Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR


o

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
incorporation or organization)
  (I.R.S. Employer
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 ý    No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 
  Shares Outstanding
October 31, 2002

Common stock, $1–2/3 par value   1,691,889,476




FORM 10-Q
TABLE OF CONTENTS

 
   
  Page
PART I   Financial Information    
Item 1.   Financial Statements    
    Consolidated Statement of Income   2
    Consolidated Balance Sheet   3
    Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income   4
    Consolidated Statement of Cash Flows   5
    Notes to Financial Statements   6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

 

 
    Summary Financial Data   21
    Overview   22
    Earnings Performance   25
        Net Interest Income   25
        Noninterest Income   28
        Noninterest Expense   30
        Operating Segment Results   31
    Balance Sheet Analysis   32
        Securities Available for Sale   32
        Loan Portfolio   34
        Nonaccrual Loans and Other Assets   35
            Loans 90 Days Past Due and Still Accruing   37
        Allowance for Loan Losses   38
        Interest Receivable and Other Assets   39
        Deposits   40
        Capital Adequacy/Ratios   40
    Off-Balance Sheet Transactions   41
    Asset/Liability and Market Risk Management   42
    Capital Management   46
    Factors that May Affect Future Results   47

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

 

Controls and Procedures

 

 
        Evaluation of Disclosure Controls and Procedures   53
        Changes in Internal Controls   53

PART II

 

Other Information

 

 
Item 2.   Changes in Securities and Use of Proceeds   54

Item 6.

 

Exhibits and Reports on Form 8-K

 

54

Signature

 

58
Certifications   59

        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 2001 Annual Report on Form 10-K.

1



PART I—FINANCIAL INFORMATION

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME


 
 
  Quarter
ended Sept. 30,

  Nine months
ended Sept. 30,

 
(in millions, except per share amounts)

  2002

  2001

  2002

  2001

 

 
INTEREST INCOME                          
Securities available for sale   $ 582   $ 669   $ 1,893   $ 1,885  
Mortgages held for sale     591     425     1,622     1,055  
Loans held for sale     52     69     194     251  
Loans     3,400     3,583     10,072     11,094  
Other interest income     74     70     225     227  
   
 
 
 
 
    Total interest income     4,699     4,816     14,006     14,512  
   
 
 
 
 
INTEREST EXPENSE                          
Deposits     483     845     1,459     2,949  
Short-term borrowings     124     316     429     1,037  
Long-term debt     367     431     1,041     1,439  
Guaranteed preferred beneficial interests in Company's subordinated debentures     30     23     88     59  
   
 
 
 
 
    Total interest expense     1,004     1,615     3,017     5,484  
   
 
 
 
 
NET INTEREST INCOME     3,695     3,201     10,989     9,028  
Provision for loan losses     395     455     1,295     1,243  
   
 
 
 
 
Net interest income after provision for loan losses     3,300     2,746     9,694     7,785  
   
 
 
 
 
NONINTEREST INCOME                          
Service charges on deposit accounts     560     470     1,612     1,370  
Trust and investment fees     439     424     1,330     1,256  
Credit card fees     242     203     666     579  
Other fees     372     303     1,009     921  
Mortgage banking     426     369     1,198     1,277  
Insurance     234     196     766     524  
Net gains on debt securities available for sale     121     97     202     166  
Loss from equity investments     (152 )   (58 )   (230 )   (1,477 )
Other     103     279     471     627  
   
 
 
 
 
    Total noninterest income     2,345     2,283     7,024     5,243  
   
 
 
 
 
NONINTEREST EXPENSE                          
Salaries     1,110     1,020     3,292     3,015  
Incentive compensation     446     315     1,165     784  
Employee benefits     304     223     997     737  
Equipment     232     217     697     672  
Net occupancy     278     240     821     716  
Goodwill         156         452  
Core deposit intangibles     38     41     118     125  
Net (gains) losses on dispositions of premises and equipment         (2 )   26     (21 )
Other     999     977     3,023     2,958  
   
 
 
 
 
    Total noninterest expense     3,407     3,187     10,139     9,438  
   
 
 
 
 
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE     2,238     1,842     6,579     3,590  
Income tax expense     794     678     2,335     1,348  
   
 
 
 
 
NET INCOME BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE     1,444     1,164     4,244     2,242  
Cumulative effect of change in accounting principle             (276 )    
   
 
 
 
 
NET INCOME   $ 1,444   $ 1,164   $ 3,968   $ 2,242  
   
 
 
 
 
NET INCOME APPLICABLE TO COMMON STOCK   $ 1,443   $ 1,160   $ 3,965   $ 2,229  
   
 
 
 
 
EARNINGS PER COMMON SHARE BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                          
  Earnings per common share   $ .85   $ .68   $ 2.49   $ 1.30  
   
 
 
 
 
  Diluted earnings per common share   $ .84   $ .67   $ 2.46   $ 1.29  
   
 
 
 
 
EARNINGS PER COMMON SHARE                          
  Earnings per common share   $ .85   $ .68   $ 2.33   $ 1.30  
   
 
 
 
 
  Diluted earnings per common share   $ .84   $ .67   $ 2.30   $ 1.29  
   
 
 
 
 
DIVIDENDS DECLARED PER COMMON SHARE   $ .28   $ .26   $ .82   $ .74  
   
 
 
 
 
Average common shares outstanding     1,700.7     1,710.6     1,704.7     1,713.8  
   
 
 
 
 
Diluted average common shares outstanding     1,717.8     1,726.9     1,722.6     1,732.9  
   
 
 
 
 

2


WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET


 
(in millions, except shares)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 

 
ASSETS                    
Cash and due from banks   $ 15,813   $ 16,968   $ 15,791  
Federal funds sold and securities purchased under resale agreements     4,047     2,530     3,241  
Securities available for sale     32,974     40,308     40,749  
Mortgages held for sale     42,339     30,405     23,154  
Loans held for sale     5,522     4,745     4,982  
Loans     186,310     172,499     168,866  
Allowance for loan losses     3,861     3,761     3,761  
   
 
 
 
  Net loans     182,449     168,738     165,105  
   
 
 
 
Mortgage servicing rights     4,415     6,241     5,404  
Premises and equipment, net     3,664     3,549     3,534  
Core deposit intangibles     905     1,013     1,053  
Goodwill     9,744     9,527     9,604  
Interest receivable and other assets     32,378     23,545     25,483  
   
 
 
 
  Total assets   $ 334,250   $ 307,569   $ 298,100  
   
 
 
 
LIABILITIES                    
Noninterest-bearing deposits   $ 69,382   $ 65,362   $ 56,271  
Interest-bearing deposits     136,374     121,904     120,491  
   
 
 
 
  Total deposits     205,756     187,266     176,762  
Short-term borrowings     30,370     37,782     40,196  
Accrued expenses and other liabilities     19,341     16,777     17,454  
Long-term debt     45,824     36,095     34,131  
Guaranteed preferred beneficial interests in Company's subordinated debentures     2,885     2,435     2,235  
STOCKHOLDERS' EQUITY                    
Preferred stock     294     218     447  
Unearned ESOP shares     (236 )   (154 )   (185 )
   
 
 
 
  Total preferred stock     58     64     262  
Common stock—$1–2/3 par value, authorized 6,000,000,000 shares; issued 1,736,381,025 shares     2,894     2,894     2,894  
Additional paid-in capital     9,499     9,436     9,438  
Retained earnings     18,441     16,005     15,281  
Cumulative other comprehensive income     1,070     752     969  
Treasury stock—37,900,563 shares, 40,886,028 shares and 30,498,100 shares     (1,888 )   (1,937 )   (1,522 )
   
 
 
 
  Total stockholders' equity     30,074     27,214     27,322  
   
 
 
 
  Total liabilities and stockholders' equity   $ 334,250   $ 307,569   $ 298,100  
   
 
 
 

3


WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME


 
(in millions, except shares)

  Number of
shares

  Preferred
stock

  Unearned
ESOP
shares

  Common
stock

  Additional
paid-in
capital

  Retained
earnings

  Treasury
stock

  Cumulative
other
comprehensive
income

  Total
stockholders'
equity

 

 
BALANCE DECEMBER 31, 2000       $ 385   $ (118 ) $ 2,894   $ 9,337   $ 14,541   $ (1,075 ) $ 524   $ 26,488  
       
 
 
 
 
 
 
 
 
Comprehensive income:                                                      
  Net income                                 2,242                 2,242  
  Other comprehensive income, net of tax:                                                      
    Translation adjustments                                             (3 )   (3 )
    Net unrealized gains on securities available for sale, net of reclassification of $455 million of net losses included in net income                                             324     324  
    Cumulative effect of the change in accounting principle for derivatives and hedging activities                                             71     71  
    Net unrealized gains on derivatives and hedging activities, net of reclassification of $27 million of net gains on cash flow hedges included in net income                                             53     53  
                                                 
 
Total comprehensive income                                                   2,687  
Common stock issued   14,349,572                       92     (221 )   643           514  
Common stock issued for acquisitions   428,343                       1     1     20           22  
Common stock repurchased   26,312,895                                   (1,225 )         (1,225 )
Preferred stock (192,000) issued to ESOP         192     (207 )         15                        
Preferred stock released to ESOP               140           (10 )                     130  
Preferred stock (130,225) converted to common shares   2,772,062     (130 )               3           127            
Preferred stock dividends                                 (13 )               (13 )
Common stock dividends                                 (1,269 )               (1,269 )
Change in Rabbi trust assets (classified as treasury stock)                                       (12 )         (12 )
       
 
 
 
 
 
 
 
 
Net change         62     (67 )       101     740     (447 )   445     834  
       
 
 
 
 
 
 
 
 
BALANCE SEPTEMBER 30, 2001       $ 447   $ (185 ) $ 2,894   $ 9,438   $ 15,281   $ (1,522 ) $ 969   $ 27,322  
       
 
 
 
 
 
 
 
 
BALANCE DECEMBER 31, 2001       $ 218   $ (154 ) $ 2,894   $ 9,436   $ 16,005   $ (1,937 ) $ 752   $ 27,214  
       
 
 
 
 
 
 
 
 
Comprehensive income:                                                      
  Net income                                 3,968                 3,968  
  Other comprehensive income, net of tax:                                                      
    Net unrealized gains on securities available for sale and other retained interests, net of reclassification of $236 million of net losses included in net income                                             514     514  
    Net unrealized losses on derivatives and hedging activities, net of reclassification of $163 million of net losses on cash flow hedges included in net income                                             (196 )   (196 )
                                                 
 
Total comprehensive income                                                   4,286  
Common stock issued   12,884,012                       41     (130 )   570           481  
Common stock issued for acquisitions   12,017,193                       4           531           535  
Common stock repurchased   25,217,058                                   (1,206 )         (1,206 )
Preferred stock (238,000) issued to ESOP         239     (256 )         17                        
Preferred stock released to ESOP               174           (11 )                     163  
Preferred stock (162,687) converted to common shares   3,301,318     (163 )               12           151            
Preferred stock dividends                                 (3 )               (3 )
Common stock dividends                                 (1,399 )               (1,399 )
Change in Rabbi trust assets and similar arrangements (classified as treasury stock)                                       3           3  
       
 
 
 
 
 
 
 
 
Net change         76     (82 )       63     2,436     49     318     2,860  
       
 
 
 
 
 
 
 
 
BALANCE SEPTEMBER 30, 2002       $ 294   $ (236 ) $ 2,894   $ 9,499   $ 18,441   $ (1,888 ) $ 1,070   $ 30,074  
       
 
 
 
 
 
 
 
 

4


WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS


 
 
  Nine months ended September 30,

 
(in millions)

  2002

  2001

 

 
Cash flows from operating activities:              
  Net income   $ 3,968   $ 2,242  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Provision for loan losses     1,295     1,243  
    Depreciation and amortization     1,777     2,011  
    Net (gains) losses on securities available for sale     (116 )   732  
    Net gains on mortgage loan originations/sales activities     (519 )   (420 )
    Net gains on sales of loans     (15 )   (10 )
    Net losses (gains) on dispositions of premises and equipment     26     (21 )
    Net losses (gains) on dispositions of operations     6     (104 )
    Release of preferred shares to ESOP     163     130  
    Net increase in trading assets     (1,598 )   (2,447 )
    Net increase (decrease) in deferred income taxes     155     (192 )
    Net decrease in accrued interest receivable     49     86  
    Net increase (decrease) in accrued interest payable     36     (128 )
    Originations of mortgages held for sale     (190,320 )   (110,238 )
    Proceeds from sales of mortgages held for sale     178,228     97,824  
    Principal collected on mortgages held for sale     1,257     837  
    Net increase in loans held for sale     (777 )   (443 )
    Other assets, net     (2,245 )   1,605  
    Other accrued expenses and liabilities, net     2,922     4,106  
   
 
 
Net cash used by operating activities     (5,708 )   (3,187 )
   
 
 
Cash flows from investing activities:              
  Securities available for sale:              
    Proceeds from sales     14,566     16,262  
    Proceeds from prepayments and maturities     6,496     4,564  
    Purchases     (11,459 )   (23,392 )
  Net cash paid for acquisitions     (574 )   (383 )
  Net increase in banking subsidiaries' loans resulting from originations and collections     (8,129 )   (5,080 )
  Proceeds from sales (including participations) of banking subsidiaries loans     877     1,731  
  Purchases (including participations) of loans by banking subsidiaries     (1,950 )   (300 )
  Principal collected on nonbank subsidiaries' loans     8,441     7,409  
  Nonbank subsidiaries' loans originated     (10,610 )   (14,698 )
  Proceeds from dispositions of operations     42     1,190  
  Proceeds from sales of foreclosed assets     339     183  
  Net increase in federal funds sold and securities purchased under resale agreements     (1,348 )   (1,643 )
  Net increase in mortgage servicing rights     (76 )   (1,615 )
  Other, net     (5,252 )   (1,939 )
   
 
 
Net cash used by investing activities     (8,637 )   (17,711 )
   
 
 
Cash flows from financing activities:              
  Net increase in deposits     13,890     7,203  
  Net (decrease) increase in short-term borrowings     (8,300 )   11,207  
  Proceeds from issuance of long-term debt     16,792     11,074  
  Repayment of long-term debt     (7,492 )   (9,048 )
  Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures     450     1,300  
  Proceeds from issuance of common stock     412     423  
  Repurchase of common stock     (1,206 )   (1,225 )
  Payment of cash dividends on preferred and common stock     (1,402 )   (1,282 )
  Other, net     46     59  
   
 
 
Net cash provided by financing activities     13,190     19,711  
   
 
 
  Net change in cash and due from banks     (1,155 )   (1,187 )
Cash and due from banks at beginning of period     16,968     16,978  
   
 
 
Cash and due from banks at end of period   $ 15,813   $ 15,791  
   
 
 
Supplemental disclosures of cash flow information:              
  Cash paid during the period for:              
    Interest   $ 3,053   $ 5,356  
    Income taxes   $ 1,881   $ 1,654  
  Noncash investing and financing activities:              
    Transfers from loans to foreclosed assets   $ 352   $ 231  
    Net transfers between mortgages held for sale and loans   $ 224   $ 1,825  

5


WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

        Descriptions of the significant accounting policies of Wells Fargo & Company and Subsidiaries (the Company) are included in Note 1 (Summary of Significant Accounting Policies) to the audited consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K. There have been no significant changes to these policies except for accounting policies related to goodwill discussed below.

Goodwill and Other Intangible Assets

        Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. On July 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During the transition period from July 1, 2001 through December 31, 2001, the Company's goodwill associated with business combinations completed prior to July 1, 2001 continued to be amortized over periods of up to 25 years. Effective January 1, 2002, all goodwill amortization was discontinued.

        Effective January 1, 2002, goodwill will be assessed at least annually for impairment on a reporting unit level by applying a fair-value-based test using discounted estimated future net cash flows. In the first quarter of 2002, the Company completed its initial goodwill impairment assessment and recorded a transitional impairment charge as a cumulative effect of a change in accounting principle in the Consolidated Statement of Income. Impairment that may result from subsequent assessments will be recognized as a charge to noninterest expense unless related to discontinued operations.

        Core deposit intangibles are amortized on an accelerated basis based on useful lives of up to 15 years. Certain identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over useful lives of up to 15 years.

        The Company reviews other intangible assets for impairment annually (except mortgage servicing rights, which are reviewed monthly), or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For those intangible assets subject to amortization, impairment is indicated if the sum of undiscounted estimated future net cash flows is less than the carrying value of the asset. Impairment is recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.

6


2.    Business Combinations

        The Company regularly explores opportunities to acquire financial institutions and related financial services 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 nine months ended September 30, 2002 include:


(in millions)

  Date

  Assets

Risk Management Services, Inc., Morristown, Tennessee   January 1   $ 2
Alcalay, Cohen, Inc. d/b/a General Insurance Consultants, Tarzana, California   February 1     6
Texas Financial Bancorporation, Inc., Minneapolis, Minnesota   February 1     2,957
Five affiliated banks and related entities of Marquette Bancshares, Inc. located in Minnesota, Wisconsin, Illinois, Iowa and South Dakota   February 1     3,086
SIFE, Walnut Creek, California   February 22     25
Rediscount business of Washington Mutual Bank, FA, Philadelphia, Pennsylvania   March 28     281
Tejas Bancshares, Inc., Amarillo, Texas   April 26     374
FAS Holdings, Inc., San Diego, California   July 22     48
       
        $ 6,779
       

7


3.    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. A detailed description of the Company's preferred stock is provided in Note 11 (Preferred Stock) to the audited consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K.


 
 
  Shares issued and outstanding

  Carrying amount (in millions)

  Adjustable dividends rate

 
 
  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 
Minimum

 
Maximum

 

 
Adjustable-Rate Cumulative, Series B (1)   1,460,000   1,460,000   1,468,400   $ 73   $ 73   $ 73   5.50 % 10.50 %
6.59%/Adjustable-Rate Noncumulative Preferred Stock, Series H (1)(2)       4,000,000             200   7.00   13.00  
2002 ESOP Cumulative Convertible (3)   85,727         86           10.50   11.50  
2001 ESOP Cumulative Convertible (3)   56,826   61,800   74,792     57     62     75   10.50   11.50  
2000 ESOP Cumulative Convertible (3)   38,242   39,962   43,762     38     40     44   11.50   12.50  
1999 ESOP Cumulative Convertible (3)   14,722   15,552   17,652     14     15     18   10.30   11.30  
1998 ESOP Cumulative Convertible (3)   5,745   6,145   7,395     6     6     7   10.75   11.75  
1997 ESOP Cumulative Convertible (3)   7,076   7,576   9,276     7     8     9   9.50   10.50  
1996 ESOP Cumulative Convertible (3)   6,907   7,707   9,957     7     8     10   8.50   9.50  
1995 ESOP Cumulative Convertible (3)   4,743   5,543   8,143     5     5     8   10.00   10.00  
ESOP Cumulative Convertible (3)   612   1,002   2,602     1     1     3   9.00   9.00  
Unearned ESOP shares (4)           (236 )   (154 )   (185 )    
   
 
 
 
 
 
         
  Total   1,680,600   1,605,287   5,641,979   $ 58   $ 64   $ 262          
   
 
 
 
 
 
         

 
(1)
Liquidation preference $50.

(2)
On October 1, 2001 all shares were redeemed at the stated liquidation price plus accrued dividends.

(3)
Liquidation preference $1,000.

(4)
In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans, the Company recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released.

8


4.    Earnings Per Common Share

        The table below shows dual presentation of earnings per common share and diluted earnings per common share and a reconciliation of the numerator and denominator of both earnings per common share calculations.


 
  Quarter
ended Sept. 30,

  Nine months
ended Sept. 30,

(in millions, except per share amounts)

  2002

  2001

  2002

  2001


Net income before effect of change in accounting principle   $ 1,444   $ 1,164   $ 4,244   $ 2,242
Less: Preferred stock dividends     1     4     3     13
   
 
 
 
Net income applicable to common stock before effect of change in accounting principle (numerator)     1,443     1,160     4,241     2,229
Cumulative effect of change in accounting principle (numerator)             (276 )  
   
 
 
 
Net income applicable to common stock (numerator)   $ 1,443   $ 1,160   $ 3,965   $ 2,229
   
 
 
 

EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 
Average common shares outstanding (denominator)     1,700.7     1,710.6     1,704.7     1,713.8
   
 
 
 
Per share before effect of change in accounting principle   $ .85   $ .68   $ 2.49   $ 1.30
Per share effect of change in accounting principle             (.16 )  
   
 
 
 
Per share   $ .85   $ .68   $ 2.33   $ 1.30
   
 
 
 

DILUTED EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 
Average common shares outstanding     1,700.7     1,710.6     1,704.7     1,713.8
Add: Stock options     16.8     15.7     17.6     18.4
          Restricted share rights     .3     .6     .3     .7
   
 
 
 
Diluted average common shares outstanding (denominator)     1,717.8     1,726.9     1,722.6     1,732.9
   
 
 
 

Per share before effect of change in accounting principle

 

$

..84

 

$

..67

 

$

2.46

 

$

1.29
Per share effect of change in accounting principle             (.16 )  
   
 
 
 
Per share   $ .84   $ .67   $ 2.30   $ 1.29
   
 
 
 

        In accordance with FAS 123, Accounting for Stock-Based Compensation, the Company follows the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, in accounting for its stock option plans for directors and employees. Under APB 25, compensation expense for stock options is generally not recognized in net income. Assuming that all in-the-money options were exercised on the measurement date and assuming that the spread between the exercise price and market price (after tax) were issued in common shares, the shares that would have been issued for the quarter and nine months ended September 30, 2002 were 17.1 million and 17.9 million, respectively. The effect of the shares that would have been issued results in a decrease to earnings per share, costing the Company one cent and three cents of dilution to earnings per share for the quarter and nine months ended September 30, 2002, respectively. For further information see Note 12 (Common Stock and Stock Plans) to the audited consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K.

9


5.    "Adjusted" Earnings—FAS 142 Transitional Disclosure

        Under FAS 142, effective January 1, 2002 amortization of goodwill was discontinued. For comparability, the table below reconciles the Company's reported earnings to "adjusted" earnings, which exclude goodwill amortization.


 
  September 30, 2001

(in millions, except per share amounts)

  Quarter
ended

  Nine months
ended


NET INCOME            
  Reported net income   $ 1,164   $ 2,242
  Goodwill amortization, net of tax     146     424
   
 
  Adjusted net income   $ 1,310   $ 2,666
   
 

EARNINGS PER COMMON SHARE

 

 

 

 

 

 
  Reported earnings per common share   $ .68   $ 1.30
  Goodwill amortization, net of tax     .08     .25
   
 
  Adjusted earnings per common share   $ .76   $ 1.55
   
 

DILUTED EARNINGS PER COMMON SHARE

 

 

 

 

 

 
  Reported diluted earnings per common share   $ .67   $ 1.29
  Goodwill amortization, net of tax     .08     .24
   
 
  Adjusted diluted earnings per common share   $ .75   $ 1.53
   
 

10


6.    Operating Segments

        The Company has three lines of business for management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. The results for these lines of business are 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, 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 Company's management structure and is not necessarily comparable with similar information for other financial services companies. 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 for comparability. Results for 2001 have been restated to eliminate goodwill amortization from the operating segments and to reflect changes in transfer pricing methodology applied in first quarter 2002.

        The Community Banking Group offers a complete line of diversified financial products and services to individual consumers and small businesses with annual sales predominantly 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, as well as insurance and securities brokerage through affiliates. These products and services include Wells Fargo Funds®, 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 and marine) loans, education 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 PhoneBankSMcenters and the National Business Banking Center. Online banking services include single sign-on to online banking, bill pay and brokerage, as well as online banking for small business.

        The Wholesale Banking Group serves businesses across the United States predominantly with annual sales in excess of $10 million. Wholesale Banking provides a complete line of commercial, corporate and real estate banking products and services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high yield debt, international trade facilities, foreign exchange services, treasury management, investment management, institutional fixed income and equity sales,

11


online/electronic products, insurance and insurance brokerage services, and investment banking services. 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, permanent loans for securitization, commercial real estate loan servicing and real estate and mortgage brokerage services.

        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, Canada and in the Caribbean. 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. Wells Fargo Financial also provides credit cards, and lease and other commercial financing.

        The Reconciliation Column includes all amortization of goodwill for 2001, 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.

12


        The following table provides the results for the Company's three major operating segments.


 
(income/expense in millions, average balances in billions)

  Community
Banking

  Wholesale
Banking

  Wells Fargo
Financial

  Reconciliation
column(4)

  Consolidated
Company

 
Quarter ended September 30,

  2002

  2001

  2002

  2001

  2002

  2001

  2002

  2001

  2002

  2001

 

 

Net interest income (1)

 

$

2,645

 

$

2,240

 

$

576

 

$

551

 

$

477

 

$

429

 

$

(3

)

$

(19

)

$

3,695

 

$

3,201

 
Provision for loan losses     180     266     60     62     155     127             395     455  
Noninterest income     1,717     1,623     538     548     96     100     (6 )   12     2,345     2,283  
Noninterest expense     2,534     2,185     604     574     269     266         162     3,407     3,187  
   
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense (benefit)     1,648     1,412     450     463     149     136     (9 )   (169 )   2,238     1,842  
Income tax expense (benefit) (2)     580     482     160     165     57     51     (3 )   (20 )   794     678  
   
 
 
 
 
 
 
 
 
 
 
Net income (loss)   $ 1,068   $ 930   $ 290   $ 298   $ 92   $ 85   $ (6 ) $ (149 ) $ 1,444   $ 1,164  
   
 
 
 
 
 
 
 
 
 
 
Average loans   $ 117   $ 101   $ 49   $ 50   $ 16   $ 13   $   $   $ 182   $ 164  
Average assets     226     202     72     66     17     15     6     6     321     289  
Average core deposits     166     155     18     16                     184     171  

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (1)

 

$

7,940

 

$

6,230

 

$

1,705

 

$

1,628

 

$

1,370

 

$

1,229

 

$

(26

)

$

(59

)

$

10,989

 

$

9,028

 
Provision for loan losses     648     728     218     172     429     343             1,295     1,243  
Noninterest income     4,849     3,403     1,891     1,531     274     273     10     36     7,024     5,243  
Noninterest expense     7,406     6,485     1,920     1,722     811     763     2     468     10,139     9,438  
   
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense (benefit) and effect of change in accounting principle     4,735     2,420     1,458     1,265     404     396     (18 )   (491 )   6,579     3,590  
Income tax expense (benefit) (2)     1,686     802     519     454     153     147     (23 )   (55 )   2,335     1,348  
   
 
 
 
 
 
 
 
 
 
 
Net income (loss) before effect of change in accounting principle     3,049     1,618     939     811     251     249     5     (436 )   4,244     2,242  
Cumulative effect of change in accounting principle             (98 )       (178 )               (276 )    
   
       
       
       
       
       
Less: Impairment and other special charges (after tax) (3)           (1,089 )         (62 )                   (6 )         (1,157 )
         
       
       
       
       
 
Net income (loss) excluding impairment and other special charges   $ 3,049   $ 2,707   $ 841   $ 873   $ 73   $ 249   $ 5   $ (430 ) $ 3,968   $ 3,399  
   
 
 
 
 
 
 
 
 
 
 
Average loans   $ 114   $ 99   $ 49   $ 50   $ 15   $ 13   $   $   $ 178   $ 162  
Average assets     222     193     71     65     17     15     6     6     316     279  
Average core deposits     163     149     18     16                     181     165  

(1)
Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes actual interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment. In general, Community Banking has excess liabilities and receives interest credits for the funding it provides the other segments.

(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)
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 $(9) million and $7 million for the third quarter of 2002 and 2001, respectively; and unallocated items of $(14) million for the third quarter of 2001. Revenue includes Treasury activities of $8 million and $50 million; and unallocated items of $(24) million and $(73) million for the first nine months of 2002 and 2001, respectively. Net income includes Treasury activities of $(6) million and $3 million for the third quarter of 2002 and 2001, respectively; and unallocated items of $(152) million for the third quarter of 2001. Net income includes Treasury activities of $3 million and $30 million; and unallocated items of $2 million and $(466) million for the first nine months of 2002 and 2001, respectively. The material item in the reconciliation column related to noninterest expense is amortization of goodwill of $156 million for the third quarter of 2001 and $452 million for the first nine months of 2001. The material item in the reconciliation column related to average assets is unallocated goodwill of $6 billion for all periods presented. Results for 2001 have been restated to reclassify goodwill amortization from the three operating segments to the reconciliation column for comparability.

13


7.    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
ended Sept. 30,

  Nine months
ended Sept. 30,

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Origination and other closing fees   $ 271   $ 179   $ 696   $ 490  
Servicing fees, net of amortization and impairment     (158 )   (127 )   (279 )   (21 )
Net gains on securities available for sale         2         134  
Net gains on mortgage loan originations/ sales activities     226     223     519     420  
All other     87     92     262     254  
   
 
 
 
 
  Total mortgage banking   $ 426   $ 369   $ 1,198   $ 1,277  
   
 
 
 
 

        The managed servicing portfolio totaled $583 billion at September 30, 2002, $514 billion at December 31, 2001 and $499 billion at September 30, 2001, which included loans subserviced for others of $45 billion, $63 billion and $71 billion, respectively.

        Net of valuation allowance, capitalized mortgage servicing rights totaled $4.4 billion (.89% of the total servicing portfolio) at September 30, 2002, compared with $5.4 billion (1.33% of the total servicing portfolio) at September 30, 2001. The Company periodically evaluates its capitalized mortgage servicing rights to determine if the carrying value before the application of the valuation allowance is recoverable. In the third quarter of 2002, the Company determined that a portion of the asset was not recoverable and reduced both the asset and the previously designated valuation allowance by $887 million reflecting the write-down.

        The following table summarizes the changes in capitalized mortgage loan servicing rights:


 
 
  Quarter
ended Sept. 30,

  Nine months
ended Sept. 30,

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Balance, beginning of period   $ 7,865   $ 6,351   $ 7,365   $ 5,609  
  Originations (1)     492     440     1,615     1,269  
  Purchases (1)     268     218     984     630  
  Amortization     (534 )   (223 )   (1,271 )   (595 )
  Write-down     (887 )       (887 )    
  Other (includes changes in mortgage servicing rights due to hedging)     (1,030 )   (567 )   (1,632 )   (694 )
   
 
 
 
 
Balance before valuation allowance     6,174     6,219     6,174     6,219  
  Less: Valuation allowance     1,759     815     1,759     815  
   
 
 
 
 
Balance, end of period   $ 4,415   $ 5,404   $ 4,415   $ 5,404  
   
 
 
 
 

(1)
Based on September 30, 2002 assumptions, the weighted-average amortization period for mortgage servicing rights added during the third quarter of 2002 and the first nine months of 2002 was 3.2 years and 2.9 years, respectively.

14


        To the extent that capitalized mortgage servicing rights exceed fair value, a valuation allowance is recorded. The following table summarizes the changes in the valuation allowance for capitalized mortgage servicing rights:


 
  Quarter
ended Sept. 30,

  Nine months
ended Sept. 30,

(in millions)

  2002

  2001

  2002

  2001


Balance, beginning of period   $ 1,909   $ 275   $ 1,124   $
  Provision for capitalized mortgage servicing rights in excess of fair value     737     540     1,522     815
  Write-down of capitalized mortgage servicing rights     (887 )       (887 )  
   
 
 
 
Balance, end of period   $ 1,759   $ 815   $ 1,759   $ 815
   
 
 
 

15


8.    Intangible Assets

        The gross carrying amount of intangible assets and the associated accumulated amortization at September 30, 2002 is presented in the following table.


 
  September 30, 2002

(in millions)

  Gross
carrying amount

  Accumulated
amortization


Amortized intangible assets:            
  Mortgage servicing rights, before valuation allowance   $ 10,342   $ 4,168
  Core deposit intangibles     2,415     1,510
  Other     373     249
   
 
  Total   $ 13,130   $ 5,927
   
 
Unamortized intangible asset (trademark)   $ 14      
   
     

        The projections of amortization expense shown below for mortgage servicing rights are based on asset balances and the interest rate environment as of September 30, 2002. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

        The following table shows the current period and estimated future amortization expense for amortized intangible assets:


(in millions)

  Mortgage
servicing
rights

  Core
deposit
intangibles

  Other

  Total


Nine months ended September 30, 2002 (actual)   $ 1,271   $ 118   $ 24   $ 1,413

 

 

 

 

 

 

 

 

 

 

 

 

 
Three months ended December 31, 2002 (estimate)     621     38     6     665

 

 

 

 

 

 

 

 

 

 

 

 

 
Estimate for year ended December 31,
2003
    1,954     142     22     2,118
2004     1,306     131     19     1,456
2005     834     120     15     969
2006     528     108     12     648
2007     337     99     10     446

16


9.    Goodwill

        The following table summarizes the changes in the first nine months of 2002 in the carrying amount of goodwill as allocated to the Company's operating segments for the purpose of goodwill impairment analysis.


 
(in millions)

  Community
Banking

  Wholesale
Banking

  Wells Fargo
Financial

  Consolidated
Company

 

 
Balance December 31, 2001   $ 6,265   $ 2,655   $ 607   $ 9,527  
  Goodwill from business combinations     627     18     6     651  
  Transitional goodwill impairment charge         (133 )   (271 )   (404 )
  Goodwill written off related to divested businesses     (30 )           (30 )
   
 
 
 
 
Balance September 30, 2002   $ 6,862   $ 2,540   $ 342   $ 9,744  
   
 
 
 
 

        During the first quarter of 2002, the Company completed its initial goodwill impairment testing. All reporting units were evaluated using discounted estimated future net cash flows. The process resulted in a $276 million (after tax), $404 million (before tax), transitional impairment charge reported as a cumulative effect of a change in accounting principle. The transitional impairment resulted from a change in the method of testing for goodwill impairment under FAS 142, as well as a change in business strategies, reflecting the economic outlook, for certain reporting units in Wholesale Banking and Wells Fargo Financial, primarily Island Finance, a Puerto Rico based consumer finance company acquired in 1995.

        Goodwill amounts allocated to the operating segments for goodwill impairment analysis differ from amounts allocated to the Company's operating segments for management reporting discussed in Note 6 (Operating Segments) to Financial Statements. At September 30, 2002, for management reporting, the balance of goodwill for Community Banking, Wholesale Banking and Wells Fargo Financial was $2.88 billion, $590 million and $342 million, respectively, with $5.93 billion recorded at the enterprise level.

17


10.  Derivative Instruments and Hedging Activities

Fair Value Hedges

        The Company uses derivative contracts to manage the risk associated with changes in the fair value of mortgage servicing rights and other retained interests. The change in value of these derivative contracts is included in current period earnings in their entirety. The Company evaluates hedge effectiveness excluding the impacts of changes in value associated with the passage of time (time value), representing the spread between spot and forward rates priced into these derivative contracts. The time value recorded in earnings amounted to a net gain of $432 million and $910 million for the third quarter and first nine months of 2002, respectively. Also, the Company recognized net gains related to ineffectiveness in these hedging relationships in the amount of $338 million and $934 million in the third quarter and first nine months of 2002, respectively, compared with a net gain of $320 million and $311 million in the third quarter and first nine months of 2001, respectively. The gain in 2002 primarily resulted from increased interest rate volatility. The gains were more than offset by higher impairment charges and amortization expense on mortgage servicing rights and other retained interests, amounting to $1,396 million and $3,512 million in the third quarter and first nine months of 2002, respectively. The gain on the derivative contracts, impairment charges and amortization expense are included in "Servicing fees, net of impairment and amortization" in Note 7 (Mortgage Banking Activities) to Financial Statements.

        The Company also enters into interest rate swaps, designated as fair value hedges, to convert certain of its fixed-rate long-term debt to floating-rate debt. The ineffective portion of these fair value hedges was negligible for the third quarter of 2002 and was a net gain of $1 million for the first nine months of 2002, compared with a net gain of $5 million and $13 million for the third quarter and first nine months of 2001, respectively, recorded as an offset to interest expense. For long-term debt, all components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness. As of September 30, 2002, all designated fair value hedges continued to qualify as fair value hedges.

Cash Flow Hedges

        The Company enters into derivative contracts to convert floating-rate loans to fixed rates and to hedge forecasted sales of its mortgage loans. The Company recognized a net loss of $81 million and $250 million in the third quarter and first nine months of 2002, respectively, which represents the total ineffectiveness of cash flow hedges, compared with a net loss of $54 million and $44 million in the third quarter and first nine months of 2001, respectively. The change was primarily due to growth in mortgages held for sale and increased interest rate volatility. 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, except for derivative instruments hedging commercial loans indexed to LIBOR, where only the benchmark interest rate is included in the assessment of hedge effectiveness. As of September 30, 2002, all designated cash flow hedges continued to qualify as cash flow hedges.

18


        At September 30, 2002, $102 million of deferred net losses on derivative instruments included in other comprehensive income are expected to be reclassified as earnings during the next twelve months, compared with $78 million of deferred net gains at September 30, 2001. The maximum term for which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is three years for hedges converting floating-rate loans to fixed and one year for hedges of forecasted sales of mortgage loans.

Derivative Financial Instruments—Summary Information

        The following table summarizes the credit risk amount and estimated net fair value for the Company's derivative financial instruments at September 30, 2002 and December 31, 2001.


 
 
  September 30, 2002

  December 31, 2001

 
(in millions)

  Credit
risk
amount (2)

  Estimated
net fair
value (3)

  Credit
risk
amount (2)

  Estimated
net fair
value (3)

 

 
ASSET/LIABILITY MANAGEMENT HEDGES (1)                          
Interest rate contracts   $ 4,938   $ 3,469   $ 2,197   $ 1,507  

 

 

 

 

 

 

 

 

 

 

 

 

 

 
CUSTOMER ACCOMMODATIONS AND TRADING (1)                          
Interest rate contracts     3,517     68     2,363     232  
Commodity contracts     19     (2 )   18     1  
Equity contracts     54     (19 )   33     5  
Credit contracts     94     (11 )   13     (2 )
Foreign exchange contracts     254     48     245     66  

(1)
The Company anticipates performance by substantially all of the counterparties for these contracts or the underlying financial instruments.

(2)
Credit risk amounts reflect the replacement cost for contracts in a gain position in the event of nonperformance by counterparties.

(3)
Estimated net fair value reflects the net gain or loss position of all contracts.

19


11.  Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures

        In March 2002, Wells Fargo Capital VI (the Trust), a business trust established by the Company, issued $450 million in trust preferred securities in the form of 6.95% Capital Securities to the public and issued $14 million of trust common securities to the Company. The Trust used the proceeds to purchase $464 million of the Company's 6.95% junior subordinated debentures (the Debentures). The Debentures are the sole assets of the Trust and are subordinate to all of the Company's existing and future obligations for borrowed or purchased money, obligations under letters of credit and certain derivative contracts, and any guarantees of any of such obligations. The Company also issued a guarantee related to the trust securities for the benefit of the holders.

        The Company treats the trust preferred securities as Tier 1 capital. The Debentures, the common securities issued by the Trust, and the related income effects are eliminated within the Company's consolidated financial statements. The Company's obligations under the Debentures, the related indenture, the trust agreement relating to the trust securities, and the guarantee constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the trust preferred securities.

        The stated maturity date of the Debentures is April 15, 2032, which may be accelerated under limited circumstances or extended to no later than April 15, 2052. Also, the Company may redeem the Debentures, with regulatory approval, in whole or in part on or after April 15, 2007. The Company can also redeem the Debentures in whole, but not in part, within 90 days after the occurrence of certain events that either would have a negative tax effect on the Trust or the Company, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trust being treated as an investment company. When the Debentures are repaid or redeemed, the Trust will use the proceeds to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

20


FINANCIAL REVIEW

SUMMARY FINANCIAL DATA


 
 
  Quarter ended

  % Change
Sept. 30, 2002 from

  Nine months ended

   
 
(in millions, except per share amounts)

  Sept. 30,
2002

  June 30,
2002

  Sept. 30,
2001

  June 30,
2002

  Sept. 30,
2001

  Sept. 30,
2002

  Sept. 30,
2001

  %
Change

 

 
For the Period                                            
Before effect of change in accounting principle and excluding goodwill amortization (1)                                            
Net income   $ 1,444   $ 1,420   $ 1,310   2 % 10 % $ 4,244   $ 2,666   59 %
Diluted earnings per common share     .84     .82     .75   2   12     2.46     1.53   61  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Profitability ratios (annualized)                                            
  Net income to average total assets (ROA)     1.78 %   1.83 %   1.80 % (3 ) (1 )   1.80 %   1.28 % 41  
  Net income applicable to common stock to average common stockholders' equity (ROE)     19.38     19.72     19.27   (2 ) 1     19.69     13.38   47  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Efficiency ratio (2)     56.4     56.6     55.3     2     56.3     63.0   (11 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
After effect of change in accounting principle                                            
Net income   $ 1,444   $ 1,420   $ 1,164   2   24   $ 3,968   $ 2,242   77  
Diluted earnings per common share     .84     .82     .67   2   25     2.30     1.29   78  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Profitability ratios (annualized)                                            
  ROA     1.78 %   1.83 %   1.59 % (3 ) 12     1.68 %   1.07 % 57  
  ROE     19.38     19.72     17.11   (2 ) 13     18.41     11.24   64  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Efficiency ratio (2)     56.4     56.6     58.1     (3 )   56.3     66.1   (15 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Dividends declared per common share   $ .28   $ .28   $ .26     8   $ .82   $ .74   11  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Average common shares outstanding     1,700.7     1,710.4     1,710.6   (1 ) (1 )   1,704.7     1,713.8   (1 )
Diluted average common shares outstanding     1,717.8     1,730.8     1,726.9   (1 ) (1 )   1,722.6     1,732.9   (1 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total revenue   $ 6,040   $ 6,017   $ 5,484     10   $ 18,013   $ 14,271   26  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Average loans   $ 181,782   $ 179,232   $ 164,046   1   11   $ 177,749   $ 161,750   10  
Average assets     321,217     311,075     289,461   3   11     315,568     279,184   13  
Average core deposits     184,448     179,394     170,710   3   8     180,521     165,315   9  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net interest margin     5.52 %   5.66 %   5.40 % (2 ) 2     5.62 %   5.31 % 6  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
At Period End                                            
Securities available for sale   $ 32,974   $ 37,132   $ 40,749   (11 ) (19 ) $ 32,974   $ 40,749   (19 )
Loans     186,310     185,001     168,866   1   10     186,310     168,866   10  
Allowance for loan losses     3,861     3,883     3,761   (1 ) 3     3,861     3,761   3  
Goodwill     9,744     9,724     9,604     1     9,744     9,604   1  
Assets     334,250     314,802     298,100   6   12     334,250     298,100   12  
Core deposits     190,606     181,807     171,303   5   11     190,606     171,303   11  
Common stockholders' equity     30,016     29,473     27,060   2   11     30,016     27,060   11  
Stockholders' equity     30,074     29,527     27,322   2   10     30,074     27,322   10  
Tier 1 capital (3)     21,026     20,564     17,752   2   18     21,026     17,752   18  
Total capital (3)     30,547     29,270     26,430   4   16     30,547     26,430   16  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Capital ratios                                            
  Common stockholders' equity to assets     8.98 %   9.36 %   9.08 % (4 ) (1 )   8.98 %   9.08 % (1 )
  Stockholders' equity to assets     9.00     9.38     9.17   (4 ) (2 )   9.00     9.17   (2 )
  Risk-based capital (3)                                            
    Tier 1 capital     7.84     7.95     7.40   (1 ) 6     7.84     7.40   6  
    Total capital     11.39     11.32     11.02   1   3     11.39     11.02   3  
  Leverage (3)     6.83     6.89     6.40   (1 ) 7     6.83     6.40   7  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Book value per common share   $ 17.67   $ 17.24   $ 15.86   2   11   $ 17.67   $ 15.86   11  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Staff (active, full-time equivalent)     125,700     123,500     116,300   2   8     125,700     116,300   8  
Common Stock Price                                            
High   $ 52.99   $ 53.44   $ 48.30   (1 ) 10   $ 53.44   $ 54.81   (2 )
Low     41.52     48.12     40.50   (14 ) 3     41.52     40.50   3  
Period end     48.16     50.06     44.45   (4 ) 8     48.16     44.45   8  

(1)
Change in accounting principle relates to transitional goodwill impairment charge recorded in first quarter 2002 related to the adoption of FAS 142.

(2)
The efficiency ratio is defined as noninterest expense divided by the total revenue (net interest income and noninterest income).

(3)
See the Capital Adequacy/Ratios section for additional information.

21


        This report, including the Notes to Financial Statements and the information in response to Items 2, 3 and 4 of Form 10-Q, contains forward-looking statements about the Company. Broadly speaking, forward-looking statements include forecasts of future financial results and condition, expectations for future operations and business, and any assumptions underlying those forecasts and expectations. Actual outcomes and results may differ significantly from forecasts and expectations. Please refer to "Factors that May Affect Future Results" for a list of some of the forward-looking statements in this report and a discussion of some of the factors that may cause results to differ.

OVERVIEW

        Wells Fargo & Company is a $334 billion diversified financial services company providing banking, insurance, investments, mortgage banking and consumer finance through banking branches, the internet and other distribution channels to consumers, commercial businesses and financial institutions in all 50 states of the U.S. and in other countries. It ranked fourth in assets and third in market capitalization among U.S. bank holding companies at September 30, 2002. In this quarterly report on Form 10-Q, Wells Fargo & Company and Subsidiaries (consolidated) is referred to as the Company and Wells Fargo & Company alone is referred to as the Parent.

        Certain amounts in the financial review for prior quarters have been reclassified to conform with the current financial statement presentation.

        Net income for the third quarter of 2002 was $1.44 billion, compared with $1.16 billion for the third quarter of 2001. Excluding goodwill amortization, net income for the third quarter of 2001 would have been $1.31 billion. Diluted earnings per common share for the third quarter of 2002 were $.84, compared with $.75 (excluding goodwill amortization) for the third quarter of 2001. Return on average assets (ROA) was 1.78% for the third quarter of 2002, compared with 1.80% (excluding goodwill amortization) for the third quarter of 2001. Return on average common equity (ROE) was 19.38% for the third quarter of 2002, compared with 19.27% (excluding goodwill amortization) for the third quarter of 2001.

        Net income for the first nine months of 2002, before the effect of a first quarter accounting change related to FAS 142, Goodwill and Other Intangible Assets, was $4.24 billion, or $2.46 per share, compared with $2.24 billion, or $1.29 per share, and $2.67 billion, or $1.53 per share (excluding goodwill amortization), for the first nine months of 2001. ROA was 1.80% for the first nine months of 2002, compared with 1.28% (excluding goodwill amortization) for the same period of 2001. ROE was 19.69% in the first nine months of 2002, compared with 13.38% (excluding goodwill amortization) for the first nine months of 2001. Results for the first nine months of 2001 include the second quarter 2001 loss due to impairment and other special charges of $1.16 billion (after tax), or $.67 per share, predominantly related to other-than-temporary impairment of publicly traded and private equity securities, primarily in the venture capital portfolio.

        Net interest income on a taxable-equivalent basis was $3.72 billion for the third quarter of 2002 and $11.07 billion for the first nine months of 2002 compared with $3.22 billion and $9.09 billion for the same periods of 2001. The Company's net interest margin was 5.52% and

22


5.62% for the third quarter and first nine months of 2002, respectively, compared with 5.40% and 5.31% for the same periods of 2001.

        Noninterest income was $2.35 billion and $7.02 billion for the third quarter and first nine months of 2002, respectively, compared with $2.28 billion and $5.24 billion for the same periods of 2001. Excluding the impairment and other special charges recorded in second quarter 2001, noninterest income would have been $7.09 billion for the first nine months of 2001.

        Noninterest expense totaled $3.41 billion and $10.14 billion for the third quarter and first nine months of 2002, respectively, compared with $3.19 billion and $9.44 billion for the same periods of 2001.

        The provision for loan losses was $395 million and $1,295 million in the third quarter and first nine months of 2002, respectively, compared with $455 million and $1,243 million in the same periods of 2001. During the third quarter of 2002, net charge-offs were $415 million, or .91% of average total loans (annualized), compared with $454 million, or 1.10%, in the third quarter of 2001. Third quarter 2002 charge-offs included $21 million of charges already provided for in the second quarter of 2002 due to the adoption of a new delinquency and loss recognition policy in the consumer finance business. Excluding these charges, third quarter and first nine months 2002 credit losses approximated the third quarter and year-to-date provision. The allowance for loan losses was $3.86 billion, or 2.07% of total loans, at September 30, 2002, compared with $3.76 billion, or 2.18%, at December 31, 2001 and $3.76 billion, or 2.23%, at September 30, 2001.

        At September 30, 2002, total nonaccrual loans were $1.55 billion, or .8% of total loans, compared with $1.64 billion, or 1.0%, at December 31, 2001 and $1.62 billion, or 1.0%, at September 30, 2001. Foreclosed assets amounted to $186 million at September 30, 2002, $171 million at December 31, 2001 and $166 million at September 30, 2001.

        At September 30, 2002, the ratio of common stockholders' equity to total assets was 8.98%, compared with 9.08% at September 30, 2001. The Company's total risk-based capital (RBC) ratio at September 30, 2002 was 11.39% and its Tier 1 RBC ratio was 7.84%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's ratios at September 30, 2001 were 11.02% and 7.40%, respectively. The Company's leverage ratio was 6.83% at September 30, 2002 and 6.40% at September 30, 2001, exceeding the minimum regulatory guideline of 3% for bank holding companies.

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. The significant changes to the Company's accounting policies related to these Statements are presented in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this report. The Company completed its initial goodwill impairment assessment under FAS 142 and recorded a transitional impairment charge of $276 million (after tax) in first quarter 2002.

23


        In June 2001, the FASB issued Statement No. 143 (FAS 143), Accounting for Asset Retirement Obligations, which addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets. FAS 143 is effective January 1, 2003, with early adoption permitted. The Company plans to adopt FAS 143 effective January 1, 2003 and does not expect the adoption of the statement to have a material effect on the financial statements.

        In June 2002, the FASB issued Statement No. 146 (FAS 146), Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. Under FAS 146, such costs will be recognized when the liability is incurred, rather than at the date of commitment to an exit plan. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application permitted. The Company does not expect the adoption of FAS 146 to have a material effect on the financial statements.

        In October 2002, the FASB issued Statement No. 147 (FAS 147), Acquisitions of Certain Financial Institutions, which no longer requires the separate recognition and subsequent amortization of goodwill that was originally required by Statement No. 72 (FAS 72), Accounting for Certain Acquisitions of Banking or Thrift Institutions. Instead, FAS 72 goodwill will be accounted for in accordance with Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets and will be subject to an annual impairment test. FAS 147 also amends Statement No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets (such as core deposit intangibles). Those intangible assets are now subject to the same recoverability and impairment loss recognition provisions that FAS 144 requires for other long-lived assets. The adoption of FAS 147 will not have a material effect on the financial statements.

24


EARNINGS PERFORMANCE

NET INTEREST INCOME

        Net interest income on a taxable equivalent basis was $3.72 billion in third quarter 2002, up 15% from third quarter of last year, largely due to growth in loans and mortgages held for sale and increases in net interest margin from 5.40% a year ago to 5.52% in third quarter 2002.

        Individual components of net interest income and the net interest margin are presented in the rate/yield table on the following page.

        Earning assets increased $30.3 billion in the third quarter from the same period last year due to increases in average loans and mortgages held for sale. Loans averaged $181.8 billion in the third quarter of 2002 compared with $164.0 billion in the third quarter of 2001. The increase was largely due to increased originations of home equity and home mortgage products. Average mortgages held for sale increased to $38.4 billion in third quarter 2002 from $25.0 billion in the third quarter of 2001 and increased to $34.0 billion in the first nine months of 2002 from $20.2 billion in the first nine months of 2001. The increase for both periods was due to increased originations including refinancing activity. These increases were partially offset by a slowdown in commercial loan demand consistent with conditions in the current U.S. economy. Debt securities available for sale averaged $34.9 billion in the third quarter of 2002 compared with $39.0 billion in the third quarter of 2001. The decrease was largely due to prepayments of mortgage-backed securities held and the sale of certain longer-maturity mortgage-backed securities subject to prepayment risk.

        The net interest margin increased to 5.52% in third quarter 2002 from 5.40% in third quarter 2001, principally due to a decline in deposit and borrowing costs and a larger proportion of higher yielding consumer loans in the total loan mix.

        An important contributor to the growth in net interest income and net interest margin from third quarter 2001 was an 8% increase in average core deposits, the Company's low cost source of funding. Average core deposits were $184.4 billion and $170.7 billion and funded 57% and 59% of the Company's average total assets in the third quarter of 2002 and 2001, respectively. While savings certificates of deposits declined on average from $28.8 billion to $23.8 billion, noninterest-bearing checking accounts and other core deposit categories increased on average from $141.9 billion in third quarter 2001 to $160.6 billion in third quarter 2002 reflecting a combination of growth in mortgage escrow deposits due to higher mortgage payoffs resulting from lower mortgage interest rates and growth in primary account relationships. Total average interest-bearing deposits increased to $134.1 billion in third quarter 2002 from $122.3 billion a year ago. For the same period, total average noninterest-bearing deposits increased to $63.4 billion from $55.3 billion.

25


AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS)(1)(2)


 
  Quarter ended Sept. 30,

 
  2002

  2001

(in millions)

  Average
balance

  Yields/
rates

  Interest
income/
expense

  Average
balance

  Yields/
rates

  Interest
income/
expense


EARNING ASSETS                                
Federal funds sold and securities purchased under resale agreements   $ 2,641   1.72 % $ 11   $ 2,683   3.44 % $ 23
Debt securities available for sale (3):                                
  Securities of U.S. Treasury and federal agencies     1,719   5.48     23     2,113   6.28     32
  Securities of U.S. states and political subdivisions     2,123   8.21     41     2,018   8.02     39
  Mortgage-backed securities:                                
    Federal agencies     26,037   7.20     445     29,292   7.19     512
    Private collateralized mortgage obligations     2,119   7.20     37     1,801   9.00     40
   
     
 
     
      Total mortgage-backed securities     28,156   7.20     482     31,093   7.29     552
  Other debt securities (4)     2,883   7.87     58     3,797   8.06     65
   
     
 
     
        Total debt securities available for sale (4)     34,881   7.23     604     39,021   7.34     688
Mortgages held for sale (3)     38,384   6.15     591     24,958   6.79     425
Loans held for sale (3)     5,302   3.92     52     4,771   5.74     69
Loans:                                
  Commercial     46,323   6.76     789     48,501   7.77     950
  Real estate 1-4 family first mortgage     27,833   6.07     422     20,227   7.05     356
  Other real estate mortgage     25,389   6.09     389     24,300   7.86     481
  Real estate construction     7,843   5.74     114     8,113   7.80     160
  Consumer:                                
    Real estate 1-4 family junior lien mortgage     32,725   7.41     611     21,729   9.18     500
    Credit card     6,898   12.35     213     6,208   13.44     208
    Other revolving credit and monthly payment     24,251   10.24     625     23,558   11.19     660
   
     
 
     
      Total consumer     63,874   9.02     1,449     51,495   10.61     1,368
  Lease financing     8,678   7.03     153     9,770   7.60     186
  Foreign     1,842   18.79     87     1,640   20.56     84
   
     
 
     
        Total loans (5)     181,782   7.44     3,403     164,046   8.71     3,585
Other     6,814   3.65     63     3,981   4.67     47
   
     
 
     
          Total earning assets   $ 269,804   7.01     4,724   $ 239,460   8.10     4,837
   
     
 
     
FUNDING SOURCES                                
Deposits:                                
  Interest-bearing checking   $ 2,464   .44     3   $ 1,946   1.12     5
  Market rate and other savings     94,768   1.00     238     84,633   1.97     421
  Savings certificates     23,813   3.05     183     28,810   4.89     355
  Other time deposits     9,068   1.88     43     1,108   4.58     13
  Deposits in foreign offices     3,949   1.62     16     5,827   3.49     51
   
     
 
     
      Total interest-bearing deposits     134,062   1.43     483     122,324   2.74     845
Short-term borrowings     29,558   1.66     124     35,582   3.52     316
Long-term debt     43,568   3.36     367     34,730   4.96     431
Guaranteed preferred beneficial interests in Company's subordinated debentures     2,885   4.17     30     1,401   6.40     23
   
     
 
     
        Total interest-bearing liabilities     210,073   1.90     1,004     194,037   3.31     1,615
Portion of noninterest-bearing funding sources     59,731           45,423      
   
     
 
     
          Total funding sources   $ 269,804   1.49     1,004   $ 239,460   2.70     1,615
   
     
 
     
Net interest margin and net interest income on a taxable-equivalent basis (6)         5.52 % $ 3,720         5.40 % $ 3,222
         
 
       
 
NONINTEREST-EARNING ASSETS                                
Cash and due from banks   $ 13,128             $ 14,237          
Goodwill     9,741               9,682          
Other     28,544               26,082          
   
           
         
          Total noninterest-earning assets   $ 51,413             $ 50,001          
   
           
         
NONINTEREST-BEARING FUNDING SOURCES                                
Deposits   $ 63,403             $ 55,321          
Other liabilities     18,137               12,962          
Preferred stockholders' equity     54               259          
Common stockholders' equity     29,550               26,882          
Noninterest-bearing funding sources used to fund earning assets     (59,731 )             (45,423 )        
   
           
         
          Net noninterest-bearing funding sources   $ 51,413             $ 50,001          
   
           
         
TOTAL ASSETS   $ 321,217             $ 289,461          
   
           
         

(1)
The average prime rate of the Company was 4.75% and 6.57% for the quarters ended September 30, 2002 and 2001, respectively, and 4.75% and 7.50% for the nine months ended September 30, 2002 and 2001, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.81% and 3.45% for the quarters ended September 30, 2002 and 2001, respectively, and 1.88% and 4.33% for the nine months ended September 30, 2002 and 2001, 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.

26



 
  Nine months ended Sept. 30,

 
  2002

  2001

(in millions)

  Average
balance

  Yields/
rates

  Interest
income/
expense

  Average
balance

  Yields/
rates

  Interest
income/
expense


EARNING ASSETS                                
Federal funds sold and securities purchased under resale agreements   $ 2,615   1.72 % $ 34   $ 2,672   4.13 % $ 83
Debt securities available for sale (3):                                
  Securities of U.S. Treasury and federal agencies     1,852   5.67     76     2,192   6.74     107
  Securities of U.S. states and political subdivisions     2,117   8.27     125     2,016   7.94     115
  Mortgage-backed securities:                                
    Federal agencies     28,338   7.10     1,460     26,763   7.18     1,405
    Private collateralized mortgage obligations     2,456   7.13     128     1,641   9.12     110
   
 
 
       
     
      Total mortgage-backed securities     30,794   7.10     1,588     28,404   7.29     1,515
  Other debt securities (4)     3,020   7.73     172     3,388   7.86     195
   
 
 
       
     
        Total debt securities available for sale (4)     37,783   7.15     1,961     36,000   7.34     1,932
Mortgages held for sale (3)     34,036   6.34     1,622     20,234   6.93     1,055
Loans held for sale (3)     5,236   4.96     194     4,802   6.98     251
Loans:                                
  Commercial     46,539   6.91     2,406     49,120   8.38     3,078
  Real estate 1-4 family first mortgage     26,932   6.29     1,271     18,870   7.33     1,038
  Other real estate mortgage     25,462   6.25     1,191     24,093   8.30     1,496
  Real estate construction     7,936   5.76     342     8,080   8.59     519
  Consumer:                                
    Real estate 1-4 family junior lien mortgage     29,607   7.54     1,669     20,047   9.64     1,448
    Credit card     6,696   12.32     619     6,229   13.65     638
    Other revolving credit and monthly payment     23,818   10.37     1,848     23,646   11.56     2,048
   
 
 
       
     
      Total consumer     60,121   9.19     4,136     49,922   11.05     4,134
  Lease financing     9,034   7.17     485     10,062   7.76     586
  Foreign     1,725   19.19     248     1,603   20.89     251
   
 
 
       
     
      Total loans (5)     177,749   7.57     10,079     161,750   9.17     11,102
Other     6,529   3.94     193     3,760   5.18     146
   
 
 
       
     
        Total earning assets   $ 263,948   7.15     14,083   $ 229,218   8.52     14,569
   
 
 
       
     
FUNDING SOURCES                                
Deposits:                                
  Interest-bearing checking   $ 2,519   .60     11   $ 2,237   1.85     31
  Market rate and other savings     92,545   .97     672     78,256   2.39     1,400
  Savings certificates     24,785   3.32     615     30,926   5.37     1,243
  Other time deposits     6,672   1.95     97     1,470   5.21     57
  Deposits in foreign offices     5,204   1.65     64     6,422   4.53     218
   
 
 
       
     
    Total interest-bearing deposits     131,725   1.48     1,459     119,311   3.30     2,949
Short-term borrowings     34,324   1.67     429     31,273   4.44     1,037
Long-term debt     40,843   3.40     1,041     34,460   5.57     1,439
Guaranteed preferred beneficial interests in Company's subordinated debentures     2,745   4.29     88     1,091   7.12     59
   
 
 
       
     
      Total interest-bearing liabilities     209,637   1.92     3,017     186,135   3.94     5,484
Portion of noninterest-bearing funding sources     54,311           43,083      
   
 
 
       
     
        Total funding sources   $ 263,948   1.53     3,017   $ 229,218   3.21     5,484
   
 
 
       
     
Net interest margin and net interest income on a taxable-equivalent basis (6)         5.62 % $ 11,066         5.31 % $ 9,085
         
 
       
     
NONINTEREST-EARNING ASSETS                                
Cash and due from banks   $ 13,696             $ 14,506          
Goodwill     9,731               9,491          
Other     28,193               25,969          
   
           
         
        Total noninterest-earning assets   $ 51,620             $ 49,966          
   
           
         
NONINTEREST-BEARING FUNDING SOURCES                                
Deposits   $ 60,672             $ 53,896          
Other liabilities     16,418               12,387          
Preferred stockholders' equity     55               260          
Common stockholders' equity     28,786               26,506          
                                 
Noninterest-bearing funding sources used to fund earning assets     (54,311 )             (43,083 )        
   
           
         
        Net noninterest-bearing funding sources   $ 51,620             $ 49,966          
   
           
         
TOTAL ASSETS   $ 315,568             $ 279,184          
   
           
         

27


NONINTEREST INCOME


 
 
  Quarter
ended Sept. 30,

   
  Nine months
ended Sept. 30,

   
 
 
  %
Change

  %
Change

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Service charges on deposit accounts   $ 560   $ 470   19 % $ 1,612   $ 1,370   18 %
Trust and investment fees:                                  
  Asset management and custody fees     173     181   (4 )   537     551   (3 )
  Mutual fund and commission fees     204     181   13     600     596   1  
  All other     62     62       193     109   77  
   
 
     
 
     
    Total trust and investment fees     439     424   4     1,330     1,256   6  

Credit card fees

 

 

242

 

 

203

 

19

 

 

666

 

 

579

 

15

 
Other fees:                                  
  Cash network fees     47     54   (13 )   139     153   (9 )
  Charges and fees on loans     160     103   55     432     316   37  
  All other     165     146   13     438     452   (3 )
   
 
     
 
     
    Total other fees     372     303   23     1,009     921   10  

Mortgage banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Origination and other closing fees     271     179   51     696     490   42  
  Servicing fees, net of amortization and impairment     (158 )   (127 ) 24     (279 )   (21 )  
  Net gains on securities available for sale         2   (100 )       134   (100 )
  Net gains on mortgage loan originations/sales activities     226     223   1     519     420   24  
  All other     87     92   (5 )   262     254   3  
   
 
     
 
     
    Total mortgage banking     426     369   15     1,198     1,277   (6 )

Insurance

 

 

234

 

 

196

 

19

 

 

766

 

 

524

 

46

 
Net gains on debt securities available for sale     121     97   25     202     166   22  
Net loss from equity investments     (152 )   (58 ) 162     (230 )   (1,477 ) (84 )
Net gains on sales of loans     7     11   (36 )   15     10   50  
Net (losses) gains on dispositions of operations     (9 )   1       (6 )   104    
All other     105     267   (61 )   462     513   (10 )
   
 
     
 
     
    Total   $ 2,345   $ 2,283   3 % $ 7,024   $ 5,243   34 %
   
 
 
 
 
 
 

        Deposit service fees increased 19% in the third quarter of 2002 compared with 2001 due to continued growth in primary accounts and increased activity.

        The increase in trust and investment fees for the third quarter of 2002, compared with the third quarter of 2001, was due to an increase in brokerage commission fees due to the acquisition of FAS Holdings, Inc. in the third quarter 2002. The increase for the first nine months of 2002 was predominantly due to an increase in "all other" fees primarily due to the acquisition of H.D. Vest, a financial planning services company. The Company managed mutual funds with $73 billion of assets at September 30, 2002, compared with $70 billion at September 30, 2001. The Company also administered personal trust, employee benefit trust and agency assets of approximately $419 billion and $388 billion at September 30, 2002 and 2001, respectively, and actively managed personal trust, employee benefit trust and agency assets of approximately $98 billion and $97 billion at September 30, 2002 and 2001, respectively.

        Credit card fees increased 19% and 15% for the third quarter and first nine months of 2002, respectively, compared with the same periods of 2001, primarily due to an increase in merchant fees on debit and credit cards.

28


        Mortgage banking fee income was higher for the quarter and lower for the first nine months of 2002, compared with the same periods of 2001. In both periods, servicing fees were lower predominantly due to increased amortization and impairment of mortgage servicing rights and other retained interests resulting from lower interest rates. Impairment of mortgage servicing rights and other retained interests was $737 million and $59 million, respectively, in the third quarter of 2002 and $1.5 billion and $496 million, respectively, for the first nine months of 2002. The increase in amortization and impairment was substantially offset by gains representing the ineffective and the excluded portion of fair value hedges of mortgage servicing rights and an increase in mortgage servicing fees resulting from growth of the servicing portfolio. Origination and other closing fees and net gains on mortgage originations/sales activities were higher in the third quarter and first nine months of 2002 due to higher mortgage origination volume and lower interest rates. Originations for the third quarter and first nine months of 2002 grew to $89 billion and $221 billion, respectively, from $50 billion and $128 billion for the same periods of 2001.

        Insurance income for the first nine months of 2002 increased from the prior year predominantly due to the second quarter 2001 acquisition of ACO Brokerage Holdings Corporation, the Acordia group of insurance agencies, a commercial insurance broker.

        Net loss from equity investments for the first nine months of 2002 was $230 million, reflecting other-than-temporary impairment in the valuation of publicly traded and private equity securities. Net loss from equity investments for the same period in 2001 included approximately $1.5 billion of impairment write-downs recognized in the second quarter of 2001.

        The Company routinely reviews its venture capital portfolios for impairment. Such write-downs were based on issuer specific factors and results, as well as general economic and market conditions, including those events occurring in the technology and telecommunications industries and adverse changes impacting the availability of venture capital financing. While the determination of impairment is based on all of the information available at the time of the assessment, new information or economic developments in the future could lead to additional impairment.

        Net gains on disposition of operations for the first nine months of 2001 included a $96 million gain from the divestiture of 39 stores in Idaho, New Mexico, Nevada and Utah as a condition to completing the First Security Corporation merger.

29


NONINTEREST EXPENSE


 
 
  Quarter
ended Sept. 30,

   
  Nine months
ended Sept. 30,

   
 
 
  %
Change

  %
Change

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Salaries   $ 1,110   $ 1,020   9 % $ 3,292   $ 3,015   9 %
Incentive compensation     446     315   42     1,165     784   49  
Employee benefits     304     223   36     997     737   35  
Equipment     232     217   7     697     672   4  
Net occupancy     278     240   16     821     716   15  
Goodwill         156   (100 )       452   (100 )
Core deposit intangibles     38     41   (7 )   118     125   (6 )
Net (gains) losses on dispositions of premises and equipment         (2 ) (100 )   26     (21 )  
Outside professional services     130     104   25     376     335   12  
Contract services     92     108   (15 )   261     366   (29 )
Telecommunications     94     91   3     263     260   1  
Outside data processing     91     84   8     262     238   10  
Travel and entertainment     85     67   27     243     209   16  
Advertising and promotion     85     66   29     229     190   21  
Postage     65     56   16     189     179   6  
Stationery and supplies     51     58   (12 )   164     181   (9 )
Operating losses     40     50   (20 )   115     149   (23 )
Insurance     29     30   (3 )   141     145   (3 )
Security     41     39   5     121     115   5  
All other     196     224   (13 )   659     591   12  
   
 
     
 
     
  Total   $ 3,407   $ 3,187   7 % $ 10,139   $ 9,438   7 %
   
 
 
 
 
 
 

        The increase in salaries in the third quarter and first nine months of 2002 resulted from additional active, full-time equivalent staff, a major portion of which was due to acquisitions and increased employment related to the growth in the mortgage and home equity business. Incentive compensation increased predominantly due to mortgage commission expense resulting from higher origination volume. The increase in employee benefits for the first nine months of 2002 includes net pension cost of approximately $107 million in 2002, due to the impact of a weaker stock market on plan asset returns, compared with net pension income of approximately $31 million in 2001.

        Under FAS 142, effective January 1, 2002, all goodwill amortization was discontinued.

        Contract services decreased partly due to the higher use of team members instead of outside contractors for systems projects.

        The Company undertook numerous initiatives in 2002 to reduce operating losses, which declined 20% from a year ago.

30


OPERATING SEGMENT RESULTS

        Community Banking's net income increased 15% to $1,068 million in the third quarter of 2002 from $930 million in the prior year. Net income increased 13% to $3,049 million for the first nine months of 2002 from $2,707 million, excluding impairment and other special charges of $1,089 million (after tax), for the first nine months of 2001. Net interest income increased to $2,645 million in the third quarter of 2002 from $2,240 million in the third quarter of 2001. Average loans grew 16% and average core deposits grew 7% from third quarter 2001. The provision for loan losses decreased by $86 million for the third quarter of 2002 due to the improved credit quality in the loan portfolio. Noninterest income for the third quarter of 2002 increased by $94 million over the same period in 2001 primarily due to an increase in mortgage banking income. Noninterest expense increased by $349 million in the third quarter of 2002 over the same period in 2001 due primarily to increased expense associated with strong mortgage origination activity.

        Wholesale Banking's net income was $290 million in the third quarter of 2002, compared with $298 million in the third quarter of 2001. Net income, before the effect of change in accounting principle, was $939 million for the first nine months of 2002, compared with $873 million, excluding impairment and other special charges of $62 million (after tax), in the first nine months of 2001, an increase of 8%. Net interest income increased 5% in both the third quarter and the first nine months of 2002, compared with the same periods in 2001. The provision for loan losses decreased by $2 million to $60 million in the third quarter of 2002 compared with the third quarter of 2001. Noninterest income was $538 million in the third quarter 2002 and decreased $10 million compared with the third quarter of 2001. On a year-to-date basis, noninterest income increased $261 million to $1,891 million in 2002 compared with the same period in 2001 which excluded impairment and other special charges of $99 million (before tax). The increase of noninterest income for the first nine months over the prior year was primarily due to higher insurance revenue predominantly from the Acordia acquisition, higher service fees on deposits, external fees and commissions and investment income. Noninterest expense increased to $604 million in the third quarter of 2002 and $1,920 million for the first nine months of 2002 from $574 and $1,722 million for the same periods in the prior year. The higher expenses in 2002 for the first nine months compared with 2001 was primarily the result of the Acordia acquisition along with the increased personnel and occupancy expenses.

        In first quarter 2002, under FAS 142, a transitional goodwill impairment charge of $98 million (after tax) was recognized in certain reporting units.

        Wells Fargo Financial's net income was $92 million in the third quarter of 2002 and $85 million for the same period in 2001. Net income, before the effect of change in accounting principle, was $251 million for the first nine months of 2002 and $249 million for the same period in 2001. Net interest income increased 11% in the third quarter and the first nine months of 2002, compared with the same periods in 2001. The provision for loan losses increased by $28 million and $86 million in the third quarter and first nine months of 2002, respectively, compared with the same periods in the prior year.

        In first quarter 2002, under FAS 142, a transitional goodwill impairment charge of $178 million (after tax) was recognized in certain international reporting units, substantially related to Island Finance, a Puerto Rico based consumer finance company acquired in 1995.

31


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.


 
  September 30,
2002

  December 31,
2001

  September 30,
2001

(in millions)

  Cost

  Estimated
fair
value

  Cost

  Estimated
fair
value

  Cost

  Estimated
fair
value


Securities of U.S. Treasury and federal agencies   $ 1,592   $ 1,665   $ 1,983   $ 2,047   $ 2,014   $ 2,105
Securities of U.S. states and political subdivisions     2,291     2,458     2,146     2,223     2,198     2,306
Mortgage-backed securities:                                    
  Federal agencies     21,958     23,380     29,280     29,721     29,818     30,963
  Private collateralized mortgage obligations (1)     2,057     2,187     2,628     2,658     1,900     1,959
   
 
 
 
 
 
    Total mortgage-backed securities     24,015     25,567     31,908     32,379     31,718     32,922
Other     2,786     2,805     2,625     2,668     2,620     2,642
   
 
 
 
 
 
  Total debt securities     30,684     32,495     38,662     39,317     38,550     39,975
Marketable equity securities     578     479     815     991     856     774
   
 
 
 
 
 
      Total   $ 31,262   $ 32,974   $ 39,477   $ 40,308   $ 39,406   $ 40,749
   
 
 
 
 
 

(1)
Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages.

        The decrease in mortgage-backed securities was largely due to prepayments of mortgage-backed securities held and the sale of certain longer-maturity mortgage-backed securities subject to prepayment risk.

        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.


 
(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 

 
Estimated unrealized gross gains   $ 1,974   $ 1,004   $ 1,711  
Estimated unrealized gross losses     (262 )   (173 )   (368 )
   
 
 
 
Estimated unrealized net gain   $ 1,712   $ 831   $ 1,343  
   
 
 
 

 

32


        The following table provides the components of the realized net gains (losses) on the sales of securities from the securities available for sale portfolio, composed of debt securities, including those related to mortgage banking, and marketable equity securities.


 
 
  Quarter ended
Sept. 30,

  Nine months
ended Sept. 30,

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Realized gross gains   $ 196   $ 230   $ 478   $ 753  
Realized gross losses (1)     (155 )   (111 )   (362 )   (1,485 )
   
 
 
 
 
Realized net gains (losses)   $ 41   $ 119   $ 116   $ (732 )
   
 
 
 
 

 
(1)
Includes other-than-temporary impairments.

        The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 3 years and 2 months at September 30, 2002. Expected remaining maturities will differ from contractual maturities because obligations may be prepaid.

        The effect of a 200 basis point increase and a 200 basis point decrease on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale portfolio is indicated below.


(in billions)

  Fair
value

  Net unrealized
gain (loss)

  Remaining
maturity


At September 30, 2002   $ 25.6   $ 1.6   2 yrs., 5 mos.
At September 30, 2002, assuming a 200 basis point:                
  Increase in interest rates     24.0       5 yrs., 3 mos.
  Decrease in interest rates     26.0     2.0   1 yr., 1 mo.

33


LOAN PORTFOLIO


 
 
   
   
   
  % Change
Sept. 30, 2002 from

 
(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

  Dec. 31,
2001

  Sept. 30,
2001

 

 
Commercial (1)   $ 46,827   $ 47,547   $ 48,444   (2 )% (3 )%
Real estate 1-4 family first mortgage     29,896     25,588     23,308   17   28  
Other real estate mortgage (2)     25,233     24,808     24,311   2   4  
Real estate construction     7,887     7,806     8,028   1   (2 )
Consumer:                            
  Real estate 1-4 family junior lien mortgage     34,070     25,530     23,901   33   43  
  Credit card     7,033     6,700     6,333   5   11  
  Other revolving credit and monthly payment     24,912     23,502     23,232   6   7  
   
 
 
         
    Total consumer     66,015     55,732     53,466   18   23  
Lease financing     8,593     9,420     9,696   (9 ) (11 )
Foreign     1,859     1,598     1,613   16   15  
   
 
 
         
   
Total loans (net of unearned income, including net deferred loan fees, of $4,308, $4,143 and $4,188)

 

$

186,310

 

$

172,499

 

$

168,866

 

8

%

10

%
   
 
 
 
 
 

 
(1)
Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $3,973 million, $4,345 million and $3,969 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

(2)
Includes agricultural loans that are secured by real estate of $1,179 million, $1,254 million and $1,244 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

34


NONACCRUAL LOANS AND OTHER ASSETS

        The table below presents comparative data for nonaccrual loans and other assets. Management's classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. The table below excludes loans that are 90 days or more past due and still accruing, 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, which are presented in the table on page 37. However, real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 120 days of becoming past due and are shown in the table below.


 
(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 

 
Nonaccrual loans:                    
  Commercial (1)   $ 840   $ 827   $ 863  
  Real estate 1-4 family first mortgage     212     203     197  
  Other real estate mortgage (2)     198     210     231  
  Real estate construction     112     145     113  
  Consumer:                    
    Real estate 1-4 family junior lien mortgage     42     24     18  
    Other revolving credit and monthly payment     55     59     42  
   
 
 
 
      Total consumer     97     83     60  
  Lease financing     85     163     146  
  Foreign     5     9     8  
   
 
 
 
    Total nonaccrual loans (3)     1,549     1,640     1,618  
As a percentage of total loans     .8 %   1.0 %   1.0 %

Foreclosed assets

 

 

186

 

 

171

 

 

166

 
Real estate investments (4)     2     2     2  
   
 
 
 
Total nonaccrual loans and other assets   $ 1,737   $ 1,813   $ 1,786  
   
 
 
 

 
(1)
Includes commercial agricultural loans of $55 million, $68 million and $67 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

(2)
Includes agricultural loans secured by real estate of $24 million, $43 million and $48 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

(3)
Includes impaired loans of $970 million, $995 million and $1,031 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

(4)
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 $11 million, $24 million and $25 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

35


        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. 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 (first 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, 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 loans covered under FAS 114, the Company makes an assessment for impairment when such loans are on nonaccrual. When a loan with unique risk characteristics is identified as impaired, the Company estimates 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, is used in place of discounted cash flows. Additionally, impaired loans with commitments of less than $1 million are aggregated to estimate impairment using historical loss factors, which approximates the discounted cash flow method.

        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 as a charge to 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.

        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:


(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001


Impairment measurement based on:                  
  Collateral value method   $ 319   $ 485   $ 416
  Discounted cash flow method     305     338     369
  Historical loss factors     346     172     246
   
 
 
    Total (1)   $ 970   $ 995   $ 1,031
   
 
 

(1)
Includes $476 million, $529 million and $624 million of impaired loans with a related FAS 114 allowance of $59 million, $91 million and $122 million at September 30, 2002, December 31, 2001 and September 30, 2001, respectively.

        The average recorded investment in impaired loans was $1,030 million and $955 million during the third quarter of 2002 and 2001, respectively, and $1,018 million and $893 million during the first nine months of 2002 and 2001, respectively. Total interest income recognized on impaired loans was $7 million and $4 million during the third quarter of 2002 and 2001, respectively, and $17 million and $12 million during the first nine months of 2002 and 2001, respectively, which was predominantly recorded using the cost recovery method. Under the cost recovery method, all

36


payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt.

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 loans. 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. However, real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 120 days of becoming past due and are excluded from the following table.


 
(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 

 
Commercial   $ 91   $ 60   $ 97  
Real estate 1-4 family first mortgage     63     107 (1)   86 (1)
Other real estate mortgage     47     22     52  
Real estate construction     26     47     65  
Consumer:                    
  Real estate 1-4 family junior lien mortgage     67     56     59  
  Credit card     111     117     117  
  Other revolving credit and monthly payment     266     289     295  
   
 
 
 
    Total consumer     444     462     471  
   
 
 
 
  Total   $ 671   $ 698   $ 771  
   
 
 
 

 
(1)
Prior period(s) have been restated to exclude certain government guaranteed loans.

37


ALLOWANCE FOR LOAN LOSSES


 
 
  Quarter
ended Sept. 30,

  Nine months
ended Sept. 30,

 
(in millions)

  2002

  2001

  2002

  2001

 

 
Balance, beginning of period   $ 3,883   $ 3,760   $ 3,761   $ 3,719  

Allowances related to business combinations/other

 

 

(2

)

 


 

 

93

 

 

41

 

Provision for loan losses

 

 

395

 

 

455

 

 

1,295

 

 

1,243

 

Loan charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Commercial     (159 )   (178 )   (534 )   (460 )
  Real estate 1-4 family first mortgage     (3 )   (14 )   (18 )   (20 )
  Other real estate mortgage     (2 )   (3 )   (14 )   (12 )
  Real estate construction     (9 )   (7 )   (34 )   (10 )
  Consumer:                          
    Real estate 1-4 family junior lien mortgage     (14 )   (11 )   (43 )   (33 )
    Credit card     (99 )   (100 )   (307 )   (320 )
    Other revolving credit and monthly payment     (212 )   (195 )   (595 )   (563 )
   
 
 
 
 
      Total consumer     (325 )   (306 )   (945 )   (916 )
  Lease financing     (21 )   (23 )   (68 )   (67 )
  Foreign     (19 )   (20 )   (63 )   (56 )
   
 
 
 
 
        Total loan charge-offs     (538 )   (551 )   (1,676 )   (1,541 )
   
 
 
 
 
Loan recoveries:                          
  Commercial     36     19     120     57  
  Real estate 1-4 family first mortgage     1     1     4     3  
  Other real estate mortgage     3     4     12     12  
  Real estate construction     10         19     2  
  Consumer:                          
    Real estate 1-4 family junior lien mortgage     4     2     12     8  
    Credit card     12     10     36     32  
    Other revolving credit and monthly payment     49     50     158     151  
   
 
 
 
 
      Total consumer     65     62     206     191  
  Lease financing     4     7     16     20  
  Foreign     4     4     11     14  
   
 
 
 
 
        Total loan recoveries     123     97     388     299  
   
 
 
 
 
          Net loan charge-offs     (415 )   (454 )   (1,288 )   (1,242 )
   
 
 
 
 
Balance, end of period   $ 3,861   $ 3,761   $ 3,861   $ 3,761  
   
 
 
 
 
Net loan charge-offs (annualized) as a percentage of average total loans     .91 %   1.10 %   .97 %   1.03 %
   
 
 
 
 
Allowance as a percentage of total loans     2.07 %   2.23 %   2.07 %   2.23 %
   
 
 
 
 

 

        The Company considers the allowance for loan losses of $3.86 billion adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit at September 30, 2002. The Company's determination of the level of the allowance for loan losses rests upon various judgments 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.

38


INTEREST RECEIVABLE AND OTHER ASSETS


(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001


Trading assets   $ 7,906   $ 4,996   $ 6,224
Nonmarketable equity investments:                  
  Private equity investments     1,651     1,696     1,711
  Federal bank stock     1,511     1,295     1,254
  All other     1,387     1,071     879
   
 
 
    Total nonmarketable equity investments     4,549     4,062     3,844

Government National Mortgage Association (GNMA) pool buy outs

 

 

2,378

 

 

2,815

 

 

2,601
Interest receivable     1,235     1,284     1,430
Interest-earning deposits     2,006     206     330
Foreclosed assets     186     171     166
Certain identifiable intangible assets     119     119     192
Due from customers on acceptances     102     104     110
Other     13,897     9,788     10,586
   
 
 
    Total interest receivable and other assets   $ 32,378   $ 23,545   $ 25,483
   
 
 

        Trading assets consist largely of securities, including corporate debt, U.S. government agency obligations, and the fair value of derivative instruments held for customer accommodation purposes. Interest income from trading assets was $43 million in the third quarter of 2002 and $27 million in the third quarter of 2001, and $135 million and $87 million in the first nine months of 2002 and 2001, respectively. Noninterest income from trading assets was $10 million and $94 million in the third quarter of 2002 and 2001, respectively, and $212 million and $298 million in the first nine months of 2002 and 2001, 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 undertakes the collection and foreclosure process on behalf of the guarantors. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances.

        The increase in "other" at September 30, 2002 compared with a year ago was due largely to an increase in funding advances as a result of an increase in mortgage loan origination volume and mark-to-market of loan commitments and derivative contracts used to hedge mortgage servicing rights and the forecasted sales of mortgage loans.

39


DEPOSITS

        The following table shows comparative detail of deposits.


(in millions)

  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001


Noninterest-bearing   $ 69,382   $ 65,362   $ 56,271
Interest-bearing checking     2,258     2,228     1,700
Market rate and other savings     95,597     89,251     85,331
Savings certificates     23,369     25,454     28,001
   
 
 
  Core deposits     190,606     182,295     171,303
Other time deposits     12,793     839     1,082
Deposits in foreign offices     2,357     4,132     4,377
   
 
 
    Total deposits   $ 205,756   $ 187,266   $ 176,762
   
 
 

        The increase in other time deposits was primarily due to an increase in certificates of deposit greater than $100,000 sold to institutional customers.

CAPITAL ADEQUACY/RATIOS

        The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Board of Governors of the Federal Reserve System 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.


 
 
  Actual

  For capital
adequacy purposes

  To be well
capitalized under
the FDICIA
prompt corrective
action provisions

 
(in billions)

  Amount

  Ratio

  Amount

  Ratio

  Amount

  Ratio

 

 
As of September 30, 2002:                                                
  Total capital (to risk-weighted assets)                                                
    Wells Fargo & Company   $ 30.5   11.39 % ³   $ 21.4   ³   8.00 %                  
    Wells Fargo Bank, N.A.     16.9   11.96   ³     11.3   ³   8.00   ³   $ 14.1   ³   10.00 %
    Wells Fargo Bank Minnesota, N.A.     3.9   13.14   ³     2.4   ³   8.00   ³     3.0   ³   10.00  

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Wells Fargo & Company   $ 21.0   7.84 % ³   $ 10.7   ³   4.00 %                  
    Wells Fargo Bank, N.A.     10.7   7.59   ³     5.7   ³   4.00   ³   $ 8.5   ³   6.00 %
    Wells Fargo Bank Minnesota, N.A.     3.6   12.19   ³     1.2   ³   4.00   ³     1.8   ³   6.00  

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  (Leverage ratio)                                                
    Wells Fargo & Company   $ 21.0   6.83 % ³   $ 12.3   ³   4.00 %(1)                  
    Wells Fargo Bank, N.A.     10.7   7.23   ³     5.9   ³   4.00     (1) ³   $ 7.4   ³   5.00 %
    Wells Fargo Bank Minnesota, N.A.     3.6   5.85   ³     2.5   ³   4.00     (1) ³     3.1   ³   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.

40


        To remain a seller/servicer in good standing, the Company's mortgage banking affiliate must maintain specified levels of shareholders' equity as required by the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. The equity requirements are generally based on the size of the loan portfolio being serviced for each investor. At September 30, 2002, the equity requirements for these agencies ranged from $1 million to $198 million. The mortgage banking affiliate had agency capital levels in excess of these requirements.

OFF-BALANCE SHEET TRANSACTIONS

OFF-BALANCE SHEET ARRANGEMENTS

        The Company generally consolidates entities in which it owns a majority interest. For entities in which it owns at least 20% but less than a majority, the Company generally accounts for its interest under the equity method of accounting. For entities in which it owns less than 20%, the Company generally carries its ownership interest at cost. The Company routinely originates, securitizes and sells into the secondary market mortgage loans, and from time to time, other financial assets, including student loans, commercial mortgages and auto receivables. The Company also structures investment vehicles, typically in the form of collateralized debt obligations, to provide investors with specialized investments to meet their specific needs. These securitizations are structured without recourse to the Company and without restrictions on the retained interest. In general, because the Company no longer maintains legal ownership of, nor controls the loans transferred, the transfers are accounted for as sales with related gain or loss recognized in income. In most securitizations, the Company retains the servicing rights related to the transferred loans so that customers that borrow from the Company benefit from continuity of service, and the Company may retain other beneficial interests from these sales. The Company does not dispose of troubled loans or problem assets by means of unconsolidated special purpose entities.

        For more information, see "Off-Balance Sheet Transactions—Off-Balance Sheet Arrangements" in the Company's 2001 Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

        Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations generally relate to funding of operations through debt issuances as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit, including loan commitments, standby letters of credit and financial guarantees. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit are likely to expire without being drawn upon. Such commitments are subject to the same credit policies and approval processes accorded to loans made by the Company. In the merchant banking business, the Company makes commitments to fund equity investments to investment funds and to specific private companies. The timing of future cash requirements to fund such commitments is generally dependent upon the venture capital investment cycle. This

41


cycle, the period over which privately-held companies are funded by venture capitalists and ultimately taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate. It is anticipated that many private equity investments and investments in funds would be repaid, would become liquid or would become public before the balance of unfunded equity commitments is utilized. Other commitments include investments in low-income housing and other community development activities undertaken by the Company. For more information, see "Off-Balance Sheet Transactions—Contractual Obligations and Other Commitments" in the Company's 2001 Annual Report on Form 10-K.

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

        Asset/liability management comprises the evaluation, monitoring, and management of the Company's interest rate risk, market risk and liquidity and funding. The Company's Corporate Asset/Liability Management Committee (Corporate ALCO) maintains oversight of these risks. Corporate ALCO is comprised of senior financial and senior business executives. Each of the Company's principal business groups—Community Banking, Mortgage Banking and Wholesale Banking—have individual asset/liability management committees and processes that are linked to the Corporate ALCO process.

INTEREST RATE RISK

        Interest rate risk, one of the more prominent risks in terms of potential earnings impact, is an inevitable part of being a financial intermediary. For more information, see "Asset/Liability and Market Risk Management—Interest Rate Risk" in the Company's 2001 Annual Report on Form 10-K. The principal tool used to evaluate Company interest rate risk is a simulation of net income under multiple economic and interest rate scenarios.

        The Company simulates its future net income under multiple interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change, and the projected shape of the yield curve. As of September 30, 2002, under scenarios of much higher short-term interest rates accompanied by higher but less pronounced increases in long-term rates, the Company's earnings would tend to decrease from most likely expectations. As an example, a 1.50% increase in the federal funds rate accompanied by a 1.30% increase in the 10 year constant maturity treasury rate from levels prevailing at September 30, 2002 would reduce estimated net income by 2.0% relative to the Company's most likely earnings plan over a twelve month horizon. The principal source of net income risk in that particular scenario is a modeled slowdown in mortgage origination activity and narrower new business spreads associated with a flatter yield curve. Simulation estimates are highly dependent on and will change with the size and mix of the actual and projected balance sheet at the time each simulation is done.

42


        The Company uses exchange-traded and over-the-counter interest rate derivatives to hedge its interest rate exposures. The credit risk amount and estimated net fair values of these derivatives as of September 30, 2002 and December 31, 2001 are indicated in Note 10 (Derivative Instruments and Hedging Activities) to Financial Statements. Derivatives are used for asset/liability management in four ways: (a) most of the Company's long-term fixed-rate debt is converted to floating-rate payments by entering into received-fixed swaps at issuance, (b) the cash flows from selected asset and/or liability instruments/portfolios are converted from fixed to floating payments or vice versa, (c) the Company actively uses swaptions, futures, forwards and rate options to hedge its funded mortgage loans and mortgage servicing rights asset, and (d) the Company uses free standing derivative contracts as undesignated derivatives to manage interest rate risk exposure in its mortgage pipeline and commercial mortgage loans held for sale portfolio.

MORTGAGE BANKING INTEREST RATE RISK

        The Company originates, funds and services mortgage loans. These activities subject the Company to a number of risks, including credit, liquidity and interest rate risks. For more information, see "Asset/Liability and Market Risk Management—Mortgage Banking Interest Rate Risk" in the Company's 2001 Annual Report on Form 10-K.

        The Company manages credit and liquidity risk by selling or securitizing the loans it originates. Changes in interest rates, however, may have a potentially large impact on Mortgage Banking earnings in any calendar quarter and over time. The Company manages both the risk to net income over time from all sources as well as the risk to an immediate reduction in the fair value of its mortgage servicing rights. The Company relies on mortgage loans held on its balance sheet and derivative instruments to maintain these risks within Corporate ALCO parameters.

        At September 30, 2002, the Company had capitalized mortgage servicing rights of $4.42 billion. The value of its servicing rights portfolio is influenced by prepayment speed assumptions affecting the duration of the mortgage loans to which the servicing rights relate. Changes in long-term interest rates affect these prepayment speed assumptions. For example, a decrease in long-term rates would accelerate prepayment speed assumptions as borrowers refinance their existing mortgage loans. Under generally accepted accounting principles (GAAP), impairment to the Company's servicing rights, due to a decrease in long-term rates or other reasons, would be reflected as a charge to earnings. The Company mitigates this risk in two ways. First, a substantial portion of the mortgage servicing rights asset is hedged with derivative contracts. The principal source of risk in this hedging process is the risk that changes in the value of the hedging contracts may not match changes in the value of the hedged portion of the mortgage servicing rights for any given change in long-term interest rates. Second, a portion of the potential reduction in the value of the mortgage servicing rights asset for a given decline in interest rates is offset by estimated increases in origination and servicing fees over a twelve month period from new mortgage activity or refinancing associated with that decline in interest rates. In a scenario of much lower long-term interest rates, the decline in the value of the mortgage servicing rights and its impact on net income would be immediate whereas the additional fee income accrues over time. Net of impairment reserves, the capitalized mortgage servicing rights asset is valued at

43


.89% of the total servicing portfolio at September 30, 2002, down from 1.33% of the servicing portfolio at September 30, 2001.

MARKET RISK—TRADING ACTIVITIES

        The Company incurs interest rate risk, foreign exchange risk and commodity price risk in several trading businesses managed under limits set by Corporate ALCO. The primary purpose of these businesses is to accommodate customers in the management of their market price risks. All securities, loans, foreign exchange transactions, commodity transactions and derivatives transacted with customers or used to hedge capital market transactions done with customers are carried at fair value. Counterparty risk limits are established and monitored by the Institutional Risk Committee. Open "at risk" positions for all trading business are monitored by Corporate ALCO.

MARKET RISK—EQUITY MARKETS

        Equity markets impact the Company in both direct and indirect ways. For more information, see "Asset/Liability and Market Risk Management—Market Risk—Equity Markets" in the Company's 2001 Annual Report on Form 10-K. The Company makes and manages direct equity investments in start up businesses, emerging growth companies, management buy-outs, acquisitions and corporate recapitalizations. The Company also invests in non-affiliated funds that make similar private equity investments. These private equity investments are made within capital allocations approved by the Company's management and its Board of Directors. Management reviews these investments at least quarterly and assesses for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment's cash flows and capital needs, the viability of its business model and the Company's exit strategy. Private equity investments totaled $1,651 million at September 30, 2002 and $1,696 million at December 31, 2001.

        The Company has marketable equity securities in its securities available for sale investment portfolio, including shares distributed from the Company's venture capital activities. These securities are managed within capital risk limits approved by management and the Board of Directors and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net income when realized and, in addition, these securities are assessed for other-than-temporary impairment periodically. At September 30, 2002, the cost of marketable equity securities was $578 million and fair market value was $479 million, compared with $815 million and $991 million, respectively, at December 31, 2001.

        The Company regularly assesses its private equity investments and marketable equity securities portfolios for other-than-temporary impairment. The Company recognizes losses to the extent it determines that such impairment exists.

44



LIQUIDITY AND FUNDING

        The objective of effective liquidity management is to ensure that the Company can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions as well as under unforeseen and unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines requiring sufficient asset based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. The Company sets liquidity management guidelines for both the consolidated balance sheet as well as for the Parent specifically to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.

        In addition to the immediately liquid resources of cash and due from banks and federal funds sold and securities purchased under resale agreements, asset liquidity is provided by the debt securities in the securities available for sale portfolio. Asset liquidity is further enhanced by the Company's ability to sell or securitize loans in secondary markets through whole-loan sales and securitizations.

        Core customer deposits have historically provided the Company with a sizeable source of relatively stable and low-cost funds.

        The remaining funding of assets is mostly provided by long-term debt, deposits in foreign offices, other time deposits, short-term borrowings (federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Liquidity for the Company is also available through the Company's ability to raise funds in a variety of domestic and international money and capital markets.

        Parent.    The Parent has registered with the Securities and Exchange Commission (SEC) to issue a variety of securities, including senior and subordinated notes and preferred and common securities to be issued by one or more trusts that are directly or indirectly owned by the Company and consolidated in the financial statements. During the quarter and nine months ended September 30, 2002, the Parent issued a total of $2.8 billion and $5.8 billion, respectively, of senior and subordinated notes and trust preferred securities leaving unused issuance capacity of $10.3 billion at September 30, 2002. In October and November 2002, the Parent issued a total of $950 million in senior and subordinated notes. The Company used the proceeds from securities issued in 2002 for general corporate purposes and expects that it will use the proceeds from the issuance of any securities in the future for general corporate purposes as well. The Parent also issues commercial paper and has two back-up credit facilities amounting to $2 billion.

        Bank Note Program.    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 as private placements in accordance with OCC regulations. During the quarter and nine months ended September 30, 2002, Wells Fargo Bank, N.A. issued $500 million and $3.5 billion, respectively, in long-term notes. At September 30, 2002, the remaining issuance authority under the long-term portion was $4.9 billion.

45


        Wells Fargo Financial.    For the quarter and nine months ended September 30, 2002, Wells Fargo Financial, Inc. (WFFI) issued $700 million and $2.1 billion, respectively, of senior notes leaving at September 30, 2002 a total of $1.6 billion available for issuance. On October 22, 2002, WFFI announced that it will no longer issue term debt securities. For the third quarter and nine months ended September 30, 2002, WFFI's wholly owned Canadian subsidiary, Wells Fargo Financial Canada Corporation (WFFC) issued $200 million (Canadian) and $350 million (Canadian), respectively, in senior notes, leaving at September 30, 2002 a total of $950 million (Canadian) available for issuance.

        On October 22, 2002, the Parent issued a full and unconditional guarantee of all outstanding term debt securities and commercial paper of WFFI. Subject to receiving required consents and approvals, WFFI will cease filing periodic reports under the Securities Exchange Act of 1934 and will no longer be a separately rated company. The Parent has also guaranteed all outstanding commercial paper of WFFC and subject to receiving required consents and approvals, intends to substitute its guarantee for the guarantee of WFFI with respect to the outstanding term debt of WFFC. WFFC expects to continue to issue term debt and commercial paper in Canada, fully guaranteed by the Parent.

CAPITAL MANAGEMENT

        The Company has an active program for managing stockholder capital. The objective of effective capital management is to produce above market long-term returns by opportunistically utilizing capital when returns are perceived to be high and issuing/accumulating capital when the cost of doing so is perceived to be low.

        The Company uses capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase its shares. During the first nine months of 2002, the Company's consolidated assets increased by $26.68 billion, or 9%. During that same period, the Company paid cash dividends of $1.40 billion and used $1.20 billion to repurchase 25.2 million shares of its common stock. At September 30, 2002, the Company had authority to repurchase approximately 75 million shares.

        The Company's potential sources of capital include retained earnings, common and preferred stock issuance, issuance of subordinated debt and the placement of trust preferred securities. In the first nine months of 2002, net income was $3.97 billion and the change in retained earnings was $2.44 billion after payment of $1.40 billion in common stock dividends. During that same period, the Company issued a total of $481 million in common stock for various employee stock plans and issued term debt and trust preferred securities for a total of $11.70 billion.

46


FACTORS THAT MAY AFFECT FUTURE RESULTS

        We make forward-looking statements in this report and from time to time in other reports and proxy statements we file with the SEC. Also, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include:

        In this report, for example, we make forward-looking statements about:

        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 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, "Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis" and "—Asset/Liability and Market Risk Management"). Factors relating to the regulation and supervision of the Company are described in our Annual Report on Form 10-K for the year ended December 31, 2001. When we refer to our Form 10-K, we refer not only to the information included directly in that report but also to information incorporated by reference into that report from other documents including our 2001 Annual Report to Stockholders. Information incorporated into the Form 10-K from our 2001 Annual Report to Stockholders is filed as Exhibit 13 to the Form 10-K.

        Any factor described in this report or in our 2001 Form 10-K could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial

47


condition. There are factors not described in this report or in our Form 10-K that could cause results to differ from our expectations.

Industry Factors

As a financial services company, our earnings are significantly affected by business and economic conditions.

        Our earnings are impacted by 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. Business and economic conditions that negatively impact household or corporate incomes could decrease the demand for the Company's products and increase the number of customers who fail to pay their loans.

        Political conditions can also impact our earnings. Acts or threats of terrorism, and/or actions taken by the U.S. or other governments in response to acts or threats of terrorism, could impact business and economic conditions in the U.S. and abroad. Last year's terrorist attacks, for example, caused an immediate decrease in demand for air travel, which adversely affected not only the airline industry but also other travel-related and leisure industries, such as lodging, gaming and tourism.

        We discuss other business and economic conditions in more detail elsewhere in this report.

Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.

        The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights. Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and hard to predict or anticipate.

The financial services industry is highly competitive.

        We operate in a highly competitive industry which could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can now merge by creating a new type of financial services company called a "financial holding company," which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the United States, further increasing competition in the U.S. market. Also, 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

48


automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

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 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 Annual Report on Form 10-K for the year ended December 31, 2001 and to Notes 3 (Cash, Loan and Dividend Restrictions) and 22 (Risk-Based Capital) to Financial Statements included in the 2001 Annual Report to Stockholders and incorporated by reference into the Form 10-K.

Future legislation could change our competitive position.

        Various legislation, including proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced in the Congress. This legislation may change banking statutes and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.

We depend on the accuracy and completeness of information about customers and counterparties.

        In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit, we may assume that a customer's audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on the audit report covering those financial statements. Our financial condition and results of operations

49


could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or that are materially misleading.

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. 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. Also, 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 Annual Report on Form 10-K for the year ended December 31, 2001.

50


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. We discuss some examples below.

        Merchant Banking.    Our merchant banking activities including venture capital investments have a much greater risk of capital losses than our traditional banking activities. Also, it is difficult to predict the timing of any gains from these activities. Realization of gains from our venture capital investments depends on a number of factors—many beyond our control—including general economic conditions, the prospects of the companies in which we invest, when these companies go public, the size of our position relative to the public float, and whether we are subject to any resale restrictions. Factors such as a slowdown in consumer demand or a deterioration in capital spending on technology and telecommunications equipment, could result in declines in the values of our publicly traded and private equity securities. If we determine that the declines are other-than-temporary, we will recognize impairment charges. Also, we will realize losses to the extent we sell securities at less than book value. For more information, see in this report "Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Securities Available for Sale."

        Mortgage Banking.    The impact of interest rates on our mortgage banking business can be large and complex. Changes in interest rates can impact loan origination fees and loan servicing fees, which account for a significant portion of mortgage-related revenues. A decline in mortgage rates might be expected to increase the demand for mortgage loans as borrowers refinance, but could also lead to accelerated payoffs in our mortgage servicing portfolio. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and a decline in payoffs in our servicing portfolio. While the Company uses dynamic and sophisticated models to assess the impact of interest rates on mortgage fees, amortization of mortgage servicing rights, and the value of mortgage servicing rights assets, the estimates of net income and fair value produced by these models are dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may overstate or understate actual subsequent experience. For more information, see in this report "Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Asset/Liability and Market Risk Management."

We rely on other companies to provide key components of our business infrastructure.

        Third parties provide key components of our business infrastructure such as internet connections and network access. Any disruption in internet, network access or other voice or data communication services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Technological or financial difficulties of a third party service provider could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party.

51


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. As a matter of policy, we generally 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 regulatory approval, and we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We might be required to divest banks or branches as a condition to receiving regulatory approval.

        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 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.

Legislative Risk

        Our business model is dependent on sharing information between the family of companies owned by Wells Fargo to better satisfy our customers' needs. Laws that restrict the ability of our companies to share information about customers could negatively impact our revenue and earnings.

Our stock price can be volatile.

        Our stock price can fluctuate widely in response to a variety of factors including:

        General market fluctuations, industry factors and general economic and political conditions and events, such as future terrorist attacks and activities, economic slowdowns or recessions, interest

52


rate changes, credit loss trends or currency fluctuations, also could cause our stock price to decrease regardless of our operating results.

CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

        As required by SEC rules, within the 90-day period prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. The Company's management, including the Company's chief executive officer and chief financial officer, supervised and participated in the evaluation. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective as of the evaluation date.

CHANGES IN INTERNAL CONTROLS

        There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

53



PART II—OTHER INFORMATION


Item 2. Changes in Securities and Use of Proceeds

        The Company and Mellon Investor Services LLC, as rights agent, entered into an Amendment to Rights Agreement, dated as of August 12, 2002, amending the Rights Agreement, dated as of October 21, 1998, between the Company and the rights agent to cause the preferred share purchase rights issued pursuant to the Rights Agreement, referred to in Note 12 (Common Stock and Stock Plans) to the audited consolidated financial statements of the Company included in the Company's 2001 Annual Report on Form 10-K, to expire as of the close of business on August 12, 2002 instead of the close of business on November 23, 2008. On October 16, 2002, the Company filed a Certificate Eliminating the Certificate of Designations for the Company's Series C Junior Participating Preferred Stock.


Item 6. Exhibits and Reports on Form 8-K


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

 

 

 

54



3(e)

 

Certificate Eliminating the Certificate of Designations for the Company's Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the Company's Current Report on Form 8-K dated November 1, 1995

(f)

 

Certificate Eliminating the Certificate of Designations for the Company's 10.24% Cumulative Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 20, 1996

(g)

 

Certificate of Designations for the Company's 1996 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 26, 1996

(h)

 

Certificate of Designations for the Company's 1997 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 14, 1997

(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 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

(l)

 

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

(m)

 

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

(n)

 

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

 

 

 

55



3(o)

 

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

(p)

 

Certificate of Designations for the Company's 2002 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated April 16, 2002

(q)

 

Certificate Eliminating the Certificate of Designations for the Company's Series C Junior Participating Preferred Stock, filed herewith

(r)

 

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(r)

(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)

 

Amendment to Rights Agreement, dated as of August 12, 2002, between the Company and Mellon Investor Services LLC (formerly known as ChaseMellon Shareholder Services, L.L.C.), as Rights Agent, incorporated by reference to Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002

(d)

 

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)

 

Supplemental 401(k) Plan, as amended through January 1, 2002, filed herewith

(b)

 

Amendment to Supplemental Cash Balance Plan, filed herewith

(c)

 

Amendment to PartnerShares Stock Option Plan, filed herewith

(d)

 

Agreement dated July 26, 2002 between the Company and Richard D. Levy, including a description of his executive transfer bonus, filed herewith

 

 

 

 

 

 

56



99(a)

 

Computation of Ratios of Earnings to Fixed Charges—the ratios of earnings to fixed charges, including interest on deposits, were 3.14 and 2.12 for the quarters ended September 30, 2002 and 2001, respectively, and 3.09 and 1.64 for the nine months ended September 30, 2002 and 2001, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 4.97 and 3.29 for the quarters ended September 30, 2002 and 2001, respectively, and 4.89 and 2.36 for the nine months ended September 30, 2002 and 2001, respectively.

99(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 3.13 and 2.11 for the quarters ended September 30, 2002 and 2001, respectively, and 3.08 and 1.64 for the nine months ended September 30, 2002 and 2001, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 4.95 and 3.26 for the quarters ended September 30, 2002 and 2001, respectively, and 4.88 and 2.34 for the nine months ended September 30, 2002 and 2001, respectively.

(c)

 

Certification of Periodic Financial Report by Chief Executive Officer Pursuant to 18 U.S.C. § 1350

(d)

 

Certification of Periodic Financial Report by Chief Financial Officer Pursuant to 18 U.S.C. § 1350

57



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: November 7, 2002   WELLS FARGO & COMPANY

 

 

By:

/s/  
RICHARD D. LEVY          
Richard D. Levy
Senior Vice President and Controller
(Principal Accounting Officer)

58



CERTIFICATIONS

I, Richard M. Kovacevich, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Wells Fargo & Company;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 7, 2002    
    /s/  RICHARD M. KOVACEVICH      
Richard M. Kovacevich
Chairman, President and
Chief Executive Officer

59


I, Howard I. Atkins, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Wells Fargo & Company;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 7, 2002    
    /s/  HOWARD I. ATKINS      
Howard I. Atkins
Executive Vice President and
Chief Financial Officer

60




QuickLinks

FORM 10-Q TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
PART II—OTHER INFORMATION
SIGNATURE
CERTIFICATIONS