Wells Fargo & Company (formerly Norwest Corporation) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, and the nine months ended on that date. The registrant, formerly Norwest Corporation, changed its name to Wells Fargo & Company following a merger with the former Wells Fargo & Company on November 2, 1998. This report reflects the financial position of the former Norwest Corporation prior to the merger. The company operates three primary segments: Banking, Mortgage Banking, and Norwest Financial (Consumer Finance).
Key Financial Metrics
| Metric | Q3 1998 | Q3 1997 | 9 Months 1998 | 9 Months 1997 |
|---|---|---|---|---|
| Net Income | $392.9 million | $341.6 million | $1,142.7 million | $994.9 million |
| Diluted EPS | $0.50 | $0.44 | $1.46 | $1.29 |
| Total Assets | $103,727.0 million | $85,252.2 million | $103,727.0 million | $85,252.2 million |
| Total Deposits | $60,182.0 million | $55,457.1 million | $60,182.0 million | $55,457.1 million |
| Net Interest Income | $1,115.4 million | $1,022.6 million | $3,263.1 million | $2,980.7 million |
| Non-Interest Income | $889.5 million | $753.4 million | $2,650.0 million | $2,194.4 million |
| Non-Interest Expense | $1,266.3 million | $1,111.3 million | $3,800.8 million | $3,272.5 million |
| Provision for Credit Losses | $146.8 million | $146.7 million | $410.7 million | $378.5 million |
| Cash and Equivalents | $5,374.7 million | $5,926.1 million | $5,374.7 million | $5,926.1 million |
| Return on Assets (Q3) | 1.64% | 1.64% | 1.66% (9M) | 1.63% (9M) |
| Return on Equity (Q3) | 22.6% | 22.1% | 22.9% (9M) | 22.3% (9M) |
Material Changes vs. Prior Period
- Earnings Growth: Net income increased 15.0% in Q3 1998 compared to Q3 1997, driven by growth in non-interest income and net interest income.
- Asset Expansion: Total assets grew 20.8% year-over-year to $103.7 billion, primarily due to a $6.8 billion increase in investment securities and a $5.9 billion increase in mortgages held for sale.
- Mortgage Banking Surge: Mortgage banking earnings rose significantly due to a 64.5% increase in origination fees and higher gains on sales of mortgages, fueled by a low interest rate environment. Originations reached $74.8 billion for the nine months ended Sept 30, 1998, compared to $38.7 billion in 1997.
- Expense Increases: Non-interest expenses rose 14.0% in Q3 and 16.1% for the nine months, reflecting higher mortgage banking operating costs and expenses related to acquisitions.
- Credit Quality: Net credit losses increased to $426.0 million for the nine months (1.32% of average loans) compared to $352.3 million (1.17%) in 1997, primarily due to higher consumer credit charge-offs in the Norwest Financial segment.
Guidance, Outlook, and Risks
- Merger Completion: The merger with the former Wells Fargo was completed on November 2, 1998. The combined entity is assessing goodwill and intangibles for impairment.
- Year 2000 Compliance: The combined company estimates total Year 2000 project costs at approximately $300 million. To date, the former Norwest incurred $74.0 million in charges, and the former Wells Fargo incurred $77.0 million. Management anticipates substantial completion of remediation by December 31, 1998, and testing by June 30, 1999.
- Market Risk: No material changes in market risk exposures were reported. The company utilizes derivatives (swaps, caps, floors) to manage interest rate risk, with a total notional value of $60.3 billion for end-user derivatives.
- Capital Position: Regulatory capital ratios exceed minimum requirements. Tier 1 capital ratio was 8.06% and total capital to risk-adjusted assets was 9.92% as of September 30, 1998.
- Acquisitions: Pending transactions (excluding the Wells Fargo merger) involved approximately $93.1 billion in assets and were expected to close in Q1 1999.
Investor Verification Checklist
- Merger Integration: Verify the final pro forma financial impact of the Wells Fargo merger and any subsequent goodwill impairment charges.
- Year 2000 Costs: Monitor actual Year 2000 expenditures against the $300 million estimate and assess potential operational disruptions from third-party vendors.
- Consumer Credit Trends: Review the trajectory of net charge-offs in the Norwest Financial segment, which drove the increase in credit loss provisions.
- Mortgage Pipeline: Assess the sustainability of mortgage banking earnings given the high volume of refinancings (49% of fundings) and the sensitivity to interest rate changes.
- Regulatory Capital: Confirm that the combined entity maintains capital ratios above regulatory minimums post-merger.