UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-2979 WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware 41-0449260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <CAPTION> Shares Outstanding July 31, 2001 ------------- <S> <C> Common stock, $1-2/3 par value 1,712,056,896 </TABLE>
FORM 10-Q TABLE OF CONTENTS <TABLE> <CAPTION> PART I FINANCIAL INFORMATION Item 1. Financial Statements Page ---- <S> <C> <C> Consolidated Statement of Income................................................................. 2 Consolidated Balance Sheet....................................................................... 3 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income....................................................................... 4 Consolidated Statement of Cash Flows............................................................. 5 Notes to Financial Statements.................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Summary Financial Data........................................................................... 18 Overview......................................................................................... 19 Factors that May Affect Future Results........................................................... 21 Operating Segment Results........................................................................ 28 Earnings Performance............................................................................. 29 Net Interest Income............................................................................ 29 Noninterest Income............................................................................. 32 Noninterest Expense............................................................................ 34 Cash Earnings/Ratios........................................................................... 35 Balance Sheet Analysis........................................................................... 36 Securities Available for Sale.................................................................. 36 Loan Portfolio................................................................................. 38 Nonaccrual and Restructured Loans and Other Assets............................................. 38 Loans 90 Days Past Due and Still Accruing................................................... 41 Allowance for Loan Losses...................................................................... 42 Interest Receivable and Other Assets........................................................... 43 Deposits....................................................................................... 44 Capital Adequacy/Ratios........................................................................ 44 Liquidity and Capital Management............................................................... 45 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 46 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............................................. 48 Item 6. Exhibits and Reports on Form 8-K................................................................. 49 SIGNATURE....................................................................................................... 52 - -------------------------------------------------------------------------------------------------------------------- </TABLE> The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Wells Fargo & Company's 2000 Annual Report on Form 10-K. 1
PART I - FINANCIAL INFORMATION ------------------------------ WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ---------------------- ---------------------- (in millions, except per share amounts) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Securities available for sale $ 611 $ 671 $ 1,215 $ 1,386 Mortgages held for sale 373 189 630 373 Loans held for sale 89 122 182 230 Loans 3,668 3,477 7,511 6,767 Other interest income 75 84 158 165 -------- -------- -------- -------- Total interest income 4,816 4,543 9,696 8,921 -------- -------- -------- -------- INTEREST EXPENSE Deposits 983 993 2,104 1,863 Short-term borrowings 328 421 722 845 Long-term debt 479 446 1,008 880 Guaranteed preferred beneficial interests in Company's subordinated debentures 18 19 35 37 -------- -------- -------- -------- Total interest expense 1,808 1,879 3,869 3,625 -------- -------- -------- -------- NET INTEREST INCOME 3,008 2,664 5,827 5,296 Provision for loan losses 427 275 788 551 -------- -------- -------- -------- Net interest income after provision for loan losses 2,581 2,389 5,039 4,745 -------- -------- -------- -------- NONINTEREST INCOME Service charges on deposit accounts 471 428 900 833 Trust and investment fees 417 394 832 791 Credit card fees 196 175 377 340 Other fees 311 266 618 518 Mortgage banking 517 336 908 669 Insurance 210 117 327 212 Net venture capital (losses) gains (1,487) 320 (1,470) 1,205 Net gains (losses) on securities available for sale 27 (39) 145 (641) Other (117) 138 322 250 -------- -------- -------- -------- Total noninterest income 545 2,135 2,959 4,177 -------- -------- -------- -------- NONINTEREST EXPENSE Salaries 1,018 906 1,995 1,787 Incentive compensation 265 185 469 353 Employee benefits 236 245 514 500 Equipment 217 208 454 429 Net occupancy 239 233 476 470 Goodwill 152 136 296 253 Core deposit intangible 41 47 84 95 Net gains on dispositions of premises and equipment -- (17) (19) (51) Other 1,087 909 1,982 1,752 -------- -------- -------- -------- Total noninterest expense 3,255 2,852 6,251 5,588 -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (129) 1,672 1,747 3,334 Income tax expense (benefit) (42) 635 669 1,257 -------- -------- -------- -------- NET INCOME (LOSS) $ (87) $ 1,037 $ 1,078 $ 2,077 ======== ======== ======== ======== NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (91) $ 1,033 $ 1,069 $ 2,068 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE $ (.05) $ .61 $ .62 $ 1.22 ======== ======== ======== ======== DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (.05) $ .61 $ .62 $ 1.21 ======== ======== ======== ======== DIVIDENDS DECLARED PER COMMON SHARE $ .24 $ .22 $ .48 $ .44 ======== ======== ======== ======== Average common shares outstanding 1,714.9 1,682.8 1,715.4 1,689.7 ======== ======== ======== ======== Diluted average common shares outstanding 1,714.9 1,702.6 1,736.0 1,706.6 ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------- </TABLE> 2
WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions, except shares) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 15,966 $ 16,978 $ 15,053 Federal funds sold and securities purchased under resale agreements 3,013 1,598 3,710 Securities available for sale 41,290 38,655 39,774 Mortgages held for sale 22,446 11,812 9,368 Loans held for sale 4,615 4,539 4,111 Loans 164,754 161,124 148,262 Allowance for loan losses 3,760 3,719 3,519 -------- -------- -------- Net loans 160,994 157,405 144,743 -------- -------- -------- Mortgage servicing rights 6,076 5,609 5,030 Premises and equipment, net 3,531 3,415 3,328 Core deposit intangible 1,093 1,183 1,226 Goodwill 9,607 9,303 8,854 Interest receivable and other assets 21,127 21,929 21,425 -------- -------- -------- Total assets $289,758 $272,426 $256,622 ======== ======== ======== LIABILITIES Noninterest-bearing deposits $ 56,774 $ 55,096 $ 50,628 Interest-bearing deposits 121,484 114,463 109,057 -------- -------- -------- Total deposits 178,258 169,559 159,685 Short-term borrowings 31,678 28,989 30,007 Accrued expenses and other liabilities 16,487 14,409 11,559 Long-term debt 35,339 32,046 29,595 Guaranteed preferred beneficial interests in Company's subordinated debentures 935 935 935 STOCKHOLDERS' EQUITY Preferred stock 485 385 441 Unearned ESOP shares (226) (118) (176) -------- -------- -------- Total preferred stock 259 267 265 Common stock - $1-2/3 par value, authorized 6,000,000,000 shares; issued 1,736,381,025 shares, 1,736,381,025 shares and 1,736,681,690 shares 2,894 2,894 2,895 Additional paid-in capital 9,427 9,337 9,302 Retained earnings 14,616 14,541 13,645 Cumulative other comprehensive income 1,054 524 811 Notes receivable from ESOP -- -- (1) Treasury stock - 22,993,569 shares, 21,735,182 shares and 47,562,074 shares (1,189) (1,075) (2,076) -------- -------- -------- Total stockholders' equity 27,061 26,488 24,841 -------- -------- -------- Total liabilities and stockholders' equity $289,758 $272,426 $256,622 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------- </TABLE> 3
WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ Unearned Additional Number of Preferred ESOP Common paid-in (in millions, except shares) shares stock shares stock capital - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> BALANCE DECEMBER 31, 1999 $ 344 $ (73) $2,894 $9,213 ----- ----- ------ ------ Comprehensive income Net income Other comprehensive income, net of tax: Translation adjustments Unrealized gains (losses) on securities available for sale arising during the period Reclassification adjustment for (gains) losses on securities available for sale included in net income Total comprehensive income Common stock issued 8,604,337 128 Common stock issued for acquisitions 41,910,064 1 (43) Common stock repurchased 59,654,866 Preferred stock (170,000) issued to ESOP 170 (181) 11 Preferred stock released to ESOP 78 (5) Preferred stock (73,253) converted to common shares 1,840,915 (73) (2) Preferred stock dividends Common stock dividends Change in Rabbi trust assets (classified as treasury stock) ----- ----- ------ ------ Net change 97 (103) 1 89 ----- ----- ------ ------ BALANCE JUNE 30, 2000 $ 441 $(176) $2,895 $9,302 ===== ===== ====== ====== BALANCE DECEMBER 31, 2000 $ 385 $(118) $2,894 $9,337 ----- ----- ------ ------ COMPREHENSIVE INCOME NET INCOME OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD RECLASSIFICATION ADJUSTMENT FOR (GAINS) LOSSES ON SECURITIES AVAILABLE FOR SALE INCLUDED IN NET INCOME UNREALIZED GAINS (LOSSES) ON DERIVATIVES AND HEDGING ACTIVITIES ARISING DURING THE PERIOD RECLASSIFICATION ADJUSTMENT FOR (GAINS) LOSSES ON CASH FLOW HEDGES INCLUDED IN NET INCOME CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES AND HEDGING ACTIVITIES TOTAL COMPREHENSIVE INCOME COMMON STOCK ISSUED 11,404,130 77 COMMON STOCK ISSUED FOR ACQUISITIONS 427,123 1 COMMON STOCK REPURCHASED 15,003,968 PREFERRED STOCK (192,000) ISSUED TO ESOP 192 (207) 15 PREFERRED STOCK RELEASED TO ESOP 99 (7) PREFERRED STOCK (92,094) CONVERTED TO COMMON SHARES 1,914,328 (92) 4 PREFERRED STOCK DIVIDENDS COMMON STOCK DIVIDENDS CHANGE IN RABBI TRUST ASSETS (CLASSIFIED AS TREASURY STOCK) ----- ----- ------ ------ NET CHANGE 100 (108) -- 90 ----- ----- ------ ------ BALANCE JUNE 30, 2001 $ 485 $(226) $2,894 $9,427 ===== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ Notes Cumulative receivable other Total Retained from Treasury comprehensive stockholders' (in millions, except shares) earnings ESOP stock income equity - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> BALANCE DECEMBER 31, 1999 $12,565 $ (1) $(1,831) $ 760 $23,871 ------- ---- ------- ------ ------- Comprehensive income Net income 2,077 2,077 Other comprehensive income, net of tax: Translation adjustments (1) (1) Unrealized gains (losses) on securities available for sale arising during the period (67) (67) Reclassification adjustment for (gains) losses on securities available for sale included in net income 119 119 ------- Total comprehensive income 2,128 Common stock issued (214) 347 261 Common stock issued for acquisitions (8) 1,732 1,682 Common stock repurchased (2,400) (2,400) Preferred stock (170,000) issued to ESOP -- Preferred stock released to ESOP 73 Preferred stock (73,253) converted to common shares 75 -- Preferred stock dividends (9) (9) Common stock dividends (766) (766) Change in Rabbi trust assets (classified as treasury stock) 1 1 ------- ---- ------- ------ ------- Net change 1,080 -- (245) 51 970 ------- ---- ------- ------ ------- BALANCE JUNE 30, 2000 $13,645 $ (1) $(2,076) $ 811 $24,841 ======= ==== ======= ====== ======= BALANCE DECEMBER 31, 2000 $14,541 $ -- $(1,075) $ 524 $26,488 ------- ---- ------- ------ ------- COMPREHENSIVE INCOME NET INCOME 1,078 1,078 OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (221) (221) RECLASSIFICATION ADJUSTMENT FOR (GAINS) LOSSES ON SECURITIES AVAILABLE FOR SALE INCLUDED IN NET INCOME 526 526 UNREALIZED GAINS (LOSSES) ON DERIVATIVES AND HEDGING ACTIVITIES ARISING DURING THE PERIOD 161 161 RECLASSIFICATION ADJUSTMENT FOR (GAINS) LOSSES ON CASH FLOW HEDGES INCLUDED IN NET INCOME (7) (7) CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES AND HEDGING ACTIVITIES 71 71 ------- TOTAL COMPREHENSIVE INCOME 1,608 COMMON STOCK ISSUED (172) 508 413 COMMON STOCK ISSUED FOR ACQUISITIONS 2 20 23 COMMON STOCK REPURCHASED (720) (720) PREFERRED STOCK (192,000) ISSUED TO ESOP -- PREFERRED STOCK RELEASED TO ESOP 92 PREFERRED STOCK (92,094) CONVERTED TO COMMON SHARES 88 -- PREFERRED STOCK DIVIDENDS (9) (9) COMMON STOCK DIVIDENDS (824) (824) CHANGE IN RABBI TRUST ASSETS (CLASSIFIED AS TREASURY STOCK) (10) (10) ------- ---- ------- ------ ------- 75 -- (114) 530 573 NET CHANGE ------- ---- ------- ------ ------- BALANCE JUNE 30, 2001 $14,616 $ -- $(1,189) $1,054 $27,061 ======= ==== ======= ====== ======= - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> 4
WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Six months ended June 30, ---------------------------------- (in millions) 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,078 $ 2,077 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 788 551 Depreciation and amortization 1,281 797 Net (gains) losses on securities available for sale (277) 641 Net venture capital losses (gains) 1,470 (1,205) Net gains on sales of mortgages held for sale (206) (6) Net losses on sales of loans 1 71 Net gains on dispositions of premises and equipment (19) (51) Net gains on dispositions of operations (104) (6) Release of preferred shares to ESOP 92 73 Net increase in trading assets (116) (2,307) Deferred income tax (benefit) expense (546) 14 Net decrease (increase) in accrued interest receivable 71 (61) Net (decrease) increase in accrued interest payable (155) 47 Originations of mortgages held for sale (72,758) (33,539) Proceeds from sales of mortgages held for sale 56,839 33,739 Net (increase) decrease in loans held for sale (76) 932 Other assets, net (1,387) 782 Other accrued expenses and liabilities, net 3,387 433 ------- ------- Net cash (used) provided by operating activities (10,637) 2,982 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 12,013 13,501 Proceeds from prepayments and maturities 2,958 2,410 Purchases (18,438) (9,542) Net cash (paid for) acquired from acquisitions (261) 616 Net decrease (increase) in banking subsidiaries' loans resulting from originations and collections 593 (11,382) Proceeds from sales (including participations) of banking subsidiaries' loans 1,273 2,510 Purchases (including participations) of banking subsidiaries' loans (285) (116) Principal collected on nonbank subsidiaries' loans 4,918 2,186 Nonbank subsidiaries' loans originated (5,426) (4,761) Proceeds from dispositions of operations 1,188 11 Proceeds from sales of foreclosed assets 140 129 Net increase in federal funds sold and securities purchased under resale agreements (1,415) (1,988) Net increase in mortgage servicing rights (1,342) (583) Other, net 249 (3,140) ------- ------- Net cash used by investing activities (3,835) (10,149) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 8,699 10,965 Net increase (decrease) in short-term borrowings 2,689 (2,176) Proceeds from issuance of long-term debt 8,524 9,571 Repayment of long-term debt (5,334) (7,141) Proceeds from issuance of common stock 332 202 Repurchase of common stock (720) (2,400) Payment of cash dividends on preferred and common stock (833) (775) Other, net 103 (21) ------- ------- Net cash provided by financing activities 13,460 8,225 ------- ------- NET CHANGE IN CASH AND DUE FROM BANKS (1,012) 1,058 Cash and due from banks at beginning of period 16,978 13,995 ------- ------- CASH AND DUE FROM BANKS AT END OF PERIOD $15,966 $15,053 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,714 $ 3,578 Income taxes $ 1,622 $ 295 Noncash investing and financing activities: Transfers from mortgages held for sale to loans $ 5,542 $ 1,553 Transfers from loans to foreclosed assets $ 123 $ 108 - ----------------------------------------------------------------------------------------------------------------- </TABLE> 5
WELLS FARGO & COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Business Combinations --------------------- Wells Fargo & Company and Subsidiaries (the Company) regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management of the Company does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. Transactions completed in the six months ended June 30, 2001 include: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Method of (in millions) Date Assets Accounting - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Conseco Finance Vendor Services Corporation January 31 $ 860 Purchase of Assets Buffalo Insurance Agency Group, Inc. March 1 1 Purchase SCI Financial Group, Inc. March 29 21 Purchase Midland Trust Company, National Association April 7 10 Purchase ACO Brokerage Holdings Corporation (Acordia Group of Insurance Agencies) May 1 866 Purchase ------ $1,758 ====== - ------------------------------------------------------------------------------------------------------------------- </TABLE> In connection with the foregoing transactions, the Company paid cash in the aggregate amount of $666 million and issued aggregate common shares of .4 million. On July 2, 2001, the Company completed its acquisition of H.D. Vest Inc., with total assets of approximately $183 million, and paid approximately $128 million in cash. Based in Irving, Texas, H.D. Vest, Inc. provides comprehensive financial planning services including securities, insurance, money management and business advice through approximately 6,000 independent tax and financial advisors. On October 25, 2000, the merger involving the Company and First Security Corporation was completed. As a condition to that merger, the Company was required by regulatory agencies to divest 39 stores in Idaho, New Mexico, Nevada and Utah having aggregate deposits of approximately $1.5 billion. These sales were completed in the first quarter of 2001 and the Company realized a net gain of $96 million, which included a $54 million reduction of unamortized goodwill. 6
2. Preferred Stock --------------- The Company is authorized to issue 20 million shares of preferred stock and 4 million shares of preference stock, both without par value. All preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. No preference shares have been issued under this authorization. The table below is a summary of the Company's preferred stock at June 30, 2001, December 31, 2000 and June 30, 2000. A detailed description of the Company's preferred stock is provided in Note 11 to the audited consolidated financial statements included in the Company's 2000 Annual Report on Form 10-K. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- Shares issued and outstanding Carrying amount (in millions) Adjustable ---------------------------------- -------------------------------- dividends rate JUNE 30, Dec. 31, June 30, JUNE 30, Dec. 31, June 30, ----------------- 2001 2000 2000 2001 2000 2000 Minimum Maximum --------- --------- --------- ------- ------ ------ ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Adjustable-Rate Cumulative, Series B (Liquidation preference $50) 1,468,400 1,468,400 1,500,000 $ 73 $ 73 $ 75 5.5% 10.5% 6.59%/Adjustable-Rate Noncumulative Preferred Stock, Series H (Liquidation preference $50) (1) 4,000,000 4,000,000 4,000,000 200 200 200 7.0 13.0 2001 ESOP Cumulative Convertible (Liquidation preference $1,000) 112,031 -- -- 112 -- -- 10.50 11.50 2000 ESOP Cumulative Convertible (Liquidation preference $1,000) 44,163 55,273 98,165 44 55 98 11.50 12.50 1999 ESOP Cumulative Convertible (Liquidation preference $1,000) 17,832 18,206 21,726 18 18 22 10.30 11.30 1998 ESOP Cumulative Convertible (Liquidation preference $1,000) 7,471 7,631 8,215 8 8 8 10.75 11.75 1997 ESOP Cumulative Convertible (Liquidation preference $1,000) 9,362 9,542 10,640 9 10 10 9.50 10.50 1996 ESOP Cumulative Convertible (Liquidation preference $1,000) 10,041 10,211 11,810 10 10 12 8.50 9.50 1995 ESOP Cumulative Convertible (Liquidation preference $1,000) 8,190 8,285 11,853 8 8 12 10.0 10.0 ESOP Cumulative Convertible (Liquidation preference $1,000) 2,620 2,656 3,681 3 3 4 9.0 9.0 Unearned ESOP shares (2) -- -- -- (226) (118) (176) -- -- $3.15 Cumulative Convertible Preferred Stock, Series A -- -- 8,252 -- -- -- -- -- --------- --------- --------- ---- ---- ---- Total 5,680,110 5,580,204 5,674,342 $259 $267 $265 ========= ========= ========= ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Annualized dividend rate is 6.59% through October 1, 2001, after which the rate will become adjustable, subject to the minimum and maximum rates disclosed. (2) In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS, the Company recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released. 7
3. Earnings Per Common Share ------------------------- The table below presents earnings (loss) per common share and diluted earnings (loss) per common share and a reconciliation of the numerator and denominator of both earnings (loss) per common share calculations. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, --------------------- ---------------------- (in millions, except per share amounts) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income (loss) $ (87) $ 1,037 $ 1,078 $ 2,077 Less: Preferred stock dividends 4 4 9 9 -------- -------- -------- -------- Net income (loss) applicable to common stock $ (91) $ 1,033 $ 1,069 $ 2,068 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE Net income (loss) applicable to common stock (numerator) $ (91) $ 1,033 $ 1,069 $ 2,068 ======== ======== ======== ======== Average common shares outstanding (denominator) 1,714.9 1,682.8 1,715.4 1,689.7 ======== ======== ======== ======== Per share $ (.05) $ .61 $ .62 $ 1.22 ======== ======== ======== ======== DILUTED EARNINGS (LOSS) PER COMMON SHARE Net income (loss) applicable to common stock (numerator) $ (91) $ 1,033 $ 1,069 $ 2,068 ======== ======== ======== ======== Average common shares outstanding 1,714.9 1,682.8 1,715.4 1,689.7 Add: Stock options -- 18.5 19.8 15.4 Restricted share rights -- 1.2 .8 1.3 Convertible preferred -- .1 -- .2 -------- -------- -------- -------- Diluted average common shares outstanding (denominator) 1,714.9 1,702.6 1,736.0 1,706.6 ======== ======== ======== ======== Per share $ (.05)(1) $ .61 $ .62 $ 1.21 ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The incremental shares from the assumed conversion of common stock equivalents (stock options of 17.2 million, restricted share rights of .9 million and convertible preferred of nil) are not included in computing the diluted loss per share for the second quarter of 2001, because the effect of such equivalents would have been antidilutive for this period. 8
4. Operating Segments ------------------ The Company has identified three lines of business for the purposes of management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. The results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and somewhat subjective. Wells Fargo Home Mortgage activities are included in the Community Banking Group due to the integration of Home Mortgage into Community Banking and the reorganization of Wells Fargo Home Mortgage as a subsidiary of Wells Fargo Bank, N.A. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial services company. The Company's operating segments are defined by product type and customer segments. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated to allow comparability. THE COMMUNITY BANKING GROUP offers a complete line of diversified financial products and services to individual consumers and small businesses with annual sales up to $10 million in which the owner is also the principal financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, insurance and securities brokerage through affiliates and venture capital financing. These products and services include WELLS FARGO FUNDS-SM-, a family of mutual funds, as well as personal trust, employee benefit trust and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation (auto, recreational vehicle, marine) loans, origination and purchase of residential mortgage loans for sale to investors and servicing of mortgage loans. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, cash management, payroll services, retirement plans, medical savings accounts and credit and debit card processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs) and time deposits. Community Banking provides access to customers through a wide range of channels, which encompass a network of traditional banking stores, banking centers, in-store banking centers, business centers and ATMs. Additionally, 24-hour telephone service is provided by PHONEBANK-SM- centers and the National Business Banking Center. Online banking services include the Wells Fargo Internet Services Group and BUSINESS GATEWAY(R), a personal computer banking service exclusively for the small business customer. THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of $10 million and maintains relationships with major corporations throughout the United States. Wholesale Banking provides a complete line of commercial and corporate banking services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, 9
equipment leasing, international trade facilities, foreign exchange services, treasury management, investment management and electronic products. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit. Secondary market services are provided through the Capital Markets Group. Its business includes senior loan financing, mezzanine financing, financing for leveraged transactions, purchasing distressed real estate loans and high yield debt, origination of permanent loans for securitization, loan syndications, real estate brokerage services and commercial real estate loan servicing. WELLS FARGO FINANCIAL includes consumer finance and auto finance operations. Consumer finance operations make direct loans to consumers and purchase sales finance contracts from retail merchants from offices throughout the United States and Canada and in the Caribbean and Latin America. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles in the United States and Puerto Rico. Credit cards are issued to consumer finance customers through two credit card banks. Wells Fargo Financial also provides lease and other commercial financing and provides information services to the consumer finance industry. THE RECONCILIATION COLUMN includes unallocated goodwill, the net impact of transfer pricing loan and deposit balances, the cost of external debt, and any residual effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage interest rate sensitivity at the consolidated level. 10 <Page> The following table provides the results for the Company's three major operating segments. <Table> <Caption> - ------------------------------------------------------------------------------------------------------------------------------------ (income/expense in millions, Recon- Consoli- average balances in billions) Community Wholesale Wells Fargo ciliation dated Banking Banking Financial column (4) Company ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> QUARTER ENDED JUNE 30, 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 Net interest income (1) $ 2,174 $1,922 $ 452 $414 $408 $350 $ (26) $ (22) $ 3,008 $2,664 Provision for loan losses 259 169 58 47 110 60 -- (1) 427 275 Noninterest income 13 1,743 460 282 88 68 (16) 42 545 2,135 Noninterest expense 2,293 2,187 607 326 272 247 83 92 3,255 2,852 ------- ------ ------ ---- ---- ---- ----- ----- ------- ------ Income (loss) before income tax expense (benefit) (365) 1,309 247 323 114 111 (125) (71) (129) 1,672 Income tax expense (benefit) (2) (152) 468 89 122 43 42 (22) 3 (42) 635 ------- ------ ------ ---- ---- ---- ----- ----- ------- ------ Net income (loss) (213) $ 841 158 $201 71 $ 69 (103) $ (74) (87) $1,037 ====== ==== ==== ===== ====== Less: Impairment and other special charges (after tax) (3) (1,089) (62) -- (6) (1,157) ------- ------ ---- ----- ------- Net income (loss) excluding impairment and other special charges $ 876 $ 220 $ 71 $ (97) $ 1,070 ======= ====== ==== ===== ======= Average loans $ 99 $ 91 $ 49 $ 40 $ 13 $ 10 $ -- $ -- $ 161 $ 141 Average assets 196 177 62 48 15 12 6 7 279 244 Average core deposits 156 134 12 10 -- -- -- -- 168 144 SIX MONTHS ENDED JUNE 30, Net interest income (1) $ 4,171 $3,825 $ 907 $830 $800 $692 $ (51) $ (51) $ 5,827 $5,296 Provision for loan losses 477 359 95 59 216 135 -- (2) 788 551 Noninterest income 1,870 3,357 891 588 173 141 25 91 2,959 4,177 Noninterest expense 4,495 4,241 1,058 633 531 497 167 217 6,251 5,588 ------- ------ ------ ---- ---- ---- ----- ----- ------- ------ Income (loss) before income tax expense (benefit) 1,069 2,582 645 726 226 201 (193) (175) 1,747 3,334 Income tax expense (benefit) (2) 370 914 234 273 85 76 (20) (6) 669 1,257 ------- ------ ------ ---- ---- ---- ----- ----- ------- ------ Net income (loss) 699 $1,668 411 $453 141 $125 (173) $(169) 1,078 $2,077 ====== ==== ==== ===== ====== Less: Impairment and other special charges (after tax) (3) (1,089) (62) -- (6) (1,157) ------- ------ ---- ----- ------- Net income (loss) excluding impairment and other special charges $ 1,788 $ 473 $141 $(167) $ 2,235 ======= ====== ==== ===== ======= Average loans $ 100 $ 88 $ 48 $ 40 $ 13 $ 10 $ -- $ -- $ 161 $ 138 Average assets 193 175 60 48 15 12 6 7 274 242 Average core deposits 151 133 12 9 -- -- -- -- 163 142 - ------------------------------------------------------------------------------------------------------------------------------------ </Table> (1) Net interest income is the primary source of income for the three operating segments. Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Community Banking and Wholesale Banking are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) Taxes vary by geographic concentration of revenue generation. Taxes as presented may differ from the consolidated Company's effective tax rate as a result of taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The offsets for these adjustments are found in the reconciliation column. (3) Non-cash impairment and other special charges in the second quarter of 2001, which are included in noninterest income, mainly related to impairment of publicly traded and private equity securities, primarily in the venture capital portfolio. (4) The material items in the reconciliation column related to revenue (i.e., net interest income plus noninterest income) and net income consist of Treasury activities and unallocated items. Revenue includes Treasury activities of $(11) million and $29 million; and unallocated items of $(31) million and $(9) million for the second quarter of 2001 and 2000, respectively. Revenue includes Treasury activities of $24 million and $48 million; and unallocated items of $(50) million and $(8) million for the first six months of 2001 and 2000, respectively. Net income includes Treasury activities of $(8) million and $18 million; and unallocated items of $(95) million and $(92) million for the second quarter of 2001 and 2000, respectively. Net income includes Treasury activities of $14 million and $29 million; and unallocated items of $(187) million and $(198) million for the first six months of 2001 and 2000, respectively. The material item in the reconciliation column related to noninterest expense is amortization of unallocated goodwill of $82 million for the second quarter of 2001 and 2000 and $165 million and $163 million for the first six months of 2001 and 2000, respectively. The material item in the reconciliation column related to average assets is unallocated goodwill of $6 billion and $7 billion for the second quarter of 2001 and 2000, respectively, and $6 billion and $7 billion for the first six months of 2001 and 2000, respectively. 11 <Page> 5. Mortgage Banking Activities --------------------------- Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, comprise residential and commercial mortgage originations and servicing. The components of mortgage banking noninterest income are presented below: <Table> <Caption> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------------- -------------------- (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Origination and other closing fees 190 93 311 158 Servicing fees, net of amortization and impairment 105 172 115 324 Net (losses) gains on securities available for sale (4) -- 132 -- Net gains on sales of mortgage servicing rights -- 33 -- 59 Net gains (losses) on sales of mortgages 149 (36) 206 6 All other 77 74 144 122 ---- ---- ---- ---- Total mortgage banking $517 $336 $908 $669 ==== ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------- </Table> The managed servicing portfolio totaled $482 billion at June 30, 2001, $468 billion at December 31, 2000 and $329 billion at June 30, 2000, which included loans subserviced for others of $75 billion, $85 billion and $3 billion, respectively. Mortgage loans serviced for others, which are included in the managed servicing portfolio, are not included in the accompanying consolidated balance sheet. The following table summarizes the changes in capitalized mortgage loan servicing rights: <Table> <Caption> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ---------------------- ---------------------- (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $5,509 $4,799 $5,609 $4,652 Originations 505 115 829 259 Purchases 252 223 412 333 Sales -- (19) -- (37) Amortization (206) (121) (372) (248) Other (includes changes in mortgage servicing rights due to hedging) 291 33 (127) 71 ------ ------ ------ ------ 6,351 5,030 6,351 5,030 Less: Valuation allowance 275 -- 275 -- ------ ------ ------ ------ Balance, end of period $6,076 $5,030 $6,076 $5,030 ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- </Table> 12 <Page> The following table summarizes the changes in the valuation allowance for capitalized mortgage servicing rights: <Table> <Caption> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------------- -------------------- (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $169 $-- $ -- $-- Provision for capitalized mortgage servicing rights in excess of fair value 106 -- 275 -- ---- --- ---- --- Balance, end of period $275 $-- $275 $-- ==== === ==== === - ------------------------------------------------------------------------------------------------------------------- </Table> 13 <Page> 6. Derivative Instruments and Hedging Activities --------------------------------------------- The Company adopted FAS 133 on January 1, 2001. The effect on net income from the adoption was an increase of $13 million (after tax). The pretax amount of $22 million was recorded as a component of other noninterest income. In accordance with the transition provisions of FAS 133, the Company recorded a transition adjustment of $71 million, net of tax, (increase in equity) in other comprehensive income in a manner similar to a cumulative effect of a change in accounting principle. The transition adjustment was the initial amount necessary to adjust the carrying values of certain derivative instruments (that qualified as cash flow hedges) to fair value to the extent that the related hedge transactions had not yet been recognized. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company's interest rate risk management strategy involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. In a fair value hedging strategy, the effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. In a cash flow hedging strategy, the variability of cash payments due to interest rate fluctuations is managed by the effective use of derivative instruments that are linked to hedged assets and liabilities. Derivative instruments that the Company uses as part of its interest rate risk management strategy include interest rate swaps, interest rate futures and forward contracts, and options. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a common notional amount and maturity date. Payments related to the Company's swap contracts are made either monthly, quarterly or semi-annually by one of the parties based on contractual terms. Interest rate futures and forward contracts are contracts in which the buyer agrees to purchase and the seller agrees to make delivery of a specific financial instrument at a predetermined price or yield. These contracts may be settled either in cash or by delivery of the underlying financial instrument. Futures contracts are standardized and are traded on exchanges. Options are contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the underlying financial instrument at a set price during a period or at a specified date in the future. The writer of the option is obligated to purchase or sell the underlying financial instrument, if the purchaser chooses to exercise the option. The Company also enters into various free-standing derivative instruments, which include interest rate, commodity and foreign exchange contracts for customer accommodation purposes. Trading activities primarily involve providing various derivative products to customers, managing foreign currency exchange risk and managing overall Company risk. Free-standing derivative instruments also include derivative transactions entered into for risk management purposes that do not otherwise qualify for hedge accounting. To a lesser extent, the Company 14 <Page> takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. By using derivative instruments, the Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. If a counterparty fails to perform, credit risk is equal to the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company and, therefore, creates a repayment risk for the Company. When the fair value of the derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment (or credit) risk. The Company minimizes the credit risk through credit approvals, limits and monitoring procedures. Credit risk related to derivative contracts is considered and, if material, provided for separately. As the Company generally enters into transactions only with counterparties that carry quality credit ratings, losses associated with counterparty nonperformance on derivative contracts have been immaterial. Further, the Company obtains collateral where appropriate and uses master netting arrangements in accordance with FASB Interpretation No. 39, OFFSETTING OF AMOUNTS RELATED TO CERTAIN CONTRACTS, as amended by FASB Interpretation No. 41, OFFSETTING OF AMOUNTS RELATED TO CERTAIN REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Company's derivative activities are monitored by the Asset/Liability Committee. The Company's Treasury function, which includes asset/liability management, is responsible for implementing various hedging strategies that are developed through its analysis of data from financial models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company's overall interest rate risk management and trading strategies. The accounting treatment applied to certain hedging activities was based on matters not yet resolved by the FASB. Final resolution of these matters could have an impact to earnings. FAIR VALUE HEDGES The Company enters into interest rate swaps to convert its nonprepayable, fixed-rate long-term debt to floating-rate debt. Additionally, the Company enters into a combination of derivative instruments (futures, floors, forwards, swaps and options) to hedge changes in fair value of its mortgage servicing rights as it relates to changes in London Interbank Offered Rate (LIBOR) interest rates and changes in the credit risk. The Company's practice is to convert a majority of fixed-rate debt to floating-rate debt. Decisions to convert fixed-rate debt to floating are made primarily by consideration of the asset/liability mix of the Company, the desired asset/liability sensitivity and by interest rate levels. In determining the portion of mortgage servicing rights to hedge, the Company takes into account offsetting economic hedge positions (comprising mortgage-backed securities and principal-only securities) as well as natural offsets from the mortgage loan production franchise. The Company recognized a gain of $2 million and $8 million for the second quarter and first half of 2001, respectively, as an offset to interest expense, representing the ineffective portion of 15 <Page> fair value hedges of long-term debt. Additionally, for the second quarter and first half of 2001, the Company recognized a gain of $8 million and loss of $9 million, respectively, in noninterest income, which represents the ineffective portion of all fair value hedges of mortgage servicing rights. For long-term debt all components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness. For mortgage servicing rights, all components of each derivative instrument's gain or loss are included in the measurement of hedge ineffectiveness, as reflected in the statement of income, while the time decay and the volatility components of an option's change in value are excluded from the assessment of hedge effectiveness. As of June 30, 2001, all designated hedges continued to qualify as fair value hedges. CASH FLOW HEDGES The Company enters into interest rate swaps to convert floating-rate loans to fixed rates. The loans are typically grouped and share the same risk exposure for which they are being hedged. Specific types of loans and amounts that are hedged are determined based on prevailing market conditions, the asset/liability mix of the Company and the current shape of the yield curve. Additionally, to hedge the forecasted sale of its mortgage loans, the Company enters into futures contracts and mandatory forward contracts, including options on futures and forward contracts. For second quarter and first half of 2001, the Company recognized a net gain of $24 million and $10 million, respectively, which represents the total ineffectiveness of all cash flow hedges. Gains and losses on derivative contracts that are reclassified from cumulative other comprehensive income to current period earnings are included in the line item in which the hedged item's effect in earnings is recorded. All components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness. For the second quarter and first half of 2001, there were no cash flow hedges discontinued related to forecasted transactions that are probable of not occurring. As of June 30, 2001, $108 million of deferred net gains on derivative instruments included in other comprehensive income are expected to be reclassified as earnings during the next twelve months. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions, excluding those related to payments of variable interest in existing financial instruments, is five years for hedges converting floating-rate loans to fixed and one year for hedges of forecasted sales of mortgage loans. FREE-STANDING DERIVATIVE INSTRUMENTS The Company enters into various derivative contracts which primarily focus on providing derivative products to customers. To a lesser extent, the Company takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivative contracts are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions and, therefore, do not qualify for hedge accounting. 16 <Page> Interest rate lock commitments issued on residential mortgage loans intended to be held for resale are considered free-standing derivative instruments. The interest rate exposure on these commitments is economically hedged primarily with options and forwards. The commitments and free-standing derivative instruments are marked to market and recorded as a component of mortgage banking noninterest income in the statement of income. Derivative instruments utilized by the Company and classified as free-standing instruments include interest rate swaps, futures, forwards, floors and caps purchased and written, options purchased and written, and warrants. 17 <Page> FINANCIAL REVIEW <Table> <Caption> SUMMARY FINANCIAL DATA - -------------------------------------------------------------------------------------------------------- % Change Quarter ended June 30, 2001 from ------------------------------- ------------------- JUNE 30, Mar. 31, June 30, Mar. 31, June 30, (in millions, except per share amounts) 2001 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> FOR THE PERIOD Net income (loss) $ (87) $ 1,165 $ 1,037 --% --% Net income (loss) applicable to common stock (91) 1,161 1,033 -- -- Earnings (loss) per common share $ (.05) $ .68 $ .61 -- -- Diluted earnings (loss) per common share (.05) .67 .61 -- -- Dividends declared per common share .24 .24 .22 -- 9 Average common shares outstanding 1,714.9 1,715.9 1,682.8 -- 2 Diluted average common shares outstanding 1,714.9 1,738.7 1,702.6 (1) 1 Profitability ratios (annualized) Net income to average total assets (ROA) --% 1.76% 1.71% -- -- Net income applicable to common stock to average common stockholders' equity (ROE) -- 17.95 17.62 -- -- Total revenue $ 3,553 $ 5,234 $ 4,799 (32) (26) Efficiency ratio (1) 91.6% 57.2% 59.4% 60 54 Average loans $161,269 $159,888 $141,465 1 14 Average assets 279,325 268,536 244,307 4 14 Average core deposits 168,183 156,898 143,565 7 17 Net interest margin 5.31% 5.21% 5.36% 2 (1) CASH NET INCOME AND RATIOS (2) Net income applicable to common stock $ 85 $ 1,384 $ 1,196 (94) (93) Earnings per common share .05 .81 .71 (94) (93) Diluted earnings per common share .05 .80 .70 (94) (93) ROA .13% 2.18% 2.06% (94) (94) ROE 2.09 34.50 33.90 (94) (94) Efficiency ratio 86.2 53.2 55.7 62 55 AT PERIOD END Securities available for sale $ 41,290 $ 38,144 $ 39,774 8 4 Loans 164,754 161,876 148,262 2 11 Allowance for loan losses 3,760 3,759 3,519 -- 7 Goodwill 9,607 9,280 8,854 4 9 Assets 289,758 279,670 256,622 4 13 Core deposits 171,218 163,414 146,522 5 17 Common stockholders' equity 26,802 26,609 24,576 1 9 Stockholders' equity 27,061 26,865 24,841 1 9 Tier 1 capital (3) 16,002 16,575 15,103 (3) 6 Total capital (3) 24,129 25,255 21,839 (4) 10 Capital ratios Common stockholders' equity to assets 9.25% 9.51% 9.58% (3) (3) Stockholders' equity to assets 9.34 9.61 9.68 (3) (4) Risk-based capital (3) Tier 1 capital 6.95 7.18 7.19 (3) (3) Total capital 10.48 10.94 10.87 (4) (4) Leverage (3) 5.97 6.44 6.46 (7) (8) Book value per common share $ 15.64 $ 15.48 $ 14.55 1 7 Staff (active, full-time equivalent) 116,278 113,214 102,551 3 13 COMMON STOCK PRICE High $ 50.16 $ 54.81 $ 47.75 (8) 5 Low 42.65 42.55 37.31 -- 14 Period end 46.43 49.47 38.75 (6) 20 - -------------------------------------------------------------------------------------------------------- <Caption> Six months ended ------------------ JUNE 30, June 30, % (in millions, except per share amounts) 2001 2000 Change - ------------------------------------------------------------------------------- <S> FOR THE PERIOD Net income (loss) $ 1,078 $ 2,077 (48)% Net income (loss) applicable to common stock 1,069 2,068 (48) Earnings (loss) per common share $ .62 $ 1.22 (49) Diluted earnings (loss) per common share .62 1.21 (49) Dividends declared per common share .48 .44 9 Average common shares outstanding 1,715.4 1,689.7 2 Diluted average common shares outstanding 1,736.0 1,706.6 2 Profitability ratios (annualized) Net income to average total assets (ROA) .79% 1.73% (54) Net income applicable to common stock to average common stockholders' equity (ROE) 8.19 17.73 (54) Total revenue $ 8,786 $ 9,473 (7) Efficiency ratio (1) 71.1% 59.0% 21 Average loans $160,583 $138,200 16 Average assets 273,960 241,885 13 Average core deposits 162,572 141,627 15 Net interest margin 5.26% 5.38% (2) CASH NET INCOME AND RATIOS (2) Net income applicable to common stock $ 1,468 $ 2,377 (38) Earnings per common share .86 1.41 (39) Diluted earnings per common share .85 1.39 (39) ROA 1.13% 2.07% (45) ROE 18.23 32.88 (45) Efficiency ratio 66.5 55.4 20 AT PERIOD END Securities available for sale $ 41,290 $ 39,774 4 Loans 164,754 148,262 11 Allowance for loan losses 3,760 3,519 7 Goodwill 9,607 8,854 9 Assets 289,758 256,622 13 Core deposits 171,218 146,522 17 Common stockholders' equity 26,802 24,576 9 Stockholders' equity 27,061 24,841 9 Tier 1 capital (3) 16,002 15,103 6 Total capital (3) 24,129 21,839 10 Capital ratios Common stockholders' equity to assets 9.25% 9.58% (3) Stockholders' equity to assets 9.34 9.68 (4) Risk-based capital (3) Tier 1 capital 6.95 7.19 (3) Total capital 10.48 10.87 (4) Leverage (3) 5.97 6.46 (8) Book value per common share $ 15.64 $ 14.55 7 Staff (active, full-time equivalent) 116,278 102,551 13 COMMON STOCK PRICE High $ 54.81 $ 47.75 15 Low 42.55 31.00 37 Period end 46.43 38.75 20 - ------------------------------------------------------------------------------- </Table> (1) The efficiency ratio is defined as noninterest expense divided by the total revenue (net interest income and noninterest income). (2) Cash net income and ratios exclude goodwill and nonqualifying core deposit intangible (CDI) amortization and the reduction of unamortized goodwill due to sales of assets. The ratios also exclude the balance of goodwill and nonqualifying CDI. Nonqualifying core deposit intangible amortization and average balance excluded from these calculations are, with the exception of the efficiency and ROA ratios, net of applicable taxes. The pretax amount for the average balance of nonqualifying CDI was $1,081 million and $1,102 million for the quarter and six months ended June 30, 2001, respectively. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $24 million and $670 million, respectively, for the quarter ended June 30, 2001 and $49 million and $683 million, respectively, for the six months ended June 30, 2001. Goodwill amortization and the reduction of unamortized goodwill due to the sales of assets and average balance (which are not tax effected) were $152 million, nil and $9,518 million, respectively, for the quarter ended June 30, 2001 and $296 million, $54 million and $9,393 million, respectively, for the six months ended June 30, 2001. (3) See the Capital Adequacy/Ratios section for additional information. 18 <Page> OVERVIEW - -------- Wells Fargo & Company is a $290 billion diversified financial services company providing banking, mortgage and consumer finance through the Internet and other distribution channels throughout North America, including all 50 states, and elsewhere internationally. It ranks fourth in assets at June 30, 2001 among U.S. bank holding companies. In this Form 10-Q, Wells Fargo & Company and Subsidiaries are referred to as the Company and Wells Fargo & Company alone is referred to as the Parent. On October 25, 2000, the merger involving the Company and First Security Corporation (the FSCO Merger) was completed, with First Security Corporation (First Security or FSCO) surviving as a wholly owned subsidiary of the Company. The FSCO Merger was accounted for under the pooling-of-interests method of accounting and, accordingly, the information included in this financial review presents the combined results as if the merger had been in effect for all periods presented. Certain amounts in the financial review for prior quarters have been reclassified to conform with the current financial statement presentation. Net loss for the second quarter of 2001 was $87 million, compared with net income of $1,037 million for the second quarter of 2000. Diluted earnings per common share for the second quarter of 2001 were a loss of $.05, compared with earnings of $.61 for the second quarter of 2000. Net income for the first six months of 2001 was $1,078 million, or $.62 per share, compared with $2,077 million, or $1.21 per share, for the first six months of 2000. In the second quarter of 2001, the Company recognized non-cash impairment and other special charges of $1.16 billion (after tax), or $.67 per share, of which approximately $1.1 billion (after tax), or $.63 per share, related to impairment of publicly traded and private equity securities, primarily in the venture capital portfolio. The other-than-temporary impairment in the valuation of securities resulted from sustained declines in market values of the securities, particularly in the technology and telecommunication industries. The impairment was determined from the periodic review of the Company's portfolio of equity securities, including investments in partnerships and joint ventures. The other special charges of $70 million (after tax), or $.04 per share, related to auto finance portfolios acquired as part of the acquisition of First Security, including adjustments to lease residual values in response to the continued deterioration in the used car market. Return on average assets (ROA) was .79% in the first half of 2001, compared with 1.73% for the first half of 2000. Return on average common equity (ROE) was 8.19% in the first half of 2001, compared with 17.73% for the first half of 2000. Diluted earnings excluding goodwill and nonqualifying core deposit intangible amortization and the reduction of unamortized goodwill due to the sales of assets ("cash" earnings) in the second quarter and first half of 2001 were $.05 and $.85 per share, respectively, compared with $.70 and $1.39 per share in the same periods of 2000. On the same basis, ROA was .13% and 19 <Page> 1.13% in the second quarter and first half of 2001, respectively, compared with 2.06% and 2.07% in the first half of 2001, respectively, compared with 33.90% and 32.88% in the same periods of 2000. Net interest income on a taxable-equivalent basis was $3,029 million and $5,863 million for the second quarter and first half of 2001, respectively, compared with $2,681 million and $5,330 million for the same periods of 2000. The Company's net interest margin was 5.31% and 5.26% for the second quarter and first half of 2001, respectively, compared with 5.36% and 5.38% for the same periods of 2000. Noninterest income was $545 million and $2,959 million for the second quarter and first half of 2001, respectively, compared with $2,135 million and $4,177 million for the same periods of 2000. The decrease in noninterest income in the second quarter of 2001 was predominantly due to non-cash impairment and other special charges. Noninterest expense totaled $3,255 million and $6,251 million for the second quarter and first half of 2001, respectively, compared with $2,852 million and $5,588 million for the same periods of 2000. The increase in noninterest expense was due to an increase in salaries and incentive compensation and an overall increase resulting from operations of acquisitions accounted for as purchases. The Company continued to experience some deterioration in credit quality in the second quarter of 2001. The provision for loan losses was $427 million and $788 million in the second quarter and first half of 2001, respectively, compared with $275 million and $551 million in the same periods of 2000. During the second quarter of 2001, net charge-offs were $427 million, or 1.06% of average total loans (annualized), compared with $262 million, or .74%, during the second quarter of 2000. The allowance for loan losses was $3,760 million, or 2.28% of total loans, at June 30, 2001, compared with $3,719 million, or 2.31%, at December 31, 2000 and $3,519 million, or 2.37%, at June 30, 2000. The Company expects gradual deterioration in asset quality into the foreseeable future, but expects it to remain manageable. At June 30, 2001, total nonaccrual and restructured loans were $1,495 million or .9% of total loans, compared with $1,195 million, or .7%, at December 31, 2000 and $874 million, or .6%, at June 30, 2000. Foreclosed assets amounted to $134 million at June 30, 2001, $128 million at December 31, 2000 and $145 million at June 30, 2000. At June 30, 2001, the ratio of common stockholders' equity to total assets was 9.25%, compared with 9.58% at June 30, 2000. The Company's total risk-based capital (RBC) ratio at June 30, 2001 was 10.48% and its Tier 1 RBC ratio was 6.95%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's ratios at June 30, 2000 were 10.87% and 7.19%, respectively. The Company's leverage ratio was 5.97% at June 30, 2001 and 6.46% at June 30, 2000, exceeding the minimum regulatory guideline of 3% for bank holding companies. 20 <Page> RECENT ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (FAS 141), BUSINESS COMBINATIONS, and Statement No. 142 (FAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS. FAS 141, effective June 30, 2001, requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated. FAS 141 also establishes how the purchase method is to be applied for business combinations completed after June 30, 2001. This guidance is similar to previous generally accepted accounting principles (GAAP), however, FAS 141 establishes additional disclosure requirements for transactions occurring after the effective date. FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 will continue to be amortized through the income statement. Effective January 1, 2002, all goodwill amortization expense will cease and goodwill will be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value-based test. FAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP. After January 1, 2002, under FAS 142 the elimination of goodwill amortization is expected to reduce noninterest expense by approximately $600 million (pretax) and increase net income by approximately $560 million (after tax), for the year ended December 31, 2002, compared with 2001. The Company will also complete an initial goodwill impairment assessment to determine if a transition impairment charge will be recognized under FAS 142. FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------- We may make forward-looking statements in this report and in other reports, prospectuses and proxy statements we file with the Securities and Exchange Commission (SEC). In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Written and oral forward-looking statements might include, generally: - projections of our revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; - descriptions of plans or objectives of our management for future operations, products or services, including pending acquisitions; 21 <Page> - forecasts of our future economic performance; and - descriptions of assumptions underlying or relating to any of the foregoing. In this report, for example, we make forward-looking statements discussing our expectations about: - future credit losses and non-performing assets; - future value of equity securities; - future net interest margin; - the impact of new accounting standards for goodwill amortization on future noninterest expense and net income; and - the impact of changes on future liquidity Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we might not update them to reflect changes that occur after the date they are made. There are several factors--many of which are beyond our control--that could cause results to differ significantly from our expectations. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate and other risks, are described elsewhere in this report (see, for example, "Balance Sheet Analysis"). Additional factors, including the regulation and supervision of the holding company and its subsidiaries, are described in our report on Form 10-K for the year ended December 31, 2000. Any factor described in this report or in our Form 10-K could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. There are factors not described in this report or in our Form 10-K that could cause results to differ from our expectations. When we refer to our Form 10-K for the year ended December 31, 2000, we are referring not only to the information included directly in that report but also to information that is incorporated by reference into that report from our 2000 Annual Report to Stockholders and from our definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. Information incorporated from our 2000 Annual Report to Stockholders is filed as Exhibit 13 to our Form 10-K. 22
INDUSTRY FACTORS AS A FINANCIAL SERVICES COMPANY, OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY GENERAL BUSINESS AND ECONOMIC CONDITIONS. Our business and earnings are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we operate. For example, an economic downturn or higher interest rates could decrease the demand for our loans and other products and services and/or increase the number of customers who fail to repay their loans. Higher interest rates also could increase our cost to borrow funds and increase the rate we pay on deposits. This could more than offset, in the net interest margin, any increase we earn on new or floating rate loans or short-term investments. Lower interest rates could also adversely impact our net interest margin--at least in the short term--insofar as the rates we earn on our loans and investments may fall more rapidly than the rates we pay on deposits. California is an example of a local economy in which we operate. In recent months, California and other western states have experienced an energy crisis, including increased energy costs, repeated episodes of diminished or interrupted electrical power supply and the filing by a California utility for protection under bankruptcy laws. We cannot predict the duration or severity of this situation. Continuation of the situation, however, could disrupt our business and the businesses of our customers who have operations or facilities in those states. It could also trigger an economic slowdown in those states, decreasing the demand for our loans and other products and services and/or increasing the number of customers who fail to repay their loans. The energy crisis could impact other states in which we operate, creating the same or similar concerns for us in those states. We discuss other business and economic conditions in more detail elsewhere in this report and in our Form 10-K for the year ended December 31, 2000. OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY THE FISCAL AND MONETARY POLICIES OF THE FEDERAL GOVERNMENT AND ITS AGENCIES. The policies of the Board of Governors of the Federal Reserve System impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest paid on interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are hard to predict. Federal Reserve Board policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability to repay its loan. 23
THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE. We operate in a highly competitive environment in the products and services we offer and the markets in which we operate. The competition among financial services companies to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitor's new products, especially offerings that provide cost savings to the customer. Some of our competitors may be better able to provide a wider range of products and services over a greater geographic area. We believe the financial services industry will become even more competitive as a result of legislative, regulatory and technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Many of our competitors have fewer regulatory constraints and lower cost structures. We expect the consolidation of the financial services industry to result in larger, better capitalized companies offering a wide array of financial services and products. The Gramm-Leach-Bliley Act (the Act) permits banks, securities firms and insurance companies to merge by creating a new type of financial services company called a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company can acquire banks and other financial institutions. The Act significantly changes our competitive environment. WE ARE HEAVILY REGULATED BY FEDERAL AND STATE AGENCIES. The holding company, its subsidiary banks and many of its non-bank subsidiaries are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. Also, our failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to our reputation. For more information, refer to the "Regulation and Supervision" section of our report on Form 10-K for the year ended December 31, 2000 and to Notes 3 and 22 to the Financial Statements included in our 2000 Annual Report to Stockholders and incorporated by reference into the Form 10-K. 24
CONSUMERS MAY DECIDE NOT TO USE BANKS TO COMPLETE THEIR FINANCIAL TRANSACTIONS. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. COMPANY FACTORS MAINTAINING OR INCREASING OUR MARKET SHARE DEPENDS ON MARKET ACCEPTANCE AND REGULATORY APPROVAL OF NEW PRODUCTS AND SERVICES. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including Internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not successfully introduce new products and services, achieve market acceptance of our products and services, and/or develop and maintain loyal customers. THE HOLDING COMPANY RELIES ON DIVIDENDS FROM ITS SUBSIDIARIES FOR MOST OF ITS REVENUE. The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company's common and preferred stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank and certain of our non-bank subsidiaries may pay to the holding company. Also, the holding company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. For more information, refer to "Regulation and Supervision--Dividend Restrictions" and "--Holding Company Structure" in our report on Form 10-K for the year ended December 31, 2000. WE HAVE BUSINESSES OTHER THAN BANKING. We are a diversified financial services company. In addition to banking, we provide insurance, investments, mortgages and consumer finance. Although we believe our diversity helps mitigate the impact to the Company when downturns affect any one segment of our industry, it also means that our earnings could be subject to different risks and uncertainties. For example, our venture capital gains are volatile and unpredictable. They depend not only on the business success of the underlying investments but also on when the holdings become publicly-traded and subsequent market conditions. We recently experienced sustained declines in the market values of our publicly traded and private equity securities, in particular securities of companies 25
in the technology and telecommunications industries. As a result, in the second quarter of 2001, we recognized non-cash charges to reflect other-than-temporary impairment in the valuation of securities. A number of factors, including the continued deterioration in capital spending on technology and telecommunications equipment, could result in additional declines in the market values of our publicly traded and private equity securities and, if we determine that the declines are other-than-temporary, additional impairment charges. In addition, we will realize losses if and to the extent we sell securities at less than book value. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview," "--Earnings Performance--Noninterest Income," "--Balance Sheet Analysis--Securities Available for Sale" and "--Balance Sheet Analysis--Interest Receivable and Other Assets." The home mortgage industry is subject to special interest rate risks. Loan origination fees and loan servicing fees account for a significant portion of mortgage-related revenues. Changes in interest rates can impact both types of fees. For example, all things being equal, we would expect a decline in mortgage rates to increase the demand for mortgage loans as borrowers refinance existing loans at lower interest rates. And, when portions of our servicing portfolio pay off, we would expect to experience lower revenues from our servicing investments unless we add new loans to our servicing portfolio to replace the loans that have been paid off. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and fewer early payoffs of our servicing portfolio. We manage the impact of interest rate changes on the dynamic between loan origination revenues and loan servicing revenues with derivative financial instruments and other asset/liability management tools. How well we manage this risk impacts our mortgage-related revenues. For more information, refer to the "Balance Sheet Analysis" section later in this report and to the same section included in our 2000 Annual Report to Stockholders and incorporated by reference into our Form 10-K for the year ended December 31, 2000. WE HAVE AN ACTIVE ACQUISITION PROGRAM. We regularly explore opportunities to acquire financial institutions and other financial services providers. We cannot predict the number, size or timing of future acquisitions. We typically do not comment publicly on a possible acquisition or business combination until we have signed a definitive agreement for the transaction. Our ability to successfully complete an acquisition generally is subject to some type of regulatory approval, and we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We typically can decide not to complete a proposed acquisition or business combination if we believe any condition under which a regulatory approval has been granted is unreasonably burdensome to us. Difficulty in integrating an acquired company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. Specifically, the integration process could result in higher than expected deposit attrition (run-off), loss of key employees, the disruption of our business or the 26
business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative impact of any divestitures required by regulatory authorities in connection with acquisitions or business combinations may be greater than expected. OUR BUSINESS COULD SUFFER IF WE FAIL TO ATTRACT AND RETAIN SKILLED PEOPLE. Our success depends, in part, on our ability to attract and retain key people. Competition for the best people--in particular, individuals with technology experience--is intense. We may not be able to hire people or pay them enough to keep them. OUR STOCK PRICE CAN BE VOLATILE. Our stock price can fluctuate widely in response to a variety of factors including - actual or anticipated variations in our quarterly operating results; - new technology used, or services offered, by our competitors; - significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; - failure to integrate our acquisitions or realize anticipated benefits from our acquisitions; and - changes in government regulations. General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, also could cause our stock price to decrease regardless of our operating results. 27
OPERATING SEGMENT RESULTS - ------------------------- COMMUNITY BANKING'S net income, excluding impairment and other special charges of $1,089 million (after tax), increased to $876 million in the second quarter of 2001 from $841 million in the second quarter of 2000, an increase of 4%. Net income, on the same basis, increased to $1,788 million for the first six months of 2001 from $1,668 million for the first six months of 2000, an increase of 7%. Net interest income increased to $2,174 million in the second quarter of 2001 from $1,922 million in the second quarter of 2000. Net interest income increased to $4,171 million for the first six months of 2001 from $3,825 million in the first six months of 2000. The increase in net interest income was primarily due to increases in loans and deposits. Total loans in Community Banking grew 14% and total core deposits grew 17%. The provision for loan losses increased by $90 million and $118 million for the second quarter and first six months of 2001, respectively. Noninterest income for the second quarter of 2001, excluding impairment and other special charges of $1,742 million (before tax), increased by $12 million over the same period in 2000. Noninterest expense increased by $106 million in the second quarter of 2001 over the same period in 2000. A significant portion of this increase was from personnel expense due to higher origination volumes in mortgage banking. WHOLESALE BANKING'S net income, excluding impairment and other special charges of $62 million (after tax), was $220 million in the second quarter of 2001, compared with $201 million in the second quarter of 2000, an increase of 9%. Net income, on the same basis, was $473 million for the first six months of 2001, compared with $453 million in the first six months of 2000, an increase of 4%. Net interest income was $452 million in the second quarter of 2001 and $414 million in the second quarter of 2000. Net interest income increased to $907 million for the first six months of 2001 from $830 million in the first six months of 2000. The increase in net interest income was due to higher loan volume. Average outstanding loan balances grew to $49 billion in the second quarter of 2001 from $40 billion in the second quarter of 2000. The provision for loan losses increased by $11 million to $58 million in the second quarter of 2001 and by $36 million to $95 million for the first six months of 2001. Noninterest income, excluding impairment and other special charges of $99 million (before tax), increased to $559 million and $990 million in the second quarter and first six months of 2001, respectively, from $282 million and $588 million in the same periods of 2000. The increase for both periods was primarily due to an increase in insurance revenue and higher trust fees. Noninterest expense increased to $607 million in the second quarter of 2001 and $1,058 million for the first six months of 2001 from $326 million and $633 million for the same periods in the prior year. The increase for the first six months of 2001 was partly due to higher personnel costs related to additional sales and service team members. WELLS FARGO FINANCIAL'S net income was $71 million in the second quarter of 2001 and $69 million for the same period in 2000. Net income increased to $141 million for the first six months of 2001 from $125 million for the same period in 2000, an increase of 13%. Net interest income increased 17% in the second quarter and 16% in the first six months of 2001, compared with the same periods in 2000. The increase in net interest income was due to increases in average loans partially offset by declines in the net interest margin. The decline in the net interest margin was due to a decline in yields resulting from a change in the mix of the 28
loan portfolio as well as a reduction in prevailing market rates. The provision for loan losses increased by $50 million and $81 million in the second quarter and first half of 2001, respectively, predominantly due to higher net write-offs in the loan portfolios. The increase in noninterest income of $20 million in the second quarter of 2001 was primarily due to an increase in loan and credit card fees. EARNINGS PERFORMANCE - -------------------- NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $3,029 million in the second quarter of 2001, compared with $2,681 million in the second quarter of 2000. The Company's net interest margin was 5.31% in the second quarter of 2001, compared with 5.36% in the second quarter of 2000. Net interest income was $5,863 million in the first six months of 2001, compared with $5,330 million in the first six months of 2000. The Company's net interest margin was 5.26% in the first six months of 2001, compared with 5.38% in the first six months of 2000. The increase in net interest income for the second quarter and first six months of 2001 was primarily due to an increase in earning assets. The reduction in the margin for the second quarter and first six months of 2001 was primarily due to falling commercial loan yields which reset with declining market rates. A significant portion of this impact was offset by lower short-term borrowing costs. Interest income included hedging income of $49 million in the second quarter of 2001 and was offset by hedging expense of $10 million in the same quarter of 2000. Interest expense was offset by hedging income of $51 million in the second quarter of 2001 and included hedging expense of $9 million in the same quarter of 2000. Individual components of net interest income and the net interest margin are presented in the rate/yield table on the following page. Loans averaged $161.3 billion in the second quarter of 2001, compared with $141.5 billion in the second quarter of 2000. For the first half of 2001, loans averaged $160.6 billion, compared with $138.2 billion for the same period of 2000. Debt securities averaged $34.6 billion during the second quarter of 2001, compared with $39.1 billion in the second quarter of 2000. Average core deposits were $168.2 billion and $143.6 billion and funded 60% and 59% of the Company's average total assets in the second quarter of 2001 and 2000, respectively. For the first six months of 2001 and 2000, average core deposits were $162.6 billion and $141.6 billion, respectively, and funded 59% of the Company's average total assets in both periods. 29
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- Quarter ended June 30, -------------------------------------------------------------- 2001 2000 --------------------------- ---------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 2,963 3.82% $ 28 $ 2,355 6.44% $ 38 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 2,057 6.83 34 2,783 6.13 43 Securities of U.S. states and political subdivisions 2,034 8.12 40 2,152 7.76 42 Mortgage-backed securities: Federal agencies 25,798 7.19 454 26,797 7.09 485 Private collateralized mortgage obligations 1,570 9.56 37 2,713 7.46 53 -------- ------ -------- ------ Total mortgage-backed securities 27,368 7.32 491 29,510 7.12 538 Other debt securities (4) 3,097 7.75 64 4,678 7.38 62 -------- ------ -------- ------ Total debt securities available for sale (4) 34,556 7.38 629 39,123 7.11 685 Mortgages held for sale (3) 21,480 6.92 373 9,195 8.15 189 Loans held for sale (3) 4,818 7.42 89 5,706 8.58 122 Loans: Commercial 49,771 8.30 1,030 44,502 9.41 1,042 Real estate 1-4 family first mortgage 18,048 7.42 335 15,388 7.84 301 Other real estate mortgage 24,070 8.26 496 22,164 8.87 489 Real estate construction 8,208 8.41 172 6,634 10.06 166 Consumer: Real estate 1-4 family junior lien mortgage 19,849 9.64 478 14,530 10.37 376 Credit card 6,148 13.35 205 5,531 14.60 201 Other revolving credit and monthly payment 23,442 11.54 676 21,439 11.90 637 -------- ------ -------- ------ Total consumer 49,439 11.00 1,359 41,500 11.73 1,214 Lease financing 10,150 7.71 196 9,634 7.53 181 Foreign 1,583 20.97 83 1,643 21.04 86 -------- ------ -------- ------ Total loans (5) 161,269 9.12 3,671 141,465 9.87 3,479 Other 3,756 4.98 47 3,113 6.12 47 -------- ------ -------- ------ Total earning assets $228,842 8.48 4,837 $200,957 9.13 4,560 ======== ------ ======== ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 2,301 2.79 16 $ 3,445 1.74 15 Market rate and other savings 79,815 2.37 473 62,997 2.72 427 Savings certificates 31,185 5.39 419 29,453 5.25 384 Other time deposits 1,093 5.22 14 4,335 5.58 60 Deposits in foreign offices 5,751 4.27 61 6,990 6.16 107 -------- ------ -------- ------ Total interest-bearing deposits 120,145 3.28 983 107,220 3.72 993 Short-term borrowings 29,970 4.39 328 27,695 6.12 421 Long-term debt 35,066 5.47 479 27,203 6.56 446 Guaranteed preferred beneficial interests in Company's subordinated debentures 935 7.59 18 935 7.89 19 -------- ------ -------- ------ Total interest-bearing liabilities 186,116 3.89 1,808 163,053 4.63 1,879 Portion of noninterest-bearing funding sources 42,726 -- -- 37,904 -- -- -------- ------ -------- ------ Total funding sources $228,842 3.17 1,808 $200,957 3.77 1,879 ======== ------ ======== ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.31% $3,029 5.36% $2,681 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 14,474 $ 12,572 Goodwill 9,518 8,652 Other 26,491 22,126 -------- -------- Total noninterest-earning assets $ 50,483 $ 43,350 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 54,882 $ 47,670 Other liabilities 11,670 9,745 Preferred stockholders' equity 256 263 Common stockholders' equity 26,401 23,576 Noninterest-bearing funding sources used to fund earning assets (42,726) (37,904) -------- -------- Net noninterest-bearing funding sources $ 50,483 $ 43,350 ======== ======== TOTAL ASSETS $279,325 $244,307 ======== ======== - ---------------------------------------------------------------------------------------------------------------- </TABLE> (1) The average prime rate of the Company was 7.34% and 9.25% for the quarters ended June 30, 2001 and 2000, respectively, and 7.98% and 8.97% for the six months ended June 30, 2001 and 2000, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 4.19% and 6.65% for the quarters ended June 30, 2001 and 2000, respectively, and 4.76% and 6.38% for the six months ended June 30, 2001 and 2000, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances computed on a settlement date basis. (4) Includes certain preferred securities. (5) Nonaccrual loans and related income are included in their respective loan categories. (6) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all periods presented. 30
<TABLE> <CAPTION> -------------------------------------------------------------- Six months ended June 30, -------------------------------------------------------------- 2001 2000 ---------------------------- -------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense -------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 2,666 4.49% $ 59 $ 2,295 6.06% $ 69 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 2,232 6.95 75 3,767 5.90 116 Securities of U.S. states and political subdivisions 2,015 7.89 77 2,140 7.84 85 Mortgage-backed securities: Federal agencies 25,477 7.18 893 26,924 7.13 982 Private collateralized mortgage obligations 1,560 9.20 71 2,854 7.19 107 -------- ------ -------- ------ Total mortgage-backed securities 27,037 7.29 964 29,778 7.14 1,089 Other debt securities (4) 3,180 7.76 129 5,180 7.70 125 -------- ------ -------- ------ Total debt securities available for sale (4) 34,464 7.35 1,245 40,865 7.10 1,415 Mortgages held for sale (3) 17,834 7.04 630 9,427 7.83 373 Loans held for sale (3) 4,818 7.60 182 5,544 8.33 230 Loans: Commercial 49,434 8.68 2,128 43,350 9.26 1,995 Real estate 1-4 family first mortgage 18,181 7.50 681 14,600 7.92 578 Other real estate mortgage 23,987 8.53 1,015 21,747 9.05 979 Real estate construction 8,063 8.99 360 6,445 9.90 317 Consumer: Real estate 1-4 family junior lien mortgage 19,192 9.91 948 13,928 10.29 714 Credit card 6,240 13.76 431 5,573 14.19 395 Other revolving credit and monthly payment 23,691 11.74 1,387 21,170 11.84 1,251 -------- ------ -------- ------ Total consumer 49,123 11.28 2,766 40,671 11.63 2,360 Lease financing 10,211 7.84 400 9,759 7.59 370 Foreign 1,584 21.07 167 1,628 21.26 173 -------- ------ -------- ----- Total loans (5) 160,583 9.40 7,517 138,200 9.83 6,772 Other 3,647 5.46 99 3,302 5.88 96 -------- ------ -------- ----- Total earning assets $224,012 8.74 9,732 $199,633 9.04 8,955 ======== ------ ======== ------ FUNDING SOURCES Deposits: Interest-bearing checking $ 2,385 3.24 38 $ 3,391 1.57 27 Market rate and other savings 75,013 2.60 966 62,339 2.64 818 Savings certificates 32,002 5.60 888 29,389 5.12 748 Other time deposits 1,655 5.43 45 4,039 5.41 109 Deposits in foreign offices 6,724 4.99 167 5,451 5.94 161 -------- ------ -------- ------ Total interest-bearing deposits 117,779 3.60 2,104 104,609 3.58 1,863 Short-term borrowings 29,082 5.00 722 28,512 5.96 845 Long-term debt 34,323 5.88 1,008 27,249 6.47 880 Guaranteed preferred beneficial interests in Company's subordinated debentures 934 7.69 35 935 7.88 37 -------- ------ -------- ------ Total interest-bearing liabilities 182,118 4.28 3,869 161,305 4.51 3,625 Portion of noninterest-bearing funding sources 41,894 -- -- 38,328 -- -- -------- ------ -------- ------ Total funding sources $224,012 3.48 3,869 $199,633 3.66 3,625 ======== ------ ======== ------ NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.26% $5,863 5.38% $5,330 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 14,642 $ 12,687 Goodwill 9,393 8,463 Other 25,913 21,102 -------- -------- Total noninterest-earning assets $ 49,948 $ 42,252 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 53,172 $ 46,508 Other liabilities 12,094 10,077 Preferred stockholders' equity 261 268 Common stockholders' equity 26,315 23,727 Noninterest-bearing funding sources used to fund earning assets (41,894) (38,328) -------- -------- Net noninterest-bearing funding sources $ 49,948 $ 42,252 ======== ======== TOTAL ASSETS $273,960 $241,885 ======== ======== - ------------------------------------------------------------------------------------------------------------------------- </TABLE> 31
NONINTEREST INCOME <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ------------------ % ----------------- % (in millions) 2001 2000 Change 2001 2000 Change - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Service charges on deposit accounts $ 471 $ 428 10% $ 900 $ 833 8% Trust and investment fees: Asset management and custody fees 181 177 2 369 353 5 Mutual fund and annuity sales fees 201 185 9 415 369 12 All other 35 32 9 48 69 (30) ------- ------ ------- ------ Total trust and investment fees 417 394 6 832 791 5 Credit card fees 196 175 12 377 340 11 Other fees: Cash network fees 53 50 6 99 91 9 Charges and fees on loans 120 80 50 213 160 33 All other 138 136 1 306 267 15 ------- ------ ------- ------ Total other fees 311 266 17 618 518 19 Mortgage banking: Origination and other closing fees 190 93 104 311 158 97 Servicing fees, net of amortization and impairment 105 172 (39) 115 324 (65) Net (losses) gains on securities available for sale (4) -- -- 132 -- -- Net gains on sales of mortgage servicing rights -- 33 (100) -- 59 (100) Net gains (losses) on sales of mortgages 149 (36) -- 206 6 -- All other 77 74 4 144 122 18 ------- ------ ------- ------ Total mortgage banking 517 336 54 908 669 36 Insurance 210 117 79 327 212 54 Net venture capital (losses) gains (1,487) 320 -- (1,470) 1,205 -- Net gains (losses) on securities available for sale 27 (39) -- 145 (641) -- Net (losses) income from equity investments accounted for by the: Cost method (115) 13 -- (25) 127 -- Equity method (86) 39 -- (85) 75 -- Net losses on sales of loans (14) (72) (81) (1) (71) (99) Net gains on dispositions of operations 3 4 (25) 104 6 -- All other 95 154 (38) 329 113 191 ------- ------ ------- ------ Total $ 545 $2,135 (74)% $ 2,959 $4,177 (29)% ======= ====== ==== ======= ====== === - ------------------------------------------------------------------------------------------------------------------- </TABLE> The increase in mutual fund fees for the second quarter of 2001 was due to the overall growth in mutual fund assets. The Company managed mutual funds with $69 billion of assets at June 30, 2001, compared with $62 billion at June 30, 2000. The Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $500 billion and $475 billion at June 30, 2001 and 2000, respectively. The increase in mortgage banking in the second quarter of 2001, compared with the same period of 2000, was primarily due to a 125% increase in originations to $45 billion from $20 billion, along with an increase in net gains on sales of mortgages. In the second quarter of 2001, net venture capital losses included approximately $1,500 million of impairment write-downs reflecting other-than-temporary impairment in the valuation of 32
publicly traded and private equity securities. In the same period, net losses from equity investments included approximately $215 million of impairment write-downs. Other-than-temporary impairment is subject to considerable judgement and analysis. For nonmarketable equity securities, the analysis is based on the specifics of each individual investment and the expectations for that investment, its cash flow and needs for capital, the viability of its business model and the Company's exit strategy. The Company routinely recognizes impairment in its venture capital portfolios. However, in the second quarter, in addition to the general economic conditions, especially in the technology and telecommunications industries, adverse changes occurred in the venture capital markets. The sharp stock market decline resulted in a delay of opportunities for private companies to become public in initial public offerings (IPOs), for those approaching that stage, and a general tightening in venture capital sources to provide the next level of financing. For those companies needing such financing under these conditions, the price extracted for such funding is a disproportionate dilution of the existing ownership interests. While the impairment recognized is based on all of the information available at the time of the assessment, other information or economic developments in the future may lead to further impairment. The net losses on securities available for sale in the first six months of 2000 were due to the restructuring of the debt securities portion of the securities available for sale portfolio. Benefits of that strategy were realized in the first half of 2001. The increase in net gains on dispositions of operations in the first half of 2001 was due to a $96 million net gain in the first quarter of 2001, which included a $54 million reduction of unamortized goodwill, related to the divestiture of 39 stores (as a condition to the First Security merger) in Idaho, New Mexico, Nevada and Utah. "All other" noninterest income in the second quarter of 2001 included write-downs of lease residual values in auto finance portfolios acquired as part of the acquisition of First Security, in response to the continued deterioration in the used car market. In conjunction with this write-down, those remaining residuals were placed under a residual loss insurance policy. 33
NONINTEREST EXPENSE <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, ----------------- % ----------------- % (in millions) 2001 2000 Change 2001 2000 Change - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Salaries $1,018 $ 906 12% $1,995 $1,787 12% Incentive compensation 265 185 43 469 353 33 Employee benefits 236 245 (4) 514 500 3 Equipment 217 208 4 454 429 6 Net occupancy 239 233 3 476 470 1 Goodwill 152 136 12 296 253 17 Core deposit intangible: Nonqualifying (1) 39 44 (11) 79 88 (10) Qualifying 2 3 (33) 5 7 (29) Net gains on dispositions of premises and equipment -- (17) (100) (19) (51) (63) Contract services 143 121 18 258 230 12 Outside professional services 129 89 45 230 179 28 Outside data processing 77 80 (4) 154 159 (3) Advertising and promotion 66 78 (15) 124 138 (10) Telecommunications 90 78 15 169 146 16 Travel and entertainment 69 71 (3) 142 128 11 Postage 54 64 (16) 124 123 1 Stationery and supplies 63 56 13 122 105 16 Insurance 68 55 24 115 97 19 Operating losses 43 31 39 99 69 43 Security 49 25 96 76 48 58 All other 236 161 47 369 330 12 ------ ------ ------ ------ Total $3,255 $2,852 14% $6,251 $5,588 12% ====== ====== ==== ====== ====== ==== - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Represents amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The increase in noninterest expense was due to an increase in salaries, due to an increase in full-time equivalent staff, an increase in incentive compensation, due to an increase in sales and service team members partially due to high mortgage origination volume, and an overall increase resulting from operations of acquisitions accounted for as purchases. 34
CASH EARNINGS/RATIOS The following table reconciles reported loss to net income excluding goodwill and nonqualifying core deposit intangible amortization ("cash" earnings) for the quarter ended June 30, 2001. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions, except per share amounts) June 30, 2001 - ------------------------------------------------------------------------------------------------------------------- Nonqualifying Reported core deposit "Cash" loss Goodwill intangible earnings - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Income (loss) before income tax expense (benefit) $(129) $152 $39 $ 62 Income tax expense (benefit) (42) -- 15 (27) ----- ---- --- ---- Net income (loss) (87) 152 24 89 Preferred stock dividends 4 -- -- 4 ----- ---- --- ---- Net income (loss) applicable to common stock $ (91) $152 $24 $ 85 ===== ==== === ==== Earnings (loss) per common share $(.05) $.05 ===== ==== Diluted earnings (loss) per common share $(.05) $.05 ===== ==== - ------------------------------------------------------------------------------------------------------------------- </TABLE> The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and related balances for the quarter ended June 30, 2001 were calculated as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions) June 30, 2001 - ------------------------------------------------------------------------------------------------------------------- ROA: A / (C-E-F) = .13% ROE: B / (D-E-G) = 2.09% Efficiency: (H-I) / J = 86.2% <S> <C> Net income $ 89 (A) Net income applicable to common stock 85 (B) Average total assets 279,325 (C) Average common stockholders' equity 26,401 (D) Average goodwill 9,518 (E) Average pretax nonqualifying core deposit intangible 1,081 (F) Average after-tax nonqualifying core deposit intangible 670 (G) Noninterest expense 3,255 (H) Amortization expense for goodwill and nonqualifying core deposit intangible 191 (I) Net interest income plus noninterest income 3,553 (J) - ------------------------------------------------------------------------------------------------------------------- </TABLE> These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows for other information regarding funds available for use by management. 35
BALANCE SHEET ANALYSIS - ---------------------- SECURITIES AVAILABLE FOR SALE The following table provides the cost and fair value for the major components of securities available for sale carried at fair value. There were no securities classified as held to maturity at the end of the periods presented. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 2001 2000 2000 -------------------- ------------------ ------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Securities of U.S. Treasury and federal agencies $ 2,033 $ 2,098 $ 2,739 $ 2,783 $ 2,792 $ 2,774 Securities of U.S. states and political subdivisions 2,224 2,307 2,322 2,400 2,433 2,384 Mortgage-backed securities: Federal agencies 30,137 30,725 26,304 26,995 24,602 24,223 Private collateralized mortgage obligations (1) 1,807 1,841 1,455 1,446 3,082 2,993 ------- ------ ------- -------- ------- ------- Total mortgage-backed securities 31,944 32,566 27,759 28,441 27,684 27,216 Other 2,805 2,854 2,588 2,502 2,919 2,845 ------- ------- ------- -------- ------- ------- Total debt securities 39,006 39,825 35,408 36,126 35,828 35,219 Marketable equity securities 982 1,465 2,457 2,529 2,571 4,555 ------- ------- ------- ------- ------- ------- Total $39,988 $41,290 $37,865 $38,655 $38,399 $39,774 ======= ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. The decrease in the cost of marketable equity securities was predominantly due to impairment writedowns reflecting other-than-temporary impairment in valuation. The following table provides the components of the estimated unrealized net gain on securities available for sale. The estimated unrealized net gain or loss on securities available for sale is reported on an after-tax basis as a component of cumulative other comprehensive income. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Estimated unrealized gross gains $1,490 $1,620 $2,149 Estimated unrealized gross losses (188) (830) (774) ------ ------ ------ Estimated unrealized net gain $1,302 $ 790 $1,375 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- </TABLE> 36
The following table provides the components of the realized net gains (losses) on the sales of securities from the securities available for sale portfolio. (Realized gains (losses) on marketable equity securities from venture capital investments are reported as net venture capital gains (losses).) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, --------------------- -------------------- (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Realized gross gains $ 66 (1) $ 23 $362 (1) $ 37 Realized gross losses (43)(2) (62) (85)(2) (678) ---- ---- ---- ----- Realized net gains (losses) $ 23 $(39) $277 $(641) ==== ==== ==== ===== - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Includes $7 million and $143 million of gross gains reported in mortgage banking noninterest income for the second quarter and first half of 2001, respectively. (2) Includes $11 million of gross losses reported in mortgage banking noninterest income for the second quarter of 2001. The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 5 years and 8 months at June 30, 2001. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At June 30, 2001, mortgage-backed securities, including collateralized mortgage obligations, were $32.6 billion, or 79% of the Company's securities available for sale portfolio. As an indication of interest rate risk, the Company has estimated the effect of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on that rate scenario, mortgage-backed securities would decrease in fair value from $32.6 billion to $27.4 billion and the expected remaining maturity of these securities would increase from 6 years to 8 years and 11 months. 37
LOAN PORTFOLIO <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- % Change June 30, 2001 from ---------------------- JUNE 30, Dec. 31, June 30, Dec. 31, June 30, (in millions) 2001 2000 2000 2000 2000 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Commercial (1) $ 49,957 $ 50,518 $ 46,513 (1)% 7% Real estate 1-4 family first mortgage 20,366 18,464 18,727 10 9 Other real estate mortgage (2) 24,140 23,972 22,248 1 9 Real estate construction 8,271 7,715 6,969 7 19 Consumer: Real estate 1-4 family junior lien mortgage 20,683 18,218 15,139 14 37 Credit card 6,174 6,616 6,049 (7) 2 Other revolving credit and monthly payment 23,632 23,974 21,395 (1) 10 -------- -------- -------- Total consumer 50,489 48,808 42,583 3 19 Lease financing 9,887 10,023 9,580 (1) 3 Foreign 1,644 1,624 1,642 1 -- -------- -------- -------- Total loans (net of unearned income, including net deferred loan fees, of $4,223, $4,231 and $3,783) $164,754 $161,124 $148,262 2% 11% ======== ======== ======== == == - ----------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $4,024 million, $4,206 million and $3,671 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. (2) Includes agricultural loans that are secured by real estate of $1,271 million, $1,280 million and $1,267 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. <TABLE> <CAPTION> NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1) - ------------------------------------------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonaccrual loans: Commercial (2) $ 823 $ 739 $ 495 Real estate 1-4 family first mortgage 198 127 129 Other real estate mortgage (3) 193 113 129 Real estate construction 80 57 23 Consumer: Real estate 1-4 family junior lien mortgage 15 23 11 Other revolving credit and monthly payment 37 36 22 ------ ------ ------ Total consumer 52 59 33 Lease financing 140 92 51 Foreign 9 7 11 ------ ------ ------ Total nonaccrual loans (4) 1,495 1,194 871 Restructured loans -- 1 3 ------ ------ ------ Nonaccrual and restructured loans 1,495 1,195 874 As a percentage of total loans .9% .7% .6% Foreclosed assets 134 128 145 Real estate investments (5) 2 27 32 ------ ------ ------ Total nonaccrual and restructured loans and other assets $1,631 $1,350 $1,051 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes commercial agricultural loans of $65 million, $44 million and $34 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. (3) Includes agricultural loans secured by real estate of $48 million, $13 million and $14 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. (4) Of the total nonaccrual loans, $912 million, $761 million and $395 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively, were considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were recorded as loans. Real estate investments totaled $28 million, $56 million and $79 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. 38
The Company generally identifies loans to be evaluated for impairment under FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, rather than the contractual terms specified by the restructuring agreement. Consequently, not all impaired loans are necessarily placed on nonaccrual status. That is, loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the Company will estimate the amount of impairment using discounted cash flows, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of estimating impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan results in a value that is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. 39
In accordance with FAS 114, the table below shows the recorded investment in impaired loans and the related methodology used to measure impairment for the periods presented: <TABLE> <CAPTION> - ------------------------------------------------------------------------------ JUNE 30, Dec. 31, June 30, (in millions) 2001 2000 2000 - ------------------------------------------------------------------------------ <S> <C> <C> <C> Impairment measurement based on: Collateral value method $368 $174 $174 Discounted cash flow method 310 331 104 Historical loss factors 234 257 120 ---- ---- ---- Total (1) $912 $762 $398 ==== ==== ==== - ------------------------------------------------------------------------------ </TABLE> (1) Includes $423 million, $345 million and $208 million of impaired loans with a related FAS 114 allowance of $91 million, $74 million and $73 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. The average recorded investment in impaired loans was $934 million and $403 million during the second quarter of 2001 and 2000, respectively, and $860 million and $387 million during the first six months of 2001 and 2000, respectively. Total interest income recognized on impaired loans was $9 million and $1 million during the second quarter of 2001 and 2000, respectively, and $16 million and $3 million during the first six months of 2001 and 2000, respectively, most of which was recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates changes in the amount of nonaccrual loans that result from increases in lending activity and reductions due to resolutions of loans in the nonaccrual portfolio. The Company expects that nonaccrual loans will increase during the year consistent with current economic conditions. The performance of any individual loan can be affected by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company may acquire loans from other financial institutions that may be classified as nonaccrual based on the Company's policies. 40
Loans 90 Days or More Past Due and Still Accruing - ------------------------------------------------- The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 120 days of becoming past due and such nonaccrual loans are excluded from the following table. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------- JUNE 30, Dec. 31, June 30, (in millions) 2001 2000 2000 - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> Commercial $ 88 $ 90 $ 61 Real estate 1-4 family first mortgage 99 66 31 Other real estate mortgage 29 24 12 Real estate construction 23 12 13 Consumer: Real estate 1-4 family junior lien mortgage 56 27 33 Credit card 114 96 100 Other revolving credit and monthly payment 291 263 210 ---- ---- ---- Total consumer 461 386 343 ---- ---- ---- Total $700 $578 $460 ==== ==== ==== - ---------------------------------------------------------------------------------------------- </TABLE> 41
ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Quarter Six months ended June 30, ended June 30, -------------------- ---------------------- (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BALANCE, BEGINNING OF PERIOD $3,759 $3,406 $3,719 $3,344 Allowances related to business combinations 1 100 41 161 Provision for loan losses 427 275 788 551 Loan charge-offs: Commercial (173) (92) (282) (197) Real estate 1-4 family first mortgage (3) (1) (6) (8) Other real estate mortgage (6) (13) (9) (16) Real estate construction (3) (3) (4) (4) Consumer: Real estate 1-4 family junior lien mortgage (11) (6) (22) (17) Credit card (117) (88) (218) (174) Other revolving credit and monthly payment (182) (136) (369) (288) ------ ------ ------ ------ Total consumer (310) (230) (609) (479) Lease financing (20) (9) (44) (22) Foreign (17) (21) (35) (45) ------ ------ ------ ------ Total loan charge-offs (532) (369) (989) (771) ------ ------ ------ ------ Loan recoveries: Commercial 21 20 37 53 Real estate 1-4 family first mortgage 1 1 2 2 Other real estate mortgage 6 4 8 7 Real estate construction 1 1 2 2 Consumer: Real estate 1-4 family junior lien mortgage 4 4 7 8 Credit card 10 10 22 20 Other revolving credit and monthly payment 50 60 99 116 ------ ------ ------ ------ Total consumer 64 74 128 144 Lease financing 7 3 14 6 Foreign 5 4 10 20 ------ ------ ------ ------ Total loan recoveries 105 107 201 234 ------ ------ ------ ------ Total net loan charge-offs (427) (262) (788) (537) ------ ------ ------ ------ BALANCE, END OF PERIOD $3,760 $3,519 $3,760 $3,519 ====== ====== ====== ====== Total net loan charge-offs as a percentage of average total loans (annualized) 1.06% .74% .99% .78% ====== ====== ====== ====== Allowance as a percentage of total loans 2.28% 2.37% 2.28% 2.37% ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------ </TABLE> The Company considers the allowance for loan losses of $3,760 million adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit at June 30, 2001. The Company's determination of the level of the allowance for loan losses 42
rests upon various judgements and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. INTEREST RECEIVABLE AND OTHER ASSETS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Nonmarketable equity investments $ 3,668 $ 4,142 $ 3,772 Trading assets 3,893 3,777 4,997 Interest receivable 1,445 1,516 1,347 Government National Mortgage Association (GNMA) pool buy outs 2,532 1,510 1,600 Certain identifiable intangible assets 203 227 235 Foreclosed assets 134 128 145 Interest-earning deposits 156 95 107 Due from customers on acceptances 101 85 108 Other 8,995 10,449 9,114 ------- ------- ------- Total interest receivable and other assets $21,127 $21,929 $21,425 ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------- </TABLE> The decrease in nonmarketable equity securities was due to impairment write-downs reflecting other-than-temporary impairment in the valuation of private equity securities. Trading assets consist largely of securities, including corporate debt, U.S. government agency obligations and derivative instruments held for customer accommodation purposes. Interest income from trading assets was $28 million and $24 million in the second quarter of 2001 and 2000, respectively, and $60 million and $46 million in the first half of 2001 and 2000, respectively. Noninterest income from trading assets was $91 million and $61 million in the second quarter of 2001 and 2000, respectively, and $204 million and $121 million in the first half of 2001 and 2000, respectively. GNMA pool buy outs are advances made to GNMA mortgage pools that are guaranteed by the Federal Housing Administration or by the Department of Veterans Affairs (collectively, "the guarantors"). These advances are made to buy out government agency-guaranteed delinquent loans, pursuant to the Company's servicing agreements. The Company, on behalf of the guarantors, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances, by the guarantors. Amortization expense for certain identifiable intangible assets included in other assets was $11 million and $10 million in the second quarter of 2001 and 2000, respectively. 43
DEPOSITS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in millions) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Noninterest-bearing $ 56,774 $ 55,096 $ 50,628 Interest-bearing checking 1,950 3,699 3,426 Market rate and other savings 82,705 66,859 62,469 Savings certificates 29,789 31,056 29,999 -------- -------- -------- Core deposits 171,218 156,710 146,522 Other time deposits 1,168 5,137 5,254 Deposits in foreign offices 5,872 7,712 7,909 -------- -------- -------- Total deposits $178,258 $169,559 $159,685 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------- </TABLE> CAPITAL ADEQUACY/RATIOS The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the Office of the Comptroller of the Currency. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions ----------------- ----------------- ------------------- (in billions) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------- -------- ----- ------ ------ ------- -------- <S> <C> <C> <C> <C> <C> <C> As of June 30, 2001: Total capital (to risk-weighted assets) Wells Fargo & Company $24.1 10.48% > $18.4 > 8.00% - - Wells Fargo Bank Minnesota, N.A. 3.3 12.75 > 2.1 > 8.00 > $ 2.6 > 10.00% - - - - Wells Fargo Bank, N.A. 13.7 12.49 > 8.8 > 8.00 > 11.0 > 10.00 - - - - Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $16.0 6.95% > $ 9.2 > 4.00% - - Wells Fargo Bank Minnesota, N.A. 3.1 11.69 > 1.0 > 4.00 > $ 1.6 > 6.00% - - - - Wells Fargo Bank, N.A. 8.2 7.52 > 4.4 > 4.00 > 6.6 > 6.00 - - - - Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $16.0 5.97% > $10.7 > 4.00% (1) - - Wells Fargo Bank Minnesota, N.A. 3.1 6.89 > 1.8 > 4.00 (1) > $ 2.2 > 5.00% - - - - Wells Fargo Bank, N.A. 8.2 7.14 > 4.6 > 4.00 (1) > 5.8 > 5.00 - - - - - ------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations. 44
LIQUIDITY AND CAPITAL MANAGEMENT The Company manages its liquidity and capital at both the parent and subsidiary levels. Liquidity for the Company is also provided by interest income, deposit-raising activities, and potential disposition of readily marketable assets and through its ability to raise funds in a variety of domestic and international money and capital markets. The Company accesses the capital markets for long-term funding through the issuance of registered debt, private placements and asset-based secured funding. In October 2000, the Parent filed a shelf registration statement with the SEC under which the Parent may issue up to $10 billion in debt and equity securities, excluding common stock, other than common stock issuable upon the exercise or conversion of debt and equity securities. In May 2001, the Parent issued a total of $1 billion in global notes and $500 million in medium-term notes. The remaining issuance authority at June 30, 2001 under the October 2000 registration statement, together with the $50 million issuance authority remaining on the Parent's registration statement filed in 1999, was $7.85 billion. In July 2001, the Parent issued $750 million in subordinated notes. Proceeds from the issuance of the debt securities listed above were, and with respect to any such securities issued in the future, are expected to be used for general corporate purposes. In February 2001, Wells Fargo Financial, Inc. (WFFI) filed a shelf registration statement with the SEC, under which WFFI may issue up to $4 billion in senior or subordinated debt securities. In May 2001, WFFI issued a total of $500 million in senior notes. As of June 30, 2001, the remaining issuance authority under that registration statement and the WFFI shelf registration statements filed in 2000 and 1999 was $4.95 billion. In July 2001, WFFI issued $600 million in global notes. In 1999, a subsidiary of WFFI filed a shelf registration statement with the Canadian provincial securities authorities for the issuance of up to $1 billion (Canadian) in debt securities. In June 2001, that registration expired with $340 million (Canadian) remaining. In February 2001, Wells Fargo Bank, N.A. established a $20 billion bank note program under which it may issue up to $10 billion in short-term senior notes outstanding at any time and up to an aggregate of $10 billion in long-term senior and subordinated notes. Securities are issued under this program in private placements in accordance with OCC regulations. Wells Fargo Bank, N.A. began issuing under the short-term portion of the program in July 2001. In May 2001, Wells Fargo Bank, N.A. called $750 million in subordinated notes at par. In February 2001, the Board of Directors authorized the repurchase of up to 25 million additional shares of the Company's outstanding common stock. As of June 30, 2001, the total remaining common stock repurchase authority was approximately 16 million shares. At the Annual Meeting of Stockholders held on April 24, 2001, the stockholders of the Company approved an increase in the number of shares of common stock authorized for issuance from four billion shares to six billion shares. 45
In July 2001, the Board of Directors approved an increase in the Company's quarterly common stock dividend to 26 cents per share from 24 cents per share, representing an 8% increase in the quarterly dividend rate. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. The majority of the Company's interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available for sale, deposit liabilities, short-term borrowings, long-term debt and derivative financial instruments used for asset/liability management. Interest rate risk occurs when assets and liabilities reprice at different times as market interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk"; it is a significant source of interest rate risk for the Company and is more difficult to quantify and manage than term structure risk. Two primary components of basis risk for the Company are (1) the spread between prime-based loans and market rate account (MRA) savings deposits and (2) the rate paid on savings and interest-bearing checking accounts as compared to LIBOR-based loans. Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage the exposure interest rate fluctuations have on net income and cash flows and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating-rate loans, the right to prepay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. 46
The simulation model is used to measure the impact on net income, relative to a base case scenario, of interest rates increasing or decreasing 100 basis points over the next 12 months. The simulation for June 30, 2001 showing the largest drop in net income relative to the base case scenario over the next twelve months is a 100 basis point increase in rates that will result in an increase in net income of $74 million. In the simulation that was run at December 31, 2000, the largest drop in net income relative to the base case scenario over the next twelve months was a 100 basis point increase in rates that was projected to result in a decrease in net income of $61 million. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures indicated by the net income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable cash flow. Additionally, receive-fixed rate swaps are used to convert floating-rate loans into fixed rates to better match the liabilities that fund the loans. The Company also uses derivatives including floors, forwards and swaps, futures contracts and options on futures contracts and swaps to hedge the Company's mortgage servicing rights as well as forwards, futures and options on futures and forwards to hedge the Company's 1-4 family real estate first mortgage loan commitments and mortgage loans held for sale. Looking toward managing interest rate risk in 2001, the Company will face risk primarily from the possibility of falling rates. Given the Company's negative one-year gap, if rates fall, risk sensitive liabilities are expected to fall faster than asset yields, leading to an increase in margin during the year. A weakness of gap analysis is that it only considers gap periods and not the exposure within periods. This period exposure was evident in the first quarter of 2001, as retail deposit rates, due to competition, lagged the decline in asset yields. The margin is starting to benefit from deposit rates catching up to market rate changes. As mentioned above, the Company has partially hedged its mortgage servicing rights against a falling rate scenario, using primarily floors, forwards and swaps, futures contracts and options on futures contracts and swaps. Based on its current and projected balance sheet, the Company does not expect that a change in interest rates would significantly affect its liquidity position. The Company is also exposed to equity price risk arising through its venture capital investments. The Company does not actively trade these investments but conducts an orderly sale considering restriction periods and market conditions. Where economic, the Company may use hedging strategies to mitigate the equity price risk. The Company considers the fair values and the potential near term losses to future earnings related to its customer accommodation derivative financial instruments to be immaterial. 47
PART II - OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on April 24, 2001. There were 1,716,374,316 shares of common stock outstanding and entitled to vote at said meeting; and a total of 1,419,980,673 (82.73%) shares were present at the meeting in person or by proxy. Each person named in the Proxy Statement as a nominee for director was elected; the proposal to increase the number of shares of common stock that may be issued from 4 billion to 6 billion was approved; the appointment of KPMG LLP to audit the books of the Company for the year ending December 31, 2001 was ratified; and the stockholder proposal requesting the Company's Board of Directors to provide for cumulative voting for directors was not approved. Following are the voting results on each matter: (1) ELECTION OF DIRECTORS <TABLE> <CAPTION> For Withheld ------------- ---------- <S> <C> <C> Leslie S. Biller 1,414,582,626 5,398,047 J. A. Blanchard III 1,414,713,835 5,266,838 Michael R. Bowlin 1,414,366,226 5,614,447 David A. Christensen 1,414,488,737 5,491,936 Spencer F. Eccles 1,412,804,666 7,176,007 Susan E. Engel 1,414,135,984 5,844,689 Robert L. Joss 1,386,144,043 33,836,630 Reatha Clark King 1,414,733,477 5,247,196 Richard M. Kovacevich 1,414,950,372 5,030,301 Richard D. McCormick 1,414,448,656 5,532,017 Cynthia H. Milligan 1,414,698,471 5,282,202 Benjamin F. Montoya 1,414,131,457 5,849,216 Philip J. Quigley 1,414,822,750 5,157,923 Donald B. Rice 1,384,942,123 35,038,550 Judith M. Runstad 1,414,627,152 5,353,521 Susan G. Swenson 1,414,848,448 5,132,225 Chang-Lin Tien 1,383,685,908 36,294,765 Michael W. Wright 1,386,325,625 33,655,048 </TABLE> (2) Proposal to Increase Authorized Common Stock -------------------------------------------- <TABLE> <CAPTION> For Against Abstentions ----------------- ----------------- ----------------- <S> <C> <C> 1,332,799,698 77,425,133 9,755,842 </TABLE> 48
(3) Proposal to Ratify Appointment of KPMG LLP ------------------------------------------ <TABLE> <CAPTION> For Against Abstentions ----------------- ----------------- ----------------- <S> <C> <C> 1,364,027,391 49,365,445 6,587,837 </TABLE> (4) Stockholder Proposal Relating to Cumulative Voting -------------------------------------------------- <TABLE> <CAPTION> For Against Abstentions Non-votes ----------------- ----------------- ----------------- ------------------ <S> <C> <C> <C> 353,482,063 784,896,329 83,588,786 198,013,495 </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(a) Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company's Current Report on Form 8-K dated June 28, 1993. Certificates of Amendment of Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated July 3, 1995 (authorizing preference stock), Exhibits 3(b) and 3(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (changing the Company's name and increasing authorized common and preferred stock, respectively), and Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (increasing authorized common stock) (b) Certificate of Change of Location of Registered Office and Change of Registered Agent, incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (c) Certificate of Designations for the Company's ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (d) Certificate of Designations for the Company's 1995 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (e) Certificate Eliminating the Certificate of Designations for the Company's Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated November 1, 1995 49
3(f) Certificate Eliminating the Certificate of Designations for the Company's 10.24% Cumulative Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 20, 1996 (g) Certificate of Designations for the Company's 1996 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 26, 1996 (h) Certificate of Designations for the Company's 1997 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 14, 1997 (i) Certificate of Designations for the Company's 1998 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 20, 1998 (j) Certificate of Designations for the Company's Adjustable Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (k) Certificate of Designations for the Company's Fixed/Adjustable Rate Noncumulative Preferred Stock, Series H, incorporated by reference to Exhibit 3(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (l) Certificate of Designations for the Company's Series C Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (m) Certificate Eliminating the Certificate of Designations for the Company's Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated April 21, 1999 (n) Certificate of Designations for the Company's 1999 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3(b) to the Company's Current Report on Form 8-K dated April 21, 1999 (o) Certificate of Designations for the Company's 2000 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (p) Certificate of Designations for the Company's 2001 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 17, 2001 50
3(q) By-Laws, incorporated by reference to Exhibit 3(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 4(a) See Exhibits 3(a) through 3(q) (b) Rights Agreement, dated as of October 21, 1998, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated October 21, 1998 (c) The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. 10(a) Deferred Compensation Plan, as amended through January 1, 2001, filed herewith (b) Agreement between the Company and an executive officer, filed herewith 99(a) Computation of Ratios of Earnings to Fixed Charges --the ratios of earnings to fixed charges, including interest on deposits, were .93 and 1.87 for the quarters ended June 30, 2001 and 2000, respectively, and 1.44 and 1.90 for the six months ended June 30, 2001 and 2000, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were .85 and 2.81 for the quarters ended June 30, 2001 and 2000, respectively, and 1.95 and 2.83 for the six months ended June 30, 2001 and 2000, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends--the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were .93 and 1.87 for the quarters ended June 30, 2001 and 2000, respectively, and 1.44 and 1.90 for the six months ended June 30, 2001 and 2000, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were .84 and 2.80 for the quarters ended June 30, 2001 and 2000, respectively, and 1.93 and 2.80 for the six months ended June 30, 2001 and 2000, respectively. 51
(b) The Company filed the following reports on Form 8-K during the second quarter of 2001: (1) April 17, 2001, under Item 5, containing the Company's financial results for the quarter ended March 31, 2001 (2) June 6, 2001, under Item 5, announcing expected second quarter 2001 non-cash charges SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. <TABLE> <CAPTION> <S> <C> Dated: August 7, 2001 WELLS FARGO & COMPANY By: /s/ Les L. Quock ------------------------------------- Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) </TABLE> 52