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.
Shares Outstanding
July 31, 2001
-------------
Common stock, $1-2/3 par value 1,712,056,896
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
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
--------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
---------------------- ----------------------
(in millions, except per share amounts) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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
======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------
2
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions, except shares) 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------
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
======== ======== ========
-------------------------------------------------------------------------------------------------------------------
3
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
------------------------------------------------------------------------------------------------------------------------------
Unearned Additional
Number of Preferred ESOP Common paid-in
(in millions, except shares) shares stock shares stock capital
------------------------------------------------------------------------------------------------------------------------------
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
===== ====== ====== ======
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Notes Cumulative
receivable other Total
Retained from Treasury comprehensive stockholders'
(in millions, except shares) earnings ESOP stock income equity
------------------------------------------------------------------------------------------------------------------------------
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
======= ==== ======= ====== =======
------------------------------------------------------------------------------------------------------------------------------
4
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------
Six months ended June 30,
----------------------------------
(in millions) 2001 2000
-----------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------
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:
-------------------------------------------------------------------------------------------------------------------
Method of
(in millions) Date Assets Accounting
-------------------------------------------------------------------------------------------------------------------
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
======
-------------------------------------------------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------------------------------------------------------------
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
--------- --------- --------- ------- ------ ------ ------- -------
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
========= ========= ========= ==== ==== ====
-----------------------------------------------------------------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
--------------------- ----------------------
(in millions, except per share amounts) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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
======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------
(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
The following table provides the results for the Company's three major operating
segments.
------------------------------------------------------------------------------------------------------------------------------------
(income/expense in millions, Recon- Consoli-
average balances in billions) Community Wholesale Wells Fargo ciliation dated
Banking Banking Financial column (4) Company
------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
(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
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:
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------------- --------------------
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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
==== ==== ==== ====
-------------------------------------------------------------------------------------------------------------------
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:
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
---------------------- ----------------------
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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
====== ====== ====== ======
-------------------------------------------------------------------------------------------------------------------
12
The following table summarizes the changes in the valuation allowance for
capitalized mortgage servicing rights:
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------------- --------------------
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $169 $-- $ -- $--
Provision for capitalized mortgage
servicing rights in excess of fair value 106 -- 275 --
---- --- ---- ---
Balance, end of period $275 $-- $275 $--
==== === ==== ===
-------------------------------------------------------------------------------------------------------------------
13
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
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
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
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
FINANCIAL REVIEW
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
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
Six months ended
------------------
JUNE 30, June 30, %
(in millions, except per share amounts) 2001 2000 Change
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
(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
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
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
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
- 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)
-----------------------------------------------------------------------------------------------------------------------------
Quarter ended June 30,
--------------------------------------------------------------
2001 2000
--------------------------- ----------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
(in millions) BALANCE RATES EXPENSE balance rates expense
-----------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 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
======== ========
----------------------------------------------------------------------------------------------------------------
(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
--------------------------------------------------------------
Six months ended June 30,
--------------------------------------------------------------
2001 2000
---------------------------- --------------------------
INTEREST Interest
AVERAGE YIELDS/ INCOME/ Average Yields/ income/
BALANCE RATES EXPENSE balance rates expense
--------------------------------------------------------------
EARNING ASSETS
Federal funds sold and securities purchased
under resale agreements $ 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
======== ========
-------------------------------------------------------------------------------------------------------------------------
31
NONINTEREST INCOME
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
------------------ % ----------------- %
(in millions) 2001 2000 Change 2001 2000 Change
-------------------------------------------------------------------------------------------------------------------
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)%
======= ====== ==== ======= ====== ===
-------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
----------------- % ----------------- %
(in millions) 2001 2000 Change 2001 2000 Change
-------------------------------------------------------------------------------------------------------------------
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%
====== ====== ==== ====== ====== ====
-------------------------------------------------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------------------------------------------------
Quarter ended
(in millions, except per share amounts) June 30, 2001
-------------------------------------------------------------------------------------------------------------------
Nonqualifying
Reported core deposit "Cash"
loss Goodwill intangible earnings
-------------------------------------------------------------------------------------------------------------------
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
===== ====
-------------------------------------------------------------------------------------------------------------------
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:
-------------------------------------------------------------------------------------------------------------------
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%
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)
-------------------------------------------------------------------------------------------------------------------
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.
-------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
2001 2000 2000
-------------------- ------------------ -------------------
ESTIMATED Estimated Estimated
FAIR fair fair
(in millions) COST VALUE Cost value Cost value
-------------------------------------------------------------------------------------------------------------------
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
======= ======= ======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------------
(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.
-------------------------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------
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
====== ====== ======
-------------------------------------------------------------------------------------------------------------------
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).)
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
--------------------- --------------------
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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)
==== ==== ==== =====
-------------------------------------------------------------------------------------------------------------------
(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
-----------------------------------------------------------------------------------------------------------------------
% Change
June 30, 2001 from
----------------------
JUNE 30, Dec. 31, June 30, Dec. 31, June 30,
(in millions) 2001 2000 2000 2000 2000
-----------------------------------------------------------------------------------------------------------------------
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%
======== ======== ======== == ==
-----------------------------------------------------------------------------------------------------------------------
(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.
NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)
-------------------------------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------
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
====== ====== ======
-------------------------------------------------------------------------------------------------------------------
(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:
------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2001 2000 2000
------------------------------------------------------------------------------
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
==== ==== ====
------------------------------------------------------------------------------
(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.
----------------------------------------------------------------------------------------------
JUNE 30, Dec. 31, June 30,
(in millions) 2001 2000 2000
----------------------------------------------------------------------------------------------
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
==== ==== ====
----------------------------------------------------------------------------------------------
41
ALLOWANCE FOR LOAN LOSSES
-------------------------------------------------------------------------------------------------------------------
Quarter Six months
ended June 30, ended June 30,
-------------------- ----------------------
(in millions) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
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%
====== ====== ====== ======
------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------
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
======= ======= =======
-------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(in millions) 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------
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
======== ======== ========
-------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY/RATIOS
The Company and each of the subsidiary banks are subject to various regulatory
capital adequacy requirements administered by the Federal Reserve Board and the
Office of the Comptroller of the Currency. Risk-based capital (RBC) guidelines
establish a risk-adjusted ratio relating capital to different categories of
assets and off-balance sheet exposures.
-------------------------------------------------------------------------------------------------------------------
To be well
capitalized under
the FDICIA
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- ----------------- -------------------
(in billions) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------- -------- ----- ------ ------ ------- --------
As of 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
- - - -
-------------------------------------------------------------------------------------------------------------------
(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
For Withheld
------------- ----------
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
(2) Proposal to Increase Authorized Common Stock
--------------------------------------------
For Against Abstentions
----------------- ----------------- -----------------
1,332,799,698 77,425,133 9,755,842
48
(3) Proposal to Ratify Appointment of KPMG LLP
------------------------------------------
For Against Abstentions
----------------- ----------------- -----------------
1,364,027,391 49,365,445 6,587,837
(4) Stockholder Proposal Relating to Cumulative Voting
--------------------------------------------------
For Against Abstentions Non-votes
----------------- ----------------- ----------------- ------------------
353,482,063 784,896,329 83,588,786 198,013,495
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.
Dated: August 7, 2001 WELLS FARGO & COMPANY
By: /s/ Les L. Quock
-------------------------------------
Les L. Quock
Senior Vice President and Controller
(Principal Accounting Officer)
52