-W ELL 5 FAR G 0 & C: 0 M PAN Y, AND 5US5IDIARIE5

HIGHLIGHTS CORPORATE PROFILE (in millions) % Change 1996/ 1995/ 1996 1995 1994 1995 1994

Wells Fargo Bank, N.A. is the primary subsidiary FOR THE YEAR ofWells Fargo & Company, founded in 1852. Net income $ 1,071 $ 1,032 $ 841 4% 23 % The Company's familiar trademark, the Concord Net income applicable to common stock 1,004 990 798 1 24 Per common share stagecoach, is both a memento of its historic role Net income $ 12.21 $ 20.37 $ 14.78 (40) 38 in developing the West's premier stage line and Dividends declared 5.20 4.60 4.00 13 15 an enduring symbol of reliability - the pride in TABLE OF CONTENTS Average common shares outstanding 82.2 48.6 53.9 69 (0) "coming through" for its customers that has been a Wells Fargo hallmark for 145 years. Profi tabil ity ratios 1 HIGHLIGHTS Net income to average total assets (ROA) 1.15% 2.03% 1.62% (43) 25 Wells Fargo operates one of the largest and Net income applicable to common stock to 2 LETTER TO SHAREHOLDERS busiest consumer banking businesses in the average common stockholders' equity (ROE) 8.83 29.70 22.41 (70) 33 FINANCIAL REVIEW United States, serving as banker to more than 6 Overview Efficiency ratio 69.0% 55.3% 56.6% 25 (2) 10 million households in the 10 Western states:" 8 Merger with First Interstate Bancorp Average loans $ 60,574 $34,508 $34,039 76 1 9 Line of Business Results The bank provides a retail network of more than (2) Earnings Performance Average assets 93,392 50,767 51,849 84 1,900 staffed service outlets, 4,300 round-the- l2 Net Interest Income Average core leposits 70,890 36,624 39,592 94 (7) clock Wells Fargo Express™ ATMs, a 24-hour 12 Noninterest Income Net intere t margin 6.11% 5.80% 5.55% 5 5 telephone banking service, and a popular online 16 Noninterest Expense Net Income and Ratios Excluding banking service. 16 Income Taxes 17 Earnings/Ratio Excluding Goodwill Goodwill and Nonqualifying Core Deposit The Company also provides a full range of and Nonqualifying COl Intangible Amortization and Balances Balance Sheet Analysis ("Cash" or "Tangible") banking services to small business, commercial, 17 Investment Securities Net income applicable to common stock $ 1,376 $ 1,025 $ 833 34 23 agribusiness and real estate customers. A joint (table on page 47) Net income per common share 16.74 21.08 15.45 (21) 36 venture, Wells Fargo HSBC Trade Bank, N.A., is 19 Loan Portf lio ROA 1.66% 2.12% 1.71% (22) 24 a nationally chartered, FDIC-insured bank that is (table on page 49) ROE 28.46 34.92 26.88 (18) 30 21 Nonaccrual and Restructured solely devoted to international trade finance for Efficiency ratio 62.2 54.5 55.7 14 (2) Loans and Other Assets middle-market businesses. Wells Fargo is also one 24 Allowance for Loan Losses AT YEAR END of tL1e nation's leading managers and administra- (table on page 50) lnve~tment securities $ 13,505 $ 8,920 $11,608 51 (23) tors of mutual fund and trust assets. In addition 26 Deposits 26 Certain Fair Value Information Loans 67,389 35,582 36,347 89 (2) to managing more than $19 billion in mutual 26 Capital Adequacy/Ratios Allowance for loan losses 2,018 1,794 2,082 12 04) funds, the bank maintains personal and institu- (table on page 69) Goodwill 7,322 382 416 (8) (6) tional trust assets of approximately $300 billion. 27 Asset/Liability Management Assets 108,888 50,316 53,374 116 31 Derivative Financial Instruments Core depo its 81,581 37,858 38,508 115 (2) *Arizona, California. Colorado, Idaho, Nevada. New Mexico, 32 Liquidity Management Common stockholders' equity 13,512 3,566 3,422 279 4 Oregon, Texas, Utah and Washington 34 Compari on of 1995 Versus 1994 Stockholder' equity 14,112 4,055 3,911 248 4 36 Additional Information Tier 1 capital 6,565 3,635 3,562 81 2 FINANCIAL STATEMENTS Total capital (Tiers 1 and 2) 10,000 5,141 5,157 95 37 Consolidated Statement of Income Capital ratios 38 Consolidated Balance Sheet ON THE COVER Common stockholders' equity to assets 12.41% 7.09% 6.41% 75 11 39 Consolidated Statement of Changes in Stockholders' equity to assets 12.96 8.06 7.33 61 10 Stockholders' Equity This year's Annual Report cover displays a portion ofan Risk-based capital 40 Consolidated Statement of Cash Flows authentic 1907 Wells Fargo map from the Company's Tier I capital 7.68 8.81 9.09 (13 ) (3) 41 Notes to Financial Statements historical archives. It oudines Wells Fargo's nationwide (index on inside back cover) Total capital 11.70 12.46 13.16 (6) (5) express routes by railroad and steamship, the dominant Leverage 6.65 7.46 6.89 (11) 8 75 INDEPENDENT AUDITORS' REPORT methods oftransportation around the tum of the century. 76 QUARTERLY FINANCIAL DATA Book value per common share $ 147.72 $ 75.93 $ 66.77 95 14 From 1852 to 1918, Wells Fargo also used Concord stagecoaches to carry gold, silver and other shipment~ over 78 DIRECTORY Common stockholders 42,277 27,885 27,904 52 thousands ofmiles ofstage lines across the West, and in the SHAREHOLDER INFORMATION Staff (active, full-time e lui valent) 36,902 19,249 19,192 92 1860s owned the largest stagecoach operation in the world: (inside back cover) Retail outlets the Great Overland Mail, running from California to INDEX OF SPECIAL TOPICS Traditional branches 1,274 535 572 138 (6) Nebraska, and northward into Idaho and Montana. (inside back cover) Supermarket branches 298 94 39 217 141 Banking centers 375 345 23 9

~-- LETTER TO SHAREHOLDERS

1a" yea, at thi' time, om I"", into focused strategic partnerships; companies for information on entire customer base by year end. to you was very short because we continued restructuring our the merger. There were several important were in the midst of planning the California branch network; By April 1, we had finalized reasons behind our decision to move integration of Wells Fargo and added supermarket locations; and many important decisions. We with such speed. Primary among First Interstate Bancorp. We said continued to promote our key had organized the First Interstate them was to control expenses by we'd report back to you at year­ business initiatives. franchise along Wells Fargo business quickly reducing the multiple-state end 1996, and, as promised, this We sold First Interstate banks lines, determined the final senior infrastructure of Flrst Interstate letter chronicles the events of the in three of the 13 states soon management structure, and and its costs, and by eliminating past year. after the merger became official ­ announced plans to close approxi­ business unit and staff redundancies Wells Fargo won its bid to Alaska, Montana and Wyoming­ mately 350 of the combined between the two companies. Equally acquire First Interstate Bancorp where our market share was very bank's California branches by important, we knew from prior in January 1996, and on April 1, small and opportunities to expand the end of September. mergers that it was critical to keep we completed the acquisition were limited. All three sales closed We also announced our plans the period of uncertainty and PAUL. HAZEN - CHAIRMAN WILLIAM ZUENDT - PRESIDENT for $11.3 billion in stock. With in the fourth quarter. Additionally, to reduce the combined staff of turbulence for customers and this merger, Wells Fargo not only to satisfy a regulatory requirement 45,800 by 7,200 by year-end employees as short as possible. Our acquired customers, staff and for the completion of the merger, through attrition and severance. intent was to get quickly past the offices throughout the West - we divested 61 branches in By December 31, the numbers disruptions we knew were inevitable, we returned to our 19th century California in September. were somewhat higher, with a total and begin to build relationships with framework. For example, agreement between the two com­ roots, when the company operated How the merger came together, staff reduction of 8,900. More our new customers. Unfortunately, Commercial Banking managers panies outlines shared responsibility its banking and express businesses what we believe we gained with First Interstate employees than we the disruptions lasted longer than faced the question of how best to and revenue, with full involvement in this same territory. the speed of our integration and anticipated were able to decline we anticipated. Nevertheless, we serve new lockbox customers. Wells by both parties in product devel­ By the end of 1996, we were a at what cost, are the topics of this our job offer under the terms of held to our timelines, believing Fargo had previously created a opment and strategic planning. very different-looking company year's letter. the severance program put in place that there was no value gained in strategic alliance for its lockbox The independence our staff than we had been at the begilU1ing by First Interstate during the take­ trying to maintain the status quo operations in 1992. We realized had in operating their businesses of the year. Our assets had more EARLY DECISIONS over attempt in late 1995. longer than necessary. significant benefits for customers allowed them to accomplish all. than doubled, from $50.3 billion One of the biggest and most In preparing for the conversion, and shareholders by aligning it unprecedented number of tasks in January to $108.9 billion in Our early decision in January to critical decisions we made at this every business unit in the company with a company that had better and address logistical problems December; we operated our retail stick predominantly with Wells early date involved the plan for developed its own integration plan. economies of scale: costs came of massive scale during the nine business in 10 states instead of one; Fargo's systems architecture converting retail and wholesale Those plans were then incorporated down, efficiency increased and months of the integration. One of staff numbered 36,900 at year end, throughout the entire conversion customers onto Wells Fargo into all. overall schedule. A small customer service improved. the best examples of the collective up from 19,250 twelve months process qu ickly established systems. Instead of shifting retail integration team reviewed key In acquiring First Interstate's strength of our employee base earlier; we had 1,950 retail locations company-wide standards for systerns customers along product lines milestones and coordinated critical lockbox business, our Commercial came from our experience during throughout the West, instead of changes and eliminated months (e.g., all consumer checking dependencies between businesses. Banking senior managers were once the physical conversions of First 975 only in California; and we ofdecision-making discussions. accounts changed over simulta- If problems or issues needed to again confronted by the challenge Interstate locations into Wells had a network of 4,300 Wells It also enabled us to link some n ously, followed by savings be resolved, they surfaced to the of delivering low-cost, high-quality Fargo locations. Fargo ATMs throughout the We t Wells Fargo/First Interstate systems accounts, etc.), we chose to convert integration team. Otherwise, customer service. The solution was Besides completing several major instead of 2,400 only in California. almo t immediately so we could the "whole" customer by geographic businesses ran their part of the a strategic alliance with Regulus facilities such as a new telephone Between April 1 and December offer customers throughout the region over several months. This process independently. This early Group LLC. The combined strengths banking center in Sacramento, 31, we converted 6 million retail We t specific benefits as soon as meant that as we transformed strategy helped involve new man­ of this alliance give customers three building out over 2.5 supermarket and wholesale accounts, over the acquisition was completed. branches within each state, custom­ agers and employees from First improvements they have requested branches per week, and moving data 1,500 ATMs and nearly 900 retail When April 1 arrived, customers ers of those branches had all their Interstate in integral parts of over the years: state-of-the-art center operations from California outlets from the First Interstate to of both banks had free access to all accounts converted simultaneously. planning and executing the technology to enhance ervi.ce, to Arizona, between April 1 and Wells Fargo system. To capitalize 4,300 Wells Fargo/First Interstate conversion. additionallockbox sites and strong December 31, our employees on our new multi-state operational ATMs to get cash. First Interstate COMING TOGETHER Throughout the integration, service quality. Wells Fargo chose handled thousands of tasks during capabilities, we moved operations customers also could call 24-hour managers had to make decisions Regulus because its senior managers branch conversions. Last year, the centers to non-earthquake prone telephone banking agents and surf We set all. ambitious conversion about how they were going to run are leaders in applying technology Physical Distribution and Corporate locations. We also restructured a merged Internet site of the two schedule for both our retail and newly acquired First Interstate to create customer benefits. The Facilities teams closed over 280 some of First Inter tate's businesses wholesale customers: convert the businesses within the Wells Fargo branches, remodeled teller F l

counters and changed signage at One business we tried to insulate trustee and agency appointments The WellsOne account, which total retail locations, more than worked diligently to meet our cus­ over 1,000 First Interstate locations. from the rigors of the integration representing mOre than $85 billion Commercial Banking introduced any other bank in the state. In tomers' needs under very difficult In addition, they completed the process during 1996 was our in outstanding securities for in late 1996, is a good example Nevada, our partnership with circumstances. sale of 70 operating branches in Business Direct program. This is municipal and corporate issuers, of one of the immediate benefits Lucky Stores in Las Vegas and Overall, it was a sorry experience California, Montana, Wyoming the Business Banking Group's primarily in the western United we are now able to offer our cus­ Scolari Brothers Food and Drug for far too many of our customers. and Alaska. nationwide, direct lending program States. tomers. An interstate depository Company in Reno will result in We did not measure up to our own The scale of the task our staff to pre-qualified small businesses Delivering products and services account designed to serve the the installation of 35 in-store high standards for delivering service. faced can be put in perspective via direct mail and fax. Because efficiently to customers are among needs of commercial banking cus­ banking locations during the first For this we apologize. by comparing the events of our they are acquired through direct the criteria that determine whether tomers with multi-state operations, half of 1997. As our employees look back upon California conversions to the 1986 mail, and serviced round-the-clock we remain in and grow a business, WellsOne makes it possible for a During the year, we also the year, we hope it is with a feeling Crocker Bank merger. In 1986, 175 via telephone from our National restructure or sell it. One business company's deposits and payables announced an agreement in of great accomplishment. Despite branches in California were closed Business Banking Center, customers that continued to grow during 1996 to flow through one account any­ principle that would allow Wells the setbacks our company faced, over an eight-month period. This of Business Direct are not tied to was Online Financial Services where in the 10 Western states Fargo to open as many as 450 new the conversions are complete and year, 257 California locations were any physical Wells Fargo locations. (OFS). From the merged Internet served by the bank. branches in Safeway stOres through­ we can now move forward. To our closed over two weekends in July Business expansion efforts and site that was available on April 1 Customers benefit because they out the West. These Safeway branch thousands ofemployees who worked and August. To add to the logistical growth continued unabated for customers of both banks to the gain faster acces to funds, and openings will begin in 1997. so hard to make this achievement challenge, more than two dozen of throughout the year, with origina­ new services we introduced during do not have to juggle multiple possible, and to the millions of those moves had to be completed tion volumes reaching $2.1 billion, the year, OFS has demonstrated its accounts, statements and reconcili­ WHAT IT COST US our customers who gave us the in total darkness, with only up 44% over 1995. ability to quickly come to market ation issues with different banks in benefit of the doubt during some flashlights, candles and generators The decision to fund small with products and services its audi­ different states. WellsOne gives The financial costs of the merger very trying times, we offer our because the largest power outage business growth throughout 1996 ence demands. Customers can now cash managers what they want: have been disclosed in previous tremendous gratitude. ever to hit the West Coast struck was straightforward. However, many apply on the Internet for accounts, convenience, control and quarterly reports and details can Much ground remains to be on Saturday, August 10. decisions involving First Interstate's send money and pay bills to any­ efficiency in banking. be found in the pages following covered as we move ahead. Our To meet our financial goals for businesses took more time. Given one in the U.S., transfer funds Retail customers living in any of this letter. focus in 1997 will be to provide the the merger, we needed to move the hostile nature of the acquisition, between accounts, and purchase our 10 states also benefit from our In many ways, the costs to our service our customers deserve and fast to control costs everywhere, we did not have access to all the travelers checks and foreign interstate service. They can open customers and our employees were deliver to shareholders the profit­ given the integration expenses we data necessary for business exchange. Our Internet services, accounts, make deposits and cash just as significant. In moving a' ability they xpect. We're confident knew we would incur - hence our evaluation until after April 1. combined with the other online checks anywhere. If they relocate quickly as we did, introducing new we will reach our goals, thanks to speed in consolidating branches One business decision that services we offer such as Money, to a residence in anyone of our ways to bank to a new customer the talent and commitment of our and scaling back staff. Some other waited until we were well beyond Quicken, Prodigy and America 10 states, they can keep the same base, changing operating systems, employees and the patience and major cost savings came from consummation of the merger Online, have resulted in healthy account, and use our familiar and training thousands of new loyalty of our customers. consolidating data centers. Prior involved Corporate and Municipal growth in online use. At year-end resources and services. employees in Wells Fargo's to the merger, Wells Fargo had Bond Administration. After 1996, we had more than 300,000 Timely completion of the procedures, we did not expect planned to consolidate its three thoroughly examining this business, online customers, a significant integration also allowed us to return things to go smoothly from start data centers into two; the two we determined that its scale, though increase from the 20,000 we had our focus to our in-store banking to finish. They didn't. additional centers we acquired from sizable, was not large enough to in May 1995. Nearly half of our expansion in California and Many random but significant First Interstate were incorporated nable us to be competitive. We online customers bank with us introduce it in several of our new telecommunications and systems into this plan. We retained our therefore made the decision to sell directly through the Internet. Paul Hazen markets. In California, we opened problems occurred in the initial new data center near Sacramento, it to The Bank of New York, and Chairman an additional 110 in-store locations months after the merger, creatu,g California, and First Interstate's that decision was announced in WHAT WE GAINED throughout the state, bringing our major service issues and inconve­ center in Tempe, Arizona. Both the fourth quarter. We chose to sell total to 500 as of the end of the niences for our retail and wholesale tJdL{y'/ are seismically stable, in relatively the business to The Bank of New Our aggressive conversion schedule year. We also announced plans for customers. Systems slow-downs, low-cost areas, and the Tempe York because of its "best in class" allowed us to begin functioning as William Zuendt the expansion of this program in clogged telephone service centers, site required less expansion than reputation in this field and its prior one bank across our territory, President Arizona and Nevada. By early 1997, errors in customer accounts and our Southern California site to success in merging with other so that after the conversion was we will have added 70 new branches long branch lines plagued oLlr accommodate the combined corporate and municipal bond completed we could offer customers in Bashas' supermarkets throughout customers. These operating and bank's needs. administration businesses. Th sale the benefits of true interstate Arizona, giving Wells Fargo 228 service problems also placed an March 6, 1997 involves the transfer of 5,000 bond banking. extra burden on employees, who F

WELLS FARGO & COMPANY AND SUBSIDIARIES

FINANCIAL REVIEW

OVERVI EW TABLE 1 RATIOS AND PER COMMON SHARE DATA 1996 was partially offset by the 1995 sale of the Company's joint venture interest in WFNIA. Year ended December 31, Noninterest expense increased from $2,201 million in L996 1995 1994 Wells Fargo & Company (Parent) is a bank holding com­ amounts reported in the corresponding period in 1995 1995 to $4,637 million in 1996. In addition to the effect PROFITABILITY RATIOS pany whose principal subsidiary is Wells Fargo Bank, N.A. resulted from the Merger. The increases in substantially of combining operations of First Interstate with the Net income to "verage total assets (ROA) 1.15% 2.03% 1.62% (Bank). In this Annual Report, Wells Fargo & Company all of the categories of the Company's balance sheet Company, the increase reflected goodwill and nonqualifying and its subsidiaries are referred to as the Company. Net income applicable to common stock between amounts reported at December 31, 1996 and COl amortization, severance for Wells Fargo employees to average common stockholders' equity (ROE) 8.83 29.70 22.41 On April 1, 1996, the Company completed its acquisi­ those reported at December 31.1995 also resulted from and other integration expenditures. tion (Merger) of First Interstate Bancorp (First Interstate), Net income to average the Merger. Other significant factors affecting the There was a provision for loan losses of $105 million in stockholders' equity 8.81 26.99 20.61 which is being accounted for as a purchase business com­ Company's results of operations and financial position 1996, compared with no provision in 1995. During 1996, EFFICIENCY RATIO (I) 69.0% 55.3% 56.6% bination. As a result, the financial information presented are described in the applicable sections below. net charge-offs were $640 million, or 1.05% of average total in this Annual Report for the year ended December 31, Net income in 1996 was $1,071 million, compared loans, compared with $288 million, or .83%, during 1995. CAPITAL RATIOS 1996 reflects the effects of the acquisition subsequent to with $1,032 million in 1995, an increase of 4%. Net The allowance for loan losses was $2,018 million, or At year end: Common stockholders' equity to assets 12.41 % 7.09% 6.41% the Merger's consummation. Since the Company's results income per share was $12.21, compared with $20.37 in 3.00% of total loans, at December 31,1996, compared Stockholders' equity to assets 12.96 8.06 7.33 of operations subsequent to April 1, 1996 reflect amounts 1995, a decrease of 40%. with $1,794 million, or 5.04%, at December 31,1995. recognized from the combined operations, they cannot be Risk-based capital (2) The increase in earnings from a year ago reflected the At December 31,1996, total nonaccrual and restructured Tier 1 capital 7.68 8.81 9.09 divided between or attributed directly to either of the two results of the Merger, substantially offset by a $163 million loans were $724 million, or 1.1 % of total loans, compared Total capital 11.70 12.46 13.16 former entities nor can they be directly compared with ($94 million after tax) gain resulting from the sale of the with $552 million, or 1.6%, at December 31,1995. Fore­ Leverage (2) 6.65 7.46 6.89 prior periods. Average balances: Company's joint venture interest in Wells Fargo Nikko closed assets were $219 million at December 31, 1996. In substantially all of the Company's income and Investment Advisors (WFNIA) in 1995 and a $105 mil­ Common stockholders' equity to aSSetS 12.17 6.57 6.86 compared with $186 million at December 31.1995. Stockholders' equity to assets 13.01 7.53 7.87 expense categories, the increases in the amounts reported lion loan loss provision in 1996 compared with none At December 31, 1996, the ratio ofcommon stockholders' for the year ended December 31, 1996 compared to the in 1995. NET INCOME AND RATIOS equity to total assets was 12.41 %, compared with 7.09% at EXCLUDING GOODWILL AND Return on average assets (ROA) was 1.15% and return December 31,1995. The Company's total risk-based capi­ NONQUALIFYING CORE DEPOSIT on average common equity (ROE) was 8.83% in 1996, INTANGlBLE AMORTIZATION tal (RBC) ratio at December 31, 1996 was 11.70% and its AND BALANCES ("CASH" OR RETURN ON AVERAGE TOTAL ASSETS (ROA) (%) compared with 2.03% and 29.70%, respectively, in 1995. Tier 1 RBC ratio was 7.68%, exceeding the minimum "TANGIBLE") (J) Earnings before the amortization of goodwill and regulatory guidelines of 8% and 4%, respectively, for bank Net income applicable to common stock $ 1.376 $ 1,025 $ 833 2.5%··················································· . nonqualifying core deposit intangible (CDl) ("cash" or holding companies and the "well capitalized" guidelines Net income per common share 16.74 21.08 15.45 "tangible" earnings) for the year ended December 31, 1996 ROA 1.66% 2.12% 1.71% • Cash 2.~2 for banks of 10% and 6%. respectively. The Company's were $16.74 per share, compared with $21.08 per share for ROE 28.46 34.92 26.88 2.0 .. · ·· .. ·.. ··· .. ·· ······ ..···· .. ·· .. ·.. ···;:7·l·~~3~i66 ratios at December 31,1995 were 12.46% and 8.81 %, Efficiency ratio 62.2 54.5 55.7 the year ended December 31,1995. This decrease is sub­ respectively. The Company's leverage ratios were 6.65% PER COMMON SHARE DATA 1.5·.. ..·1.62· ·.. ·.. ·· .. stantially due to the estimated expenses related to the First and 7.46% at December 31,1996 and 1995, respectively, Dividend payollt (4) 43% 23% 27% 1.15 Interstate integration of about $440 million and a loan exceeding the minimum regulatory guideline of 3% for bank loss provision of $105 million. On the same basis, ROA Book value $147.72 $ 75.93 $ 66.77 • holding companies and the "well capitalized" guideline for Market prices IS): was 1.66% and ROE was 28.46% in 1996, compared with • As reported banks of 5%. A discussion of RBC and leverage ratio guide­ High $289.88 $229.00 $160.38 2.12% and 34.92%, respectively, in 1995. lines is in the Capital Adequacy/Ratios section. Low 203.13 143.38 127.63 Following the Merger, "cash" earnings, as well as "cash" The Company has bought in the past, and will continue Year end 269.75 216.00 145.00 o· .. ROA and ROE, are the measures of performance which to buy, shares to offset stock issued or expected to be issued 1992 1993 1994 1995 1996 will be most comparable with prior periods. They are also under the Company's employee benefit and dividend rein­ (I) The efficiency ratio is defined as non interest expense divided by the total of the most relevant measures of financial pelformance for net inreresr income and noninrerest income. vestment plans. In addition to these shares, the Board of (2) See the Capital Adequ"cy/Ratios secrion for nddirional information. shareholders because they measure the Company's ability Directors authorized in April 1996 the repurchase of up to (3) Nonqualifying COl amortization and average balance excluded from these RETURN ON COMMON STOCKHOLDERS' EQUITY (ROE) (%) to support growth, pay dividends and repurchase stock. 9.6 million shares of the Company's outstanding common calculations are, with rhe exception of the efficiency ratio, net of applicable (See page 17 for additional information.) stock. The Company repurchased a total of 8,4 million shares taxes. The aftcr~tax amOlmts for the amortization ~lnd average balance of 34.92 Net interest income on a taxable-equivalent basis was nonqualifying COl were $122 million and $922 million, respectively, for of common stock during 1996, compared with 5.0 million the yenr ended December 31, 1996. Goodwill amortiwtion and average ;:%:·~~·:;~.h~····:·······:·29;o~i8 $4,532 million in 1996, compared with $2,655 million a shares in 1995. The Company currently expects to repur­ balance (which nre nor tnx effected) were $250 million and $5,614 million, .. year ago. The Company's net interest margin was 6.11 % respectively, for the year ended December 31. 1996. See page 17 for chase approximately 1.5 million shares per quarter in 1997. 25 / . for 1996, compared with 5.80% in 1995. The increase nclditional information. This Annual Report includes forward-looking statements (4) Dividends declared per comlllon share as a percentage of net income per 20.98~ ~. in the margin was primarily due to the mix offunding 20 .... ·· .. ·· .. ··· .. · ·Z:·y22.41.. ····· that involve inherent risks and uncertainties. The Company common shBre. sources due to the Merger, as core depOSits replaced more cautions readers that a number of important factors could (5) Based on daily closing prices reponed on the New York Stock Exchange ~/ Cornposite Transaction Reponing System. 15 .. · ;·;:i·i .. 7 16.74· ·· ·· ·.. · .. expensive shorr-term borrowings. cause actual results to differ materially from those in the 10" ~... . 883 Noninterest income increased from $1,324 million in forward-looking statements. Those factors includefluctua­ 7.93-' • As reported • 1995 to $2,200 million in 1996, an increase of 66%. In 5.. ·· . .. tions in interest rates, inflation, government regulations, addition to the effects of the Merger. the increase reflects the progress of integrating First Interstate, economic con­ 0.. the loss on sale in 1995 of certain product types within the ditions and competition in the geographic and business 1992 1993 1994 1995 1996 real estate 1-4 family first mortgage portfolio. The increase in areas in which the Company conducts its operations. TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA LINE OF BUSINESS RESULTS

(in millions) 1996 1995 1994 1993 1992 1991 % Change Five-year 1996/ compound 1995 growth rate The Company has identified six distinct line of business In 1996, the Retail Distribution Group completed the INCOME STATEMENT for the purposes of management reporting, as shown in integration f First Interstate into Wells Fargo with the Net interest income $ 4,521 $ 2,654 $ 2,610 $ 2,657 $ 2,691 $ 2,520 70 % 12 % Table 3. consolidation of the two banks' physical distribution net­ Provision for loan losses 105 - 200 550 1,215 1,335 - (40) The line of business results show the financial perfor­ works. This consolidation consisted of the sale and closure Noninterest income 2,200 1,324 1,200 1,093 1,059 889 66 20 mance of the major business units. Line of business results of traditional branches as well as the continued opening Noninterest expense 4,637 2,201 2,l56 2,162 2,035 2,020 18 111 are determined based on the Company's management of in-store branches and banking centers. The Company Net income 1,071 1,032 841 612 283 21 4 120 Per common share accounting process, which assigns balance sheet and closed 107 traditional Wells Fargo branches and 176 tradi­ Net income $ 12,21 $ 20.37 $ 14.78 $ 10.10 $ 4.44 $ .04 (40) 214 income statement items to each responsible business unit. tional fonner First Interstate branches. The Company Dividends declared 5.20 4.60 4.00 2.25 1.50 3.50 13 8 This process is dynamic and somewhat subjective. Unlike also divested 61 traditional former First Interstate branches

BALANCE SHEET financial accounting, there is no comprehensive, authori­ to Home Savings of America and sold the former First (at year end) tative body of guidance for management accounting Interstate banks, including nine traditional branches, Investment securities $ 13,505 $ 8,920 $11,608 $13,058 $ 9,338 $ 3,833 51 % 29 % equivalent to generally accepted accounting principles. in Alaska, Montana and Wyoming. Loans 67,389 35,582 36,347 33,099 36.903 44.099 89 9 The management accounting process measures the The new in-store branches and banking centers are part Allowance for loan losses 2,018 1,794 2,082 2,122 2,067 1,646 12 4 of the ongoing effort to provide higher-convenience, lower­ Goodwill 7,322 382 416 477 523 559 - 67 performance of the business lines based on the manage­ Assets 108,888 50,3 J 6 53,374 52,513 52,5 7 53,547 116 15 ment structure of the Company and is nor necessarily cost service to customers. The in-store banking centers Core deposits 81,581 37,858 38,508 41,291 41,879 42.941 115 14 comparable with similar information for any other (modularly designed kiosks equipped with an ATM, a cus­ Common srockh Iders' equity 13,512 3,566 3,422 3,676 3,170 2,808 279 37 financial institution. First Interstate results prior to tomer service telephone and staffed by a banking manager) Stockholders' equity 14,112 4,055 3,911 4.315 3,809 3,271 248 34 April 1, 1996 are not in~luded and, therefore, the y ar are capable of providing substantially all consumer services. Tier I capital 6,565 3,635 3,562 3.776 3,287 2,714 81 19 As of December 31, 1996, there were 673 in-store branches Total capital 10,000 5,141 5.157 5,446 5,255 4,784 95 16 1996 is not comparable to 1995. The results incorporate estimates of cost allocations, and banking centers. -- transfer and assignments reflecting management's current The number of ATM locations continued to increase understanding of the First Interstate businesses. The cost in 1996, reaching a total of 2,672 at December 31, 1996 allocations are based on estimates of the steady state level (including 1,295 former First Interstate ATM locations). of expenses. Changes in management structure and/or the Average consumer checking core deposits for 1996 were MERGER WITH FIRST INTERSTATE BANCORP allocation process may result in changes in allocations, $15.8 billion, compared with $9.2 billion in 1995. transfers and assignmems. In that ca e, results for prior The Business Banking Group provides a full range of periods would be (and have been) restated to allow credit products and financial services to small businesses comparability from one period to the next. April 1, 1996, the Company cOlTlpleted its acquisition pleted the sales of the First Interstate banks in Wyoming, and their owners. These include lines of credit, receivables On The Company believes that cash earnings is the most of First Interstate. As a condition of the Merger, the Montana and Alaska in the fourth quarter of 1996. Each and inventory financing, equipment loans and leases, real relevant measure of financial performance for shareholders. Company was required by regulatory agencie to divest bank had three branches. The three banks had aggregate estate financing, SBA financing, cash management, deposit For this reason, goodwill and nonqualifying core deposit 61 First Interstate branches in California. In September, assets of approximately $.6 billion and aggregate deposits and investment accounts, payroll services, retirement intangible have not been allocated to the business units the Company completed the required divestiture of 61 of approximately $.5 billion. Banks in the other states plans and credit and debit card processing. Business Banking in thi presentation and are reported in "Other." branches to Home Savings of America. These branches retained by the Company are expected to merge into Wells customers are small businesses with annual sales up to Intemal expense allocations are independently negotiated had aggregate deposits of approximately $1.9 billion and Fargo Bank, N .A. as soon as permitted by applicable state $10 million in which the owner is also the principal between business units and, where possible, service and loans of approximately $1.1 billion. The selling price of laws (i.e., Colorado in June 1997; Texas not earlier than financial decision maker. Core deposits for 1996 averaged price is measured against comparable services available the divested branches represented a premium of 8.11 % September 1999). $11.2 billion, compared with $6.4 billion in 1995. Loans in the external marketplace. on the deposits. The Company expects to meet its pre-merger objective averaged $4.3 billion, compared with $2.4 billion in 1995. The following de cribes the six major busines units. As of the acquisition date, the California bank of First of realizing annual cost savings of $800 million not later Business Banking distributes credit products through Interstate merged into Wells Fargo Bank, N.A. In June than 18 months after the date of the Merger. About 50% The Retail Distribution Group sells and services a national direct marketing and 135 commercial loan special­ 1996, the Company merged fonner First Interstate bank ($100 million, or $400 million annualized) of the cost complete line of retail financial products for consumers ists in small business lending offices in 22 markets in the subsidiaries in six states (Idaho, Nevada, New Mexico, savings is anticipated to be realized in the first quarter of and small businesses. In addition to the 24-hour Tele­ western United States. Business Banking jointly owns Oregon, Utah and Washington) into Wells Fargo Bank, N.A. 1997. The full impact of revenue losses due to the Merger phone Banking Centers and Wells Fargo's Online Finan­ with First Data Corp. a merchant card processing alliance, In September 1996, Wells Fargo Bank of Arizona, N .A. is expected to be recognized by the first quarter of 1997, cial Services (the Company's personal computer banking which acquires customers through a 125-person sales force. (formerly First Interstate Bank of Arizona, N.A.) merged with revenue growth resuming in the second quarter of services), the Group encompasses Physical Distribution's Busin· ss Banking provides access to customers through into Wells Fargo Bank, N.A. Each of these states has 1997. For additional discussion of the Company's plan for network of traditional branches, in-store branches, bank­ a wide range of channels. These include Business Banking opted-in early under the interstate branching provisions branch closures and consolidations and for pro forma infor­ ing centers and ATMs. Retail Distribution also includes Officers who are relationship managers for the premier of the Riegle-Neal Interstate Banking and Branching mation, see Note 2 t the Financial Statements. the consumer checking business, which primarily uses the segment ofsmall business customers, as well as Wells Fargo's Efficiency Act of 1994. In addition, the Company com- network as a source of new customers. extensive network of traditional and in-store branches,

- TABlE 3 LINE OF BUSINESS RESULTS (ESTIMATED)

(income/expense in millions, Retail Business Wholesale average balances in billions) Distribution Group Banking Group Investment Group Real Estate Group Products Group ~nsumer Lending Other Consolidated Company 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995

Net interest income (1) $ 836 $463 $ 612 $372 $ 745 $ 472 $ 382 $242 $ 771 $ 396 $1,062 $ 641 $ 113 $ 68 $4,521 $2,654 Provision for loan losses (2) 10 I 99 55 4 I 42 29 71 41 454 262 (575) (389) 105 Noninterest income (3) 1,046 560 265 144 475 464 86 35 278 143 294 218 (244) (240) 2,200 1,324 Noninterest expense (3) 1,858 961 276 626 425 -- 428 113 82 433 202 ~ 298 684 -ill) 4,637 2,201 Income before income tax expen e (benefit) 14 61 350 185 590 510 313 166 545 296 407 299 (240) 260 1,979 1,777 Income tax expense (benefit) (4) 6 26 144 79 243 216 -- -- 129 71 224 125 167 127 __(5) 101 908 -----.l45 Net income (loss) $ 8 $ 35 $ 206 $106 $ 347 $ 294 $ 184 $ 95 $ 321 $ 171 $ 240 ~172 $(235) $ 159 $1,071 $1,032 Average loans $ $ - $ 4.3 $ 2.4 $ 1.6 $ 0.5 $ 9.4 $ 6.3 $15.9 $ 9.1 $ 21.4 $10.8 $ 8.0 $ 5.4 $ 60.6 $ 4.5 Average assets 1.9 1.0 6.4 3.6 2.3 0.8 10.0 6.8 19.9 10.2 22.1 11.2 30.8 17.2 93.4 50.8 Average core deposits 16.2 94 11.2 64 32.2 18.0 0.2 0.1 9.3 2.2 0.4 0.2 1.4 0.3 70.9 36.6 Return on equity (5) 1% 7% 28% 28% 50% 66% 20% 15% 21% 22% 18°!.) 24% -% -'Yo 9% 30% Risk-adjusted efficiency ratio (6) 109% 103% 73% 75% 62% 54% 68% 83% 74% 70% 84% 73% -% -% -'Yo -%

(I) Net interest income is the difference between actual interest earned on as cts (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on (4) Businesses are taxed at the Company's marginal (statutory) tax rare, adjusted for any nondeductible expenses. Any differences between the marginal and effecrive the Company's cost of funds. Groups 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 imerest spread tax rate are in Other. is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (5) Equity is allocated to the lines of business based on an lIssessment of the inherent risk associated with each business so that ,he returns on allocated equity arc on (2) The provision allocated to the line groups for 1996 and 1995 is based on management's current assessmem of the normalized net charge-off ratio for each line of business. a risk-adjusted basis and comparable acros> business lines. In any particular year, the actual net charge-offs can be higher or lower than the normalized provision allocated to the lines of business. The difference berween the normalized (6) The risk-adjusted efficiency ratio is defined as noninterest expense plus the Cost of capital divided by revenues (net interest income and noninterest income) provision and the Company provision is included in Other. less normalized loan losses. (3) Retail Distribution Group's charges to the product groups are shown as noninterest income to the btanches and noninterest expense to rhe product groups. They amounted to $392 million and $206 million for 1996 and 1995, respectively. These charges are eliminated in the Other category in arriving at the Consolidated Company torals for noninteresr income and expense.

banking centers, ATMs and, starting in 1997, business and Municipal Bond Administration (Corporate Trust) in 1996 included operation and office consolidations. The Group's loans averaged $15.9 billion in 1996, compared branches. Business Banking also serves customers through business. The sale is scheduled to close during the first quarter Real Estate Group's loans averaged $9.4 billion in 1996, with $9.1 billion in 1995, and average core deposits were its National Business Banking Center, a 24-hour telephone of 1997. The Corporate Trust business had net income for compared with $6.3 billion in 1995. $9.3 billion, compared with $2.2 billion in 1995. center dedicated to the small business customer, and 1996 of approximately $4 million. through Business Gateway, a personal computer banking Assets under management at December 31, 1996 were The Wholesale Products Group serves businesses with Consumer Lending offers a full array of consumer loan service exclusively for the small business customer. $57.3 billion, compared with $34.2 billion in 1995. For 1996, annual sales in excess of $5 million and maintains rela­ products, including credit cards, transportation (auto, average loans were $1.6 billion and average core deposits tionships with major corporations throughout the United recreational vehicle, marine) financing and leases, home The Investment Group is responsible for the sales and were $32.2 billion, compared with average loans of $.5 bil­ States. The Group is responsible for soliciting and main­ equity lines and loans, lines of credit and installment loans. management ofsavings and investment products, invest­ lion and average core deposits of$18.0 billion in 1995. taining credit and noncredit relationships with businesses The loan portfolio for 1996 averaged $21.4 billion, consist­ ment management and fiduciary and brokerage services to by offering a variety of products and services, including ing of$4.9 billion in credit cards, $10.6 billion in equity/ institutions, retail c~stomers and high net worth individuals. The Real Estate Group provides a complete line of services traditional commercial loans and lines, letters of credit, unsecured loans and $5.9 billion in transportation financing. This includes the Stagecoach and Overland Express families supporting the commercial real estate market. Products and international trade faCilities, foreign exchange services, This compares with $3.5 billion in credit cards, $5.3 billion of mutual funds as well as personal trust, employee benefit services include construction loans for commercial and resi­ cash management and electronic products. The Group in equity/unsecured loans and $2.0 billion in tran portation trust and agency assets. It also includes product manage­ dential development, land acquisition and development includes the majority ownership interest in the Wells Fargo financing in 1995. ment for market rate accounts, savings deposits, Individual loans, secured and unsecured lines of credit, interim HSBC Trade Bank established in October 1995 that pro­ The Other category includes the Company's 1-4 family first Retirement Accounts ORAs) and time deposits. Within financing arrangements for completed structures, rehabili­ vides trade financing, letters ofcredit and collection services. mortgage portfolio, the investment securities portfolio, good­ this Group, Private Client Services operates as a fully inte­ tation loans, affordable housing loans and letters of credit. Middle market commercial banking distribution capability will and the nonqualifying core depOSit intangible, the differ­ grated financial services organization focusing on banking/ Secondary market services are provided through the Real was enhanced through the Merger with the addition of ence between the normalized provision for the line groups credit, trust ervices, investment management and full ser­ Estate Capital Markets Group. Its business includes pur­ offices in the Pacific Northwest, Southwest and Texas. The and the Company provision for loan losses, the net impact of vice and discount brokerage. chasing distressed loans at a discOlUlt, mezzanine financing, Merger also provided additional cash management and transfer pricing loan and deposit balances, the cost of exter­ Significant integration activities in 1996 included the acquisition financing, origination of permanent loans for electronic products market penetration, especially in the nal debt, the elimination of intergroup noninterest income merger of the Stagecoach and Pacifica families of mutual securitization, syndications, commercial real estate loan large corporate segment. Integration activities completed and expense, and any residual effects of unallocated systems funds, the merger of personal trust funds and the consolida­ servicing and real estate pension fund advisory services. in 1996 were the consolidations of the regional commer­ and other support groups. It also includes the impact ofasset/ tion of investment management and private banking The Merger added lending offices in Portland, Houston, cial banking offices, cash management service centers and liability strategies the Company has put in place to manage operations. In addition, the Bank entered into an agree­ San Diego and Phoenix. Integration activities completed commercial loan service centers. The Wholesale Products ment with The Bank of New York to sell the Corporate the sensitivity of net interest spreads.

m "- '. .. ~ . .. '. ',' -I

EARNINGS PERFORMANCE

The overall increase in noninterest income in 1996 At December 31,1995, the Company had a liability The Bank generated net income of $1,006 million and hedging income resulted primarily from the swap hedges compared with 1995 reflected the impact of the Merger. of $83 million related to the disposition of premises and, $1,105 million in 1996 and 1995, respectively. The Parent put in place to hedge floating-rate loans and fixed-rate "All other" fees and commissions include mortgage loan to a lesser extent, severance and miscellaneous expenses (excluding its equity in earnings of subsidiaries) and its deposits, partially offset by lower gains from futures used servicing fees and the related amortization expense for associated with scheduled branch dispositions. Of this other bank and nonbank subsidiaries had net income to hedge deposits. purchased mortgage servicing rights. Mortgage loan servic­ amount, $13 million represented a third quarter 1995 (loss) of $65 million and $(73) million in 1996 and Net interest income and the net interest margin are ing fees totaled $82 million and $55 million in 1996 and accrual for the closure of 21 branches, of which 19 were 1995, respectively. expected to increase in 1997, assuming both loan growth 1995, respectively. The related amortization expense was closed in March 1996. The remaining amount consisted and investment securities runoff and there is no significant $63 million and $39 million in 1996 and 1995, respectively. of a fourth quarter 1995 accrual for the disposition of 120 NET INTEREST INCOME change in deposit rates. The balance of purchased mortgage servicing rights was branches, of which 88 branches were closed in the third $257 million and $152 million at December 31,1996 and quarter of 1996. In 1996, the 1995 accrual was increased NONINTEREST INCOME 1995, respectively. The purchased mortgage loan servicing. by approximately $7 million based on revised estimates of Net interest income is the difference between interest portfolio totaled $22 billion at December 31, 1996, com­ premise disposition and severance expenses. In October income (which includes yield-related loan fees) and interest pared with $13 billion at December 31, 1995. 1996, the Company entered into definitive agreements with expense. Net interest income on a taxable-equivalent basis Table 4 shows the major components of noninterest income. A major portion of the increase in trust and investment seven institutions to sell 12 traditional branches, includ­ was $4,532 million in 1996, compared with $2,655 million services income for 1996 was due to greater mutual fund ing deposits, of Wells Fargo located in California. The in 1995. management fees, reflecting the overall growth in the fund sales, which had been included in the fourth quarter 1995 Net interest income on a taxable-equivalent basis TABLE 4 NONINTEREST INCOME families' net assets, including the Pacifica funds previously accrual (and which are in addition to 20 former First expressed as a percentage of average total earning assets (in millions) Year ended December 31, __% Change managed by First Interstate. In September 1996, the Pacifica Interstate California branches being sold), closed in the is referred to as the net interest margin, which represents 1996 1995 1994 1996/ 1995/ funds, totaling $5.3 billion, were merged into the Stage­ first quarter of 1997. In the fourth quarter, the Company the average net effective yield on earning assets. For 1996, 1995 1994 coach family of mutual funds. The Company managed evaluated the remaining 22 scheduled branch dispositions the net int rest margin was 6.11 %, compared with 5.80% Service charges on 28 of the Stagecoach family of mutual funds consisting of and decided to retain 11 branches. Of the other 11 in 1995. deposit accounts $ 868 $ 478 $ 473 82 % 1% $14.2 billion ofassets at December 31,1996, compared branches, 10 were closed in the first quarter of 1997 Table 5 presents the individual components of net interest Fees and commi' 'ions: with 15 mutual funds consisting of $7.0 billion of assets at and 1 is expected to be sold in the third quarter of 1997. income and net interest margin. Credit card membership and other credit card fees 116 95 64 22 48 December 31,1995. Of the merged Pacifica funds, $2.4 bil­ The liability at December 31,1996 for the remaining 11 The increase in the margin in 1996 compared with 1995 Debit and credit card lion was added to the Stagecoach institutional funds with branche was $14.8 million. In addition, an expense was primarily attributable to the mix offunding sources merchant fees 112 65 55 72 18 24 the remaining $2.9 billion merged into the Stagecoach due to the Merger, as core deposits replaced more expensive Charges and fee on loans 112 52 42 115 accrual of $96 million wa' made in the fourth quarter of Shared ATM network fees 102 51 43 100 19 retail funds. The Company also manages the Overland 1996, representing disposition of premises and, to a lesser short-term borrowings. The increase in net interest income Mutual fund and Express family of 14 mutual funds, which had $5.1 billion extent, severance and communication expenses associated for 1996 compared with 1995 was primarily due to an annuity sales fees 61 33 64 85 (48) of assets under management at December 31, 1996, com­ increase in average earning assets as a result of the Merger. All other 237 137 119 73 15 with the disposition of another 137 traditional branches pared with 12 mutual funds consisting of $3.7 billion at in California in 1997. Interest income included hedging income of $81 million Total fees and commissions 740 433 387 71 12 December 31, 1995, and is sold through brokers around At December 31,1996, the Company had 1,947 retail in 1996, compared with $4 million in 1995. Interest expense Trust and investment the country. In addition to managing Stagecoach and outlets, comprised of 1,274 traditional branches, 298 super­ included hedging income f $3 million in 1996, compared services income: Overland Express Funds, the Company also managed or market branches and 375 banking centers, in 10 western with $15 million in 1995. The increase of$65 million in Asset management ancl custody fees 214 129 124 66 4 maintained personal trust, corporate trust, employee states. In 1996, the Company and Safeway Inc. signed all. Mutual funcl benefit trust and agency assets of approximately $300 bil­ agreement in principle that would allow the Company management fees 129 71 46 82 54 All other 34 41 33 (I7) 24 lion (including $245 billion from First Interstate) and to open as many as 450 n w retail outlets (banking $51 billion at December 31,1996 and 1995, respectively. Total trust and investment centers and branches) in Safeway stores in the western NET INTEREST MARGIN ('Yo) services income 377 241 203 56 19 In addition, the increase in asset management and custody United States. Investment securities fees was predominantly due to the Merger. During 1995, gains and losses on sales of loans included gains (losses) 10 (17) 8 6.25%·····.. ·······················.. ····················.. ·················6..i·)········ Sale of joint The MasterWorks division along with the Company's an estimated $83 million write-down to the lower of cost venture interest 163 (100) 6.00 ~~ .. joint venture interest in Wells Fargo Nikko Investment or estimated market due to the reclassification of certain Income (rom equity Advisors were sold at year-end 1995, resulting in a 5.8V investments accounted types of products within the real estate 1-4 family first 5.75 · ~ . for by the: reduction of$.5 billion of the retail funds and the entire mortgage loan portfolio to mortgage loans held for sale. 5.5~ Cost method 137 58 31 136 87 $1.8 billion in institutional funds. This write-down was partially offset by gains on sales of 5.50 ! .. (38) 26 Equity method 24 39 31 Income from cost method equity investments in both two loans, resulting from the assumption of the borrowers' Check printing charges 61 39 40 56 (3) 5.25 . Gains (losses) on sales 1996 and 1995 reflected net gains on the sales of and loans by third parties. 1994 1995 1996 of loans 22 (40) 4 distribution from nonmarketable equity investments. Losses from dispositions :::::::::::::::::::: ::::::::::::::::::::.. ::: .. of operations (95) (89) (5) 7 Yield on rotal Losses on dispositions of earning assetS 8.00% 8.93% 8.81% premises and equipment (46) (31) (12) 48 158 All other 102 50 40 104 25 Rare on roral ---- funding sources 2.45 3.13 2.70 Total $2,200 $1,324 $1,200 66 % 10 % TABLE 5 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) (in millions) 1996 1995 1994 1993 1992 Average Yieldsf Interest Average Yieldsf Interesr Average Yieldsf Interest Average Yieldsf Interest Average Yieldsf Interest balance rates incomef balance rates incomel balance rates incomef balance rates incomel balance rates incomef expense expense expense expense expense EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 522 5.55% $ 29 $ 69 5.94% $ 4 $ 189 3.51% $ 7 $ 734 3.17% $ 23 $ 919 3.62% $ 33 Investment securitie': At fair value (3): U.S. Treasury securities 2,460 5.77 142 499 6.34 31 190 6.66 13 Securities of U.S. government agencies and corporations 6,980 6.20 435 1,426 5.55 81 1,547 5.82 93 Private collateralized mortgage obligations 2,691 6.39 174 1,095 6.24 71 1,240 6.L4 80 Other securities 455 6.84 28 81 L9.69 It 76 14.13 6 ~ Total investment securities at fair value 12,586 6.18 779 ----nm 6.17 3,053 6.L2 192 At cost: U.S. Treasury securities 1,246 4.88 61 2,376 4.77 113 2,283 5.03 115 L,562 5.80 91 Securities of U.S. government agencies and corporations 4,428 6.07 269 5,902 6.05 357 7,974 6.41 511 4,197 7.38 309 Private collateralized mortgage obligations 1,124 5.87 66 1,242 5.74 71 864 4.16 36 Other securities 145 6.90 10 133 5.75 8 L89 5.67 11 ltO 6.16 7 Total investment securiries at cost 6,943 5.84 406 9,653 5.69 549 11,310 5.95 673 5,869 6.93 407 A r lower of cost or market 108 8.73 9 Total investment securities 12,586 6.18 779 10,044 5.94 600 12,706 5.79 741 11,310 5.95 673 5,977 6.97 416 Mortgage loans held for sale (3) 1,002 7.48 76 Loans: Commercial 16,640 9.02 1,501 8,635 9.88 853 7,092 9.19 652 7,154 9.36 670 9,702 8.50 825 Real estate 1-4 family first mortgage 9,601 7.43 713 5,867 7.36 432 8,484 6.85 581 6,787 7.92 538 7,628 9.27 707 Other real esrate mortgage 11,470 9.31 1,068 8,046 9.50 765 8,071 8.68 700 9,467 8.20 776 10,634 8.21 873 Real estate construction 2,093 10.43 218 1,146 10.16 116 977 9.29 9L 1,303 8.50 111 1,837 8.47 156 Consumer: Real estate 1-4 family junior lien mortgage 5,801 9.09 528 3,349 8.61 288 3,387 7.75 262 3,916 6.97 273 4,585 8.14 373 Credit card 4,938 14.87 734 3,547 15.59 552 2,703 15.39 416 2,587 15.62 404 2,771 15.93 441 Other revolving credit and monthly payment 7,329 9.57 701 2,397 10.68 257 2,023 9.60 194 1,893 9.45 179 2,083 9.85 205 Total consumer 18,068 10.87 1,963 9,293 11.81 1,097 8,113 10.75 872 8,396 10.19 856 9,439 10.81 L,019 Lease financing 2,557 8.82 226 1,498 9.22 138 1,271 9.16 116 1,190 9.83 117 1,165 10.36 L2L Foreign 145 6.62 10 23 7.54 2 31 5.06 2 7 1 8.85 Toralloans (4)(5) 60,574 9.41 5,699 34,508 9.86 3,403 34,039 3,014 34,304 8.94 3,068 40,406 9.16 3,701 Other 432 6.29 27 62 5.47 3 54 5.89 3 1 Total earning assets $ 74,114 8.81 6,534 $45,685 8.93 4,086 $46,988 8.00 3,765 $46,348 8.12 3,764 $47,303 8.77 4,150 FUNDING SOURCES Deposits: Interest-bearing checking $ 4,236 1.26 53 $ 3,907 1.00 39 $ 4,622 .98 45 $ 4,626 1.18 55 $ 4,597 1.77 81 Market rate and other savings 29,482 2.64 777 15,552 2.61 405 18,92L 2.34 442 19,333 2.26 438 18,534 2.88 533 Savings certificates 14,433 4.93 712 8,080 5.25 424 7,030 4.28 301 7,948 4.37 347 10,763 4.94 532 Other time deposits 385 6.64 27 385 6.14 24 304 7.35 22 331 7.19 24 444 7.52 34 Deposits in foreign offices 336 5.19 17 L,77L 5.91 105 925 4.75 44 7 43 7.89 3 Toral interest-bearinF deposits 48,872 3.25 1,586 29,695 3.36 997 31,802 2.69 854 32,245 2.68 864 34,381 3.44 1,183 Federal funds purchased ant securities sold under repurchase agreements 1,769 5.22 92 3,401 5.84 199 2,223 4.45 99 1,051 2.79 29 1,299 3.16 4L Commercial paper and other short-term borrowings 369 4.13 16 544 5.82 32 224 4.25 10 207 2.90 6 252 3.54 9 Senior debt 2,213 6.13 136 1,6L8 6.67 107 1,930 5.29 102 2,174 4.75 L03 2,175 5.77 126 Subordinated debt 2,403 6.93 166 1,459 6.55 96 1,510 5.94 90 1,958 5.23 103 1,872 4.99 93 Guaranteed preferred beneficial interests in Company's subordinated debentures 82 7.82 6 Toral inrere t-bearing liabilities 55,708 3.59 2,002 36,7L7 3.90 L,431 37,689 3.06 L,155 37,635 2.93 L,105 39,979 3.63 1,452 Portion of noninrerest-bearing funding sources 18,406 8,968 9,299 8,713 7,324 Toral funding sources $ 74,114 2.70 2,002 $45,685 3.13 1,431 $46,988 2.45 ~5 $46,348 2.38 ~ $47,303 3.07' 1,452 Net interest margin and net interest income on a taxable-equivalent basis (6) 6.11% $4,532 5.80% $2,655 5.55% $2,610 5.74% $2,659 5.70% $2,698 NONINTEREST·EARN1NG ASSETS Cash and due from banks $ 7,977 $ 2,681 $ 2,618 $ 2,456 $ 2,536 Goodwill 5,614 399 458 501 541 Other 5,687 2,002 1,785 1,805 .--bl.!1 Toral noninterest-earning assets $ 19,278 $ 5,082 $ 4,861 $ 4,762 $ 5,194 NONINTEREST.BEARING FUNDING SOURCES $ 9,019 DeRoSitS $ 22,739 $ 9,085 $ 8,482 $ 7,885 Ot 1er liabilities 2,796 1,142 1,062 997 1,060 Preferred stockholders' equity 779 489 521 639 608 Common stockholders' equity 11,370 3,334 3,558 3,357 2,965 Noninterest-bearing funding sources used to fund earning assets (18,406) (8,968) (9,299) (8,713) (7,324) Net noninterest-bearing funding sources $ 19,278 $ 5,082 $ 4,861 $ 4,762 $ 5,194 TOTAL ASSETS $ 93,392 $50,767 $51,849 $51,110 $52,497

(1) The average prime rare of rhe Bank was 8.27%,8.83%,7.14%,6.00% and 6.25% for 1996, 1995, 1994, 1993 and 1992, respectively. The average three-month London (4) Interesr income includes loan fees, net of deferred costs, of approximately $104 million, $41 million, $40 million, $41 million and $57 million in 1996,1995,1994, Interbank Offered Rate (UBOR) was 5.51 %, 6.04%,4.75%,3.29% amI 3.83% for the same years, respecrively. 1993 and 1992, respectively. (2) Interest rates

Table 6 shows the major components of noninterest expense. equivalent (FTE) staff, including hourly employees, was Table 7 reconciles reported earnings to net income excluding ended December 31,1996. These calculations were specific­ 36,902 at December 31,1996, compared with 19,249 at goodwill and nonqualifying core deposit intangible ("cash" ally fonuulated by the Company and may not be comparable FTE December 31,1995. First Interstate had 27,200 average or "tangible") for the year ended December 31,1996. to similarly titled measures reported by other companies. TABLE 6 NONINTEREST EXPENSE in December 1995. The Company currently expects to have Also, "cash" or "tangible" earnings are not entirely available less than 35,000 active FTE by the third quarter of 1997. EARNINGS EXCLUDING GOODWILL for use by management. See the Consolidated Statement (in millions) Yenr ended December 31, % Chnnge Excluding the effects of the Merger, increases in equip­ TABLE 7 AND NONQUALIFYING CDI of Cash Flows and Note 3 to the Financial Statements for 1996 [995 1994 1996/ 1995{ ment expense in. 1996 compared with 1995 were primarily 1995 1994 other information regarding funds available for use by due to a higher level of spending on software and technol­ (in millions) Year ended December 31,1996 management. ogy for product development and increased depreciation Reported Amortization "Cnsh" Salaries $1,357 $ 713 $ 671 90 % 6% earnings Goodwill earnings Incentive compensation 227 126 155 80 (19) expense on equipment related to business initiatives and Nonqualifying core depOSit RATIOS EXCLUDING GOODWILL AND Employee benefits 373 187 201 99 (7) system upgrades. intangible TABLE ~ NONQUALIFYING CDI EqUipment 399 193 174 107 11 Goodwill and CDI amortization resulting from the Merger Net occupancy 366 211 215 73 (2) were $216 million and $206 million, respectively, for the Income before Contract services 295 149 101 98 48 (in millions) Year ended December 31, 1996 year ended December 31, 1996. The core deposit intangible income tax expense $1,979 $ 250 $ 206 $2,435 Goodwill 250 35 36 614 (3) Income tax expense 908 84 992 Core deposir intangible: is amortized on an accelerated basis based on an estimated ROA: Af( -E) 1.66% Net income 1,071 250 122 1,443 Nonqualifying (J) 206 useful life of 15 years. The impact on noninterest expense ROE: B/(D-E) 28.46% Qualifying 37 42 49 (12) (14) Preferred stock from the amortization of the nonqualifying core deposit dividends 67 67 Efficiency: (F-G)/l-I 62.2% (27) Operating losses 145 45 62 222 intangible in 1997, 1998 and 1999 is expected to be $241 mil­ Telecommunications 140 58 49 141 18 Net income applicable lion, $211 million and $186 million, respectively. The to common stock $1,004 $ 122 $1,376 Advertising and promotion 116 73 65 59 12 Net income $ 1,443 (A) Outside professional services 112 45 33 149 36 related impact on income tax expense is expected to be Per common share $12.21 $1.48 $16.74 Net income applicable to common stock 1,376 (B) Postage 96 52 44 85 18 a benefit of$99 million, $87 million and $76 million Average total assets 93,392 (C) Tt'ave! and entertainment 78 36 30 117 20 in 1997, 1998 and 1999, respectively. Average common stockholders' equity 11,370 (0) 105 23 Stationery and sllpplies 76 37 30 The decrease in federal deposit insurance expense in Average goodwill ($5,614) and afrer-tax nonqualifying Security 56 21 20 167 5 core deposit intangible ($922) 6,536 (E) 1996, compared with 1995, was substantially due to the Olilside dma processing 55 11 10 400 10 Table 8 presents the calculation of the ROA, ROE and Noninterest expense 4,637 (F) Check printing 43 25 29 72 (14) revised rate structure effective June 1, 1995, partially offset Amortization expense for goodwill and nonqualifying efficiency ratios excluding goodwill and nonqualifying core core deposit intangible 456 (G) Escrow and collection by the passage of the Deposit Insurance Funds Act of 1996 120 (21) deposit intangible amortization and balances for the year Net interest income plus noninrerest income 6,721 (J-l) agency fees 33 15 19 (DIFA). DIFA was ena ted, in part, to increase the Federal Federal deposit insurance 28 52 101 (46) (49) Deposit Insurance Corporation Savings Association Insur­ Forec losed assets 7 I 600 All other 142 74 62 92 19 ance Fund reserve ratio to 1.25% and levied a 65.7 cent -- -- Total $4,637 $2,20 I $2,156 111% 2 0/0 fee on every $100 of thrift deposits held on March 31, 1995. --- The Company acquired thrift deposits tbough the Merger. Accordingly, $22 million was paid in 1996 based on the BALANCE SHEET ANALYSIS (I) Amortization of core depOSit intangibles acquired after February 1992 that are subtracted from stockholders' equiry in computing regulatory capital for thrift deposits ofFirst Interstate. bank holding companies. The Company expects noninterest expense, excluding goodwill and nonqualifying CDl amortization, to decrease in 1997 compared with 1996. By the fourth quarter of Acomparison between the year-end 1996 and 1995 Table 9 provides expected remaining maturities and balance sheets is discussed below. The Bank's assets of yields (taxable-equivalent basis) of debt securities within In addition to the effect of combining operations of 1997, noninterest expense is expected to reflect the full $98.7 billion and $48.6 billion at December 31,1996 and First Interstate with the Company, the overall increase in impact of integrating the two separate companies, by the investment portfolio. The weighted average expected 1995, respectively, represented more than 90% of the noninterest expense primarily reflected intangible amorti­ reducing non interest expense by $200 million per quarter remaining maturity of the debt securities portfolio was Company's consolidated assets at those dates. zation and other integration expenses, including severance, from the pre-merger combined amounts. 2 years and 2 months at December 31,1996, compared advertising and higher expenses for contract and outside with 2 years and 1 month at December 31, 1995. In replacing INVESTMENT SECURITIES the maturing securities with new securities, it has been the professional services. INCOME TAXES Salaries, incentive compensation and employee benefits intention of the Company to maintain a short-term expected maturity position in order to provide additional liquidity expense increased $931 million in 1996 compared with Primarily as a result of the Merger, total investment securities The Company's effective tax rate was 46% for 1996 and and to fund future loan growth. Expected remaining maturities 1995. This was substantially due to higher staff levels after averaged $12.6 billion in 1996, a 26% increase from 42% for 1995. The increase in the effective tax rate for 1996 will differ from remaining contractual maturities because the consummation of the Merger. Salaries and employee $10.0 billion in 1995. Total investment securities were was due to increased goodwill amortization related to the borrowers may have the right to prepay certain obligations benefits expense during 1996 included integration-related $13.5 billion at December 31,1996, a 52% increase from Merger, which is not tax deductible. with or without penalties. It is more appropriate to monitor severance expense of $78 million. Additional severance $8.9 billion at December 31,1995. Investment securities investment security maturities and yields llsing prepayment expense may be in.cLJrred in 1997 as the Company continues are expected to decrease in the future as the cash received the integration proces . The Company's active full-time from their maturities is used to fund loan growth.

! INVESTMENT SECURITIES TABLE 9 EXPECTED REMAINING MATURITIES AND YIELDS LOAN PORTFOLIO LOAN MIX AT YEAR END (%) (in millions) December 31, 1996 • A comparative schedule of average loan balances is presented Commercial Weighted Afrcr one yc~l' Afrer five yems After ten years 22 Total Weighted Within one year 29 amount average aVCr::lge through fi ve ~Iears through ten yems in Table 5; year-end balances are presented in Note 5 to n. yield expected • Amount Yield Amount YielJ Amount Yield ArnolllH Yield the Financial Statements. Real estate remaining 1-4 family maturity (in Loans averaged $60.6 billion in 1996, compared with 25 13 first mong

ESTIMATED FAIR VALUE $13,460 $4,490 $8,313 $554 $103 increase of $9.7 billion was due to the Merger. Total unfunded commercial loan commitments grew from $8.4 billion at December 31,1995 to $28.1 billion at (I) The weighted average yidd is compllred using the alllonizcd cost of

$26 million at December 31,1995. interest rates on the value of the mortgage-backed securities (I) Included in cnIllIllCrci

Not all impaired loans are necessarily placed on nonaccrual ance for loan losses. FAS 114 does not change the timing (l) Consists of lifteen stares; 110 Sfare haJ foreclused assets in excess of $4 milliun al December 31, 1996. status. That is. restructured loans perfonning under restruc­ of charge-offs of loans to reflect the amount ultimately tured terms beyond a specified performance period are expected to be collected. -- .,

TABLE 1~ NET CHARGE-OFFS BY LOAN CATEGORY LOANS 90 DAYS OR MORE PAST DUE During 1991 and 1992, the Company had a significantly AND STILL ACCRUING higher provision for loan losses than in the years prior (in millions) Year ended December 31, Table 17 shows loans contractuaLLy past due 90 days or resulting from a nationwide (particularly California) 1996 1995 . 1994 more as to interest or principal, but not included in the recession as well as the Company's examination process Amount %of Amount 0/0 of Amoull[ %of average average average nonaccrual or restructured categories. ALL loans in this and that of its regulators. As both the economic environ­ loans loans loans category are both well-secured and in the process of col­ ment and the credit quality of the Company's loan port­ lection or are real estate 1-4 family first mortgage loans folio improved, the Company began reducing its provision Commercial $ 86 .50 % $ 17 .19 % $ 17 .23 % or consumer loans that are exempt under regulatory rules in 1993 and 1994. In 1995, as California continued to make Real esrate 1-4 family first mortgage 10 .11 10 .17 12 .14 .55 from being classified as nonaccrual because they are auto­ progress in its economic recovery and as the Company con­ Other real estate mortgage (7) (.06) (I) (.02) 44 Real estate construction 2 .09 9 .80 4 .34 matically charged off after being past due for a prescribed sidered the allowance for loan losses adequate in relation Consumer: period (generally, 180 days). Notwithstanding, real estate to its existing loan portfolio, no provision was made. The Real estate 1-4 family junior lien mortgage 19 .33 13 .40 20 .59 1-4 family loans (first liens and junior liens) are placed on Company made a $35 million and $70 million provision Credit card 368 7.44 195 5.46 120 4.45 nonaccrual within 150 days of becoming past due and such Other tevolving credit and monthly payment 139 1.91 41 1.73 25 1.26 in the third and fourth quarters of 1996, respectively, which -- -~ nonaccrual loans are excluded from Table 17. were the first provisions since the fourth quarter of 1994. Toral consumer 526 2.91 249 2.67 165 2.04 Lease financing 23 .89 4 .31 (2) (.15) The Company anticipates that it will continue making -- LOANS 90 DAYS OR MORE PAST DUE incremental increases to the provision of approximately Toral net loan charge-offs $640 LOS % $288 .83 % $240 .70 % TABLE 17 AND STILL ACCRUING $35 million through the fourth quarter of 1997, when it is expected that the provision will approximate net charge­ (in millions) December 31, offs. In addition, the Company absorbed the $770 million 1996 1995 1994 1993 1992 in aLLowance for loan losses of First Interstate as a result of Any loan that is past due as to principal or interest and relationship of the unallocated component to the total the Merger. Net charge-offs in 1996 were $640 million, or allowance for loan losses may fluctuate from period to period. Commercial $ 65 $ 12 $ 6 $ 4 $ 4 that is not both weLL-secured and in the process of coLLec­ Real estate 1.05% of average total loans, compared with $288 million, tion is generally charged off (to the extent that it exceeds Although management has allocated a portion of the 1-4 family or .83%, in 1995. Loan loss recoveries were $220 miLLion the fair value of any related collateral) after a predetermined allowance to specific loan categories, the adequacy of fi rst mortgage 42 8 18 19 29 in 1996, compared with $134 million in 1995. Table 18 Other real estate period of time that is based on loan category. For example, the allowance must be considered in its entirety. mortgage 59 24 47 14 22 summarizes net charge-offs by loan category. credit card loans generally are charged off within 180 days The Company's determination of the level of the allow­ Real esrate The largest category of net charge-offs in 1996 was credit of becoming past due. Additionally, loans are charged off ance and, correspondingly, the provision for loan losses construction 4 8 11 card loans, comprising more than 50% of the total net Consumer: when classified as a loss by either intemalloan examiners rests upon various judgments and assumptions, including Real esrate charge-offs. During 1996, credit card gross charge-offs due or regulatory examiners. general (particularly California's) economic conditions, 1-4 family junior to bankruptcies were $171 million, or 42%, of total credit The Company has an established process to determine loan portfoliO composition, prior loan loss experience and lien mortgage 23 4 4 6 9 card charge-offs, compared with $82 million, or 39%, and Credit card 120 95 42 43 55 the adequacy of the allowance for loan losses which assesses the Company's ongoing examination process and that of Other revolving $54 million, or 39%, in 1995 and 1994, respectively. In the risk and losses inherent in its portfolio. This process its regulators. The Company has an internal risk analysis credit ,md addition, credit card loans 30 to 89 days past due and still provides an aLLowance consisting of two components, and review staff that reports to the Board of Directors and Inonthly payment 20 1 1 1 2 accruing totaled $199 million at December 31,1996, com­ allocated and unallocated. To arrive at the allocated com­ continuously reviews loan quality. Such reviews also assist ------pared with $127 million and $73 million at December 31, Total consumer 163 100 47 50 66 ponent of the allowance, the Company combines estimates management in establishing the level of the allowance. Lease financing 1 1995 and 1994, respectively. of the allowances needed for loans analyzed individually Similar to a number ofother large national banks, the Bank -- Toral $333 $144 $118 $95 $133 During 1994 and the first half of 1995, the Company grew (including impaired loans subject to FAS 114) and loans has been for several years and continues to be examined its credit card loan portfolio through nationwide direct analyzed on a pool basis. While coverage ofone year's losses by its primary regulator, the Office of the Comptroller of mail campaigns as weLL as through retail outlets. The is often adequate (particularly for homogeneous pools of the Currency (OCC), and has OCC examiners in residence. objective of the direct mail campaigns was higher-yielding loans), the time period covered by the allowance may vary These examinations occur throughout the year and target loans to higher-risk cardholders. As these loans continue by portfolio, based on the Company's best estimate of the various activities of the Bank, including specific segments ALLOWANCE FOR LOAN LOSSES to mature, the total amount of credit card charge-offs inherent losses in the entire portfolio as of the evaluation of the loan portfolio (for example, commercial real estate and the percentage of net charge-offs to average credit date. The Company has deemed it prudent, when reviewing and shared national credits). In addition to the Bank being An analysis of the changes in the allowance for loan losses, card loans are expected to continue at levels higher the overall allowance, to maintain a total allowance in examined by the OCC, the Parent and its nonbank sub­ including charge-offs and recoveries by loan category, is than experienced prior to the campaigns. The Company excess of projected losses. To mitigate the imprecision sidiaries are examined by the Federal Reserve. presented in Note 5 to the Financial Statements. At continuously evaluates and monitors its selection criteria inherent in most estimates of expected credit losses, the The Company considers the allowance for loan losses of December 31,1996, the allowance for loan losses was for direct mail campaigns and other account acquisition allocated component of the allowance is supplemented by $2,018 million adequate to cover losses inherent in loans, $2,018 million, or 3.00% of total loans, compared with methods to accomplish the desired risk/customer mix an unallocated component. The unallocated component commitments to extend credit and standby letters of credit $1,794 million, or 5.04%, at December 31,1995. The pro­ within the credit card portfolio. includes management's judgmental determination of the at December 31,1996. vision for loan losses was $105 million in 1996, compared amounts necessary for concentrations, economic uncer­ with none and $200 million in 1995 and 1994, respectively. tainties and other subjective factors; correspondingly, the CORE DEPOSITS AT YEAR END ($ BILLIONS)

$90·······················.. ················.. ········· 81.6 • RISK-BASED CAPITAL AND Noninrcrcs[# TABU 20 LEVERAGE RATIOS bearing of the Company's financial instruments, management has leverage ratios were 6.65% and 7.46% at December 31,1996 provided its best estimate of the calculation of the fair values (in billions) December 3 I, and 1995, respectively. The decrease in the leverage ratio 60··.. ···.... ·· .... ·.. ·....·.. ······.. ······...... ·· .. ··· .. · • using discounted cash flows. Fair value amounts differ from 1996 1995 at December 31,1996 compared with December 31,1995 lntcrcstpbearing: Tier 1: book balances because fair values attempt to capture the resulted primarily from an overall increase in quarterly checking Common stockholders' equity 13.5 3.6 effect of current market conditions (for example, interest $ $ Preferred srock (I) .4 .5 average total assets due to the Merger. 38.5 37.9 rates) on the Company's financial instruments, Guaranteed preferred beneficial interests in • Company's subordinated debentllres Marker rare & There was a decrease in the excess (premium) of the fair 1.2 FEDERAL DEPOSIT INSURANCE CORPORATION 30 Goodwill and other deductions (2) (8.5) _(_,5) other savings value over the carrying value of the Company's financial IMPROVEMENT ACT OF 1991 (FDICIA) instruments at December 31,1996 compared with Decem­ Total Tier 1 capital 6.6 3.6 [n addition to adopting a risk-based assessment system, ber 31,1995. The Company's FAS 107 disclosures are Tier 2: • FDICIA required that the federal regulatory agencies adopt Savings presented in Note 19 to the Financial Statements, Mandatory convertible debt .2 0·.. ····· cerrificares Subordinated debt and unsecured senior debt 2.1 \.0 regulations defining five capital tiers: well capitalized, 1994 1995 1996 Allowance for loan losses allowable in Tier 2 1.1 .5 --- -- adequately capitalized, undercapitalized, significantly under­ CAPITAL ADEQUACy/RATIOS Toral Tier 2 capital 3.4 \.5 capitalized and critically undercapitalized. Under the --- -- Total risk-based capital $ 10.0 $ 5.1 regulations, a "well capitalized" institution must have The Company uses a variety of III asures to evaluate capital Risk-weighted balance sheet assets $ 82.2 $ 39.2 a Tier 1 RBC ratio of at least 6%, a total capital ratio of adequacy. Management reviews the various capital measures Risk-weighted off-balance sheet items: at least 10% and a leverage ratio of at least 5% and not monthly and takes appropriate action to ensure that they Commitments to make or purchase loans 10.1 2.7 be subject to a capital directive order. The Bank had a are within established internal and external guidelines. Standby letters of credit 2.1 .7 Tier 1 RBC ratio of 8.53%, a total capital ratio of 11.00% Other .5 .4 DEPOSITS The Company's current capital position exceeds current --- and a leverage ratio of 6.81 % at December 31, 1996, com­ Total risk-weighted off-balance sheet items 12.7 3,8 guidelines established by industry regulators. -- pared with 10.12%, 13.23% and 7.89% at December 31, Goodwill and other deductions (2) (8.5) (.5) Comparative detail of average deposit balances is presented 1995, respectively. Allowance for loan losses not included in Tier 2 (.9) (1.3) in Table 5. Average core deposits increased 94% in 1996 RISK-BASED CAPITAL RATIOS Total risk-weighted assets $ 85.5 $41.2 compared with 1995 primarily due to the Merger. Average The Federal Reserve Board (FRB) and the OCC issue risk­ ASSET/LIABILITY MANAGEMENT core deposits funded 76% and 72% of the Company's aver­ based capital (RBC) guidelines for bank holding companies Risk-based capital ratios: age total assets in 1996 and 1995, respectively. Tier 1 capital (4% minimum requirement) 7.68% 8.8l 'Yo and national banks, respectively. The FRB is the primary The principal objectives ofasset/liability management are to Year-end deposit balance are presented in Table 19. Total capital (8% minimum requirement) 11.70 12.46 regulator for the Parent and the OCC is the primary regula­ manage the sensitivity of net interest spreads to potential Leverage ratio (3% minimum requirement) (3) 6.65% tor for the Bank. RBC guidelines establish a risk-adjusted 7.46% changes in interest rates and to enhance profitability in ratio relating capital to different categories of assets and ways that promise sufficient reward for understood and TABLE 19 DEPOSITS off-balance sheet exposures. (See Note 17 to the Financial (1) Excludes $175 million of Series D preferred stock due to the Company's controlled risk, Funding positions are kept within pre­ December 1996 announcemenr to redeem rhis series in March 1997. Statements for additional information.) (in millions) December 31, % (2) Other deducrions include COl acquireJ afrer february 1992 (nonqualifying determined limits designed to ensure that risk-taking is Change The Company's total RBC ratio at December 31,1996 CDI) and the unrealized net gain (loss) on availablc~(or-salcinvestment 1996 1995 not excessive and that liquidity is properly managed, was 11. 70% and its Tier 1 RBC ratio was 7.68%, exceed­ securities carried at fair value. Interest rate risk occurs when assets and liabilities ing the minimum guidelines of 8% and 4%, respectively. (3) Tier I capital divided by quarterly average roral assers (excluding goudwill, Noninterest-bearing $29,073 $10,391 180 % nonqualifying COl <:1nd other items which were deducteu tu arrive at reprice at different times as interest rates change. For Interesr-bearing checking 2,792 887 215 The ratios at December 31, 1995 were 12.46% and 8.81%, Tier I capiral), example, if fixed-rate assets are funded with floating-rate Market rate and respectively. The decrease in the Company's total and debt, the spread between asset and liability rates will other savings 33,947 17,944 89 Tier 1 RBC ratios at December 31,1996 compared with Savings certificates 15,769 8,636 83 decline or turn negative if rates increase. The Company 1995 resulted primarily from an overall increase in risk­ refers to this type of risk as "term structure risk:' There is, Core deposits 81,581 37.858 115 weighted assets due to the Merger. LEVERAGE RATIO Other time deposits 186 248 (25) however, another source of interest rate risk, which results Deposits in foreign offices 54 876 (94) The Company's risk-weighted assets are calculated as To supplement the RBC guidelines, the FRB established from changing spreads between loan and deposit rates. These ------Total deposits $81,821 $38,982 110 % shown in Table 20. Risk-weighted balance sheet assets a leverage ratio guideline. The leverage ratio consists of changing spreads are not highly correlated to changes in the were $26.7 billion and $11.1 billion less than total assets Tier 1 capital divided by quarterly average total assets, exclud­ level of interest rates and are driven by other market condi­ on the consolidated balance sheet of $108.9 billion and ing goodwill and certain other item . The minimum leverage tions. The Company calls this type of risk "basis risk"; it $50.3 billion at December 31,1996 and 1995, respectively, ratio guideline is 3% for banking organizations that do not is the Company's main source of interest rate risk and is as a i:esult of weighting certain types of assets at less than anticipate significant growth and that have well-diversified significantly more difficult to quantify and manage than· CERTAIN FAIR VALUE INFORMATION 100%; such assets, for both December 31,1996 and 1995, risk, excellent asset quality, high liquidity, good earnings term structure risk. substantially consisted of claims on or guarantees by the U.S. and, in general, are considered top-rated, strong banklng One way to measure the impact that future changes in FAS 107 requires that the Company disclose estimated fair government or its agencies (risk-weighted at 0% to 20%), organizations. Other banking organizations are expected interest rates will have on n t interest income is through a values for certain financial instruments, Quoted market cash and due from banks (0% to 20%),1-4 family first to have ratios of at least 4% to 5%, depending upon their cumulative gap measure, The gap represents the net position prices, when available, are used to reflect fair values. If mortgage loans (50%) and private collateralized mortgage particular condition and growth plans. Higher leverage ratios of assets and liabilities subject to repricing in speCified time market quotes are not available, which is the case for most obligations backed by 1-4 family first mortgage loans (50%), could be required by the particular circumstances or risk periods. Table 21 shows in summary form the Company's profile of a given banking organization. The Company's interest rate sensitivity based on expected interest rate · '\ ..

repricing intervals in specific time frames for the balance Some asset/liability managers allocate these nonmarket The under-one-year net liability position at Decem- ings at risk analysis. Subject to these limits, the Company sheet and swaps as of December 31,1996. A more detailed assets and liabilities to the various maturity categories. The ber 31, 1996 was $1,402 million 0.3% of total assets), may maintain a particular gap position to achieve a more report of the Company's interest rate sen itivity by major Company believes that these allocations are mostly arbitrary compared with the under-one-year net liability position of desirable ris.k/return tradeoff. Earnings at risk analy is and asset and liability categories, together with an adjusted and tend to provide a false sense that the gap structure is $394 million at December 31, 1995 (.8% of total assets). net interest income simulations allow the Company to fully cumulative gap measure is presented in Table 22. In addi­ accurately defined. For this reason, they remain in the This measure of term structure risk would indicate a nearly explore the complex relationships within the gap over time tion, a detailed swap maturity schedule is included in nonmarket category, in order to maintain the Company's balanced interest rate risk position. A significant under-one­ and for various rate environmentS. The results during the Table 24. focu on their unusual rate maturity characteristics. year net liability position (greater than 4% of total assets) year showed that the Company's interest rate sensitivity In categorizing assets and liabilities according to expected Mortgage-backed investment securities and fixed-rate would indicate that the Company's net interest income is was well within the policy limit. The net interest income repricing time frames, management makes certain judgments loans in the real estate 1-4 family first mortgage, other real exposed to rising short-term interest rates, while a similar simulation at December 31, 1996 showed a sensitivity of and approximations. For example, a new d1ree-year loan with estate mortgage and consumer loan categories are based on size net asset position would mean an exposure to declining 3 basis points between the net interest margins for the a rate that is adjusted every 30 days would be included in expected maturities rather than on contractual maturities. short-term interest rates. The average under-one-year net high and the expected rate scenarios over the next year. the "0-3 months" category rather than the "over 1-5 years" Expected maturities are estimated based on dealer prepay­ liability positions during 1996 and 1995 were $761 million To get a complete picture of its current interest rate risk category. There are also balance sheet categories that have ment projections to the extent that such projections are and $555 million, respectively. position, the Company must look at both term structure a fixed rate and an unspecified maturity, or a rate that is available. For certain types of adjustable-rate mortgages and The twO adjustments to the cumulative gap amount risk and basis ri k. The two most significant components administered but changes slowly or not at all as market consumer loans where dealer prepayment projections are shown on Table 22 provide comparability with those bank of basis risk are the Prime/MRA spread and the rate paid rates change. An example of this type of account is inter­ not available, the Company uses its historical experience. I. holding companies that present interest rate sensitivity on savings and interest-bearing checking accounts. At the est-bearing checking, which has balances available on The gap structure also does not allocate Prime-based loans information in an alternative manner. However, manage­ peak of the rate cycle in 1989 and during the first quarter demand and pays a rate that changes infrequently. The and market rate account (MRA) savings deposits, included ment does not believe that these adjustments depict its of 1991, the Prime/MRA spreads as well as lagged move­ balances are relatively stable from quarter to quarter, in market rate and other savings, to specific maturity cat­ interest rate risk. The first adjustment line excludes non­ ments in other deposit rates caused spreads to increase to but could decline because of disintermediation if rates egories. Statistical evidence indicates that both Prime-based interest-earning assets, noninterest-bearing liabilities and historic level. During this time, interest rate contracts increased substantially. Another example is the revolving loans and MRA savings deposits have relatively short stockholders' equity from the cumulative gap calculation were purchased by the Company to hedge against margin credit feature of fixed-rate credit card loans, which differ­ maturities, with that of MRA savings deposits being some­ so that only earning assets, interest-bearing liabilities and compression due to declining interest rates. As interest entiates these loans from loans with specified contractual what longer. Keeping them in distinct categories (as with all interest rate swap contracts used to hedge such assets rates once again began to rise in early 1994 and continued maturities. Given the unusual rate maturity characteristics nonmarket) helps maintain focus on these rates, since and liabilities are reported. The second adjustment line through mid-199S, the spread between loans and deposits of these balance sheet items, they are placed in a "nonmarket most of the Company's short-term net interest income moves interest-bearing checking and market rate and other began to rise again as the Prime rate increased rapidly and category." This category is generally viewed as being rela­ variability depends on their relative movements. savings deposits in the nonmarket liability category to the deposit rates were slow to react. As a re ult of this move­ tively stable in terms of interest rate variability and the The Company uses interest rate derivative financial shortest rate maturity category. This second adjustment ment, the decline in hedging income was roughly offset net nonmarket liabilities are viewed as funding fixed-rate instruments as an asset/liability management tool to hedge reflects the availability of these deposits for immediate by the increasing loan/deposit spread. During 1996, the assets with maturities greater than one year. Nonmarket mismatches in interest rate maturities. They are used to withdrawal. The resulting adjusted under-one-year cumu­ Company incorporated First Interstate's interest rate risk assets include noninterest-earning assets, fixed-rate reduce the Company's exposure to interest rate fluctuations lative gap (net liability position) was $12.5 billion and position into its own balance sheet and assessed the newly credit card loans, nonaccrualloans and equity securities. and provide more stable spreads between loan yields and $8.7 billion at December 31,1996 and 1995, respectively. combined term structure risk and basis risk positions. Nonmarket liabilities and stockholders' equity include the rates on their funding sources. For example, the Com­ In addition, the Company performs earnings at risk Looking toward managing interest rate risk in 1997, the savings deposits, interest-bearing checking, noninterest­ pany uses interest rate futures to shorten the rate maturity analysis and net interest income simulations based on Company is confronted with several risk scenarios. If inter­ bearing deposits, other noninterest-bearing liabilities, of MRA savings deposits to better match the maturity of multiple interest rate scenarios and projected on- and off­ est rates rise, net interest income may actually increase if common stockholders' equity and fixed-rate perpetual Prime-based loans. balance sheet .changes to estimate the potential effects of deposit rates lag increases in market rates. The Company preferred stock. changing interest rates. The Company uses four standard could, however, experience significant pressure on net cenario - rates unchanged, expected rates, high rates and interest income if there is a substantial movement in low rates in analyzing interest rate sensitivity for policy deposit rates relative to market rates. This basis risk TABLE 21 SUMMARY OF INTEREST RATE SENSITIVITY measurement. The expected rate scenario is based on the potentially could be hedged with interest rate caps, but Company's projected future interest rates, while the high the Company believes they are not cost-effective in rela­ December 31, 1996 (in millions) ------~- rates and low rates scenarios cover 90% probable upward tion to the risk they would mitigate. Non­ Total Prill1e~ MRA 0-3 >3-6 >6-12 >1-5 >5 and downward rate movements based on the Company's A declining interest rate environment might result in a based savings months months months years years marker loans , own interest rate models. Earnings at risk may be estimated decrease in loan rates, while deposit rates remain relatively by multiplying the short-term gap positions by possible stable, since they did not significantly increase between $ 5,061 $ 6,305 $22,831 $13,121 $ 21,134 $108,888 Assets $20,477 $ $ 19,959 ,I changes in interest rates. The potential adverse impact on 1994 and 1996. This rate scenario could also create sig­ 108,888 Liabilities and stockholders' equity 18,344 11,268 3,901 3,902 4,003 3,817 63,653 earnings over the next 12 months is compared to an inter­ nificant risk to net interest income. The Company has Gap before interest rate swaps $20,477 $(18,344 ) $ 8,691 $ 1,160 $ 2,403 $18,828 $ 9,304 $(42,519) $ est rate risk limit with a sublimit for the term structure risk. partially hedged against this risk with interest rate floor (3,268) 3,253 14,591 1,198 Interest tate swaps (15.774) --- The current interest rate risk limit allow up to 30 basis contracts purchased in 1996 and those remaining from $(18,344) $ (7,083) $(2,108) $ 5,656 $33,419 $10,502 $(42,519) $ I Gap adjusted for interest rate swaps $20,477 --- points ofsensitivity in the average net interest margin over previ us years. Based on its current and projected balance Cumulative gap $ $ 2,133 $ (4,950) $(7,058) $( 1,402) $32,017 $42,519 $ - the next year. The term structure risk sublimit is currently sheet, the Company does not expect that a change in 2 percent of annual net interest income based on the earn- interest rates would affect its liquidity position.

I

1- DERIVATIVE FINANCIAL INSTRUMENTS TABLE 22 INTEREST RATE SENSITIVITY I, December 31,1996 (in millions) The Company uses interest rate derivative financial for 1996 and shows the expected remaining maturity at >5 Non- Total Prime· MRA 0-1 >3-6 >6-12 >1-5 instruments as an asset/liability management tool to hedge year-end 1996. Table 24 ummarizes the notional amount, hased savings monrhs months months years years market loans the Company's exposure to interest rate fluctuations. The expected maturities and weighted average interest rates Company also offers contracts to its customers, but hedges associated with amounts to be received or paid on ASSETS such contracts by purchasing other financial contracts or interest rate swap agreements, together with an indica­ Federal funds sold and securities $ $ 187 purchased under resale agreemems $ $ 187 $ $ $ $ uses the contracts for asset/liability management. tion of the asset/liability hedged. For a further discussion 1,257 1,798 8,313 657 45 L3,505 Invesnl1ent securities (I) 1,435 Table 23 reconciles the beginning and ending notional or of derivative financial instruments, refer to Note 18 to Loans: 1,021 416 1,166 19,515 contractual amounts for derivative financial instruments the Financial Statements. Commercial 8,673 7,320 631 288 1,686 99 10,425 Real estate 1-4 family first murtgage 85 2,120 1,070 1,483 3,882 1,889 1,4 8 348 11,860 Other real estate mortgage 2,885 3,754 804 722 119 64 25 2,303 ReaI estate construction 1,2 L3 799 62 21 3,510 762 2,890 20,114 TABlE 23 DERIVATIVE ACTIVITIES Consumer 7,599 3,355 787 1,21 I 1,884 82 2 3,003 Lease financing 298 269 468 II 9 169 (norional or conrracllIal amountS in millions) Year ended December 31, 1996 Foreign 100 25 2 Beginning Firsr AJdirions Expirations Terminations (3) Ending Weigh red 17,746 3,648 4.195 12,316 4,468 4,539 67,389 Total loans (I) balance Intcrsmrc balance average 397 468 Additions (I) expected Other earning assets (J) 71 5,993 20.629 5,125 4,981 81,549 remaining Toral earning assets 20,477 19,439 4,90" maturity (in 7,996 16,153 27,339 Noninterest-earning assets 520 156 312 2,202 yrs.-mos.) $22,831 $13,121 $ 21,L34 $108,888 ToraI assets $ $ 19,959 $ 5,061 $ 6,305 Interest rate contracts: LlABIUTlES AND Futures contracts $ 5,395 $ $21,908 $21,373 (I) $732 $ 5,198 0-3 STOCKHOLDERS' EQUITY Floors written 105 15 285 405 3-6 Deposits: Caps written 1,170 982 813 675 116 2,174 1-9 $ $ $ 2,792 $ 2,792 Interest-bearing checking $ $ $ $ $ Floors purchased 15,627 3,935 2,284 790 12 21,044 (4) 2-8 959 14,644 33,947 Market rate and orher savings 18,344 Caps purchased 1,530 1,001 832 731 109 2,523 1-10 5,377 3,756 3,648 2,748 157 83 15,769 Savings cerrificmes 186 Futures uptions purchased 12 12 Other time depusits 93 52 38 3 20 54 Swap contracts 7,832 4,758 19,329 12,778 155 18,986 (5) 3-7 Deposits in foreign offices 34 157 17,519 52,748 Foreign exchange contracts: Tc)tal interest-bearing deposits 18,344 6,463 3,808 3,686 2,771 2,430 Forwards and spot contracts 934 35,994 35,551 1,377 0-2 Short-term borrowings 2,426 4 482 88 2,120 Option contracts purchased 29 91 55 65 0-3 Senior debt 1,512 4 34 325 1,941 2,940 Option cuntracts written 23 88 52 59 0-6 Subordinated debt 602 70 2 Guaranteeu preferred beneficial intere ts in Company's subordinated debentures ~ ~ (I) Derivatives acquired from First Inrerstate on April I, 1996 (Ihe Merger date). 3,336 17,519 61,388 1:0 Total interest-bearing liabilities 18,344 ] ],003 3,886 3,722 3,578 (2) To facilirare the settlement ptocess, the Company emers into offsetting contracrs 21045 days prior their maturity date. Concurrent with rhe closing of these posi­ 481 32,622 33,388 lions, the Company generally enters into new interest rare futures and forwan.l contracts with ~\ hacr expiration dare since the Company's use of these contraC[s Nuninterest-bearing liabilities 15 15 30 225 14,112 predominantly rclares to ongoing hedging programs. Sruckholders' equity 250 150 200 ~ ( ) Terminmions occur if a customer that purchased ~l connact decides to cancel it before the maturity date. If the customer conrracr was heugcd the Company rcrminares Total liabilities and l $ 3,817 $ 63,653 the interest rate derivative instrument used fa hedge the customer's connan upon cancellation. The impacl of tcnllinarions on income before income Laxes (or 1996 was stockholders' equity $ $ 18,344 $ 11,268 $ 3,901 $ 3,902 $ 4,003 " loss of less than $.5 million. $( 18,344) $ 8,691 $ 1,160 $ 2,403 $18,828 $ 9,304 $(42,519) I, Gap before interest rate swaps $20,477 (4) Includes forward Ooors, which will hedge loans, of$155 million Slarring in January 1997, $300 million sm!'ling in March 1997. $225 million starring in April 1997. $475 Intere't rare swaps: million smrting in May 1997 ,mel $2,000 million starting October 1998. (15,774) (3,268) 1,198 Receive fixed (5) See Table 24 for further Jetails of maturities and average rates received or paid. $10,502 $(42,519) Gap adjusted for interest rate swaps $(] 8,344) $ (7,083) $ (2,108) $42,519 $ - I Cumulative gap $ 2,133 $ (4,950) $ (7,058) Adjustmems: Exclude nnninterest-earning assets, noninterest-bearing liabilities and (1,777) (7,515) 29,981 stockholders' equity (255) (141 ) (132) Move interest-bearing checking and market rate savings from nonmarket 10,577 to shonest maturity (10,577) $ 20,161 Adju"ted cumulative gap $20,477 $ 2,133 $( 15,782) $(18,031 ) $( 12,507) $19,135 1

(I) The nonm~rker column consisrs uf markcmblc equity ~ccurities. . I (2) The nonmarket column consisrs of nonaccrualloans of $714 million, fixed-rare credit card Imll)s of $ 3,025 million (including $1 H million in commercIal redit c(lrd loans) and overdrafts of$800 million. (3) The nonmarket column consists of Federal Reserve Bank stock.

I Ilif·--- .... ~, m W '- TABLE 24 INTEREST RATE SWAP MATURITIES AND AVERAGE RATES (I) approximately $2.2 billion represcnts fixed initial-rate trust preferred securities in private placements (see Note 10 (norional amOunts in millions) 1997 1998 1999 2000 Thereafrer Toral mortgage (FIRM) loans. FIRM loans carry fixed rates for to the Financial Statements). The proceeds from these Receive-fixed rate (hedges loans) a minimum of 3 years to a maximum of 10 years of the loan issuances were invested in junior subordinated deferrable Notional amount $ 436 $1,883 $2,570 $3,649 $2,672 $11,210 term and carry adjustable rates thereafter. (Refer to the interest debentures of the Company. The proceeds from Weighted average rate received 5.06% 5.95% 6.85% 6.74% 6.59% 6.53% Consolidated Statement of Cash Flows for further infor­ the sale of these debentures were used by rhe Company for Weighted average rate paid 5.74 5.64 5.58 5.61 5.61 5.61 mation on the Company's cash flows from its operating, general corporate purposes. Similar t the registered trust Receive-fixed rate (hedges senior debt) j investing and financing activities.) preferred securities above, these preferred securities qualify Notional amount $ 12 $ 67 $ $ $1,472 $ 1,551 Liquidity for the Parent Company and its subsidiaries is Weightcd average rate received 5.95% 8.38% -% -'Yo 7.43% 7.46% as Tier 1 capital for regulatory purposes and the interest on generated rhrough its ability to raise funds in a variety of Weighted average rate paid 9.38 5.97 5.73 5.77 the debentures is paid as tax deductible distributions to the lomestic and intemational money and capital markets, and trust preferred security holders. Receive-fixed rate (hedges purchased mortgage servicing rights) ~~ through lividends from subsidiarics and lines of credit. In 1996, a significant portion of the Parent's source of Notional amount $ $ 200 $ $ $ 200 $ 400 In 1996, the Company filed a shelf registration with the funding.l'/as due to dividen Is paid by the Bank totaling Weighted average rate received -% 5.92% -% -% 5.67% 5.80% Securities and Exchange Commissi n (SEC) that allows $1,461 million. The dividends received helped to fund the Weighted average rate paid 5.61 5.59 5.60 for the issuance of $3.5 billion ofsenior or subordinated Company's stock repurchase program. The Company expects Receive-fixed rate (hedges dep sits) J debt or preferred stock. The proceeds from the sale of any the Parent to continue to receive dividends from the Bank Notional amount $ $ $ 250 $1,600 $1,650 $ 3,500 securities will be used for general corporate purposes. The in 1997. (See Notes 3 and 15 to the Financial Statements Weighted average rate received -% -% 6.07% 5.36% 5.54% 5.49% Company issucd $200 million of preferred stock under for a discussion of the restrictions on the Bank's ability to Weighted avcrage rate paid 5.64 5.60 5.61 5.61 this shelf registration. At December 31,1996, $3.3 billion pay dividends and the Parent Company' financial state­ I: Other swaps (2) ofsecurities remained unissued. No additional securities ments, respectively.) Notional amount $ 643 $ 494 $ 300 $ 186 $ 702 $ 2,325 have been issued under this shelf registration. Weighted average rate received 5.50% 6.11% 6.02% 6.29% 5.94% 5.89% To accommodatc future growth and current hu 'iness In 1996, the Company also filed a univer al shelf Weighted average rate paid 5.47 6.03 6.02 6.09 5.87 5.83 needs, the Company has a capital expenditure program. registration 'tatement of$750 million with the SEC which Capital expenditures for are estimated at about Total notional amount $1,091 $2,644 $3,120 $5,435 $6,696 $18,986 1997 includes senior and subordinated dcbt, preferred tack and $275 million for equipment for supermarket branches, ammon srock of the Company and preferred securities (1) Variable interest rates are presented on the basis of rates in cffecr ar December 31, 1996. These rates may change substantinlly in the furure due to open market faerors. relocation and remodel ing ofCompany facilities and routine of 'pecial purpose subsidiary trusts. The registration allows (2) Represents customer accommodation swaps nOllised for asset/liability managemenr purposes. The notiol1:11 nmount fenCerS customer accommodations as well as the replacement of furniture and equipment. The Company swaps lIsed to hedge rhe customer accommodations. each pecial purpose subsidiary to issue trust preferred will fund these expenditures from various sources, includ­ securities which qualify as Tier 1 capital of the Company ing retained earning of the Company and borrowings of for regulatory purposes. The special purpose sub idiary various maturities. will hold junior subordinated deferrable interest deben­ LIQUIDITY MANAGEMENT tures of the Company. Interest paid on these debentures will be distributed to the holders of the trust preferred

Liquidity refers to the Company's ability to maintain a cash The weighted average expected remaining maturity of " securities. As a result, distributions to the holders of the flow adequate to fund operations and meet obligations and the debt securities within the investment securities port­ trust preferred securities will be tax deductible and treated other commitments on a timely and co t-effective basis. folio was 2 years and 2 months at December 31,1996. Of as interest expense in the consolidated statement of income. In recent years, core deposits have provided the Company the $13.4 billion debt securities that were available for sale This provides the Company with a more cost-effective with a sizable source of relatively stable and low-cost funds. at December 31,1996, $4.5 billion, or 33%, is expected to means ofobtaining Tier I capital than if the Company The Company's average core deposits and stockholders' mature or be prepaid in 1997 and an additional $3.7 bil­ itself were to issue additional preferred stock. In December equity funded 89% and 80% of its average total assets in lion, or 28%, is expected to mature or be prepaid in 1998. 1996, the Company issued $400 million in trust preferred 1996 and 1995, respectively. The Company purchased shorter-term debt securities to securities through one trust, Wells Fargo Capital!. The The remaining funding of average total assets was maintain asset liquidity and to fund loan growth. proceed from the sale of these debentures will be u ed by primarily provided by senior and subordinated debt, deposits Other sources of liquidity include maturity extensions the Company for general corporate purposes. At Decem­ in foreign offices, short-term borrowings (comprised of of short-term borrowings and sale or runoff of assets. ber 31,1996, $350 million remained unissued under thi federal funds purchased and securities sold under repurchase Commercial and real estate loans totaled $44.1 billion shelf registration. (See Note 10 to the Financial Statements.) agreements, commercial paper and other short-term borrow­ at December 31,1996. Of these loans, $15.1 billion matures In January 1997, the Company issued an additional $150 ings) and trust preferred securities. Senior and subordinated in one year or less, $14.0 billion matures in over one year I million in trust preferred securities through a new trust, debt averaged $4.6 billion and $3.1 billion in 1996 and 1995, through five years and $15.0 billion matures in over five Wells Fargo Capital II. respectively. Short-term borrowings averaged $2.1 billion years. Of the $29.0 billion that matures in over one year, In addition to the publicly regi tereel trust preferred and $3.9 billion in 1996 and 1995, respectively. Trust pre­ $17.8 billion has floating or adjustable rates and $11.2 bil­ ecurities, the ompany established in 1996 three special felTed securities averaged $82 million in 1996. lion has fixed rates. Of the $11.2 billion of fixed-rate loans, purpo'e tru ts, which collectively i sued $750 million of

-L------:1------i __ __-I1iiiiI COMPARISON OF 1995 VERSUS 1994

Net income in 1995 was $1,032 million, compared with Trust and investment services income increased 19% Gains and losses on sales of loans for 1995 included a In the fourth quarter of 1995, the Company adopted Financial Accounting Standard Nos. 121, Accounting for $841 million in 1994, an increase of 23%. Net income per to $241 million in 1995 compared with 1994 and was first quarter $83 million write-down to the lower of cost or share was $20.37, compared with $14.78 in 1994, an increase primarily due to greater mutual fund investment manage­ estimated market resulting from the reclassification of certain the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (FAS 121), and 122, Accounting of 38%. The percentage increase in per share earnings was ment fees, reflecting rhe overall growth in the net assets of types of products within the real estate 1-4 family first greater than the percentage increase in net income due to fund families. These fees amounted to $71 million in 1995 mortgage loan portfolio to mortgage loans held for sale. for Mortgage Servicing Rights (FAS 122). These adoptions the Company's stock repurchase program. Retum on average compared with $46 million in 1994. The investment secu­ During the second half of 1995, as all mortgage loans held did not have a material impact on the financial state­ ments. For a further discussion of FAS 121 and 122, refer assets (ROA) was 2.03% and return on average common rities losses of$17 million in 1995 largely resulted from the for sale were sold and because such sales were at prices equity (ROE) was 29.70% in 1995, compared with 1.62% sale of debt securities from the available-for-sale portfolio. greater than originally estimated, the Company recorded to Note 6 of the Financial Statements. a $19 million gain on sale. Total loans were $35.6 billion at December 31,1995, a 2% and 22.41 %, respectively, in 1994. The investment securities gains of $8 million in 1994 The increase in earnings in 1995 compared with 1994 reflected the sale of both corporate debt and marketable Noninterest expense increased from $2,156 million in decrease from December 31, 1994. The decrease resulted reflected a $163 million ($94 million after tax) gain equity s curities from the available-for-sale portfolio. 1994 to $2,201 million in 1995. The increase in salaries from the sale of $4.4 billion of real estate 1-4 family first mortgages in 1995, mostly offset by increa es in other resulting from the sale of the Company's joint venture In December 1995, the Company sold its joint venture expense in 1995 compared with 1994 was primarily attrib­ loan portfolios. interest in Wells Fargo Nikko Investment Advisors interest in WFNIA as well as its MasterWorks division utable to increased temporary help expense and higher (WFNIA) and a zero loan loss provision, compared with to Barclays PLC of the U.K., resulting in a $163 million salary levels. The Company's full-time equivalent staff, There was no provision for loan losses in 1995, compared including hourly employees, averaged 19,520 in 1995, with $200 million in 1994. Net charge-offs in 1995 were $200 million in 1994. pre-tax gain. The Company's joint venture interest in Net interest income on a taxable-equivalent basis was WFNIA was accounted for as an equity investment under compared with 19,558 in 1994. $288 million, or .83% of average total loans, compared $2,655 million in 1995, compared with $2,610 million in the equity method. The income from the equity invest­ The decrease in incentive compensation from $155 mil­ with $240 million, or .70%, in 1994. Loan loss recoveries 1994. The Company' net interest margin was 5.80% for ment in WFNIA, included in noninterest income, totaled lion in 1994 to $126 million in 1995 was predominantly due were $134 million in 1995, compared with $129 million 1995, compared with 5.55% in 1994. The increase in the $27 million and $21 million in 1995 and 1994, respectively. to a differing mix of product sales, reflecting a shift away in 1994. The allowance for loan losses was 5.04% of total margin was attributable to an increase in the spread between Noninterest income from the MasterWorks division, included from commissioned retail products, such as fixed-rate loans at December 31,1995, compared with 5.73% at loans and deposits and a change in the mix ofaverage earn­ in "all other" trust and investment services income, totaled annuities. Additionally, the decrease reflected a decline December 31, 1994. ing assets, as higher-yielding loan, such as credit card and $26 million and $20 million in 1995 and 1994, respectively. in incentive compensation related to Mortgage Business' Total nonaccrual and restructured loans were small business, replaced lower-yielding securities and In 1995, losses from dispositions of operations included decision at year-end 1994 to cease the origination of $552 million, or 1.6% of total loans, at December 31, first mortgages. 1995, compared with $582 million, or 1.6% of total loans, single family loans. a $70 million fourth quarter accrual related to the dispo­ Noninterest income was $1,324 million in 1995, compared sition of premise and, to a lesser extent, severance and The increase in equipment expense to $193 million at December 31,1994. Foreclosed as ets were $186 million with $1,200 million in 1994. Credit card membership and miscellaneous expenses associated with the scheduled in 1995 compared with $174 million in 1994 was related at December 31, 1995, compared with $272 million at other credit card fees increased from $64 million in 1994 closures of 120 traditional retail branch locations. In addi­ to a higher level of spending on software and technology December 31, 1994. to $95 million in 1995, an increase of 48%. The growth tion to the $70 million accrual, there was also a $13 mil­ for product development and increased depreciation The average volume of core deposits in 1995 was was predominantly due to late fees and other transaction lion liability at December 31,1995, representing a third expense on equipment related to business initiatives and $36.6 billion, 7% lower than in 1994. Average core deposits fees incurred by customers. The decrease in mutual fund quarter 1995 accrual for the closure of 21 branches. In 1994, system upgrades. funded 72% of the Company's average total assets in 1995, and annuity sales fees from $64 million in 1994 to $33 mil­ losses from dispositions of operations included fourth quarter In August 1995, the FDIC significantly reduced the compared with 76% in 1994. lion in 1995 substantially reflected a lower sales volume accruals for the disposition of premises and, to a lesser deposit insurance premiums paid by most banks. Under the of commis ion-based fixed-rate annuities. The increase in extent, severance of$14 million as ociated with schedul d revised rate structure (retroactive to June 1,1995), the best­ "other" fees and commissions in 1995 compared with 1994 branch closures and $10 million associated with ceasing rated institutions insured by the Bank Insurance Fund (BIF) includes mortgage loan servicing fees of $55 million and the direct origination of 1-4 family first mortgage loans by paid four cents per $100 of domestic deposits, down from $17 million, respectively, offset by the related amortization the Company's mortgage lending unit. Partially offsetting the previous rate of 23 cents per $100. In the third quarter expense of $39 million and $8 million, respectively. these accruals was an $8 million payment received in the of 1995, the Company received a $23 million refund for first quarter of 1994 that was contingent upon performance the overpayment of assessments made for the period June 1 in relation to the alliance formed with Card Establishment through September 30, 1995. In November 1995, the Services (CES). Additional payments from the CES agree­ FDIC further reduced the rate by four cents per $100 of ment are also contingent upon future performance. domestic deposits, effective January 1, 1996. Under the most recent rate structure, the best-rated institutions insured by the BIF pay the statutory annual minimum assessment of $2,000. & COMPANY AND SUBSiDIARIES

CONSOLIDATED STATEMENT OF INCOME

ADDITIONAL INFORMATION (in millions) Yea r ended Decemher 31 , 1996 1995 1994

[ommon srock of the Company is traded on the New Common dividends declared I er share totaled $5.20 in INTEREST INCOME 1996, $4.60 in 1995 arid $4.00 in 1994. The dividend was York Stock Exchange, the Pacific Srock Exchange, the Federal fund sold and securities purchased under resale agreements $ 29 $ 4 $ 7 increased in the first quarter of 1995 from $1.00 per share London Stock Exchange and the Frankfurt Stock Exchange. Investment securities 779 599 740 The high, low and end-of-period annual and quarterly to $1.15 per share and increased again to $1.30 per share Mortgage loans helel for sale 76 closing prices of the Company's stock as reported on in]anuary 1996. Quarterly dividends are considered at the Loans 5,688 3,403 3,015 the New York Stock Exchange Composite Transaction Board of Directors meeting the month following quarter Other 27 3 3 Reporting System are presented in the graphs. The num­ end. Dividends declared are payable the second month ------Total interest income 6,523 ber of holders of record of the Company's common stock

The accompllnying nores are an i1Ue~ral pan of rhese SClUements. WELLS FARGO & COMPANY AND SUBSIDIARIES PANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in millions) December 31, (in millions) Preferred Common Additional Retained Foreign lnvestment Total 1996 1995 stock stock paid-in earnings currency securities stock- capital translation valuation holders' adjustments allowance equity ASSETS Cash and due from banks $ 11,736 $ 3,375 BALANCE DECEMBER 31, 1993 $ 639 $ 279 $ 551 $ 2,829 $ (4) $ 21 $ 4,315 Federal funds sold and securities purchased under resale agreements 187 177 Net income-1994 841 841 Investment securities at fair value 13,505 8,920 Common stock issued under employee benefit and Loans 67,389 35,582 dividend reinvestment plans 3 54 Allowance for loan losses 2,018 1,794 57 Preferred stock redeemed (150) (150) Net loans 65,371 33,788 Common stock repurchased (26) (734) (760) Due from customers on acceptances 197 98 Preferred stock dividends (43) (43) Accrued interest receivable 665 308 Common stock dividends (218) (218) Premises and equipment, net 2,406 862 Change in unrealized net gains, Core deposit intangible 2,038 166 after applicable taxes (131 ) (131) Goodwill 7,322 382 Transfer 1,000 (1,000) 5,461 2,240 Other assets Net change (150) (23) 320 (420) (131) (404) $50,316 Total assets $108,888 BALANCE DECEMBER 31,1994 489 256 871 2,409 (4) (110) 3,911 Net income-1995 1,032 1,032 LIABILITIES Common stock issued under Noninterest-bearing deposits $ 29,073 $10,391 employee benefit and Interest-bearing deposits 52,748 28,591 dividend reinvestment plans 4 86 90 Total deposits 81,821 38,982 Common stock repurchased (25) (822) (847) Federal funds purchased and securities sold under repurchase agreements 2,029 2,781 Preferred stock dividends (42) (42) Commercial paper and other short-term borrowings 401 195 Common stock dividends (225) (225) Acceptances outstanding 197 98 Change in unrealized net losses, Accrued interest payable 171 85 after applicable taxes 136 136 Other liabilities 3,947 1,071 Transfer 1,000 (1,000) 2,120 1,783 Senior debt Net change (21 ) 264 (235) 136 144 Subordinated debt 2,940 1,266 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,150 BALANCE DECEMBER 31,1995 489 235 1,135 2,174 (4) 26 4,055 Net income-1996 1,071 1,071 STOCKHOLDERS' EQUITY Preferred stock issued to Preferred stock 600 489 First Interstate stockholders 350 10 360 Common stock-$5 par value, authorized 150,000,000 shares; Preferred stock issued, issued and outstanding 91,474,425 shares and 46,973,319 shares 457 235 net of issuance costs 200 (3) 197 Additional paid-in capital 10,287 1,135 Common stock issued to Retained earnings 2,749 2,174 First Interstate stockholders 260 11,037 11,297 Cumulative foreign currency translation adjustments (4) (4) Common stock issued under Investment securities valuation allowance 23 26 employee benefit and dividend reinvestment plans 4 113 Total stockholders' equity 14,112 4,055 117 Preferred stock redeemed (439) (439) Total liabilities and stockholders' equity $108,888 $50,316 Common stock repurchased (42) (2,116) (2,158) Preferred stock dividends (67) (67) Common stock dividends (429) (429) Change in unrealized net gains, after applicable taxes (3) (3) Fair value adjustment related to First Interstate stock options 111 111 Net change 111 222 9,152 575 (3 ) 10,057 BALANCE DECEMBER 31, 1996 $ 600 $457 $10,287 $ 2,749 $(4) $ 23 $14,112

The accom{Janying nOtes are an integral pan of these statements. The accompanying notes are an imegml /Jan of these swcemenrs. WELLS FARGO & COMPANY AND SUBSIDIARIES , &1=: f~ CONSOLIDATED STATEMENT OF CASH FLOWS L NOTES TO FINANCIAL STATEMENTS

(in millions) Year ended December 31, 1 1996 1995 1994 Cash flows from operating activities: Net in ome $ 1,071 $ 1,032 $ 841 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 105 200 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Depreciation and amortization 809 272 246 1 Lo es on disposition of operations 95 89 5 , Gain on sale of joint venture interest ( 163) Deferred income tax expense (benefit) 169 17 (32) Wells Fargo & Company (Parent) is a bank holding com­ SECURITIES I lncrea'e (decrease) in net deferred loan fees 22 (6) (8) pany whose principal subsidiary is Wells Fargo Bank, N.A. Net (increase) decrease in accrued interesr receivable (49) 20 (31 ) Writedown on mortgage loans held for sale 64 (Bank), Besides servicing millions of customers in ten Securities are accounted for according to their jJurjJose and Net (decrease) increase in accrued interest payable (1) 25 (3) western states, Wells Fargo & Company and Subsidiaries holding period, Net decrease (increase) in loans acquired for sale 390 (535) - (Company) provide::l full range of banking and 6nancial Other, net (1,536) (139) (74) --- services to commercial, agribusiness, rcal cstate and small I 1,144 INVESTMENT SECURITIES Net cash provided by operating activitie' 1,075 676 business customers across the nation, Securities generally acquired to meet long-term investment Cash flows fr0111 investing activities: The accounting alld reponing policies of the ComjJany Investment securities: objectives, including yield ::lIldliquidity management conform with generally accep[ed accounting prin iples At fair value: purposes, are classified as investment securities. Realized Proceeds from sales (GAAP) and prevailing practices within the banking gains and losses are recorded in non interest income using Proceeds from prepayments and maturitie industry, The preparatioll of financial statcmcnts in con­ Purchases the identined certificate method. For certai.n debt securities formity with GAAP requires managemem to make estimates At cost: (for example, Government National Mortgage Associa­ Proceeds from prepayments and maturities and assUmp[iOllS that affect the reported amounts of asse[s tion securities), the ompany anticipates prepayments of Purchases andliabili[ies a[ [he date of the l1nallcial sta[ements and Cash acqu ired from First Interstate principal in [he calcularion of the effective yield, Proceeds from sales of mortgage loans held for sale income and expcn 'cs during [he reponing period. Actual Net (increase) dect'ease in loans resulting from originations and collections results could differ from [hose estimates, Ccr[ain amounts Securities at fair value Debt securities that may not be Proceeds from sales (including participations) of loans in [he f1nancial tatements for prior years have been reclas­ held untilm

2MERGER WITH FIRST INTERSTATE BANCORP or expense reported on the asset or liability hedged; fees ACCOUNTING STANDARDS TO BE un these finan ial contracts are amortized over their ADOPTED IN FUTURE PERIODS On April 1, 1996, the Company completed its acquisition As a condition of the Merger, the Company was required contractual lite as a c mponent of the interest reported on (Merger) of First Interstate Bancorp (First Interstate), the l:y regulatory agencies to divest 61 First Interstate hranches the asset or liability hedged. If a hedged asset or liability InJune 1996, the Financial Accounting Standards Board 14th largest bank holding company in the nation as of in California. The Company complet-d the sale of these settles before maturity of the intere;;t rate derivative finan­ (FASB) issued Statement of Financial Accounting Stan­ March 31, 1996 with 405 offices in alifornia and a total branches to Home Savings of America, principal subsidiary cial instruments used as a hedge, the derivatives are closed dard No. 125 (FAS 125), Accounting for Transfers and of approximately 1,150 offices in 13 western state. The of H.E Ahmanson & Company, in September 1996. In out or settled, and previously unrecognized hedge re'ults Servicing of Financial Assets and Extinguishment ofLiabili­ Merger resulted in the creation of the eighth largest bank addition, the ompany completed the sale of the former and the net settlement upon close-oLlt or termination are ties. This Statement provicles guidance for distinguishing holding company in the United States based on assets as First Interstate banks in Wyoming, Montana and Alaska accounted for as part of the gains and losses on the asset or transfers offinancial assets that are sales from transfers of December 31, 1996. The purchase price of the transaction in the fourth quarter of 1996. The 61 hranches and the liability hedged. If interest rate derivative financial instru­ that are secured borrowings. FAS 125 supersedes FAS 76, was approximately $11.3 billion based on Wells Fargo's three banks had aggregate assers uf approximately $J.7 hil­ ments used in an effective hedge are closed out or terminated 77 and 122, while amending both FAS 65 and 115. The share price on January 19, 1996, the last trading day before lion and aggregate depOSits of approximately $2.4 hillion. before the hedged item, previously unrecognized hedge Statement is effective January 1, 1997 and is to be applied Wells Fargo and First Interstate agreed on an exchange ratio. The Company entered into an agre'mcm with The Bank results and the net settlement upon close-out or tennina­ prospectively. Earlier implementation is not permitted. In First Interstate shareholders received two-thirds of a share of New York to sell the Corporate and Municipal Bond tion are deferred and amortized over the Iife of the asset December 1996, the FASB issued FAS 127 which defers of Wells Fargo common stock for each share ofcommon srock Administration busines . The sale is scheduled to close or liability hedged. Cash Haws resulting from interest rate certain provisions of FAS 125 for one year. owned; 52,001,970 shares of the Company's common stock during the first quarte-r of 1997. derivative financial instruments th"'t are accounted for as A transfer of financial assets in which control is surren­ were issued. Each share of First Interstate preferred stock Other significant adjustments to goodwill included the hedges of assets and liabilities are classified in the same dered over those assets is accounted for as a sale to the was converted into the right to receive one share of the write-off of First Interstate's existing goo hvill and other category as the cash Hows from the items being hedged. extent that consideration other than beneficial interests in Company's preferred stock. Each outstanding and unexer­ intangibles of $701 million. Interest rate derivative financial instrument entered the transferred assets is received in the exchange. Liahilities cised option granted by First Interstate was converted into The unaudited pro forma amount in rhe tahle below are int( as an accommodation to customers and interest rate and derivatives incurred or obtained by the transfer of an option to purchase Company common ,tock based on presented for informational purposes and are not necessarily derivative hnancial in ·truments used to offset the interest financial assets arc required to be measured at fair value, if the original plan and the agreed upon exchange ratio. indicative of the results of operations of the combined rate risk of those contract are carried at fair value with practicable. Also, any servicing assets and other retained The Merger was accounted for a a purchase transaction. company for the periods presented. These amounts are also unrealized gains and 10' 'es recorded in nonintere t income. interests in the transferred assets must be measured by allo­ Accordingly, the results of operations of First Interstate are not necessarily indicative of the future results of operations Cash Haws resulting from interest rate derivative fin",ncial cating the previous carrying value between the asset sold included with those of the Company for periods subsequent of the combined company. In particular, the Company instruments carried at fair value are clas'ified as operating and the interest retained, if any, based on their relative fair to the date of the Merger (i.e., the financial information expects to achieve significant operating cost savings :-1S cash Hows. values at the date of transfer. For each servicing contract for periods prior to April I 1996 included in this Annual a result of the Merger, which have not been included in Credit risk related to interest rate derivative financial in existence before January 1,1997, previously recognized Report excludes First Interstate). The name of the com­ the unaudited pro forma amounts. imtru11lents is considered and, if material, provided for servi ing rights and excess ·ervicing receivables that do not bined company is Wells Fargo & Company. The following unaudited pro forma combined slimmmy separateIy from the allowance for loan losses. exceed contractually specified servicing are required to be The major components of management's plan for the of income gives effect to the combina.tion as if the Merger Foreign exchange derivatives The C011lpany enters combined, net of any previously recognized servicing obliga­ combined company include the realignment of First was consummated on January I, "1995. into foreign exchange derivative financial instruments tions under that contract, as a servicing asset or liability. Interstate's businesses to reHect Wells Fargo's structure, (forward and spot contracts and options) primarily as an l reviously recognized servicing receivables that exceed consolidation of retail branches and administrative facilities accommodation to customers and offsets the rdated foreign contractually specified servicing fees arc required to be and reduction in staffing level.s. As a result of this plan, UNAUDITED PRO FORMA COMBINED exchange risk with other foreign exchange derivative reclassified as interest-only strips receivable. the adjustments to goodwill included accrm11s totaling FINANCIAL DATA approximately $302 million ($178 million after tax) financial instruments. All conn'acts are carried at fair value The Statement alo requires an assessment of interest­ (in milium... excepl plo'f shan: l.hua) Ycar ended Deccmher ') 1. related to the disposition of premises, including an accrual with unrealized gains and 10' es recorded in noninterest only strips, loans, other receivables and retained interests 199(i IlNj income. Cash Hows resulting from foreign exchange in securitizations. If these a ets can be contractually of $116 mill ion ($68 million after tax) associated with the derivative tinancial instruments are classified as operating prqaid or otherwise settled such that the holder would dispositions of traditional former First Interstate branches Summary of incomc Ncr imcrc~r income $5,125 $5.234 cash flows. Credit risk rel'Hed to foreign exchange deriva­ not recover substantially all of its recorded investment, in California and out of state. The California di positions Provision fur loan losses 105 the a "et will be mea ured like aVCliiable-for-sale securities included 176 branch closures during 1996. The Company ti ve hnancial instruments is considered and, if material, Noninlerc,r income 2,505 2,428 ha also entered into definitive agreements with several provided for separately from the allowance for loan losses. or trading securities, under FAS 115. This assessment is Nonimeresl expcmc (I) 4,826 4.870 required for financial assets held on or acquired after in'titutions to ell 20 former First Interstate branches, Ncr income (I) 1,481 1.580 January I, 1997. including deposits, located in California. The sales of 17 NET INCOME PER COMMON SHARE PCI' common share The adoption of FAS 125 is not expected to have a of these branches were closed in the fin quarter of 1997. Ncr incomc (I) $15.37 15.19 material effe t on the Company's financial statements. The out-of-state dispositions as ociated with the goodwill Dividend, dcclareLI 5.20 4.60 Nct income per common share is computed by dividing adju tment are expected to be completed in 1997. Addi­ net income (after deducting dividends on preferred srock) tionally, the adju tments to goodwill included accruals of Average common shares our~randing 91.5 Q9.1 by the average number of common shares outstanding approximately $415 million ($245 million after tax) during the year. The impact of common stock equivalents, related to severance of form r Fi rst Interstate employees (I) NonlnrereH expense excludes $21 I mIllion ($241 million afrer mxl ;]nd $28 mil· such as stuck l1ptinns, and other potentially dilutive secu­ throughout the Company who will be displaced through linn ($28 million after mxl fnr rip yeor, ended December 11. Iq% :m.1 1995. rcspecli\'dy, ur nunrecurring mergel'-I't"I:lled expeI1';c:, recorded hv Firsr (ntCrSI:1ll'. riti~s is not material; therefore, they are not included in December 31,1997. Severance payments of $151 million the computation. were paid during 1996. 4INVESTMENT SECURITIES Th unaudited pro forma combined net income of Goodwill may change as certain estimates and contin­ $1,481 million for the year ended December 31,1996 con­ gencies are finalized, although any adjustments are not sists of second, third and fourth quarter 1996 net income expected to have a significant effect on the ultimate amount The following table proVides the major components of investment securities at fair value and at cost: . of the combined company of$807 million, first quarter 1996 of goodwill. net income of the Company of$264 mUlion and a first quarter In addition to First Interstate premise and severance costs ---- (in millions) net loss of First Interstate of $23 million, plus unaudited affecting goodwill, an estimated $60 million, $80 million -- - Deccmher ) 1. pro forma adjustment of $433 million. The unaudited and $300 million ofcosts related to the Company's premises, 1996 1995 1994 Cost Estimatcd Estimated Estirnated pro forma combined net income of$1 ,580 million for the employees and operations as well as all costs relating to Cnst Estimatcd Esrimared Estimilted Cost Esrimarcd unrealized unrealized year ended December 31,1995 consists ofnet income of the systems conversions and other indirect, integration costs fair value 1Iluci.llized unreali:eJ fair vrthle fair value gross gains gross losses gross gains gross tosses Company of $1,032 million and First Interstate of $885 mil­ were expensed during the second, third and fourth quarters, AVAILABLE-FaR-SALE lion, less unaudited pro forma adjustments of$337 million. respectively. The Company expects to incur additional SECURITIES AT The unaudited pro forma combined net income for both integration costs, which will be expensed as incurred. With FAIR VALUE: periods includes amortization of $288 million relating respect to timing, it is assumed that the integration will be U.S. Treasury securities $ 2,824 $ 16 $ 3 $ 2,837 $1,347 $13 $ 3 $1,357 $ 372 $ 362 to $7,191 million excess purchase price over fair value of completed and that such costs will be incurred not later Securities of U.S. First Interstate's net assets acquired (goodwill). Goodwill than 18 months after the closing of the Merger. government agencies and corporations (J) 7,043 46 is amortized using the straight-line method over 25 years. 39 7,050 5,218 35 30 5,223 [,476 1,380 Private collateralized mortgage obligations (2) 3,237 16 23 3,230 2,121 9 8 2,122 1,290 1,178 Othcr 342 2 1 343 169 12 181 24 38 Toral dcbt securities 13,446 80 66 13,460 8,855 69 41 8,883 3,162 2.958 Marketable equity securities 18 27 -- 45 18 19 37 16 31 Total $13,464 $107 $66 $13,505 $8,873 $88 $41 $8,920 $3,178 $2.989

HELD-TO-MATURITY 3CASH, LOAN AND DIVIDEND RESTRICTIONS SECURITIES AT COST: U.s. Treasury securities $ $ - $ - $ $ $ - $ - $ $1,772 $1,720 Securities of U.S. Federal Reserve Board regulations require reserve balances the Currency (aCC) are limited to the Bank's retained government agencies on deposits to be maintained by the Company's banking net profits for the preceding two calendar years plus and corporations (I) 5,394 5,IOL subsidiaries with the Federal Reserve Banks. The average retained net profits up to the date of any dividend declara­ Private collateralized mortgage bligations (2) required reserve balance was $2.0 billion and $1.2 billion tion in the current calendar year. Retained net profits are 1,306 1,221 Other in 1996 and 1995, respectively. defined by the ace as net income, less dividends declared 147 143 Total $ $ The Bank is subject to certain restrictions under the during the period, both of which are based on regulatory - $ - $ $ $ - $ - $ $8,619 $8,185 Federal Reserve Act, including restrictions on extensions accounting principles. Based on this definition, the Bank - -- of credit to its affiliates. In particular, the Bank is prohibit d declared dividends in 1996 and 1995 of $650 million in (I) All securities ()(U.S. government agencies cmd corporations arc ll1ortgagc-backeJ SCClirilic.s, from lending to the Parent and its nonbank subsidiaries excess of its net income of $2,431 million for those years. (2) Substantially all private collateralized mortgage obligarions arc AAA-rated bonds col hltera Iizcd hI' 1-4 family rcsidential firsr mortgages. unless the loans are secured by specified collateral. Such Therefore, before it can declare dividends in 1997 without secured loans and other regulated transactions made by the the approval of the ace, the Bank must have net income In November 1995, the FASB permitted a one-time Bank (including its subsidiaries) are limited in amount as of $650 million plus an amount equal to or greater than $18 million in 1996, 1995 and 1994, respectively. The opportunity for companies to reassess by December 31,1995 to each of its affiliates, including the Parent, to 10% of the the dividends declared in 1997. Dividends declared by sales of debt securities in the available-~ r-sale portfolio Bank's capital stock and surplus (as defined, which for this the Bank in 1996, 1995 and 1994 were $1,461 million, their classification of securities under Statement of Finan­ resulted in a $1 million gain, a $13 million loss and a cial Accounting Standards No. 115 (FAS 115), Accounting purpose represents Tier 1 and Tier 2 capital, as calculated $1,620 million (including a $489 million deemed dividend) $5 million gain in 1996, 1995 and 1994, respectively. These for Certain Investments in Debt and Equity Securities. As under the risk-based capital guidelines, plus the balance of and $1,001 million, respectively. were sold for asset/liability management purposes. Addi­ the allowance for loan losses excluded from Tier 2 capital) The Company's other banking subsidiaries are subject a result, on November 30, 1995, the Company reclassified all tionally, a $1111illion loss was realized in 1994 resulting of its he1d-to-maturity securities at cost portfolio of$6.5 bil­ and, in the aggregate to all of its affiliates, to 20% of the to the same restrictions as the Bank. However, any such from a write-down due to other-than-temporary impair­ Bank's capital stock and surplu, . The capital stock and restrictions have not had a material impact on the banking lion to the available-for-sale securities at fair value portfolio ment in the fair value of certain debt securities. The sales in order to provide increased liquidity flexibility to meet surplus at December 31,1996 was $9 billion. subsidiaries or the Company. of marketable equity securities in the available-for-sale anticipated loan growth. A related unreal ized net after­ Dividends payable by the Bank to the Parent without portfoli resulted in a gain of $9 million, none and $4 mil­ the express approval of the Office of the Comptroller of tax loss of $6 million was recorded in tockholders' equity. lion in 1996, 1995 and 1994, respectively. Additionally, Proceeds from the sale ofsecurities in the available-for­ a $4 million loss was realized in 1995 resulting from a sale portfolio totaled $719 million, $674 million and write-down of certain equ ity s~curities due to other-than­ temporary impairment. Expecte I remaining maturities will differ from contractual The following table provides the remaining contractual (in millions) ______December 31, maturities because borrowers may have the right to prepay principal maturities and yields (taxable-equivalent basis) 1996 1995 obligations with or without penalties. (See the lnve tment of debt securities within the investment portfolio. The Outstanding Commitments OUlsl

Commerci~1 (I) $19,515 $28,125 $ 9,750 $ 8,368 December ,1, 1996 Real estate 1-4 family first mortgage (2) 10,425 778 4,448 723 (in millions) Rcmainin.l:: cOnlT~C[\l:l1 princip:.llmalllriry Oth~r real estate mortgage 11,860 872 8,263 563 Total \'(I('ighrcd Weighted i.t\'~rag(' :Ivcmgc A(ler ren year, Real estate construction 2,303 1,719 1,366 859 Hmnlillf \\lirhin one ye:ll' After nne yeCif A(lcr tive 'cars yield rC!ll(l.inlllg rhr()ugh five ycar~ through Tell years Consumer: m:twritr (in Amount Yield Real esrate 1-4 family junior lien mortgage 6,278 4,781 3,358 3,053 )Ir~ !\l1wunt Yield AI1l0111ll Y,e1,1 AmoUllf Yield .•mo::..) Credit card 5,462 15,737 4,001 8,644 Other revolving credit and m )I1thly paymenr 8,374 3,123 2/326 ~35 AVAILABLE-FOR-SALE Tot~l consumer 20,114 23,641 9.935 13,732 Lease financing 3,003 1,789 SECURITIES (I): 6.84% 5.76% $2,129 6.05% $ 6.26% $ Foreign 101 U.s. Treasury securiries $ 2,824 5.98% 1-10 $ 689 169 31 Securities of U.S. Total loans 0) $67,389 $55,236 $35,582 $24,245 goverllillent agl:l1cics 6.63 6.25 3,173 6.51 1,327 6.99 1,104 -- - and corporations 7,043 6.56 5-1 l.439 (I) Outsramling balances include loans (primarily unsecured) to real estare developers anil REITs 0($1,070 milliun and $700 million al December,l, 1996 and 1995, respectively. Privale collmerali:ecl 7.46 1,007 6.44 6.64 7-6 395 6.34 1,056 6.34 779 (Z) Subsrantially all the commirments ro extend credir relale rn rhose equiry lines rhat arc ((ectively firsr m ngages. mortgage ohl igations 3,237 7.44 62 8.14 177 6.61 44 6.65 59 (3) Outsramling loan balances at December 31, 1996 and 1995 arc net of lllle"med in ome, including ner ile(erreil loan (ees, u($654 million ami $463 million, respectively. Orher 342 7.00 2-6 TOTAL COST OF 6.56% 6.18% $6,535 6.33% $2, I55 7.15% $2,171 DEBT SECURITIES $13,446 6.47% 4-11 $2,585 $6,542 $2, I57 $2,173 In the course of evaluating the credit risk presented by a In addition, the Company manages the potential credit ESTIMATED FAIR VALUE $13,460 $2,'5R8 customer and the pricing that will adequately compensate risk in commitments to extend credit by limiting the total ----- the Company for assuming that risk, management determines amount ofarrangements, both by individual customer and in (I) The weighted iI\'l:Tagl" yield b compurcd lISlIlg the ,ulloni:l'd COl'ir ('If nvailnhlc#fl11·,s::tlc Ilwesnnrnl :o:;eCliril ic:, carried m fair vHllle. a requisite amount ofcollateral support. The type ofcollateral the aggregate; by monitOring the size and maturity SO'ucture held varies, but may include accounts receivable, inventory, of these portfolios; and by applying the same credit standards lnvestment securities pI 'dged primarily to secur' trust and land, buildings, equipment, income-producing commercial maintained for all of its credit activities. The credit risk There was no dividend income in 1996, 1995 and 1994 public deposits an I for other putposes as required or per­ properties and residential real estate. The Company has associated with these commitments is considered in man­ included in imerest income on investment securities in mitted by law was billion, billion and billion the same collateral policy for loans whether they are funded agement's determination of the allowance for loan losses. the Consolidated Statement of Income. Substantially flll $5.3 $4.8 $3.1 at December 31,1996,1995 and 1994, respectively. immediately or on a delayed basi (commitment). Standby letters of credit totaled $2,981 million and income on investment securities is taxable. A commitment to extend credit i a legally binding $921 million at December 31, 1996 and 1995, respectively. agreement to lend funds to a customer and is usually for Standby letters of credit are issued on behalf of customers a specified interest rate and purpose. These coml1l itments in connection with contracts between the custOmers and have fixed expiration lates and generally require a fee. The third parties. Under a standby letter of credit, the ompany extension of a commitment gives rise to credit risk. The as ures that the third party will receive specified funds if actual liquidity needs or the credit risk that the Company a customer fails to meet his contractual obligation. The will experience will be lower than the contractual amount liquidity risk to the Company arises from its obligation to LOANS AND ALLOWANCE FOR LOAN LOSSES of commitment to extend credit shown in the table above make payment in the event of a customer's contractual 5 because a significant portion of these commitments is default. The credit risk involved in issuing letters of credit expected to expire without being drawn upon. Certain and the Company's management of that credit ri k is con­ A summary of the major categories of loans outstanding Review summmize real estate mortgage loans (excluding family first mortgage loans) I y state and property type commitments are subject to a loan agreement containing sidered in management's determination of the allowance and related unfunded commitments to extend credit is 1-4 and real estate construction loans by state and project covenants regarding the ful.ancial performance of the cus­ for loan losses. At December 31, 1996 and 1995, standby shown in rhe table on the next page. At December 31, tomer that must be met before the Company is required to letters of credit included approximately $243 million and 1996 and 1995, the commercial loan category (lnd related type. A majority of the Company's real estate 1-4 family fund the commitment. The Company uses the same credit $159 million, respectively, of participations purcha ed, net commitments did not have an industry concentration that first mortgages amI consumer loans are with cu·tamers policies in making commitments to extend credit a it ofapproximately $61 million and $90 million, respectively, of exceeded 10% of total loans and commitmems. Table' 11 located in California. loes in making loans. [articipations sold. Approximately 72% of the Company's and 12 in the Loan Portfolio section of the Financial

., year-end 1996 standby letters of credit had maturities of one Changes in the allowance for loan losses were as follows: In accordance with FAS 114, the table below shows the The average recorded investment in impaired loans during year or less and substantially all had maturities of seven recorded investment in impaired loans by 10Cln category years or less. 1996 and 1995 was $542 million and $472 million, respec­ and the related methodology used to measure impairment tively. TotClI interest income recognized on impaired loans Included in standby letters of credit are those that back (in millions) Year ended December 3\, at December 31,1996 and 1995: during 1996 and 1995 was $17 million and $15 million, financial instruments (financial guarantees). The Company 1996 1995 1994 had issued or purchased p'articipations in financial guarantees respectively, substantially all of which was recorded using the cash method. ofapproximately $1,798 million and $450 million at Decem­ Balance, beginning of year $1,794 $2,082 $2,122 (in millions) __ December 31, ber 31, 1996 and 1995, respectively. The Company also had Allowance of First Interstate 770 The Company uses either the cash or cost recovery 1996 1995 commitments for commercial and similar letters ofcredit of Sale of former First Interstate banks (11) method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest $406 million and $209 million at December 31,1996 and Provision for loan losses 105 200 Commercial $155 $ 77 is redited to interest income when received. This method 1995, respectively. Substantially all fees received from the Loan charge-offs: Real estate 1-4 (amily first mortgage 1 2 Other real estate mortgage (I) is used when the ultimate collectibility of the total princi­ is uance of financial guarantees are deferred and amortized Commercial (I) (140) (55) (54) 362 330 Rea I estare construction Real estate 1-4 family 24 46 pal is not in doubt. Under the cost recovery method, all on a straight-line basis over the term of the guarantee. Losses Other (18) (18) 1 3 on standby letters of credit and other similar letters of credit first mortgage (13) payments received are applied to principal. This method is Total (2) Other real estate mortgage (40) (52) (66) $543 $458 used when the ultimate collectibility of the total principal have been immaterial. Real estate construction (13) (10) (19) Impairment measurement based on: is in doubt. Loans on the cost recovery method may be The Company considers the allowance for loan losses of Consumer: Collatewl value method $416 $2,018 million adequate to cover losses inherent in loans, Real estate 1-4 family $374 changed to the CClsh method when the application of the Discounted cash flow method 101 junior lien mortgage (28) (16) (24) 66 cash payments has reduced the principal balance to a level loan commitm nts and standby letters of credit at Decem­ Historical loss factors (138) 26 • 18 ber 31, 1996. However, no assurance can be given that the Credit card (404) (208) where collection of the remaining recorded investment is Other revolving credit and $543 $458 no longer in doubt. Company will not, in any particular period, sustain loan monthly payment (186) (53) (36) losses that are sizable in relation to the amount reserved, or Total consumer (618) (277) (198) (I) Includes accruing loans of$50 million ar bOlh December 11, 1996 and 1995 that that subsequent evaluations of the loan portfolio, in light Lease finan ing _(31) (15) (14) were purchased ar a steep c1iscoul1[ whose contractual [crlllS were modified after acquisition. The modified terms did nor "ffeer the bouk halance nor the \delds of the factors then prevailing, including economic condi­ Total loan charge-offs (860) (422) (369) tions and the Company's ongoing examination process and expeered ar lhc dare of purchase. Loan recoveries: (2) Includes $27 millinn and $22 million of impaired loans with a related FAS 114 that of its regulators, will not require significant increases Commercial (2) 54 38 37 allowance of$2 million and $3 million ar Decemher 3 I, 1996 and 1995, in the allowance for loan losses. Real estate 1-4 family respectively. Loans held for sale are included in their respective loan first mortgage 8 3 6 categories and recorded at the lower of cost or market. At Other real estate mortgage 47 53 22 Real estate construction 11 1 15 December 31,1996 and 1995, loans held for sale were Consumer: $308 million and $640 million, respectively. Real estate 1-4 family junior lien mortgage 9 3 4 Credit card 36 13 18 Other revolving credit and PREMISES, EQUIPMENT, monthly payment 47 12 11 --- -- 6LEASE COMMITMENTS AND OTHER ASSETS Total consumer 92 28 33 Lease financing 8 11 16 ------Total loan recoveries 220 134 129 The following table presents comparative data for premises Depreciation and amortizCltion expen e was $238 million, and equipment: Total net loan $154 million and $142 million i.n 1996,1995 and 1994, charge-offs (640) (288) (240) respectively. Losses on disposition of premises and equip­ Balance, end of year $2,018 $1,794 $2,082 ment, recorded in non interest income, were $46 million, (in miliiollS) Total net loan charge-offs as ___ Decemher 31, $31 million and $12 million in 1996,1995 and 1994, a percentage of average 1996 1995 res! ectively. In addition, also recorded in noninterest total loans (3) 1.05% .83% .70% Land income were losses from disposition of operations primarily Allowance as a percentage $ 234 $ 96 Buildings related to the disposition of premises associated with of total loans 3.00% 5.04% 5.73% 1,687 520 Furniture and equipment 1,362 730 scheduled branch closures of $95 million, $89 million Leasehold improvements 392 270 and $5 million in 1996,1995 and 1994, respectivcIy. (I) Includes charge-offs of loans (primarily unsecured) to real estate developers and Premises leased under capital leases 111 66 The Company is obligated under a number of noncan­ REITs of$2 million, none and $14 million in 1996, 1995 and 1994, respectively. Total 3,786 1,682 celable operating leases for premises (including vacant (2) Includes recoveries from loans to real estate developers and REITs of Less ~ccumulated depreciation $10 million, $3 million and $2 million in 1996, 1995 and 1994, respectively. premises) and eqUipment with terms up to 25 years, many and amortization 1,380 820 (3) Average total loans exclude first mortgage loans held for sale in 1995. of which provide for periodic adjustment of rentals based Net book value $2,406 $ 862 on chang s in various economic indicators. The following Income from nonmarketable equity investments Amortization expense, recorded in noninterest income, servicing rights is determined based on valuation techniques table shows future minimum payments under noncancelable accounted for using the cost method was $137 million, totaled $63 million, $39 million and $8 million for 1996, utilizing discounted cash flows incorporating assumptions operating leases and capital leases with terms in excess of $58 million and $31 million in 1996, 1995 and 1994, 1995 and 1994, respectively. Purchased mortgage servicing that market. participants would use and totaled $289 mil­ one year as of December 31, 1996: respectively. rights included in certain identifiable intangible assets were lion and $153 million at December 31,1996 and 1995, Total amortization expense for certain i lentifiable $257 million (including $72 million from First Interstate), respectively. Impairment, net of hedge results, is recognized intangible assets recorded in noninterest expense was $152 million and $96 million at December 31,1996,1995 through a valuation allowance for each individual stratum. (in millions) Operaring leases Capiralleases $26 million, $12 million and $13 million in 1996, 1995 and 1994, respectively. At December 31,1996 and 1995, the balance of the valua­ and 1994, respectively. For purposes of evaluating and measuring impairment for tion allowances totaled $582 thousand and $352 thousand, Year enJeJ December 31, Foreclosed assets consist of assets (substantially real purchased mortgage servicing rights, the Company stratified respectively. Certain mortgage servicing rights owned by 1997 $ 257 $ 13 estate) acquired in satisfaction of troubled debt and are these rights based on the type and interest rate of the under­ the Company have not been capitalized as they were 1998 229 13 carried at the lower of fair value (less estimated costS to 1999 204 12 lying loans. Impairment is measured as th amount by which acquired by origination prior to the adoption of FAS 122. 2000 168 12 sell) or cost. Foreclosed assets expense, including disposi­ the purchased mortgage servicing rights for a stratum exceed These rights were not included in the valuation. 2001 119 10 tion gains and losses, was $7 million, $1 million and none their fair value. Fair value of the purchased mortgage Thereafter 578 72 in 1996, 1995 and 1994, respectively. Toral minimum lease payments $1,555 132 The Company adopted on December 31, 1995 Statement Execurory costs (3) of Financial Accounting Standards No. 121 (FAS 121), Amounts representing interest (62) Accounting for the Impairment of Long-Lived Assets and Present value of net minimum lease payments $ 67 for Long-Lived Assets to be Disposed of. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances 7DEPOSITS Total future minimum payments to be received under indicate that the carrying amount of an as et may not be noncancelable operating subleases at December 31, 1996 recoverable. Additionally, FAS 121 requires that long-lived At December 31, 1996, the maturities of time certificates of and 1995, respectively. Time certificates ofdeposit and were approximately $266 million; the e payments are not assets to be disposed of be reported at the lower of their deposit and other time deposits were as follows: $12,961 mil­ other time deposits issued by foreign offices in amounts of reflected in the preceding table. carrying amount or fair value, less costs to sell. The impact lion in 1997, $1,496 million in 1998, $643 million in $100,000 or more represent substantially all of the foreign Rental expense, net of rental income, for all operating of adopting FAS 121 was immaterial. Independent of 1999, $376 million in 2000, $236 million in 2001 and deposit liabilities of $54 million and $876 million at leases was $199 million, $111 million and $97 million in FAS 121, the Company periodically reviews its space $243 million thereafter. Substantially all of these deposits December 31,1996 and 1995, respectively. 1996,1995 and 1994, respectively. requirements. During the course of 1995, such reviews were interest-bearing at December 31, 1996. Demand deposit overdrafts that have been reclassified The components of other assets at December 31, 1996 resulted in two properties being designated as held for sale. Time certificates of deposit and other time deposits each as loan balances were $800 million and $210 million at and 1995 were as follows: Regardless of FAS [21, assets designated as held for sale are with a minimum denomination of $100,000 totaled December 31,1996 and 1995, respectively. carried at the lower of cost or fair value, less costs to sell. $3,495 million and $2,099 million at December 31,1996 Accordingly, the Company recorded a $21 million write­ down in 1995 in noninterest income related to these (in millions) December J I, 1996 1995 properties. These properties had a carrying value of $15 million at both December 31, 1996 and 1995. Nonmarketable equity investments (I) $ 937 $ 428 In 1995, the Company adopted Statement of Financial Net deferred tax asset (2) 437 817 Accounting Standards No. 122 (FAS 122), Accounting Certain identifiable intangible assets 471 220 for Mortgage Servicing Rights. This Statement amends Foreclosed assets 219 186 FAS 65 to require that, for mortgage loans originated for SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Other 3,397 589 8 sale with servicing rights retained, the right to service Toral other assets $5,461 $2.240 those loans be recognized as a separate asset, similar to The table on the right provides comparative data for securi­ purchased mortgage servicing right. This Statement also ties sold under repurchase agreements. These borrowings (in millions) December 3I, (I) Commirments related to nonmmkerable equity investments totaled $376 million requires that capitalized mortgage ervicing rights be 1996 1995 1994 and $159 million ar December 31, 1996 and 1995, respectively. generally mature in less than 30 days. (2) See Nore 14 to rhe Financial Staremenrs. assessed for impairment based on the fair value of those rights. Mortgage servicing rights purchased during [996, Average amuunt outstanding (I) $ 689 $1,788 $ 884 Highest month-end balance (2) 1,100 2,776 1,794 1995 and 1994 were $165 million, $95 million and $89 mil­ Year-end balance 533 896 1,794 lion, respectively. There were no originated mortgage servicing rights capitalized in 1996 and 1995. Purcha ed (I) Average balances were compmeJ using daily amounts. mortgage servicing rights are amortized in proportion to (2) Highest month-eml balances were at Febnmr\' 1996, April 1995 and December and over the period of estimated net servicing income. 1994, respective I\,_ .

9SENIOR AND SUBORDINATED DEBT restrictions under the risk-based capital rules. The terms $200 million of stockholders' equity had been designated of the $200 million of the Mandatory Equity Notes, due for the retirement or redemption of those Notes. The following is a summary ofsenior and ubordinated debt (reflecting unamortized debt discounts and premiums, where in 1998, and $190 million Mandatory Equity Notes, due Certain of the agreements under which debt has been applicable) owed by the Parent and its subsidiaries: in 1999, require the Company to sell or exchange with issued contain provisions that may limit the merger or sale of the noteholder the Company's common stock, perpetual the Bank and the issuance of its capital stock or convertible preferred stock or other capital securities at maturity or securities. The Company was in compliance with the provi­ (in millions) Maturity Interesr December 31, earlier redemption of the Notes. At December 31, 1996, sions of the borrowing agreements at December 31, 1996. date rHre ---- 1996 1995

SENIOR Parent: FltlHring-Rate Medium-Term Notes 1996-99 Various $1,571 $1,4 78 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN Nutes (I) 1996-98 11% 55 200 Medium-Term Notes (I) 1996-2002 769-10.83% 359 25 10 COM PANY'S SU BORDI NATED DEB ENTU RES Notes payable by subsidiaries 68 28 Obligations of subsidiaries under capital1cases (Note 6) 67 52 Total senior debt 2,120 1,783 In 1996, the Company established four separate special invested $309.3 million in debentures of the Company purpose trusts, which collectively issued $1,150 million in with a stated maturity of December I, 2026. This class of SUBORDINATED trust preferred securities as described below. The proceeds trust preferred securities will accrue serni-aLu1ual distribu­ Parent: Floating-Rate Notes (2)(]) 1997 Various 100 101 from such issuances, together with the proceeds of the related tions of $40.63 per security (8.13% annualized rate). Floating-Rate Nmes (2)(4)(i) 1997 Various 100 100 issuances of common securities of the trusts, were invested in Floating-Rate Notes (2)(4) 1997 Variou 83 Wells Fargo Capital B This trust issued $200 million in junior subordinated deferrable interest debentures (deben­ Flaming-Rate Capital Notes (2)(4)(6) 1998 Various 200 200 trust prefelTed securities in November 1996 and concurrently Floating-Rate Notes (2)(4) 2000 Various 118 liS tures) of the Company. The purpose of issuing these trust invested $206.2 million in d benrures of the Company Capital Notes (6) 1999 8.625% 190 preferred securities was to provide the Company with a with a stated maturity of December 1, 2026. This class of Notes 1997 12.75% 70 more cost-effective means of obtaining Tier 1 capital for Notes (I )(7)(8) 2002 8.15% 97 trust preferred securities will accrue semi-annual distribu­ regulatory purposes than if the Company itself were to Notes 2002 8.75% 201 199 tions of $39.75 per security (7.95% annualized rate). Notes 2002 8.375% 149 149 issue additional preferred stock because the Company is Notes 2003 6.875% 150 150 allowed to deduct, for income tax purposes, distributions to Wells Fargo Capital C This trust issued $250 milli n in Notes 2003 6.125% 249 249 the holders of the trust preferred securities. The sole assets trust prefened securities in November 1996 and concurrently Notes (I) 2004 9.125% 137 of these special purpose trusts are the debentures. These invested $257.8 million in debentures of the ompany Notes (I )(7)(8) 2004 9.0% 121 debentures rank junior to the senior and subordinated debt with a stated maturity of December 1, 2026. This class of Nutes (I) 2006 6.875% 499 Notes (I) 2006 7.125% 299 issued by the Company. The Company owns all of the trust preferred securities will accrue semi-annual distribu­ Medium-Term Notes (I) 1998-2002 9.38-11.25% 177 common securities of the four trusts. The preferred securities tions of$38.65 per security (7.73% annualized rate). Toral subordinated debt 2,940 1,266 issued by the trusts rank senior to the common securities. Wells Fargo Capital I This trust issued $400 million in Concurrent with the issuance of the preferred securities by Toral senior and subordinated debt $5,060 $3,049 trust preferred securities in December 1996 and concurrently the trusts, the Company issued guarantees for the benefit invested $412.4 million in debentures of the Company of the security holders. The obligations of the Company (I) The Cumpany entered inm inrerest rmc swap agrcclllents for substantially :111 of these Notes, whereby rhe Company receives fixcd-ml~ interest payments approxim,ucly cqUfd with a stated maturity of December 15,.2026. This class of under the debentures, the indentures, the relevant trust lO interest un the Norcs and n"Hlkes interest payments based on an average rhree· ur six·monrh L1flOR rare. trust preferred securities will accrue semi-annual distribu­ (2) NOles are currelHly reJeemable in whule ur in part, at par. agreements and the guarantees, in the aggregate, consti­ tions of $39.80 per ecurity (7.96% annualized rate). (3) Suhjecr (0 t1 maximum interest roue of 13l}{, due [0 the purchase of an interest nne Crlp. tute a full and unconditional guarantee by the Company (4) tvlny he redeemed in whole, at p"T, at any rime in The event wirhholding taxes arc imposed by rhe United Stares. of the obligations of the trusts under the trust preferred (5) 511hjeer ro n Illaxilllum illleresr rote of 13%. On and after December 2006, each of the series of trust securities and rank subordinate and junior in right of (6) Mandatory Eqllirl' orcs. preferred securities may be redeemed and the corresponding (7) These Notc~ arc redeemahle ar various future dares. in whole or in pan. at p3f, priur tu maturiTy. payment to all liabilities of the Company. debentures may be prepai I at the option of the Company, (8) The interest rLltC swap agreement for these NOle~ b callable by the C()lIIHer~r'lfH·ty prior tu the maruriry of rhe Notes. Listed below are the series of trust preferred securities of subject to Federal Reserve approval, at declining redemp­ Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo tion prices. Prior to December 2006, the securities may be Capital C and Wells Fargo Capital I issued at $1,000 per redeemed at the option of the Company on the occurrence At December 31, 1996, the principal payments, including security. The distributions are cumulative and payable of certain events that result in a negative tax impact, sinking fund payments, on senior an I subordinated debt (in millions) PaTent oll"lpany semi-annually on the first day ofJune and December for negarive regulatory impact on the trust preferred securities are due as follows in the table on the right. 1997 $1,168 $1, 173 Wells Fargo Capital A, Wells Fargo Capital B and Wells of the Company or negative legal or regulatory impact on The intere t rate on floating-rate notes are determined 1998 992 999 Fargo Capital C and on the fifteenth day ofJune and the appropriate special purpose trust which would define it periodically by formulas based n certain money market 1999 347 352 December for Wells Fargo Capital 1. The trust preferred as an investment company. In addition, the Company has rates, subject, on certain notes, to minimum or maximum 2000 118 128 securities are subject to mandatory redemption at the stated the right to defer payment of interest on the debentures interest rates. 2001 359 366 maturity date of the debentures, upon repayment, or earlier, Thereafter 1,941 2,042 and, therefore, distributions on the trust preferred securi­ The Company's mandatory convertible debt, which pursuant to the terms of the Trust Agreement. Total $5,060 ties for up to five years. is identified by note (6) to the table above, qualifies as $4,925 Wells Fargo Capital A This trust issued $300 million in Tier 2 capital but is subject to discounting and note fund trust preferred securities in November 1996 and concurrently - 11 PREFERRED STOCK stock. Dividends of $11.25 per share (9% annualized 9% Cumulative Preferred Stock, Series G This class rate) were cumulative and payable on the last day of each of preferred stock has been issued as depositary shares, Of the 25,000,000 shares authorized, there were 6,600,000 as to dividends and liquidation preference but have no calendar quarter. each representing one-eighth of a sl~are of the Series G shares and 2,327,500 shares of preferred stock issued and general v ting rights. preferred st~ck. These shares are redeemable at the option 87/8% Cumulative Preferred Stock, Series D This outstanding at December 31,1996 and 1995, respectively. The following is a summary of preferred stock (adjustable of the Company on or after May 29, 1997 at a price of$200 class of preferred stock has been issucd as depositary shares, All preferred hares rank senior to common share both and fixed): per share plus accrued and unpaid dividends. Dividends of each rcpresenting one-twentieth of a share of the Series D $4.50 per share (9% annualized rate) are cumulative and preferred stock. These shares are redeemable at the option payable on the last day of each calendar quarter. Share~ iS5ueJ Carrying amount AJjusmblc Dividends declored of the Company on and after March 5, 1997 at a price of flnJ uULStanuing (in millions) dividends rote (in millions) $500 per share plus accrued and unpaid dividends. Divi­ 6.59%/Adjustable Rate Noncumulative Preferred Decemb r 31, December J I, Minimll1'll Maximum Yeor ended December 31, dendsof$11.09 per share (8718% annualized rate) are Stock, Series H These shares are redeemable at the 1996 1995 1996 1995 1996 1995 1994 cumulative an I payable on the last day of each calendar option of the C mpany on or after Octobcr 1, 2001 at a quarter. In December 1996, the Company announced that price of $50 per share plus accrued and unpaid dividends. Adjustable-Rate Cumulative, Series A $ - $ - 6.0% 12.0% $ - $ - $ 2 it will redeem all outstanding depositary shares represent­ Divi lends are noncumulative and payable on the first day (Liquidation preference $50) (1) ing its Series D preferred stock on March 5,1997. of each calendar quarter at an annualized rate of 6.59% Adjustahle-Rate Cumulative, Series B 1,500,000 1,500,000 75 75 5.5 10.5 4 5 4 through October 1, 2001. The dividend rate after Octo­ (Liquidation preference $50) 9718% Cumulative Preferred Stock, Series F In ber I, 2001 will be equal to 0.44% plus the highest of the November 1996, the Company redeemed all $200 million 9% Cumulative, eries C 477,500 239 21 21 21 Treasury bill discount rate, thc lO-year constant maturity (Liquidation preference $500) (2) of its Series F preferred stock at a price of $200 per share rate an I the 30-year constant maturity rate, as determined plus accrued and unpaid dividend. This class of preferred 8%% CUlllulative, Series 0 350,000 350,000 175 175 16 16 16 in advance of such dividend period, limited to a minimum stock had been issued as depositary shares, each repre­ (Liquidation preference $500) of 7% and a maximum of 13%. senting one-eighth of a share of the Series F preferred 9%% CUlllulative, Series F 12 7 (Liquidation preference $200) (3)(4) stock. Dividends of $4.94 per share (9 /8% annualized rate) were cumulative and payable on the last day of 9% CU)TIulativl:, Series G 750,000 150 10 (Liquidation preference $200) (3) each calendar quarter.

6.59%/Adjusrable Rate Noncumularive Preferred Stock, Series H 4,000,000 200 7.0 13.0 4 (Liquidation preference $50) COMMON STOCK, ADDITIONAL PAID-IN Total 6,600,000 2,327,500 $600 $67 $42 $43 12 CAPITAL AND STOCK PLANS (I) In Morch 1994, ,he Company redeemed oil $150 million of its Series A preferred slOck. (2) In December 1996, the Company redeemed oil $239 million of its Series C preferred stock. COMMON STOCK (J) On April I, 1996. the Series F and Series G preferred srock IVere convened from Fir;[ In,ers""e preferred stock into the right ro receive one share of the Company's preferred slOck. (4) In November 1996, rhe Company redeemed all $200 million of irs Series F preferred srock. The following table summarizes common sto k reserved, Under the terms of mandatory convertiblc debt, the issued, outstanding and authorized as of December 31, 1996: Company must exchange with the noteholder, or sell, Adjustable-Rate Cumulative Preferred Stock, unpaid dividends. Dividends are cumulative and payable various capital securities of the Company a described in Series A In March 1994, the Company redeemed all quarterly on the 15th of February, May, August and Note 9 to the Financial Statements. $150 million of its Series A preferred stock at a price of November. For each quarterly peri d, the lividend rate Number of .hares $50 per share plus accrued and unpaid dividends. Dividends is 76% of the highest of the three-month Treasury bill ADDITIONAL PAID-IN CAPITAL were cumulative and payable on the last day ofeach calendar discount rate, lO-year constant maturity Treasury security Tax Advantage and Retircmenl Plan 2,7 J8,228 quarter. For each quarterly period, the dividend rate was yield or 20-year constant maturity Treasury bond yield, but Long-Term 'md Equity Incentive Plans 3,780,721 Divid~nd 2.75% less thall the highest of the three-month Treasury bill limited to a minimum of 5.5% and a maximum of 10.5% Reinvestment ami Repurchases made in connection with the Company's stock Common Stock Purchase Plan 4,012,662 repurchase program result in a reduction of the additional discount rate, 10-year constant maturity Treasury security per year. The average dividend rate was 5.5%, 5.8% and Employee rock Purchase Pbn 673,197 paid-in capital (APIC) account equal to the amount paid yield or 20-year constant maturity Tr- asury bond yield, but 5.7% during 1996,1995 and 1994, respectively. Direcror Oprion Plans 164.599 limited to a minimum of 6% al1d a maximum of 12% per year. Stock Bonus Plan 14,405 in repurchasing the stock, less the $5 per share representing 9% Cumulative Preferred Stock, Series C In Decem­ The average dividend rate was 6.1 % (annualized) in 1994. TotaI shares reserved 11,363,812 par value that is charged to the common stock account. In ber 1996, the Company redeemed all $239 million of its Shares issue I and oUlstanciing 91,474,425 order to absorb future repurchases of common srock, the Adjustable-Rate Cumulative Preferred Stock, Series C preferred stock at a price of $500 per share plus Shares nor reserved 47,161,763 Company transferred $1 billion from Retained Earnings Series B These shares were redeemable at the option of accrued and unpaid dividends. Thi class of preferred Total shares aurhorized (I) I 50,000,000 to APIC in each of the years 1995 and 1994. the Company through May 14, 1996 at a price of $51.50 stock had been issued as depositary shares, each represent­ per share and, thereafter, at $50 per share plus accrued and ing one-twentieth of a share of the Series C preferred (I) In 1996, shareholders

DIRECTOR OPTION PLANS longer than 10 years, the maximum provided in the Other Stock Plans Pursuant to the Merger agreement, option granted by First Interstate was converted into an 1990 EIP. Employee stock options generally become fully the First Interstate stock option plans were converted into option to purchase Company common stock based on the exercisable over 3 years from the grant date. Upon termi­ stock option plans to purchase the Company's common original plan and the agreed upon e~change ratio. As a The 1990 Director Option Plan (1990 DOP) provides for nation of employment, the option period is reduced or the stock based on the original stock option plan and the agreed result of the change in control, all outstanding First Inter­ annual grants ofoptions to purchase 500 shares of common options are canceled. The LTIP also provides for grants upon exchange ratio (see Note 2 for additional information state options became exercisable as of April 1, 1996. The stock to each non-employee director elected or re-elected to recipients not limited to present key employees of the concerning the Merger). 1988 and 1991 First Interstate stock option plans also at the annual meeting of shareholders. Non-employee Company. The total number of shares of common stock The stock option plans adopted in 1988 and 1991, by provided for the issuance of restricted common stock. As directors who join the Board between annual meetings issuable under the LTIP is 2,500,000 in the aggregate First Interstate, provided for the granting of options to key of April 1, 1996, all outstanding restricted shares became receive options on a prorated basis. The options may be (excluding outstanding awards under the 1990 and 1982 ElPs) employees to purchase common stock of First Interstate at vested and were issued. As no additional awards were made exercised until the tenth anniversary of the date of grant; and 800,000 in anyone calendar year. No compensation a price not less than 100% of the fair market value on the under these plans an I all outstanding grants became fully they become exercisable after one year at an exercise price expense was recorded for the stock options under the LTIP date of grant. The First Interstate Bancorp ]991 Director vested at the time of the Merger, no compensation expense equal to the fair market value of the stock at the time of (or 1990 and 1982 ElPs), as the exercise price was equal to Option Plan, as amended and restated, provided for the was recognized by the Company for these plans in 1996. grant. The maximum total number of shares of common the quoted market price of the stock at the time of grant. granting to non-employee directors of options to purchase .The following table is a summary of the Company's stock stock issuable under the 1990 DOP is 100,000 in the Loans may be made, at the discretion of the Company, common stock of First Interstate at a price not less than option activity and related information for the three years aggregate and 20,000 in anyone calendar year. No com­ to assist the participants of the LTIP and the EIPs in the 100% of the fair market value on the date of grant. Pursuant ended Decemb r 31, 1996: pensation expense was recorded for the stock options under acquisition of shares under options. The total of such to the Merger agreement, each outstanding and unexercised the 1990 DOP, a the exercise price was equal to the quoted interest-bearing loans were $2.9 million and $5.8 million market price of the stock at the time of the grant. at December 31,1996 and 1995, respectively. The 1987 Director Option Plan (1987 DOP) allows par­ The holders of the restricted share rights are entitled at ticipating directors to file an irrevocable election to receive 1990 and 19M7 IXlI' LTIP 1990 and 1982 Ell' First Interstate no cost to the shares of common stock represented by the stock options in lieu of their retainer to be earned in any Numher Weighted- Number Weighred- Numher Weighted- Number Weighted- restricted share rights held by each person five years after average average average average one calendar year. The options become exercisable after exercise exercise exercise exercise the restricted share rights were granted. Upon receipt of one year and may be exercised until the tenth anniversary price price price price the restricted share rights, holders are entitled to receive of the date ofgrant. Options granted prior to 1995 have an quarterly cash payments equal to the cash dividends that Options outstanding as exercise price of$1 per share. Commencing in 1995, options would be paid on the number of common shares equal to of December 31, 1993 24,158 $ 72.35 $ 2,007,400 $ 64.23 granted have an exercise price equal to 50 percent of the the number of restricted share rights. Except in limited quoted market price of the stock at the time of grant. circumstances, restricted share rights are canceled upon 1994: Compensation expense for the 1987 DOP is measured as Granted 6,149 132.97 284,000 146.75 termination of employment. In 1996 and 1995,95,233 the difference between the quoted market price of the Transferred 400,400 110.65 (400,400) 110.65 and 69,778 restricted share rights were granted with a Canceled (28,500) 110.75 (28,665) 73.71 stock at the date of grant less the option exercise price. weighted-average grant date fair value of $236.87 and Exercised (2,000) 71.09 (720) 110.75 (303,947) 52.29 This expense is accrued as retainers are earned. $173.90, respectively. As of December 31, 1996, the LTlP, Options outstanding as the 1990 EIP and the 1982 ElP had 199,014,218,434 and of December 31, 1994 28,307 85.18 655,180 126.27 1,274,388 66.86 EMPLOYEE STOCK PLANS 12,483 restricted share rights outstanding, respectively, to 1,442, 648 and 49 employees or their beneficiaries, respe ­ 1995: 209.27 tively. The compensation expense for the restricted share Granted 7,264 134.83 284,700 Long-Term and Equity Incentive Plans The Wells anceled (8,500) 121.34 (2,330) 75.6 Fargo & Company Long-Term Incentive Plan (LTIP) rights equals the market price at the time of grant and is Exercised (2,000) 72.47 (66,870) 110.75 (471,625) 6 .7 became effective in 1994. The LTIP supersedes the 1990 accrued on a straight-line basis over the vesting period. Options outstanding as Equity Incentive Plan (1990 ElP), which is itself the suc­ of December 31, 1995 33,571 96.68 864,510 154.87 800,433 68.69 cessor to the original 1982 Equity Incentive Plan (1982 ElP). No additional award or grants will be issued under 1996: the 1990 or 1982 EIPs. Granted 11,391 225.70 232,620 273.86 The LTlP provides for awards of restricted shares in Acquired (I) 926,857 $93.78 Canceled (9,280) 215.27 (10,420) 95.49 addition to the stock options, stock appreciation rights Exercised (500) 66.25 (33,922) 130.73 (I 21 ,444) 65.48 (499,472) 97.94 and share rights that could have been awarded under the Options outstanding as 1990 ElP. Employee stock options granted under the LTIP of December 31, 1996 44,462 $130.08 1,053,928 $181.38 678,989 $69.26 416,965 $88.74 can be granted with exercise prices at or, unlike the 1990 EIP, above the current value of the common tock Outswnding options and, except for incentive stock options, can have terms exercisable as of: December 3 I, 1996 33,071 $ 97.14 544,508 $138.54 678,989 $ 69.26 416,965 $88.74 Decembed1, 1995 26, 07 86.15 287,875 121.78 800,433 68.69 December 31, 1994 22,158 7192 371,180 110.64 1,274,388 66.86

(I) Optiolls acquired from First Inrcrstatc I'"rsuanr [0 Merger agreement, April I, 1996. The following table is a summary ofselected information Options to purchase 750,000 shares of common stock The Company elected to continue to apply the provisions The fair value of each option grant is estimated based on for the Company's compensatory stock option plans: may be granted under the ESPP. Employees of the Com­ of APB 25 in accounting for the employee stock plans the date of grant using a modified Black Scholes option­ pany who have completed their introductory period of described on the preceding pages. Accordingly, no com­ pricing model. For the fixed stock option plans, the following employment, except hourly employees, are eligible to par­ pensation cost has been recognized for fixed stock options weighted-a,;erage assumptions were used for 1996 and December 31, 1996 ticipate. Certain highly compensated employees may be granted under the LT1P, 1990 and 1982 EIP and Fir t Inter­ 1995, respectively: dividend yield of 1.4% and 1.6%; state plans or the ESPP stock purchase plan. WeighteJ- NUlllher Weighred- excluded from participation at the discretion of the Man­ expected volatility of 29.0% and 33.3%; risk-free interest nvcragc average agement Development and Compensation Committee of Had compensation cost for these employee stock plans rates of 6.0% and 5.7% and expected life of 5.4 years for remaining exercise been determined based on the new fair value meth d under cunlracLlIal price the Board of Directors. The plan provides for an. option both years. For the stock purchase plan, the following life (in 1'1"') price of the lower of market value at grant date or 85% to FAS 123, the Company's net income and earnings per assumptions were used for 1996 and 1995, respectively: RANGE OF EXERCISE PRICES 100% (as determined by the Board of Di.rectors for each share would have been reduced to the pro forma amounts dividend yield of 1.8% for both years; expected volatility 1990 and 1987 DOP (I) option period) of the market value at the end of the one­ indicated below. of 23.8% and 18.0%; risk-free interest rates of 5.8% $1.00 year option period. For the current option period ending and 5.7% and expected life of one year for both years. Options outstanding/exercisable 5.2 4,919 $ 1.00 July 31,1997, the Board approved a closing option price of For information on employee stock ownership through $44.63-$93.00 (in millions) Yem ended December 31, Options outstanding/exercisable 4.0 11,438 71.30 85% of the market value. The plan is noncompensatory the Tax Advantage and Retirement Plan, see Note 13. $108.00-$160.00 and results in no expense to the Company. 1996 1995 Options outstanding 6.6 18,64 139.49 None of the options outstanJing as of December 31, Net income DIVIDEND REINVESTMENT PLAN ptions excrcisablc 16.714 143.13 1996,1995 and 1994 was exercisable. For options out­ $236.38-$250.38 As reported $1,071 $1,032 standing as of December 31, 1996, the exercise price for Options outstanding 8. 9,462 24969 Pro forma (I) 1,063 '1,030 The Dividend Reinvestment and Common Stock Purchase each option was $227.80, and the remaining contractual Net income pCI' common share Options exercisable and Share Custody Plan aUows hiders of the Company's LTIP (2) life was seven month. The fair value of options granted As reponed $12.21 $20.37 common srock to purchase additional shares either by $107.25-$159.63 in 1996 and 1995 was $52.46 and $39.25, respectively. Pro forma (I) 12.12 20.33 reinvesting all or part of their dividends, or by making Options uutstanding 6.5 556.310 128.98 The total compensation expense recognized for the Options exercisable 459.765 125.12 (I) The pro rorma amounts noted above only reflecr lhc eflccis orstrlck-hased com­ optional cash payments. Participants making optional cash employee stock plans described above was $10 million, $211.38-$277.00 pensatiun grants made ;l(tcr 1994. Because srock oplions <:IT(: gr~lI1rccl each ~Iear payments to purchase additional shares may do so by making $8 million and $8 million in 1996,1995 and 1994,

EMPLOYEE BENEFITS AND OTHER EXPENSES Employee Stock Purchase Plan Transaction involving 13 the Employee Stock Purchase Plan (ESPP) are summarized as follows: RETIREMENT PLAN ......

1996 1995 1994 The Company's retirement plan is known as the Tax plans (covered compensation). The Company also makes Number Weighted­ Numher Weighred­ Number Weighred­ Advantage and Retirement Plan (TAP), a defined contri­ special transition contributions related to the termination average average average bution plan. As part ofTAP, the Company makes basic exercise exercise exercise of a prior defined benefit plan of the Company ranging price price price retirement contributions to employee retirement accounts. from .5% to 5% of covered compensation for certain Effective July 1994, the Company increased its basic employees. The plan covers salaried employees with at Options oursranding, beginning of year 129,980 $182.25 143,404 $153.38 160,476 $114.73 retirement contributions from 4% to 696 of the total of Granted 157,878 227.80 143.072 182.25 159. I 153.38 least one year of service and contains a vesting schedule CmKcled (1) (62,524) 189.06 (73,359) 158.53 (83,734) 122.17 employee base salary plus payments from certain bonus graduared from three to seven years of service. Exercised (76,803) 182.25 (83,137) 153.38 (92.853) 114.73 ptions outsrallding, end of year 148,531 $227.80 129,980 $182.25 143,404 $153.38

(I) At the beginning of the opdun period. panicipanTs arc grantcJ an additional ')0% of opTions [hat me exercised only ro rhe extent rhm the closing option price is sufficiendy below the l1lClrkel value 1:H grant dme and u(lsed on rhe participant's level of pllrticiparion. Since the closing option price WClS higher in 1996, 1995 and 1994, the addilionAI option grants wen~ cancded. These uptions represenr a majority of rhe GlI1cclcd options shown above. .. •

Prior to July 1994, the Company made supplemental Expenses related to TAP for the years ended December 31, The net periodic pension cost for 1996 included the First Interstate had a group benefits plan that provided retirement contributions of 2% of employee-covered com­ 1996, 1995 and 1994 were $95 million, $57 million and following: health and welfare benefits to active employees. Pursuant to pensation. All salaried employees with at least one year of $56 million, respectively. the Merger agreement, portion of dIe First Interstate plan service were eligible to receive these Company contribu­ First Interstate also had a noncontributory defined were discon'tinued, effective June 30,1996, and eligible tions, which vested immediately. Effective July 1994, the benefit plan that provides retirement benefits that are a (in millions) Year ended December 31. 1996 employees were allowed to participate in similar plans supplemental retirement contributions were discontinued, function of both years of service and the highest average provided by the Company. The remainder of the programs except for tho e contributions that are made to employees compensation for any five (consecutive) year period dur­ Service cost (benefits earned during the period) under the First Interstate group benefits plan will be dis­ hired before January 1, 1992. Those employees will continue ing the last 10 years before retirement. Pursuant to the $ 7.4 Interest cost on projected benefit obligation 52.9 continued for active employees after December 31, 1996, to receive the supplemental 2% contribution and the 4% Merger agreement, accrued benefits, as ofJune 30, 1996, Actual rerum on plan assets (59.I) and eligible employees will be allowed I' participate in basic retirement contributions until fully vested. Upon for all participants employed as of March 28, 1996 became Net amortization and deferral (1.2) similar plans provided by the Company. becoming 100% vested, the basic retirement contribution fully vested. Effective June 30, 1996, all accrued benefits Net periodic pension COSt $ First Interstate also provided health care benefits to retired will increase to 6% of employee-covered compensation under the plan were frozen. There is no intention at the employees through its group benefits plan. Employees hired and the supplemental 2% contributions will end. present time to terminate the plan. prior to January 1, 1992 and who retire at or after age 55 Salaried employees who have at least one year of service The funding I olicy for the defined benefit retirement The weighted-average discount rate used in determining with at least 10 years of service were eligible for a fixed are eligible to contribute to TAP up to 10% of their pretax plan is to make contributions sufficient to meet the mini­ contribution from First Interstate. Employees hired after covered compensation through salary deductions under mum requirements set forth in the Employee Retirement the pension benefit obligation was 7.5%. No increase in future salary levels was assumed as all accrued benefits December 31,1991 were not eligible for retiree health Section 401(k) of the Internal Revenue Code, although a Income Security Act of 1974, with additional contributions under the plan were frozen effective June 30, 1996. The care benefits. This plan will be discontinued after Decem­ lower contribution limit may be applied to certain employees being made periodically when deemed appropriate. The expected long-term rate of return on assets was 8.5%. ber 31, 1996. All active and retired employees covered in order to maintain the qualified status of the plan. The following table sets forth the funded status of the plan as under the plan will become eligible for similar benefits Company makes matching contributions of up to 4% of an of its Measurement Date (September 30, 1996) and provided by the Company. employee's covered compensation for those who have at least amounts recognized in the Company's Consolidated Bal­ HEALTH CARE AND LIFE INSURANCE ...... The Company recognized the cost of health care benefits three years ofservice and elect to contribute under the plan. ance Sheet as of December 31, 1996. (The plan was not for active eligible employees by expensing contributions Effective July 1994, the Company began to partially match included in the Company's Consolidated Balance Sheet The Company provides health care and life insurance totaling $78 million, $37 million and $45 million in 1996, contributions by employees with at least one but less than as of December 31,1995.) benefits for certain active and retired employees. The 1995 and 1994, respectively. Life insurance benefits for three years of service. For such employees who elect to Company reserves its right to terminate these benefits at active eligible employees are provided through an insurance contribute under the plan, the Company matches 50% of any time. The health care benefits for active and retired company. The Company recognizes the co I' of these benefits each dollar on the first 4% of the employee's covered com­ (in millions) December 31.1996 employees are self-funded by the Company with the Point­ by expensing the annual insurance premiums, which were pensation. The Company's matching contributions are of-Service Managed Care Plan or provided through health $1.2 million in 1996 and $2 million in 1995 and 1994. immediately vested and, similar to retirement contributions, Actuarial present value of benefit obligmions: maintenance organizations (HMOs). The amount ofsubsi­ At December 31,1996, the Company had approximately are tax deductible by the Company. dized health care coverage for employees who retired prior 33,400 active eligible employees and 10,000 retirees par­ Employees direct the investment of their TAP funds and Accumulated benefit obligation (fully vestcJ) $975.2 to January 1, 1993 is based upon their Medicare eligibility. ticipating in these plans. may elect to il1vest in the Company's common stock. Plan assets at fair value (I) 988.5 The amount ofsubsidized health care coverage for employees Effective January 1, 1993, the Company adopted State­ As a result of the Merger, certain benefit plans were Projected benefit obligation 975.2 who retire after December 31,1992 is based upon their eli­ ment of Financial Accounting Standards No. 106 (FAS acquired from First Interstate. These plans and their cur­ Plan asset in excess of projected benefit obligation 13.3 gibility to retire as ofJanuary 1, 1993 and their years of 106), Employers' Accounting for Postretirement Benefits rent status are described as follows. Unrecognized net gain (due to past experience different from assumptions made and effects of changes in a"'lllllptions) (13.3) service at the time of retirement. Active employees with Other Than Pensions. This Statement changed the First Interstate had a defined contribution plan available Prepaid pension aSset (accrued pension liability) an adjusted service date after September 30, 1992 are not method of accounting for postretirement benefits other to all eligible employees who had completed one year of -$- eligible for subsidized health care coverage upon retir ment. than pensions from a cash to an accrual basis. service. Employees could contribute up to 6% of their base Employees with an adjusted service date after January 1, 1994 Under FAS 106, the determination of the accrued salary, which was matched 150% by First Interstate. Addi­ (1) Primarily invcsrcJ in eqllily sccllrirics. are not eligible for Company paid life insurance benefits. liability requires a calculation of the accumulated tional pre-tax or after-tax contributions could be made by As a result of the Merger, certain benefit plans were postretirement benefit obligation (APBO). The APBO employees of up to 6% or 10%, respectively, of their base acquired from First Interstate. These plans and their cur­ represents the actuarial present value of postretirement salary with no matching contributions. Pursuant to the rent status are described as follows. benefits other than pensions to be paid out in the future Merger agreement, accounts for active employees became (e.g., health benefits to be paid for retirees) that have fully vested on March 28,1996. OnJuly 1, 1996, this plan been earned as of the end of the year. The unrecognized was merged into TAP, and all eligible employees began APBO at the time of adoption of FAS 106 (transition participation in TAP. obligation) of$142 million for postretirement health care benefits is being amortized over 20 years. 14 INCOME TAXES The following table sets forth the net periodic cost for For measurement purposes, a health care cost trend rate was used to recognize the effect of expected changes in postretirement health care benefits for 1996 and 1995: Total income taxes for the years ended December 31, future health care costs due to medical inflation, uti! ization Amounts for the current year are based upon estimates 1996,1995 and 1994 were recorded as follows: changes, technological changes, regulatory requirements and assumptiOns as of the date of this report and could vary significantly from amounts shown on the tax retums as Year endeJ December 31. and Medicare cost shifting. Average annual increases of (in millions) filed. Accordingly, the variances from the amounts previ­ 1996 1995 5.5% for HMOs and 7.5% for all other types of coverage in the per capita cost of covered health care benefits were (in millions) Ycar ended December 31, ously reported for 1995 are primarily a result of adjustments 1996 1995 1994 to conform to tax returns as filed. Imerest coSt on APBO $14.3 $ 8.5 assumed for 1997. The rate for other coverage was assumed A mortization of transition ohligation 7.1 7.1 The Company's income tax expense (benefit) related to t decrease gradually to 5.5% in 2001 and remain at that Income taxes applicable to income Amortization of nct gain (4.2) (3.5) investment securities transactions was $4 million, $(7) mil­ level thereafter. Increasing the assumed health care trend hefore income tax expense $908 $745 $613 Service cost (benefits attributed to by one percentage point in each year would increase the Goodwi II for tax benefi ts related lion and $3 million for 1996, 1995 and 1994, respectively. service during the period) 2.0 1.1 APBO as of December 31,1996 by $7.3 million and the to acquired assets (25) The Company had net deferred tax assets of $437 million Total $19.2 $13.2 aggregate of the interest cost and service cost components Subtotal 908 745 588 and $817 million at December 31,1996 and 1995, respec­ of the net periodic cost for 1996 by $0.4 million. Stockholders' equity for tively. The tax effect of temporary differences that gave rise compensation expense for tax The $10.7 million increase in the Llruecognized net gain to significant portions ofdeferred tax assets and liabilities purposes in excess ofamounrs at December 31,1996 and 1995 are presented below: in 1996 was due to a lower average p r capita cost of health recognized for financial The following table sets forth the funded status for care coverage and an increase in the discount rate, which was reporting purposes (17) (24) ( 13) postretirement health care benefits and provides an analysis partially offset by an increase in the number of participants Stockholders' equity for tax effect of of the accrued postretirement benefit cost included in the and amortization of the previously unrecognized net gain. the change in net unrealized gain (in millions) Year ended December 31, Company's Consolidated Balance Sheet at December 31, (loss) on investment securities (3) 100 (95) The Company al 0 provides postretirement life in urance 1996 1995 Total income taxes 1996 and 1995. to certain existing retirees. The APBO and expenses related $888 $821 $480 Deferred Tax Assets to these benefits were not material. Net tax-deferred expenses $ 879 $ 196 A Ilowance for loan losses 784 717 Ye,,, endeJ Decemher 31. (in milliull» tate tax expense OTHER EXPENSES 63 56 1996 1995 ...... The following is a summary of the components of Certain identifiable intangibles 46 income tax expense (benefit) applicable to income before Foreclosed assers 45 42 APBO (I)(Z): The following table shows expenses which excee led 1% of Premises and equipment 26 $ 64.2 income taxes: Retirees $ 174.7 Core deposit intangible 7 11.4 11.9 total interest income and noninterest income and which Eligible acrive employees 1,771 35.1 L8.7 are not otherwise shown separately in the financial state­ 1.090 Other active employees ------Valuation allowance 221.2 94.8 ments or notes thereto. (in mill inns) Year ended December 31. Total deferred faX assets, Plan as ets m fair value 1996 199'1 1994 less valuation allowance 1,771 1.090 221.2 94.8 APBO in excess of plan assets Deferred Tax Liabilities Year ended Dccember 31. Current: Unrecognized net gain from pasr experience (inmilliom) ore deposit intangible Federal 759 differenr from that assumed and 1995 1994 $557 $507 $472 1996 Leasing 393 254 from changes in assumptions 62.0 51.3 State and local 182 183 146 -- -- Premises and equipment 106 Unrecognized transition ohligation (113.7) (120.8) $149 $LOI Contract services $295 739 690 618 Investments 40 10 62 Accrued postretirement benefit cost Operating losses (I) 145 45 Deferred: Certain identifiable intangibles 16 58 49 (included in mher Iiabilitie') $ 169.5 $ 25.3 Telecommunications 140 Federal 139 37 (26) Other 20 --- 9 Advertising and promotion 116 73 65 Stare and local 30 18 21 Toml deferred tax liabilities 1,334 273 Outside profeSSional services 112 45 33 ------(I) "aseJ un a di,cnum rdre of 7.17% anJ 6.98% in 1996 ami 1995. respectively. 169 55 (5) Postage 96 52 44 -- -- Net Deferred T.1x Asset $ 437 $ 817 (2) Ar the time of rhc Merger, rhc Company recognized a liabiliry nf $140.7 million Toral $908 1745 $613 for [he eslimarcJ outstanding ublig:niun relarcJ LO Ihc."c benelits. (I) Includes losscs from litigation. fraud and orher maners. .

15 PARENT COMPANY primarily relates to approximately $448 million ofnet deduc­ Substantially all of the Company's net deferred tax asset tions that are expected to reduce future California taxable of $437 million at December 31,1996 related to net expenses ~onde:lsled finaJ~ci~ll'bnformatio~ o~Wells Fargo & Cornpany (Parent) is presented below. For information regarding the income (California tax law does not permit recovery of (the largest of which were the net tax-deferred expenses ments ong-term e t and denvattve financial instruments, see Notes 9 and 18, respectively. previously paid taxes). The Company's California taxable and the provision for loan losses, offset by the core deposit income has averaged approximately $1.5 billion for each of intangible) that have been reflected in the financial state­ the last three years. The Company believes that it is more ments, but which will reduce future taxable income. At likely than not that it will have sufficient future California December 31,1996, the Company did not have any net CONDENSED STATEMENT OF INCOME CONDENSED BALANCE SHEET taxable income to fully utilize these deductions. The amount operating loss carryforwards. The Company estimates of the total deferred tax asset considered realizable, however, (in millions) Ye"r ended December 3\, (in millions) [)ecember 31 , that approximately $401 million of the $437 million net could be reduced in the near term if estimates of future 1996 \995 \994 [996 1995 deferred tHX asset at December 31, 1996 could be real ized taxable income during the carryforward periods are reduced. by the recovery of previou ly paid federal taxes; however, ASSETS The following is a reconciliation of the statutory federal INCOME the Company expects to actually realize the federal net Dividends from subsidiaries: Cash and due frum Wells Fargo Bank, N.A. income tax expense and rate to the effective income tax deferred tax asset by claiming deductions against future Wells Fargo Bank, N.A. $1,461 $1,13 I $1,001 (includes interest-earning depusits of taxable income. The balance of approximately $36 million expense and rate: Other bank subsidiaries 33 $1,000 million and $1 million) $ 1,043 $ 31 Nonbank subsidiaries 1 Investment securities at fair value 395 424 Il1lerest income from: Loans 220 263 ___ Year ended December 31, Wells Fargo Bank, N.A. 99 86 81 A Ilowance for loan losses 66 58 (in millions) Other bank subsidiaries 9 3 1995 1994 Net loans 154 205 1996 --- Nonbank subsidiaries 8 12 15 ----~- % Amolll1t % An'lount % Amounl Other 71 53 51 Loans and advances to subsidiaries: Noninterest income 163 52 38 35.0% Wells Fargo Bank, N.A. 2,156 1,417 35.0% $622 35.0% $509 Smtutory federal incume mx expense and mte $693 Toral income 1,845 1,337 ~ Othcr bank subsidiaries 275 90 Change in tax rate resulting from: Nonbank subsidiaries 90 141 Smte and local taxes on income, net of federal Investmenr in subsidiaries (I): 7.4 110 7.5 EXPENSE 124 6.3 132 Wells Fargo Bank, N.A. 13,912 4,322 income tax henefit Imerest on: Amortization ofcertain inrangibles not ther bank subsidiaries 1,439 203 .8 17 1.2 Commercial paper and 102 5.2 14 Nonbank subsidiaries 213 113 deductible for tax rerum purposes (l.2) (23) (1.5) 8 -ill) (.6) (23) other short-term borrowings 10 14 Other Other assers 1,457 508 $613 42.2% Senior and subordinated debt 299 194 181 $908 45.9% $745 42.0% Effective income taX expense and rate Noninterest expense 93 35 56 Total assets $21,134 $7,454 ------Toral expense 402 243 245 LlABILITlES AND STOCKHOLDERS' EQUITY Income before income tax henefir and Commercial paper and other The Company has not recogniz d a federal deferred tax undistribured income shnrt-term borrowings $ 170 $ 160 liability of $36 million on $102 million of undistributed of sub 'idiaries 1,443 1,094 941 Orher liabilities 742 270 Income tax benefit 17 17 27 Senior debt 1,984 1,703 earnings of a foreign subsidiary because such earning are Equity in undistributed income Subordinated debt 2,940 1,266 indefinitely reinvested in the subsidiary and are not tax­ ofsubsidiaries: Indebtedness to subsidiaries (2) 1,186 able under current law. A deferred tax liability would be Wells Fargo Bank, N.A. (I) (455) (26) (138) Stockholders' equity 14,112 4,055 Other bank subsidiaries 48 (65) recognized to the extent the Company changed its intent Total liabilities and stockholders' equity $21,134 $7,454 Nonbank subsidiaries 18 12 11 to not indefinitely reinvest a portion or all of such undis­ -- -- tributed earnings. In addition, a current tax liability would NET INCOME $1,071 $1,032 $ 841 ( I) The double .Ieverage rario. which repre

(in millions) Year ended December 3\, 1996 1995 1994 16 LEGAL ACTIONS 17 RISK-BASED CAPITAL Cash flows from operating activities: 50% and 100 Yo) is applied to the different balance sheet Net income $1,071 $1,032 $ 841 In the normal course of business, the Company is at all The Company and the Bank are subject to various regulatory Adjustments to reconcile net income times subject to numerous pending and threatened legal capital adequacy requirements administered by the Federal and off-balance sheet assets, primarily based on the relative to net cash pmvided by actions, some for which the relief or damages sought are Reserve Board (FRB) and the OCC, respectively. The Fed­ credit risk of the counterparty. For example, claims guar­ operating activities: eral Deposit Insurance Corporation Improvement Act of anteed by the u.s. government or one of its agencies are (3) (15) (4) substantial. After reviewing pending and threatened actions Deferred income tax benefit 1991 (FDIClA) required that the federal regulatory agencies risk-weighted at 0%. Off-balance sheet items, such as loan Equity in undistributeclloss ofsubsidiaries 389 79 127 with counsel, management considers that the outcome of Other, net 155 (52) (24) such actions will not have a material adverse effect on adopt regulations defining five capital tiers for banks: well commitments and derivative financial instruments, are also capitalized, adequately capitalized, undercapitalized, signifi­ applied a risk weight after calculating balance sheet equi­ Net cash provided by operating activities -2,612 1,044 940 stockholders' equity of the Company; the Company is not cantly undercapitalized and critically undercapitalized. valent amounts. One offour credit conversion factors (0%, Cash flows from investing activities: able to predict whether the outcome of uch actions mayor Investment securities: may not have a material adverse effect on result of opera­ Failure to meet minimum capital requirements can initiate 20%,50% and 100%) are assigned to loan commitments At fair value: tions in a particular future period as the timing and amount certain mandatory and possibly additional discretionary based on the likelihood of the off-balance sheet item 5 Pmceeds from sales 11 4 of any resolution of such actions and its relationship to the actions by regulators that, if undertaken, could have a direct becoming an asset. For example, certain loan commitments Proceeds from prepayments material effect on the Company's financial statements. are converted at 50% and then risk-weighted at 100%. 206 2 future results of operations are not known. and maturities Quantitative measures, established by the regulators to Derivative financial instruments are converted to balance Purchases (183) (59) (175) At cost: ensure capital adequacy, require that the Company and sheet equivalents based on notional values, replacement Proceeds from prepayments the Bank maintain minimum ratios (set forth in the table costs and remaining contractual terms. (See Notes 5 and maturities 56 256 below) of capital to risk-weighted assets. There are two and 18 for further discussion of off-balance sheet items.) (122) Purchases categories of capital under the guidelines. Tier 1 capital The capital amounts and classification are also subject to 51 70 24 Net decrease in loans includes common stockholders' equity, qualifying preferred qualitative judgments by the regulators about components, Net (increase) decrease in loans and risk weightings and other factors. advances to subsidiaries 289 (192) 529 stock and trust preferred securities, less goodwill and cer­ Net (increase) decrease in investment tain other deductions (including the unrealized net gains Management believes that, as of December 31,1996, in subsidiaries (216) (266) 5 and losses, after applicable taxes, on available-for-sale the Company and Bank met all capital adequacy require­ Net decrease in securities purchased investment securities carried at fair value). Tier 2 capital ments to which they are subject. 250 under resale agreements includes preferred stock not qualifying as Tier 1 capital, Under the FDICIA prompt corrective action provisions Other, net (88) [19 12 - mandatory convertible debt, subordinated debt, certain applicable to banks, the most recent notification from the Net cash provided (used) by unsecured senior debt issued by the Parent and the allow­ oec categorized the Bank as well capitalized. To be cat­ investing activities 70 (266) 784 ance for loan los es, subject to limitations by the guidelines. egorized as well capitalized, the institution must maintain Cash flows from financing activities: Net increase (decrease) in Tier 2 capital is limited to the amount ofTier 1 capital a total risk-based capital ratio as set forth in the following short-term borrowings 10 27 (5) (i.e., at least half of the total capital must be in the form table and not be subject to a capital directive order. There Proceeds from issuance of senior debt 1,260 1,230 248 of Tier 1 capital). are no c nditions or events since that notification that (811) (I,LOl) Repayment of scnior debt (1,183) Under the guidelines, capital is compared to the relative management believes have changed the Bank's risk-based Proceeds fmm issuance of risk related to the balance sheet. To derive the risk included capital category. subordinated debt 800 Repayment of subordinated debt (210) (526) in the balance sheet, one of four risk weights (0%, 20%, Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 1,186 (in billiOllS) To be well capitalized Proceeds from issuance of" preferred stock 197 For capind under the FDICIA prompt Proceeds from issuance ofcommon stock 117 90 57 Actual adequacy purposes corrective action provisions Redemption of preferred stock (439) (ISO) Amount Ratio Amount Ratio Amount Rario Repurchase of common stock (2,158) (847) (760) Payment of cash dividends on As of December 31, 1996: preferred stock (73) (42) (34) Total capital (to risk-weighted assets) Payment of cash dividends on Wells Fargo & Company $10.0 11.70% 2:$6.8 2:8.00% common stock (429) (225) (218) Wells Fargo Bank, N.A. 8.0 11.00 2: 5.8 2:8.00 2:$7.2 2:10.00% 42 16 57 Other, net - -- Tler 1 capital (to risk-weighted assers) Net cash used by financing activities (670) (772) (2,432) Wells Fargo & Company $ 6.6 7.68% 2:$3.4 2:4.00% Net change in cash and cash Wells Fargo Bank, N.A. 6.2 8.53 2: 2.9 2:4.00 2:$4.4 2: 6.00% equivalents (due from Tier 1 capiral (to average a~sets) 1,012 6 (708) Wells Fargo Bank, N.A.) (Leverage ratio) Cash and cash equivalents at Wells Fargo & Company $ 6.6 6.65% 2:$4.0 2:4.00%(1) 31 25 733 beginning of year Wells Fargo Bank, N.A. 6.2 6.81 2: 3.6 2:4.00 (I) 2:$4.5 2: 5.00% Cash and cash equivalents at $ 31 $ 25 end of year $1,043 (l) The leverage n"uio consisrs afTier 1 capiwl divided by quarterly average total rlssers. excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anriciparc significant growth and that have well~diversi(jed risk. excellent asset quality, high liquidity, good earnings anJ, in general, are Noncash investing activities: considered top-rmed, strong banking organizations. Transfers fmm investment securities at ost to investment securities at fait value $- $ 147 L_

I' •

18 DERIVATIVE FINANCIAL INSTRUMENTS (in millions) December 1I, The Company enters into a variety of financial contracts, parties, losses associated with counterparty nonpelformance 1996 1995 which include interest rate futures and forward contracts, on derivative financial instruments have been immaterial. Notional or Credit risk 'Estimated Norion"lor Credit risk Estimared interest rate floors and caps and interest rate swap agree­ The table on the right summarizes the aggregate notional contract lIal amount (~) fc.lir value connnclllal amount (~) fair value amount amount ments. The contract or notional amounts of derivatives or contractual amounts, credit risk amount and net fair do not represent amounts exchanged by the parties and value for the Company's derivative financial instruments ASSET/LIABILITY MANAGEMENT HEDGES therefore are not a measure of exposure through the use of at December 31,1996 and 1995. Inreresr rate conrracrs: derivatives. The amounts exchanged are determined by Interest rate futures contracts are contracts in which Fuwres conrracrs $ 5,188 $ - $ $ 5,372 $ - $ - reference to the notional amounts and the other terms of the buyer agrees to purchase and the seller agrees to make Floors purch"sed (I) 20,640 101 101 11,522 206 206 the derivatives. The contract or notional amounts do not delivery ofa specific financial instrument at a predetermined Caps pllrch,lse I (I) 435 3 3 391 1 1 Swap contracts (1)(2) 16,661 217 117 6,314 185 175 represent exposure to liquidity risk. The Company is not a price or yield. Gains and losses on futures contracts are dealer but an end-user of these instruments and does not settled daily based on a notional (underlying) principal Foreign exchange conn-acts; use them speculatively. The Company also offers contracts value and do not involve an actual transfer of the specific Forward contracts (I) 64 25 to its customers, but offsets such contracts by purchasing instrument. Futures contracts are standardized and are other financial contracts or uses the contracts for asset/ traded on exchanges. The exchange assumes the risk that CUSTOMER ACCOMMODATIONS liability management. a counterparty will not pay and generally requires margin Interest rate contracts; Fmures contracts 10 23 The interest rate derivative financial instruments that are payments to minimize such risk. Market risks arise from Flours written 405 (10) 105 (1) used primarily to hedge mismatches in interest rate matu­ movements in interest rates and security values. The Caps written 2,174 (4) l,170 (4) rities serve to reduce rather than increase the Company's Company uses 90- to nO-day futures contracts on Euro­ Floors purchased (I) 404 9 9 105 I I exposure to movements in interest rates. These instruments dollar deposits and U.S. Treasury Notes mostly to shorten Caps purchased (I) 2,088 4 4 1,139 4 4 are accounted for by the deferral or accrual method only the rate maturity of market rate savings to better match the Swap contracts (1) 2,325 12 2 1,518 5 I if they are designated as a hedge and are expected to be rate maturity of Prime-based loans. Initial margin. requirements Foreign exchange contr,lCts (1): and are effective in substantially reducing interest rate risk on futures contracts are provided by investment securities Forward and spot cont"racrs (I) 1,313 14 1 909 10 arising from assets and liabilities exposing the Company pledged as collateral. The net deferred gains related to Option contracts purchased (I) 65 1 1 29 to interest rate risk at the consolidated or enterprise level. interest rate futures contracts were $4 million at Decem­ Option contracts written 59 (1) 23 Furthermore, futures contracts mu t meet specific correla­ ber 31,1996, which will be fully amortized in 1997. tion tests. If periodic assessment indicates derivatives no Interest rate floors and caps are interest rate protection (1) The Company anticipates performance hI' sllbst<1l1lially nil of the cOllnlerp,mies for these financial instruments. (2) The Pnretll's share of the notional principal amOllm outsmnding WaS $1 ,231 million nnd $224 million at December 3 I, 1996 and 1995, respecri\'ely. longer provide an effective hedge, the derivatives are closed instruments that involve the payment from the seller to the (3) The COlnpany h~s immaterial UeHling pusitiol1~ in ccrrain of these contracts. out or settled; previously unrecognized hedge results and buyer of an interest differential. This differential represents (4) Credir risk amounts reflect the replacement cuSt fur those contracfS in a gain posirion in rhe evenl of" nonperformance by cClunrcrpartic.s. the net settlement upon close-out or termination that off­ the difference between a short-term rate (e.g. thr e-montll set changes in value of the asset or liability hedged are LlBOR) and an agreed-upon rate, the strike rate, applied deferred and amortized over the life of the asset or liability to a notional principal amount. By purchasing a floor, the with excess amounts recognized in noninterest income. Company will be paid the differential by a counterparty, starting October 1998. The remaining purchased floors of rate swaps outstanding for interest rate risk management The Company also enters into foreign exchange derivative should the current short-term rate fall below the strike level $1.6 bill ion and purchased caps of $.4 billion at Decem­ purposes on which the Company receives payments based financial instruments (forward and spot contracts and of the agreement. The Company generally receives cash ber 31, 1996 were used to hedge interest rate risk of various on fixed interest rates and makes payments based on variable options) primarily as an accommodation to customers and quarterly on purchased floors (when the current interest rate other specific assets anJ liabilities. rates (i.e., one- or three-month LlBOR rare). Included offsets the related foreign exchange risk with other foreign falls below the strike rate) and purchased caps (when the Interest rate swap contracts are entered into primarily in this amount, $11.2 billion was used to convert floating­ exchange derivative financial instruments. current interest rate exceeds the strike rate). The premiums as an asset/liability management strategy to reduce interest rate loans into fixed-rate assets. These contracts have a The Company is exposed to credit risk in the event of paid for interest rate purchased floor and cap agreements rate risk. Interest rate swap contracts are exchanges of weighted average maturity of3 years and 2 months, a weighted nonperformance by counterparties to financial instruments. are included with the assets hedged. Of the total purchased interest payments, such as fixed-rate payments for floating­ average receive rate of 6.53% and a weighted average pay The Company controls the credit risk of its financial con­ floors of $20.6 billion at December 31, 1996, the Company rate payments, based on a notional principal amount. rate of 5.61 %. An additional $3.5 billion was used to con­ tracts (except futures contracts and floor, cap, and option had $19.0 billion of purchased floors to protect variable­ Payments related to the Company's swap contracts are vert fixed-rate deposits into floating-rate deposits. These contracts written, for which credit risk is de minimus) rate loans from a drop in interest rates. These contracts have made either monthly, quarterly or semi-aLUlually by one of contracts have a weighted avewge maturity of3 years and through credit approvals, limits and monitoring procedures. a weighted average maturity of2 years and 8 months. Included the parties depending on the specific terms of the related 11 months, a weighted average receive rate of 5.49% and Credit risk related to derivative financial instruments is in purchased floors are forward starting floor contracts of contract. The primary risk associated with swaps is the a weighted average pay rate of5.61 %. The remaining swap considered and, if material, provided for separately from $155 million starting in January 1997, $300 million start­ exposure to movements in interest rates and the ability of the contracts used for interest rate risk management of $2.0 the allowance for loan losses. As the Company generally ing in March 1997, $225 million starting in April 1997, counterparties to meet the terms of the contract. At Decem­ billion at December 31, 1996 were used to hedge interest enters into transactions only with high quality counter- $475 million starting in May 1997 and $2,000 million ber 31,1996, the Company had $16.7 billion of interest rate risk of various other specific assets and liabil.ities.

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19 FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents a summary of the Company's financial instruments, as defined by FAS 107:

Statement of Financial Accounting Standards No. 107 FINANCIAL ASSETS (FAS 107), Disclosure about Fair Value of Financial (in millions) December 31 • Instruments, requires that the Company disclo e estimated 1996 1995 fair values for its financial instruments. Fair value estimates, SHORT-TERM FINANCIAL ASSETS Carrying Estimated Carrying EstimaTed methods and assumptions set forth below for the Company's This category includes cash and due from banks, federal amount fair value HmOllnl fair vallie financial instruments are made solely to comply with the funds sold and securities purchased under resale agreements requirements of FAS 107 and should be read in conjunction and due from customers on acceptances. The carrying FINANCIAL ASSETS with the financial statements and notes in this Annual amount is a reasonable estimate of fair value because of ash and due (rom banks $11,736 $11.736 $ 3,375 $ 3,375 Federal funds sold and securities purchased under resale agreements Report. The carrying amounts in the table are recorded the relatively short period of time between the origination 187 187 177 177 Investment securities at fair value 13,505 13,505 8.920 8,920 in the Consolidated Balance Sheet under the indicated of the instrument and its expected realization. Loans: captions, except for the derivative financial instruments, Commercial 19,515 19.550 9,750 9,785 which are recorded in the specific asset or liability balance INVESTMENT SECURITIES Real estate 1-4 family first Illongage 10,425 10.343 4,448 4,370 being hedged or in other assets if the derivative fmancial Orher real estate mongage 11,860 IL.772 8,263 8,249 Investment securities at fair value at December 31, 1996 instrument is a customer accommodation. Real estate construction 2,303 2,319 1,366 1,367 and 1995 are set forth in Note 4. Consumer 20,114 19,149 9,935 9,460 Fair values are ba ed on estimates or calculations at the Lease financing 3,003 3,022 1,789 1,789 tral,saction level using present value techniques in instances Foreign 169 162 31 ) 1 LOANS ------where quoted market prices are not available. Because 67,389 66,317 35,582 35,051 The fair valuation calculation process differentiates loans broadly traded markets do not exist for most of the Company's Less: A lInwan e fur loan losses 2,018 1,794 financial instruments, the fair value calculations attempt based on their financial characteristics, such as product Net deferred fees on loan commitments and standby lerters of credit 76 27 to incorporate the effect of current market conditions at classification, loan category, pricing features al,d remaining Net loans 65.295 66,317 33,761 35,051 a specific time. Fair valuations are management's estimates maturity. Prepayment estimates are evaluated by product Due from cusromers on acceprances 197 197 98 98 of the values, and they are often calculated based on current and loan rate. Discount rates presented in the paragraphs Nonmarketable equity investments 937 1.361 428 694 Other financial assets 637 637 J51 J51 pricing policy, the economic and competitive environment, below have a wide range due to the Company's mix offixed­ and variable-rate products. The Company used variable the characteristics of the financial instruments and other FINANClAL LlABILlTIES discount rate which incorporate relative credit quality such factors. These calculations are subjective in nature, Deposits $81.821 $81,943 $38,982 $39,162 involve uncertainties and matters of significant judgment to reflect the credit risk, where appropriate, on the fair Federal funds purchased and securities sold under repurchase agreemems 2,029 2.029 2,781 2,781 and do not include tax ramificati ns; therefore, the results value calculation. omm rcial paper and other short-term borrowings - 401 401 195 195 cannot be determined with precision, substantiated by The fair value of commercial loans, other real estate Acceptances Out tanding 197 197 98 98 mortgage 10al)s and real estate construction loans is calcu­ Senior debt (I) 2,053 2,117 1,731 1,753 comparison to independent markets and may not be Subordinmed debt lated by dis ounting contractual cash flows using discount 2,940 2,806 1,266 1,319 realized in an actual sale or immediate settlement of the Guamntced preferred beneficial interests in ompany's suburdinated debenl'ures 1,150 1,151 instruments. There may be inherent weaknesses in any rates that reflect the Company's current pricing for loans calculation technique, and changes in the underlying with similar characteristics and remaining maturity. Most DERIVATIVE FlNANCIAL INSTRUMENTS (2) assumptions used, including discount rates and estimates of the discount rates for commercial loans, other real estate lntere't rate floor contracts purchaseJ in a receivable position $ 82 $ LIO $ 27 $ 207 offuture cash flows, could significantly affect the results. mortgage loans and real estate construction loans are Interest rate floor conrracts written in a payable position (9) (10) (I) (I) between 7.75% an 19.5%, 7.75% and 12.25%, and 7.75% Interest rate cap contracts purchased in a receivable posirion 12 7 13 5 The Company has not included certain material items in Interest rare cap contracts written in a payable pusition (9) (4) and 11.0%, respectively, at December 31,1996. Most of (11) (4) its disclosure, uch as the value of the long-term relation­ Imerest rme swap contracts in a receivable position 229 190 ships with the Company's deposit, credit card and trust the discowlt rates for the same portfolios in 1995 were Interest rate swap contracts in a payahle position (110) (14) customers, since these intangibles are not financial instru­ between 6.3% and 9.5%, 7.0% and 11.3%, and 7.3% and Foreign exchange contracts in a gain position 15 15 II 10 ments. For all of these reasons, the aggregation of the fair 10.0%, respectively. Foreign exchange conrracts in a loss position (14) (14) (9) (9) value calculations presented herein do not represent, and For real estate 1-4 family first and junior lien mortgages, (I) The carrying amollnt ,md fair value exclude ohligations IInder capital leases of $67 million anel $52 million at December 31, 1996 ami 1995, respecrively. to fair value is calculated by discounting contractual cash should not be construed represent, the underlying value (2) The carrying amounts include unamortized fees paid or received, Jeferrcd gains or losses and gains or losses on derivative linnncial insrrlllllcnrs receivino of the Company. flows, adjusted for prepayment estimates, using discount mark~lo-l11nrkcl rremmenl. co rates based on current industry pricing for loans of similar size, type, remaining maturity and repricing characteristics. Most of the discount rates applied to this portfolio are between 5.5% and 8.5% at December 31,1996 and 6.0% and 9.0% at December 31, 1995. For credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. INDEPENDENT AUDITORS' REPORT

For other consumer loans, the fair value is calculated rate is estimated using the rates currently offered for like by discounting the contractual cash flows, adjusted for pre­ deposits with similar remaining maturities. payment e timates, based on the current rates offered by the Company for loans with similar characteristics. Most SHORT-TERM FINANCIAL LIABILITIES of the discount rates applied to this portfolio are between This category includes federal funds purcha 'ed and securities 8.0% and 10.5% at December 31, 1996 and 7.3% and sold under repurchase agreements, commercial paper and The Board of Directors and Stockholders 16.5% at December 31,1995. other short-term borrowings. The carrying amount is a of Wells Fargo & Company: For auto lease financing, the fair value is calculated by reasonable estimate of fair value because of the relatively discounting the contractual cash flows at the Company's short period of time between the origination of the instru­ current pricing for item of similar remaining term, with­ ment and its expected realization. We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of Decem­ out including any tax benefits. The discount rate applied ber 31, 1996 and 1995, and the related consolidated statements of income, changes in stockhollers' equi.ty, and cash flows to this portfolio was 8.22% at December 31,1996 and SENIOR AND SUBORDINATED DEBT for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the 8.35% at December 31,1995. The fair value of the Company's underwritten senior and responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial Commitments, standby letters of credit and commercial statements based on our audits. and similar letters of credit not included in the previous table subordinated debt is estimated based on the quoted market prices of the instruments. The fair value of the medium­ have contractual values of $55,236 million, $2,981 million We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and $406 million, respectively, at December 31,1996, and term note programs, which are part of senior debt, is calculated based on the discounted value of contractual and perform the audit to obtain reasonable assurance about whether the financial statemenrs are free of material misstatement. $24,245 million, $921 million and $209 million, respectively, An audit includes examining, on a test basi, evidence supporting the amounts and disclosures in the financial statements. at December 31,1995. These instruments generate ongoing cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remain­ An audit also include assessing the accounting principles used and significant estimates made by managemenr, as well as eval­ fees at the Company's current pricing levels. Of the com­ uating the overall financial statemenr presenration. We believe that our audits provide a reasonable ba is for our opinion. mitments at December 31, 1996,63% mature within one ing maturities. year and 92% are commitments to extend credit at a In our opinion, the consolidated financial statements referred to above pre ent fairly, in all material respects, the financial floating rate. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED position of Wells Fargo & Company and Subsidiaries a" of December 31, 1996 and 1995, and the results of their operations DEBENTURES and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally NONMARKETABLE EQUITY INVESTMENTS accepted accounting principles. The Company's nonmarketable equity investments, The fair value of the Company's trust preferred including securities, are carried at cost and have a book securities is estimated based on the quoted market value of$937 million and $428 million and an estimated prices of the instruments. fair value of $1,361 million and $694 million at Decem­ ber 31,1996 and 1995, respectively. There are restrictions DERIVATIVE FINANCIAL INSTRUMENTS on the sale and/or liquidation of the Company's interest, KPMG Peat Marwick LLP Certified Public Accountants which is generally in the form of limited partnerships; and Derivative financial instruments are fair valued based the Company has no direct control over the investment on the estimated amounts that the Company would San Francisco, California decisions of the limited partnerships. To estimate fair value, receive or pay to terminate the contracts at the reporting January 21, 1997 a significant portion of the underlying limited partnerships' date (i.e., mark-to-market value). Dealer quotes are avail­ investments are valued based on market quotes. able for substantially all of the Company's derivative financial instruments. FINANCIAL LIABILITIES LIMITATIONS

DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated These fair value disclosures are made solely to comply with maturity, such as noninterest-bearing demand deposits, the requirements of FAS 107. The calculations represent interest-bearing checking and market rate and other savings, management's best estimates; however, due to the lack of is equal to the amount payable on demand at the measure­ broad markets and the significant items excluded from th is ment date. Although the FASB's requirement for these disclosure, the calculations do not represent the underly­ categories is not consistent with the market practice of ing value of the Company. The information presented is using prevailing interest rates to value these amounts, the based on fair value calculations and market quotes as of amount included for these deposits in the previous table is December 31,1996 and 1995. These amOLmts have not been their carrying value at December 31,1996 and 1995. The updated since year end; therefore, the valuations may have fair value of other time deposits is calculated based on changed significantly since that point in time. the discounted value of contractual cash flows. The discount

EL _ --- --_._------WELLS FARGO & COMPANY AND SUBSIDIARIES

QUARTERLY FINANCIAL DATA AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) _ QUARTERLY (I) (in millions) Quarter cnded Deccmber 31, 1996 Quarter ended [)ecemher 31, 1995 CONDENSED CONSOLIDATED STATEMENT OF INCOME QUARTERLY Average Yieldsl Interest Average Yieldsl Interest balance r(\tC$ income/ b,ilance rarcs in ollle/ EARNING ASSETS expense (in milliuns) 1996 [995 expense Feder~1 funds sold and securities plJl:ch~sed uncler resale agreements Quarter ended Quarter ended $ 570 5.88% Investment securities: $ 8 $ 83 5.59% $ Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 At fair value (2): U.S. Tt'easury securities 2,624 6'.06 40 753 Securities of U.S. government agencies and corporations 7,017 584 11 INTEREST INCOME $1,812 $1,847 $1,858 $1,006 $1,010 $1,019 $1,031 $1,025 Private collateralized mortgage obligations 6.41 112 2.476 5.61 3,105 6.67 35 INTEREST EXPENSE 562 552 558 330 343 356 372 360 Other securitics 52 1,370 6.0L 21 440 6.83 7 Tot~l investment securities at fair value 125 26.47 6 NET INTEREST INCOME 1,250 1,295 1,300 676 667 663 659 665 13,186 6.42 At COSt: 211 4,724 6.20 73 Provision for loan losses 70 35 U.S. Tre~sury securities Net imcrest income afrer Securities of U.S. government ~gencies and corporations 676 5.04 9 provision for loan losses 1,180 1,260 1,300 676 667 663 659 665 Private collateralized mortgage obligations 2,842 6.21 44 Other securities 762 5.91 LI 102 7.02 NONINTEREST INCOME Tor~1 investment securities ~t cost 2 4,382 6.00 66 Service charges on deposit accounts 233 254 258 122 121 121 L19 118 TaraI investment securities 13,186 Mortgage loans held for sale (2) 6.42 211 9,106 6.10 Fees and commissions 207 205 211 118 116 112 103 101 139 Loans: L60 7.55 3 Trust and investment services income 110 104 104 59 65 63 57 55 Commercial (3) 18,897 Investment securities gains (losses) 8 3 (J 5) Real estare 1-4 family hrfit mortg~ge 8.93 424 9,167 10,535 9.83 227 Sale of joint venture interest 163 Other real estate mortgage 7.42 196 4,461 7.51 12,039 9.54 84 Other 6 80 63 55 ~) 43 31 _~_!2) Real estate construction 288 8,010 9.46 191 ------2,311 10.52 Consumer: 61 1,307 10.05 33 Total nOn interest in ome 564 643 639 354 434 339 310 242 Real estate 1-4 fanlily junior lien mortgage 6,348 redit card 9.45 lSI 3,356 8.67 5,335 14.65 73 NONINTEREST EXPENSE Other revolving credit and monthly pnymem 195 3,882 15.49 151 8,522 9.47 203 Tor~1 consumer ~ 10.97 69 Salaries 397 378 400 181 L87 176 177 172 20,205 Lease hnancing 10.83 549 9,755 11.98 Incentive compensation 80 53 61 32 33 33 33 27 2,936 8.71 293 Foreign 64 1,705 9.22 39 Employee benehts 112 105 102 54 40 46 48 53 174 7.80 Toralloans 3 18 Equipmenx 129 103 111 55 54 47 45 47 67,097 9.42 Other 1,585 34,423 10.D3 867 Net occupancy 109 709 6.15 11 96 108 53 52 54 53 53 Knal e~rn ing assers 70 Fedeml deposit insurance 1 24 3 1 5 24 24 $ 81,562 8.88 1,815 FUNDING SOURCES $43,842 9.19 ~ Goodwill 80 81 81 9 9 9 9 9 Deposits: Core deposit intangible 73 78 82 10 LO 10 II 11 Interest-bearing checking s~vings $ 3,000 1.28 10 $ 2.946 Other 507 387 329 172 173 167 160 14L Market rate savings and other 34,012 1.01 8 Savings Certihcates 2.66 227 15,955 2.66 1,488 15,785 5.07 107 Total noninterest expense 1,305 1,277 567 563 542 560 537 Other time deposi rs 201 8,609 5.40 117 Deposits in foreign ofhces 331 6.79 5 297 INCOME BEFORE INCOME TAX EXPENSE 256 598 662 463 538 460 409 370 227 7.64 6 4.85 3 673 5.75 Income tax ex.iense 133 277 299 199 232 199 177 137 Total interest-bearing deposits 9 --- 53,355 3.33 Federal funds purchased and securities sold under 446 28,480 3.44 247 NET INCOME $ 123 $ 321 $ 363 $ 264 $ 306 $ 261 $ 232 $ 233 repurchase agreemenrs 1,493 5.29 Commercial paper and other short-term horrowings 20 2,665 5.69 38 NET INCOME APPLICABLE TO Senior debt 416 3.66 4 431 5.69 COMMON STOCK 2,240 6 $ 103 $ 302 $ 344 $ 254 $ 295 $ 251 $ 222 $ 223 Subordinated debt 6.19 35 [,768 6.37 29 2,941 6.90 51 L,405 PER COMMON SHARE Guaranteed preferred benehcial interests in Company's 6.60 23 subordinmed debenrures Net income $ 1.12 $ 3.23 $ 3.61 $ 5.39 $ 6.29 $ 5.23 $ 4.5L $ 4.41 326 7.86 6 Toml interest-bearing liabilities 60,771 3.68 562 Dividends declared $ 1.30 $ 1.30 $ 1.30 $ 1.30 L~I~ $ 1.15 $ l. J 5 $ 1.15 Portion of noninterest-bearing funding sources 34.749 3.92 343 20,791 9,093 Toral funding sources 81,562 Average c()mmon shares outsranding 92.2 93.7 95.6 47.0 47.0 47.9 49.1 50.5 $ 2.74 562 $43,842 3.11 Net interest margin and net interest income 343 on a taxable-equivalent basis (3) 6.14% $1,253 NONINTEREST-EARNING ASSETS 6.08% $ 667 Cash and due from hanks Goodwill $ 10,539 $ 2,858 Other 7.362 386 7,845 Tot~1 noninterest-earning assets 2,083 $ 25,746 $ 5,327 NON INTEREST-BEARING FUNDING SOURCES Deposits Other liabilities $ 27,979 $ 9,43 Preferred stockholders' equity 3,917 1,148 Common stockholders' equity 934 489 13.707 Noninreres -heariJ"g funding sources used to fund e~rning assets 3,350 (20,791) (9,093) Net noninteresr-bearing funding sources .!L25 ,746 $ 5,327 TOTAL ASSETS $107,308 $49,169

(I) The "vemge prime rare of the Bank was 8.25% and 8.72% for rhe qutlrler, ended December 1I, 1996 and 1995, respecrively. The average rhree-monrh London Inter­ bank Offered Rare (L1 BOR) nHe was 5.53% and 5.86% (or Ihe same quarrel's, respectivell" (2l Yields arc hased on amortized CDSI' balances. The average amortized COst halances for investment secllrities al fair value toraled $13, I4~ million and $4,708 million for endedIhe quarretsDecemherencled31,Decemher1995. 31. 1996 and 1995, respectively. The average amortized cost balance for mortgage loans held fur sale toraled $160 million for the quarrel' (3) Includes taxable-equivalelll adjustments that primarily relate ro income un certain loans and securirles thaI' is exempt from federal and applicahle "ate income taxes. 4 The federal sraturnry tax ratc \Vas 35 ):) for buth quarrcrly Ileriod.s presenled. fa .-- DIRECTORY

DIRECTORS EMERITI MANAGEMENT DIRECTORS ------WELLS FARGO & COMPANY AND ITS PRINCIPAL SUBSIDIARY. WELLS FARGO BANK. N.A.

WELLS FARGO & COMPANY WELLS FARGO BANK. N.A. Donald B. Rice James F. Dickason H. Jesse Arnelle, Esq. Paul Hazen Chairman of the Chairman & President & Executive Committee CHAIRMAN AND CHAIRMAN AND EXECUTIVE VICE PRESIDENTS SENIOR VICE PRESIDENTS Senior Partner Chief Executive Officer CIIiEF EXE UTIVE OFFICER CHIEF EXECUTIVE OFFICER Arnelle, Hastie, McGee, Chief Executive Officer The Newhall Lan I and Leslie L. Altick Vernon Aguirre Wells Fargo & Company UroGenesys, Inc. Paul Hazen Paul Hazen Willis & Greene Farming Company Colleen M. Anderson Richard S. Allen Patricia R. Callahan Nancy O. Altobello PRESIDENT AND PRE '!DENT AND Robert K. Jaedicke Richard J. Stegemeier Paul A. Miller Paul W. (Chip) Carlisle Scott R. Andrews Michael R. Bowlin CHIEF OPERATING OFFICER CHI EF OPERATING OFFICER Iris S. Chan Joseph H. Argue III Director Emeritus Chairman of the Professor (Emeritus) of William F. Zuendt William F. Zuendt A. Larry Chapman Mats G. Arklind Chairman & Unocal Corporation Executive Commitree Accounting and Robert A. Chereck CaryI J. Athanasiades Chief Executive Officer Pacific Enterprises Atlantic Richfield Company Former Dean VICE CHAIRMEN VICE CHAIRMEN Fenton E. Cross Allen J. Ayvazian Graduate School of Business Susan G. Swenson Terri A. Dial Terri A. Dial Donald E. Dana Michad W. Azevedo Stanford University Robert T. Nahas Thomas]. Davis Luann A. Bangsund Edward M. Carson President & Charles M. Johnson Charles M. Johnson Chief Executive Officer President Clyde W. Ostler Clyde W. Ostler Albert F. (Rick) Ehrke Dennis Barnette Retired Chairman & Thomas L. Lee Cellular One R.T. Nahas Company Paul M. Watson Paul M. Watson Elizabeth A. Evans Charles Beauregard Chief Executive Officer David Gonzales Helen Beitz Chairman & First Interstate Bancorp Harry O. Reinsch VICE CHAIRMAN AND VICE CHAIRMAN AND Richard R. Green Robert W. Belson Chief Executive Officer Daniel M. Tellep CIIiEF FINANCIAL OFFICER CHIEF FINANCIAL OFFICER Arnold T. Grishan.l Shelley Benson The Newhall Land and Retired Chairman of the Board Retired President William W. Henderson Dale F. Bentz William S. Davila Rodney L. Jacobs Rodney L. Jacobs Farming Company Lockheed Martin Corporation Bechtel Power E. Alan Holroyde Gail K. Bernstein President Emeritus Corporation VICE CHAIRMAN AND VICE CHAIRMAN AND Seawadon L. HoustOn Marc L. Bernstein The Vons Companies, Inc. William F. Miller Chang-Lin Tien CHIEF CREDIT OFFICER CIIiEF CREDIT OFFICER David A. Hoyt Joa11.n N. Bertges Michael R. James George N. Bishop Professor of Public and Michael J. Gillfillan Michael]. Gillfi.llan Rayburn S. Dezember hancellor Margaret L. Kane Robert W. Bissell Private Management University of California, Ross J. Kari Rita Bladow Retired Chairman CHIEF COUNSEL AND SECRETARY Stanfon.l University Berkeley James K. Ketcham Robert E. Blakemore of the Board Guy Rounsaville, Jr. Ely L. Licht J. Edward Blakey Central Pacific Corp. Michael J. Loughlin Effie E. Booker Ellen M. Newman John A. Young CONTROLLER Kathleen H. Lucier Thomas J. Booker President Retired President & Frank A. Moeslein Barry X Lynn Scott L. Bottles Myron Du Bain Ellen Newman Associates Chief Executive Officer Robin W. Michel Joseph L. Brady 1II Retired Chairman & Hewlett-Packard Company GENERAL AUDITOR Chief Executive Officer Frank A. Moeslein Michael S. Brown Philip J. Quigley Dennis Mooradian Samuel Brown Firemans Fund Corporation Ross J. Kari Chairman, President & William F. Zuendt David]. Munio Barbara BruseI' PERSONNEL DIRECTOR Michael J. Niedermeyer Steven W. Burge Chief Executive Offi.cer President & Don C. Frisbee Dudley M. Nigg Kathleen A. Burke Pacific Telesis Group Chief Operating Officer Patricia R. Callahan George Passadore William Burns,]r. Chairman Emeritus Wells Fargo & Company PacificCorp DIRECTOR 01' Michael M. Patriarca Katharine A. Byrne Carl E. Reichardt INVESTOR RELATIONS Frank A. Petro, Jr. Robert W. Byrne Retired Chairman Leslie L. Altick M. Lucile Reid Douglas W. Carlson of the Board Lois R. Rice Robert Chlebowski Wells Fargo & Company TREASURER Guy Rounsaville, Jr. Kenneth R. Chrisman Richard T. Schliesmann Philip C. Clark Alan]. Pabst Bruce Schroder Nicholas V. Colonna Eric D. Shand Peter P. Connolly Timothy J. Sloan Gerrit Cormany Diana Starcher Lou Cosso Joseph P. Stiglich Sherry A. Courtney Unda M. Tubbs Janet S. Crane Timothy W. Washburn Barbara A. Crist G. Hardy Watford' Robert J. Crouch Karen Wegmann Harry L. Cuddy David]. Zuercher Terry R. Dallas John D. Daughenbaugh SHAREHOLDER INDEX OF SPECIAL TOPICS INFORMATION

STOCK EXCHANGE 28,30 Asset/liabilitv management-interest rate sensitivity tables 14,77 Average balance, yields and rates-annual and quarterly New York Stock Exchange 38 Balance sheet Trading Symbol: WFC 24,50 Charge-offs Pacific Stock Exchange Dianne Davis Dana Hines Robert McDuff Peter J. Roos 7.36 Comm n stock book value and market price Anthony M. DeRose George D. Hoke Susan McGovern Debra B. Rossi Trading Symbol: WFC 31.70 Derivative financial instruments Lynn DeGroot Steven J. Holoien Michael M. McNickle Robert L. Roszkos London Stock Exchange 6 Earnings per share Diane P. DeRousseau David Holvey Annie C. Mendenhall Marci R. Rubin Trading Symbol: WFGO 17 Earnings/ratios excluding goodwill and nonqualifying COl p. Steve Dobel Richard G. Horne Stephen S. Merchant Carmie F. Saldana Marcia J. Donner Vincent J. Hruska Lorraine B. Meuleners' Jon W. Salmon Frankfurt Stock Exchange Financial Accounting Standards Board statements: 22,51 Don L. Dormer Reed M. HUlnmel Elizabeth A. Montgumery Robert L. Sandberg Trading Symbol: WEL FAS 114-Accounting by Creditors for Impairment of a Loan Lesley A. Eckstein George E. Huxtable Ashok Moorthy William P. Sentenac 52 FAS 121-Accounting for Impairment of Long-Lived Assets Stephen M. Ellis Mark A. Ingram James H. Muir Nancy B. Shelby and for Long-Lived As ets to be Disposed of 52 FAS 122-Accounting for Mortgage Servicing Rights Jolm Evans SU1l1 R. Jeppsen Thomas]. Murphy Sandra K. Shuman TRANSFER AGENT AND 60 FAS 123-Accounting for Stock-Based Compensation Rol crt J. Falkenberg Gailyn A. Johnsun Timothy H. Murray L. Timothy Silva REGISTRAR OF 44 FAS 125-Accounting for Transfers and Servicing of Financial Saturnino S. Fanlo J. Michael Johnson Mark L. Myers Mary M. Silverman COMMON STOCK Assets and Extinguishment of Liabilities Juhn P. Fay Robert T. Juhnson Thomas O'Malley Rubert N. Slesinger 8 Five-year compound growth rate Charles H. Fedalen Arthur S. .I ones Paul G. Nalbandian Brenda D. Smith First Chicago Trust Company 37, 76 Income statement-annual and quarterly George W. Fehlhaber David A. Jones Sherry D. Nash Susan O. Snell of New York Stephen A. Finnigan Walter L. Jones David L. Nelson Theodore Sparks 9 Line of business results P.O. Box 2500 Michael Foglia Susan Kaysi nger Jeffrey Newman Ronald W. Stavert Loans: Jersey City, New Jersey Don A. Fracchia Robert S. Kegley Donovan E. Olson Harold Steely 19, 21 Agricultural loans 07303-2500 Robert J. Frame Kim Kellogg Richard O. Olsson Michael B. Sullivan 14,19,77 Average balances Shelley Freeman Amru A. Khan Shawn Osberg Sandy C. Sverdloff 1-800-756-8200 19,49,74 Commitments Raymond A. Frese John C. Kilhefner Alan J. Pabst Linda M. Tanner 19,49 Mix at year end Russell . Fuj ii Edward Kim Debra Paterson Tamyra D. Thomas Real estate loans: Gary .I. Garrett Andrew L. King Susan C. Patter on Dale M. Van D,rhm NOTICE To SHAREHOLDERS 20 By state and type Peg W. Gerdes Mike K. Klugman Michael A. Pazzi Nancy Vannorsdel 19 Total commercial real estate loans John Getz .lay J. Kornmayer David N. Pearson Jae L. Walker The annual meeting of 8,45 Merger with First Interstate Bancorp Dennis P. Gibbons Edward T. Kron Andrew Pederson James R. Wallace Wells Farg & Company 12, 14. 77 Net interest margin Glenn Gu Ikin Donald H. Kuemmeler Juhn D. Perry Bryan W. Waters will be held at 1 p.m. on Nonaccrual and restructured loans and foreclosed assets: Margot Golding Catherine G. Kulkin Kenneth E. Peterson Davi 1.1. Weber Tuesday, April 15, 1997, at 21 Five-year trend Robert Goldstone Stephen C. Landry Michelle Phung .lay S. Welker 420 Montgomery Street 23 Foreclosed assets by state and type Kevin Goldstein Richard G. LaPorte Anthony N. Pnlitopoulos Roy M. Whitehead 22, 23 Quarterly trend Alan C. Gordon Joseph E. Laughlin Richard Polver Paul B. Whitney San Francisco, California Tanni Graichen Donna G. Lee Alan K. Pribble George D. Wick Notes to financial statements: William Green James J. Lent Madeline Pring Lisa T. Wilhelm 41 Summary of significant accounting policies 45 Merger with First Interstate Bancorp Shirley O. Griffin Yung S. Lew Stephen P. Prinz Richard C. Williams FORM to-K 46 Cash, loan and dividend restrictions Leonard A. Gucciardi Vito P. Limitone Les L. Quock Seth Williams 47 Investment securities Griffin Gunter Clayton R. Lloyd Barbara R,ilston Janice Wilson Readers wishing more 48 Loans and allowance for loan losses Lawrence M. Gurnack David G. Lohman Carlos Razo Keith A. Wilton detailed information about 51 Premises, equipment, lease commitments and other assets John Hanby, Jr. Jane F. Magpiong Jeffrey c. Reed William Wipprecht Wells Fargo & Company 53 Deposits Lawrence M. Harrigan Heather Martin Maier tephen E. Reiter Linda F. Woods may obtain copies of the 53 Securities sold under repurchase agreements 54 Senior and subordinated debt Donald A. Hartmann MaureenJ. (Nikki) Maziasz Lawrence .I. Remmers William J. Wood Company's Form lO-K at no Stephanie McAuliffe 55 Guaranteed preferred beneficial interests in Company's Richard A. Hayes Dean Rennell Michael Worthy charge upon request from: Douglas R. Hay k William J. McClung J. Scott Rhoades Anthony J. Xinis subordinated debentures 56 Preferred stock Douglas L. He se Stephen C. McClure David E. Ritchie, Jr. Patrick Yalung Wells Fargo & Company 57 Common stock, additional paid-in capital and stock plans Jon R. Hickman Patrick J. McC mnick Julian Roca Kim Young Public Relations Department 61 Employee benefits and other expenses MAC 0163-029 65 Income taxes 343 Sansome Street 67 Parent company 68 San Francisco, Cal ifomia 94163 Legal actions 69 Risk-based capital JOINT VENTURE 1-415-396-0560 70 Derivative financial instruments n Fair value of financial instruments Wells Fargo HSBC Trade Bank Ratios: David]. Zuercher Maryann B. Graulich 6, 7 Profitability (ROA and ROE) Chief Executive Officer Senior Vice President 7 Efficiency 7 Common stockholders' equity to assets Bruce M. Cannon Kenneth J. Petrilla 7,27,69 Risk-based capital and leverage Chief Operating Officer Senior Vice President 8 Six-year summary of selected financial data

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