 4. On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date. The Company shall not be obligated to pay any dividends which shall have accrued or have been declared and shall be payable to holders of shares of 2000 ESOP Preferred Stock if the date on which such dividends are paid is on or after the effective date of conversion of such shares. (g) The Company shall not be obligated to deliver to holders of 2000 ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of 2000 ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (h) The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of 2000 ESOP Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of 2000 ESOP Preferred Stock then outstanding. (i) The Company will use its best efforts to cause the listing of the shares of Common Stock required to be delivered upon conversion of the 2000 ESOP Preferred Stock prior to distribution to Plan participants on the national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. (j) The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the 2000 ESOP Preferred Stock pursuant hereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the 2000 ESOP Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. (k) Upon the issuance of shares of Common Stock following conversion of shares of 2000 ESOP Preferred Stock as contemplated by this Section 4, the Company shall, to the extent provided for, and subject to the limitations set forth in the Rights Agreement hereafter described, issue together with each such share of Common Stock one right to purchase Series C Junior Participating Preferred Stock of the Company (or other securities in lieu thereof) pursuant to the Rights Agreement dated as of October 21, 13 1998 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, as such agreement may from time to time be amended, or any rights issued to holders of Common Stock of the Company in addition thereto or in replacement therefor, whether or not such rights shall be exercisable at such time, but only if such rights are issued and outstanding and held by other holders of Common Stock of the Company at such time and have not expired. 5. REDEMPTION AT THE OPTION OF THE COMPANY. (a) The 2000 ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Company at any time, at a redemption price per share of 2000 ESOP Preferred Stock equal to the higher of (x) $1,000.00 per share, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption, and (y) the Fair Market Value (as that term is defined in paragraph (d) of this Section 5) per share of 2000 ESOP Preferred Stock on the date fixed for redemption. Payment of the redemption price shall be made by the Company in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (c) of this Section 5. From and after the date fixed for redemption, dividends on shares of 2000 ESOP Preferred Stock called for redemption will cease to accrue and all rights in respect of such shares of the Company shall cease, except the right to receive the redemption price. Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Company, to be retired as provided in paragraph (a) of Section 1. If the full cumulative dividends have not been paid, or contemporaneously declared and set aside for payment, on all outstanding shares of 2000 ESOP Preferred Stock, the Company may not redeem fewer than all the outstanding shares of 2000 ESOP Preferred Stock pursuant to this Section 5. (b) Unless otherwise required by law, notice of any redemption pursuant to this Section 5 will be sent to the holders of 2000 ESOP Preferred Stock at the address shown on the books of the Company or any transfer agent for the 2000 ESOP Preferred Stock by hand delivery, by courier, by standard form of telecommunication or by first-class mail (postage prepaid) delivered, sent or mailed, as the case may be, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date. Each such notice shall state: (i) the redemption date; (ii) the total number of shares of the 2000 ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether the redemption price shall be paid in cash or in shares of Common Stock, or in a combination of such Common Stock and cash; (v) in the case of certificated 2000 ESOP Preferred Stock the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the manner in which the number of shares of Common Stock issuable upon conversion of a share of 2000 ESOP Preferred Stock will be determined. The Company shall redeem shares so called for redemption and not previously converted at the date fixed for redemption and at the redemption price set forth in this Section 5, provided that, in the case of certificated 2000 ESOP Preferred Stock, the Company shall not be obligated to pay the redemption price until the certificates for the shares to be 14 redeemed are surrendered (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state). (c) The Company, at its option, may make payment of the redemption price required upon redemption of shares of 2000 ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such Common Stock and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (d)(ii) of this Section 5) or their Current Market Price, in either case as of the date fixed for redemption of the 2000 ESOP Preferred Stock, whichever value will result in the issuance of the greater number of shares of Common Stock to the holder of the 2000 ESOP Preferred Stock then being redeemed. (d) For purposes of these resolutions, the following terms shall have the meanings set forth below: (i) "Adjustment Period" shall mean the period of five (5) consecutive Trading Days preceding the date as of which the Fair Market Value of a security is to be determined. (ii) "Fair Market Value" shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Company or any other issue which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period. The "Fair Market Value" of any security which is not publicly traded (other than the 2000 ESOP Preferred Stock) or of any other property shall mean the fair value thereof on the date as of which the Fair Market Value of the security is to be determined, as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board or a committee thereof. The "Fair Market Value" of the 2000 ESOP Preferred Stock for purposes of paragraph (a) of Section 5, and for purposes of paragraph (c) of Section 6 shall mean the fair market value thereof determined by an independent appraiser, appointed by the Trustee of the Plan in accordance with the provisions of the Plan, as of the date fixed for redemption of the 2000 ESOP Preferred Stock (in the case of a redemption pursuant to Section 5) or as of the date specified in paragraph (c) of Section 6 (in the case of a redemption under that section). For purposes of determining the Fair Market Value of the 2000 ESOP Preferred Stock, the independent appraiser shall assume (i) that all dividends on the 2000 ESOP Preferred Stock would have been paid when due, and (ii) that the mandatory conversion of shares of 2000 ESOP Preferred Stock held by the Plan into shares of Common Stock pursuant to Section 4(a) hereof would have occurred when and as payments of principal (together with accrued interest thereon) would have been made by the Trustee of the Plan in accordance with the terms of that certain 2000 ESOP Convertible Preferred Stock Note Agreement dated on or about March 29, 2000 between the Company and the Plan (including any amendments or modifications thereto). 6. CONSOLIDATION, MERGER, ETC. (a) If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or 15 changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Company) that constitutes "qualifying employer securities" with respect to a holder of 2000 ESOP Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of 2000 ESOP Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become Preferred Stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 5 and 6 hereof), and the qualifications, limitations or restrictions thereon, that the 2000 ESOP Preferred Stock had immediately prior to such transaction, subject to the following: (1) After such transaction each share of the 2000 ESOP Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 4 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of 2000 ESOP Preferred Stock could have been converted immediately prior to such transaction. (2) The Company shall not consummate any such merger, consolidation or similar transaction unless all then outstanding shares of 2000 ESOP Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid. (b) If the Company consummates any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (a) of this Section 6) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of 2000 ESOP Preferred Stock shall, without any action on the part of the Company or any holder thereof (but subject to paragraph (c) of this Section 6), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such shares of 2000 ESOP Preferred Stock could have been converted at such time so that each share of 2000 ESOP Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2000 ESOP Preferred Stock could have been converted immediately prior to such transaction. However, if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the 2000 ESOP Preferred Stock, then the shares of 2000 ESOP 16 Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of 2000 ESOP Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction. If the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares. (c) In the event the Company shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (b) of this Section 6 (a "Business Combination"), then the Company shall as soon as practicable thereafter (and in any event at least fifteen (15) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of 2000 ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Company, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Company or the successor of the Company, in redemption and retirement of such 2000 ESOP Preferred Stock, a cash payment per share of 2000 ESOP Preferred Stock equal to the higher of (x) $1,000.00, plus accrued and unpaid dividends thereon to the date of consummation of such transaction or (y) the Fair Market Value per share of 2000 ESOP Preferred Stock, as of the last Business Day (as defined in paragraph (c) of Section 4 hereof) immediately preceding the date the Business Combination is consummated. No such notice of redemption shall be effective unless given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction, unless the Company or the successor of the Company shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Company prior to the close of business on the last Business Day prior to consummation of such transaction. (d) In the event that a Purchase Offer (as defined below) shall have been made and shall be continuing, each holder of 2000 ESOP Preferred Stock shall have the right to convert shares of 2000 ESOP Preferred Stock into shares of Common Stock at the Conversion Price specified in Section 4(c)(iii)(C) hereof until the date the Purchase Offer is terminated, including without limitation because the original Purchase Offer is withdrawn or because the Purchase Offer has expired and is not renewed, upon notice of such conversion given to the Company not later than the close of business on the date the Purchase Offer terminates (the "Purchase Offer Conversion Period"), unless the Company or any successor of the Company shall waive such prior notice, but any notice of conversion so given may be withdrawn by notice of withdrawal given to the Company prior to the end of the Purchase Offer Conversion Period. For purposes of this paragraph (d), the following terms shall have the meanings set forth below: 17 (i) "Beneficial Ownership" shall have the meaning ascribed to it in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and "person" shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act. (ii) A "Purchase Offer" shall have been made when any person (other than the Company or any affiliate of the Company) shall have "commenced" (as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer or exchange offer to purchase shares of Common Stock, such that, upon consummation of such offer, such person would have Beneficial Ownership (as defined herein) or the right to acquire Beneficial Ownership, of twenty percent (20%) or more of the voting power of the Company. 7. LIQUIDATION RIGHTS. (a) Upon the dissolution, liquidation, or winding up of the Company, the holders of the shares of 2000 ESOP Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or any other class of stock ranking junior to 2000 ESOP Preferred Stock upon liquidation, the amount of $1,000.00 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution. (b) Neither the sale of all or substantially all the property and assets of the Company, nor the merger or consolidation of the Company into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Company shall be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary, for the purposes of this Section 7. (c) After the payment to the holders of the shares of 2000 ESOP Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of 2000 ESOP Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the Company. (d) In the event the assets of the Company available for distribution to the holders of shares of 2000 ESOP Preferred Stock upon any dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be made on account of any shares of any other series of Preferred Stock or other capital stock of the Company ranking on a parity with the shares of 2000 ESOP Preferred Stock upon such dissolution, liquidation, or winding up unless proportionate distributive amounts shall be paid on account of the shares of 2000 ESOP Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation, or winding up. 18 (e) Subject to the rights of the holders of the shares of any series or class or classes of stock ranking on a parity with or prior to the shares of 2000 ESOP Preferred Stock upon liquidation, dissolution, or winding up, upon any liquidation, dissolution, or winding up of the Company, after payment shall have been made in full to the holders of the shares of 2000 ESOP Preferred Stock as provided in this Section 7, but not prior thereto, any other series or class or classes of stock ranking junior to the shares of 2000 ESOP Preferred Stock upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of 2000 ESOP Preferred Stock shall not be entitled to share therein. 8. RANKING. For the purposes of these resolutions, any stock of any series or class or classes of the Company shall be deemed to rank: (a) prior to the shares of 2000 ESOP Preferred Stock, either as to dividends or upon liquidation, if the holders of such series or class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of 2000 ESOP Preferred Stock; (b) on a parity with shares of 2000 ESOP Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share, or sinking fund provisions, if any, be different from those of 2000 ESOP Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of 2000 ESOP Preferred Stock; and (c) junior to shares of 2000 ESOP Preferred Stock, either as to dividends or upon liquidation, if such class shall be Common Stock or if the holders of shares of 2000 ESOP Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation, or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such series or class or classes. 9. PRIORITY OF 2000 ESOP PREFERRED STOCK. The shares of 2000 ESOP Preferred Stock will rank on a parity, both as to payment of dividends and the distribution of assets upon liquidation, with the Company's ESOP Cumulative Convertible Preferred Stock, its 1995 ESOP Cumulative Convertible Preferred Stock, its 1996 ESOP Cumulative Convertible Preferred Stock, its 1997 ESOP Cumulative Convertible Preferred Stock, its 1998 ESOP Cumulative Convertible Preferred Stock, its 1999 ESOP Cumulative Convertible Preferred Stock, its Adjustable Cumulative Preferred Stock, Series B, and its Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H. The 2000 ESOP Preferred Stock will rank prior, both as to payment of dividends and the distribution of assets upon liquidation, to the Common Stock and the Company's Series C Junior Participating Preferred Stock. 19 IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by Richard M. Kovacevich, its President, and attested by Robert S. Singley, its Assistant Secretary, whereby such President affirms, under penalties of perjury, that this Certificate of Designations is the act and deed of the Company and that the facts stated herein are true, this 27th day of March, 2000. WELLS FARGO & COMPANY By /s/ Richard M. Kovacevich ------------------------- Richard M. Kovacevich President Attest: /s/ Robert S. Singley - --------------------- Robert S. Singley Assistant Secretary [Filed with the Delaware Secretary of State's Office on March 28, 2000] 20 EX-27 3 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 12,096 0 3,066 2,253 36,774 0 0 124,846 3,237 222,276 141,467 21,334 10,293 25,553 0 263 2,777 20,589 222,276 2,983 631 349 3,963 757 1,523 2,440 255 (602) 2,479 1,617 1,010 0 0 1,010 0.62 0.61 5.56 743 461 1 0 3,170 372 118 3,237 0 0 0
EX-99.(A) 4 EXHIBIT 99(A) EXHIBIT 99(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- -------------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------- (in millions) 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $1,617 $1,381 Fixed charges 1,550 1,253 ------ ------ $3,167 $2,634 ====== ====== Fixed charges (1): Interest expense $1,523 $1,222 Estimated interest component of net rental expense 27 31 ------ ------ $1,550 $1,253 ====== ====== Ratio of earnings to fixed charges (2) 2.04 2.10 ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $1,617 $1,381 Fixed charges 793 536 ------ ------ $2,410 $1,917 ====== ====== Fixed charges: Interest expense $1,523 $1,222 Less interest on deposits 757 717 Estimated interest component of net rental expense 27 31 ------ ------ $ 793 $ 536 ====== ====== Ratio of earnings to fixed charges (2) 3.04 3.58 ====== ====== - --------------------------------------------------------------------------------------------------------------------------------
(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 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-99.(B) 5 EXHIBIT 99(B) EXHIBIT 99(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- -------------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, ------------------- (in millions) 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $1,617 $1,381 Fixed charges 1,550 1,253 ------ ------ $3,167 $2,634 ====== ====== Preferred dividend requirement $ 4 $ 9 Ratio of income before income tax expense to net income 1.60 1.56 ------ ------ Preferred dividends (2) $ 6 $ 14 ------ ------ Fixed charges (1): Interest expense 1,523 1,222 Estimated interest component of net rental expense 27 31 ------ ------ 1,550 1,253 ------ ------ Fixed charges and preferred dividends $1,556 $1,267 ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 2.03 2.08 ====== ====== EARNINGS, EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $1,617 $1,381 Fixed charges 793 536 ------ ------ $2,410 $1,917 ====== ====== Preferred dividends (2) $ 6 $ 14 ------ ------ Fixed charges: Interest expense 1,523 1,222 Less interest on deposits 757 717 Estimated interest component of net rental expense 27 31 ------ ------ 793 536 ------ ------ Fixed charges and preferred dividends $ 799 $ 550 ====== ====== Ratio of earnings to fixed charges and preferred dividends (3) 3.01 3.49 ====== ====== - --------------------------------------------------------------------------------------------------------------------------------
(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. -----END PRIVACY-ENHANCED MESSAGE-----