-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MFb/Ol29ACYAtyBl2c1YZjpmwI/9O83D4PrY0hKfTGrLiWlc8ixpR4WsX5UDBq5g oSlhAi0r7q82SCuf0Exlyg== 0000912057-02-010174.txt : 20020415 0000912057-02-010174.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-010174 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FARGO & CO/MN CENTRAL INDEX KEY: 0000072971 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410449260 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02979 FILM NUMBER: 02576813 BUSINESS ADDRESS: STREET 1: 420 MONTGOMERY ST STREET 2: SIXTH AND MARQUETTE CITY: SAN FRANCISCO STATE: CA ZIP: 94163 BUSINESS PHONE: 6126671234 MAIL ADDRESS: STREET 1: WELLS FARAGO CENTER STREET 2: SIXTH & MARQUETTE CITY: MINNEAPOLIS STATE: MN ZIP: 55479 FORMER COMPANY: FORMER CONFORMED NAME: NORWEST CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST BANCORPORATION DATE OF NAME CHANGE: 19830516 10-K 1 a2072635z10-k.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File Number 001-2979 WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware No. 41-0449260 (State of incorporation) (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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, par value $1-2/3 New York Stock Exchange Chicago Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Chicago Stock Exchange 6-3/4% Convertible Subordinated Debentures Due 2003 New York Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series B New York Stock Exchange No securities are registered pursuant to Section 12(g) of the Act. 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 28, 2002, 1,706,170,079 shares of common stock were outstanding having an aggregate market value, based on a closing price of $46.90 per share, of $80,019 million. At that date, the aggregate market value of common stock held by non-affiliates was approximately $78,322 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 2001 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV of this Form 10-K, and portions of the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The cross-reference index on the following page identifies by page numbers the portions of each document that are incorporated by reference into this Form 10-K. Only those portions identified in the cross-reference index are incorporated into this Form 10-K. FORM 10-K CROSS-REFERENCE INDEX
Page(s) ------------------------------------------------- FORM Annual Proxy 10-K Report (1) Statement (2) ----- ------- --------- PART I Item 1. Business Description of Business 2-9 33-98 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 10 40-43 -- Investment Portfolio -- 44, 58, 64-65 -- Loan Portfolio 11-12 45, 47-48, 58-59, 66-68 -- Summary of Loan Loss Experience 13-15 47-48, 59, 68 -- Deposits -- 45, 70 -- Return on Equity and Assets -- 34-35 -- Short-Term Borrowings -- 70 -- Derivative Financial Instruments -- 60-61, 91-93 -- Item 2. Properties 16 69 -- Item 3. Legal Proceedings -- 90 -- Item 4. Submission of Matters to a Vote of Security Holders (3) -- -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- 53 -- Item 6. Selected Financial Data -- 36 -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- 34-53 -- Item 7A. Quantitative and Qualitative Disclosures About Market Risk -- 49-50 -- Item 8. Financial Statements and Supplementary Data -- 54-98 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant 17-20 -- 6-9, 35, 36 Item 11. Executive Compensation -- -- 13-31, 35, 36 Item 12. Security Ownership of Certain Beneficial Owners and Management -- -- 4-5 Item 13. Certain Relationships and Related Transactions -- -- 14-15, 32-35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21-27 54-98 -- SIGNATURES 28 -- -- - ------------------------------------------------------------------------------------------------------------------------
(1) The information required to be submitted in response to these items is incorporated by reference to the identified portions of the Company's 2001 Annual Report to Stockholders. Pages 33 through 98 of the 2001 Annual Report to Stockholders have been filed as Exhibit 13 to this Form 10-K. (2) The information required to be submitted in response to these items is incorporated by reference to the identified portions of the Company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders to be held on April 23, 2002, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. (3) Not applicable. 1 DESCRIPTION OF BUSINESS GENERAL Wells Fargo & Company is a diversified financial services company organized under the laws of Delaware and registered as a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended (BHC Act). Based on assets at December 31, 2001, it was the fifth largest bank holding company in the United States. In this report, Wells Fargo & Company and Subsidiaries (consolidated) is referred to as the Company and Wells Fargo & Company alone is referred to as the Parent. The Parent's subsidiaries engage in banking and a variety of related financial services businesses. Retail, commercial and corporate banking services are provided through bank subsidiaries located in Alaska, Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin and Wyoming. Other financial services are provided by subsidiaries engaged in various businesses, principally: wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency services, computer and data processing services, trust services, mortgage-backed securities servicing and venture capital investment. On October 25, 2000, the Company completed its merger with First Security Corporation (the FSCO Merger), with First Security Corporation surviving the merger as a wholly-owned subsidiary of the Parent. The Company accounted for the FSCO Merger under the pooling-of-interests method of accounting. Accordingly, the information included in this report, including the Financial Statements and Supplementary Data, and Management's Discussion and Analysis of Financial Condition and Results of Operations, presents the combined results as if the merger had been in effect for all periods presented. The Company has three operating segments for management reporting purposes: Community Banking, Wholesale Banking and Wells Fargo Financial. The 2001 Annual Report to Stockholders includes financial information and descriptions of these operating segments. The Company had 119,714 full-time equivalent team members at December 31, 2001. HISTORY AND GROWTH The Company is the product of the merger of equals involving Norwest Corporation and the former Wells Fargo & Company, completed on November 2, 1998 (the WFC Merger). On completion of the WFC Merger, Norwest Corporation changed its name to Wells Fargo & Company. Norwest Corporation, prior to the WFC Merger, provided banking services to customers in 16 states and additional financial services through subsidiaries engaged in a variety of businesses including mortgage banking and consumer finance. The former Wells Fargo & Company's principal subsidiary, Wells Fargo Bank, N.A., was the successor to the banking portion of the business founded by Henry Wells and William G. Fargo in 1852. That business later operated the westernmost leg of the Pony Express and ran stagecoach lines in the western part of the United States. The California banking business was separated from the express business in 1905, was merged in 1960 with American Trust Company, another of the 2 oldest banks in the Western United States, and became Wells Fargo Bank, N.A., a national banking association, in 1968. The former Wells Fargo & Company acquired First Interstate Bancorp in April 1996. First Interstate's assets had an approximate book value of $55 billion. The transaction was valued at approximately $11.3 billion and was accounted for as a purchase. The Company expands its business, in part, by acquiring banking institutions and other companies engaged in activities that are financial in nature. The Company continues to explore opportunities to acquire banking institutions and other financial services companies. Discussions are continually being carried on related to such possible acquisitions. The Company cannot predict whether, or on what terms, such discussions will result in further acquisitions. As a matter of policy, the Company generally does not comment on such discussions or possible acquisitions until a definitive acquisition agreement has been signed. COMPETITION The financial services industry is highly competitive. The Company's subsidiaries compete with financial services providers, such as banks, savings and loan associations, credit unions, finance companies, mortgage banking companies, insurance companies, and money market and mutual fund companies. They also face increased competition from nonbank institutions such as brokerage houses and insurance companies, as well as from financial services subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy the benefits of fewer regulatory constraints and some have lower cost structures. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. Acquisitions of this type could significantly change the competitive environment in which the Company conducts business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. REGULATION AND SUPERVISION The following discussion, together with Notes 3 (Cash, Loan and Dividend Restrictions) and 22 (Risk-Based Capital) to Financial Statements included in the 2001 Annual Report to Stockholders sets forth the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain information specific to the Company. This regulatory framework is intended to protect depositors, federal deposit insurance funds and the banking system as a whole, and not to protect security holders. To the extent that the information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. Further, such statutes, regulations and policies are continually under review by Congress and state legislatures, and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company, including changes in interpretation or implementation thereof, could have a material effect on the Company's business. Applicable laws and regulations could restrict the Company's ability to diversify into other areas of financial services, acquire depository institutions, and pay dividends on the Company's capital stock. They could also require the Company to provide financial support to one or more of its 3 subsidiary banks, maintain capital balances in excess of those desired by management, and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of depository institutions. GENERAL PARENT BANK HOLDING COMPANY. As a bank holding company, the Company is subject to regulation under the BHC Act and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (Federal Reserve Board or FRB). SUBSIDIARY BANKS. The Company's national subsidiary banks are subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC) and secondarily by the Federal Deposit Insurance Corporation (FDIC) and the FRB. The Company's state-chartered banks are subject to primary federal regulation and examination by the FDIC or the FRB and, in addition, are regulated and examined by their respective state banking departments. NONBANK SUBSIDIARIES. Many of the Company's nonbank subsidiaries are also subject to regulation by the FRB and other applicable federal and state agencies. The Company's brokerage subsidiaries are regulated by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. and state securities regulators. The Company's insurance subsidiaries are subject to regulation by applicable state insurance regulatory agencies. Other nonbank subsidiaries of the Company are subject to the laws and regulations of both the federal government and the various states in which they conduct business. 4 PARENT BANK HOLDING COMPANY ACTIVITIES "FINANCIAL IN NATURE" REQUIREMENT. As a bank holding company that has elected to become a financial holding company pursuant to the BHC Act, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "Financial in nature" activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the FRB, in consultation with the Secretary of the Treasury, determines from time to time to be financial in nature or incidental to such financial activity or is complementary to a financial activity and does not pose a safety and soundness risk. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Federal Reserve Board approval is not required for the Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Prior FRB approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. If any subsidiary bank of the Company ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the FRB may, among other actions, order the Company to divest the subsidiary bank. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of 1977 of less than satisfactory, the Company will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Company became a financial holding company effective March 13, 2000. It continues to maintain its status as a bank holding company for purposes of other FRB regulations. INTERSTATE BANKING. Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal Act), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company's initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish DE NOVO branches in other states where authorized under the laws of those states. REGULATORY APPROVAL. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the 5 public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution's record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act of 1977, as amended. DIVIDEND RESTRICTIONS The Parent is a legal entity separate and distinct from its subsidiary banks and other subsidiaries. Its principal source of funds to pay dividends on its common and preferred stock and principal and interest on its debt is dividends from its subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends the Parent's subsidiary banks and certain other subsidiaries may pay without regulatory approval. For information about the restrictions applicable to the Parent's subsidiary banks, see Note 3 (Cash, Loan and Dividend Restrictions) to Financial Statements included in the 2001 Annual Report to Stockholders. Federal bank regulatory agencies have the authority to prohibit the Parent's subsidiary banks from engaging in unsafe or unsound practices in conducting their businesses. The payment of dividends, depending on the financial condition of the bank in question, could be deemed an unsafe or unsound practice. The ability of the Parent's subsidiary banks to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. HOLDING COMPANY STRUCTURE TRANSFER OF FUNDS FROM SUBSIDIARY BANKS. The Parent's subsidiary banks are subject to restrictions under federal law that limit the transfer of funds or other items of value from such subsidiaries to the Parent and its nonbank subsidiaries (including affiliates) in so-called "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10% of the subsidiary bank's capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20% of the subsidiary bank's capital and surplus. Also, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. A bank's transactions with its nonbank affiliates are also generally required to be on arm's length terms. SOURCE OF STRENGTH. The FRB has a policy that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide the support. The OCC may order the assessment of the Parent if the capital of one of its national bank subsidiaries were to become impaired. If the Parent failed to pay the assessment within three months, the OCC could order the sale of the Parent's stock in the national bank to cover the deficiency. Capital loans by the Parent to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank. In addition, in the event of the Parent's bankruptcy, any commitment by the Parent to a federal bank regulatory agency to maintain 6 the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. DEPOSITOR PREFERENCE. The Federal Deposit Insurance Act (FDI Act) provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the Parent, with respect to any extensions of credit they have made to such insured depository institution. LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. All of the Parent's banks are insured by the FDIC. FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, and for any assistance provided by the FDIC to an FDIC-insured depository institution that is in danger of default and that is controlled by the same bank holding company. "Default" means generally the appointment of a conservator or receiver. "In danger of default" means generally the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. CAPITAL REQUIREMENTS The Parent is subject to risk-based capital requirements and guidelines imposed by the FRB, which are substantially similar to the capital requirements and guidelines imposed by the FRB, the OCC and the FDIC on depository institutions under their jurisdictions. For information about these capital requirements and guidelines, see Note 22 (Risk-Based Capital) to Financial Statements included in the 2001 Annual Report to Stockholders. The FRB may set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Also, the FRB considers a "tangible Tier 1 leverage ratio" (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or new activities. Effective April 1, 2002, new FRB rules will govern the regulatory treatment of merchant banking investments and certain other equity investments, including investments made by the Company's venture capital subsidiaries, in non-financial companies held by bank holding companies. The rules generally impose a capital charge that increases incrementally as the banking organization's level of concentration in equity investments increases. An 8% Tier 1 capital deduction would apply on covered investments that in total represent up to 15% of an organization's Tier 1 capital. For covered investments that total more than 25% of the organization's Tier 1 capital, a top marginal charge of 25% would be established. The Company does not expect the new rules to have a significant impact on the Company. FRB, FDIC and OCC rules also require the Company to incorporate market and interest rate risk components into their risk-based capital standards. Under the market risk requirements, capital is allocated to support the amount of market risk related to a financial institution's ongoing trading activities. 7 In December 2001, the Basel Committee on Banking Supervision updated the status of the revised draft Basel Capital Accord issued earlier in 2001. The Basel Committee continues to evaluate certain aspects of the draft Accord and expects to issue a new consultative package during 2002. The draft Basel Accord incorporates three pillars that address (a) minimum capital requirements, (b) supervisory review, which relates to an institution's capital adequacy and internal assessment process, and (c) market discipline, through effective disclosure to encourage safe and sound banking practices. Embodied within these pillars are aspects of risk assessment that relate to credit risk, interest rate risk, operational risk, among others, and certain proposed approaches by the Basel Committee to complete such assessments may be considered complex. The Company continues to monitor the status of the Basel Accord, which may be finalized by the end of 2002, with required implementation of the new framework not anticipated prior to 2005. From time to time, the FRB and the Federal Financial Institutions Examination Council (FFIEC) propose changes and amendments to, and issue interpretations of, risk based capital guidelines and related reporting instructions. Such proposals or interpretations could, if implemented in the future, affect the Company's reported capital ratios and net risk-adjusted assets. As an additional means to identify problems in the financial management of depository institutions, the FDI Act requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards. The FDI Act requires federal bank regulatory agencies to take "prompt corrective action" with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various capital measures and certain other factors, as established by regulation. DEPOSIT INSURANCE ASSESSMENTS Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of the Parent's depository institution subsidiaries up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution's capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The BIF assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The BIF assessment rate for the Parent's depository institutions currently is zero. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate could have a material adverse effect on the Parent's earnings, depending on the amount of the increase. The FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable 8 rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of deposit insurance for one or more of the Parent's subsidiary depository institutions could have a material adverse effect on the Parent's earnings, depending on the collective size of the particular institutions involved. All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-insured depository institutions paid approximately 1.9 cents per $100 of BIF-assessable deposits in 2001. The FDIC established the FICO assessment rate effective for the first quarter of 2002 at approximately 1.8 cents annually per $100 of BIF-assessable deposits. FISCAL AND MONETARY POLICIES The Company's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions' deposits, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the Company's business, results of operations and financial condition. PRIVACY PROVISIONS OF THE GRAMM-LEACH-BLILEY ACT Federal banking regulators, as required under the Gramm-Leach-Bliley Act (the GLB Act), have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. FUTURE LEGISLATION Various legislation, including proposals to change substantially the financial institution regulatory system, is from time to time introduced in Congress. This legislation may change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, this 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. The Company 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 Company's business, results of operations or financial condition. 9 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------------- 2001 OVER 2000 2000 over 1999 ---------------------------- -------------------------- (in millions) VOLUME RATE TOTAL Volume Rate Total - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Federal funds sold and securities purchased under resale agreements $ 12 $ (60) $ (48) $ 40 $ 17 $ 57 Debt securities available for sale: Securities of U.S. Treasury and federal agencies (84) 11 (73) (173) 35 (138) Securities of U.S. states and political subdivisions (8) -- (8) (2) (4) (6) Mortgage-backed securities: Federal agencies 28 (14) 14 187 117 304 Private collateralized mortgage obligations (57) 18 (39) (114) 31 (83) Other securities (7) -- (7) 46 6 52 Mortgages held for sale 883 (137) 746 (213) 111 (102) Loans held for sale (8) (93) (101) (18) 59 41 Loans: Commercial 295 (662) (367) 588 305 893 Real estate 1-4 family first mortgage 250 (134) 116 241 23 264 Other real estate mortgage 145 (234) (89) 330 48 378 Real estate construction 104 (145) (41) 167 25 192 Consumer: Real estate 1-4 family junior lien mortgage 566 (196) 370 377 57 434 Credit card 56 (74) (18) 26 47 73 Other revolving credit and monthly payment 191 (148) 43 271 36 307 Lease financing 8 1 9 74 (13) 61 Foreign (4) (6) (10) 14 8 22 Other 44 (52) (8) (2) 39 37 ------ ------- ------ ------ ------ ------- Total increase (decrease) in interest income 2,414 (1,925) 489 1,839 947 2,786 ------ ------- ------ ------ ------ ------- Increase (decrease) in interest expense: Deposits: Interest-bearing checking (27) 18 (9) 3 30 33 Market rate and other savings 415 (546) (131) 64 323 387 Savings certificates (14) (72) (86) 1 153 154 Other time deposits (160) (26) (186) 25 32 57 Deposits in foreign offices 16 (140) (124) 260 31 291 Short-term borrowings 306 (791) (485) 319 312 631 Long-term debt 332 (445) (113) 276 210 486 Guaranteed preferred beneficial interests in Company's subordinated debentures 31 (16) 15 -- 2 2 ------ ------- ------ ------ ------ ------- Total increase (decrease) in interest expense 899 (2,018) (1,119) 948 1,093 2,041 ------ ------- ------ ------ ------ ------- Increase (decrease) in net interest income on a taxable-equivalent basis $1,515 $ 93 $1,608 $ 891 $ (146) $ 745 ====== ======= ====== ====== ====== ======= - --------------------------------------------------------------------------------------------------------------------------
10 LOAN PORTFOLIO The following table presents the remaining contractual principal maturities of selected loan categories at December 31, 2001 and a summary of the major categories of loans outstanding at the end of the last five years. At December 31, 2001, the Company did not have loan concentrations that exceeded 10% of total loans, except as shown below.
- ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 ----------------------------------------------------------------- OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS -------------------- -------------------- FLOATING FLOATING OR OR December 31, ONE YEAR FIXED ADJUSTABLE FIXED ADJUSTABLE ----------------------------------------- (in millions) OR LESS RATE RATE RATE RATE TOTAL 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Selected loan maturities: Commercial $15,379 $11,377 $18,220 $ 487 $ 2,084 $ 47,547 $ 50,518 $ 41,671 $ 38,218 $ 34,368 Real estate 1-4 family first mortgage 428 1,039 95 12,323 11,703 25,588 18,464 13,506 12,613 15,220 Other real estate mortgage 4,590 11,006 373 4,475 4,364 24,808 23,972 20,899 18,033 17,587 Real estate construction 3,199 2,517 1,560 395 135 7,806 7,715 6,067 4,529 3,941 Foreign 274 1,097 -- 213 14 1,598 1,624 1,600 1,528 1,155 ------- ------- ------- ------- ------- -------- -------- -------- -------- -------- Total selected loan maturities $23,870 $27,036 $20,248 $17,893 $18,300 107,347 102,293 83,743 74,921 72,271 ======= ======= ======= ======= ======= -------- -------- -------- -------- -------- Other loan categories: Consumer: Real estate 1-4 family junior lien mortgage 25,530 18,218 12,949 11,135 10,622 Credit card 6,700 6,616 5,805 6,119 6,989 Other revolving credit and monthly payment 23,502 23,974 20,617 19,441 20,255 -------- -------- -------- -------- -------- Total consumer 55,732 48,808 39,371 36,695 37,866 Lease financing 9,420 10,023 9,890 8,046 6,298 -------- -------- -------- -------- -------- Total loans $172,499 $161,124 $133,004 $119,662 $116,435 ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------------------
The table at the top of the following page summarizes other real estate mortgage loans by state and property type. The table at the bottom of the following page summarizes real estate construction loans by state and project type. 11 REAL ESTATE MORTGAGE LOANS BY STATE AND PROPERTY TYPE (excluding 1-4 family first mortgages)
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 ---------------------------------------------------------------------------------------------------------------- Other Non- California Texas Colorado Minnesota states (2) All states accruals --------------- --------------- -------------- -------------- --------------- ---------------- as a % Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- of total (in millions) Loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual by type - ----------------------------------------------------------------------------------------------------------------------------------- Office buildings $3,147 $ 5 $ 630 $ 5 $ 252 $-- $ 146 $-- $ 2,724 $ 14 $ 6,899 $ 24 --% Industrial 2,347 10 274 7 208 -- 285 3 1,264 7 4,378 27 1 Retail buildings 1,516 3 345 8 253 1 251 3 1,891 34 4,256 49 1 Hotels/motels 417 1 287 -- 57 -- 50 -- 1,446 17 2,257 18 1 Apartments 715 1 201 -- 86 -- 79 -- 735 1 1,816 2 -- Agricultural 397 4 77 -- 29 -- 91 3 585 36 1,179 43 4 Land 381 1 202 -- 59 1 51 -- 427 3 1,120 5 -- Institutional 222 11 45 4 15 -- 5 -- 204 9 491 24 5 1-4 family structures (1) 42 -- 8 -- 12 -- 7 -- 93 -- 162 -- -- Other 727 9 278 3 150 -- 134 1 961 5 2,250 18 1 ------ --- ------ --- ------ --- ------ --- ------- ---- -------- ---- Total by state $9,911 $45 $2,347 $27 $1,121 $ 2 $1,099 $10 $10,330 $126 $24,808 $210 1% ====== === ====== === ====== === ====== === ======= ==== ======= ==== == % of total loans 40% 9% 5% 4% 42% 100% ====== ====== ====== ====== ======= ======= Nonaccruals as a % of total by state --% 1% --% 1% 1% === === === === === - -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents loans to real estate developers secured by 1-4 family residential developments. (2) Consists of 46 states; no state had loans in excess of $1,071 million at December 31, 2001. REAL ESTATE CONSTRUCTION LOANS BY STATE AND PROPERTY TYPE
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 ---------------------------------------------------------------------------------------------------------------- Other Non- California Texas Arizona Colorado states (1) All states accruals --------------- --------------- -------------- -------------- --------------- ---------------- as a % Total Non- Total Non- Total Non- Total Non- Total Non- Total Non- of total (in millions) Loans accrual loans accrual loans accrual loans accrual loans accrual loans accrual by type - ----------------------------------------------------------------------------------------------------------------------------------- Retail buildings $ 263 $-- $ 42 $-- $206 $ -- $ 35 $-- $ 455 $ -- $1,001 $ -- --% 1-4 family: Land 133 -- 24 -- 1 -- 33 -- 120 -- 311 -- -- Structures 177 -- 223 1 120 3 196 -- 1,326 83 2,042 87 4 Land (excluding 1-4 family) 442 -- 70 1 64 -- 60 -- 534 -- 1,170 1 -- Apartments 198 -- 36 -- 26 -- 17 -- 345 50 622 50 8 Office buildings 415 -- 102 -- 66 -- 122 -- 612 -- 1,317 -- -- Industrial 158 -- 97 1 44 -- 32 -- 185 -- 516 1 -- Hotels/motels 85 -- 14 -- 15 -- 10 -- 111 1 235 1 -- Institutional 41 -- 11 -- 4 -- 5 -- 69 -- 130 -- -- Agricultural 15 -- 1 -- -- -- 1 -- 8 -- 25 -- -- Other 20 -- 65 1 17 -- 30 -- 305 4 437 5 1 ------ --- ---- ---- ---- --- ----- --- ------ ---- ------- ---- Total by state $1,947 $-- $685 $ 4 $563 $ 3 $541 $-- $4,070 $138 $7,806 $145 2% ====== === ==== ==== ==== === ==== === ====== ==== ====== ==== === % of total loans 25% 9% 7% 7% 52% 100% ====== ===== ==== ===== ====== ====== Nonaccruals as a % of total by state --% 1% 1% --% 3% === ==== === === === - ---------------------------------------------------------------------------------------------------------------
(1) Consists of 43 states; no state had loans in excess of $533 million at December 31, 2001. 12 CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------- (in millions) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 3,719 $ 3,344 $ 3,307 $ 3,220 $ 3,202 Allowances related to business combinations 41 265 48 148 172 Provision for loan losses 1,780 1,329 1,104 1,617 1,203 Loan charge-offs: Commercial (692) (429) (395) (271) (369) Real estate 1-4 family first mortgage (29) (16) (14) (29) (28) Other real estate mortgage (32) (32) (28) (54) (27) Real estate construction (37) (8) (2) (3) (5) Consumer: Real estate 1-4 family junior lien mortgage (47) (34) (33) (31) (37) Credit card (421) (367) (403) (549) (593) Other revolving credit and monthly payment (770) (623) (585) (1,069) (672) ------- ------- ------- ------- ------- Total consumer (1,238) (1,024) (1,021) (1,649) (1,302) Lease financing (94) (52) (38) (49) (49) Foreign (78) (86) (90) (84) (37) ------- ------- ------- ------- ------- Total loan charge-offs (2,200) (1,647) (1,588) (2,139) (1,817) ------- ------- ------- ------- ------- Loan recoveries: Commercial 96 98 90 87 110 Real estate 1-4 family first mortgage 3 4 6 12 10 Other real estate mortgage 22 13 38 79 63 Real estate construction 3 4 5 4 12 Consumer: Real estate 1-4 family junior lien mortgage 11 14 15 7 10 Credit card 40 39 49 59 64 Other revolving credit and monthly payment 203 213 243 187 166 ------- ------- ------- ------- ------- Total consumer 254 266 307 253 240 Lease financing 25 13 12 12 15 Foreign 18 30 15 14 10 ------- ------- ------- ------- ------- Total loan recoveries 421 428 473 461 460 ------- ------- ------- ------- ------- Total net loan charge-offs (1,779) (1,219) (1,115) (1,678) (1,357) ------- ------- ------- ------- ------- BALANCE, END OF YEAR $ 3,761 $ 3,719 $ 3,344 $ 3,307 $ 3,220 ======= ======= ======= ======= ======= Total net loan charge-offs as a percentage of average total loans 1.09% .84% .90% 1.44% 1.19% ======= ======= ======= ======= ======= Allowance as a percentage of total loans 2.18% 2.31% 2.51% 2.76% 2.77% ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------
The ratio of the allowance for loan losses to total nonaccrual loans was 229% and 311% at December 31, 2001 and 2000, respectively. This ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, the prospects of borrowers and the value and marketability of collateral as well as, for the nonaccrual portfolio taken as a whole, wide variances from period to period in 13 terms of delinquency and relationship of book to contractual principal balance. Classification of a loan as nonaccrual does not necessarily indicate that the principal of a loan is uncollectible in whole or in part. Consequently, the ratio of the allowance for loan losses to nonaccrual loans, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan losses. Indicators of the credit quality of the Company's loan portfolio and the method of determining the allowance for loan losses are discussed below and in greater detail in the 2001 Annual Report to Stockholders. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table below provides a breakdown of the allowance for loan losses by loan category.
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial $ 882 $ 798 $ 655 $ 664 $ 603 Real estate 1-4 family first mortgage 64 55 64 58 71 Other real estate mortgage 276 220 220 238 284 Real estate construction 86 69 58 62 51 Consumer: Credit card 394 394 349 356 483 Other consumer 659 556 428 588 575 ------ ------ ------ ------ ------ Total consumer 1,053 950 777 944 1,058 Lease financing 155 67 71 66 67 Foreign 116 95 62 79 43 ------ ------ ------ ------ ------ Total allocated 2,632 2,254 1,907 2,111 2,177 Unallocated component of the allowance (1) 1,129 1,465 1,437 1,196 1,043 ------ ------ ------ ------ ------ Total $3,761 $3,719 $3,344 $3,307 $3,220 ====== ====== ====== ====== ======
December 31, ------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------------------ ------------------ ------------------ ------------------ ------------------ Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan Alloc. Loan allow. catgry allow. catgry allow. catgry allow. catgry allow. catgry as % as % as % as % as % as % as % as % as % as % of loan of total of loan of total of loan of total of loan of total of loan of total catgry loans catgry loans catgry loans catgry loans catgry loans ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Commercial 1.86% 28% 1.58% 31% 1.57% 31% 1.74% 32% 1.75% 30% Real estate 1-4 family first mortgage .25 15 .30 12 .47 10 .46 11 .47 13 Other real estate mortgage 1.11 14 .92 15 1.05 16 1.32 15 1.61 15 Real estate construction 1.10 5 .90 5 .96 5 1.37 4 1.29 3 Consumer: Credit card 5.88 4 5.96 4 6.01 4 5.82 5 6.91 6 Other consumer 1.34 28 1.32 26 1.28 26 1.92 25 1.86 27 --- --- --- --- --- Total consumer 1.89 32 1.95 30 1.97 30 2.57 30 2.79 33 Lease financing 1.65 5 .67 6 .72 7 .82 7 1.06 5 Foreign 7.26 1 5.89 1 3.88 1 5.17 1 3.72 1 --- --- --- --- --- Total allocated 1.53 100% 1.40 100% 1.43 100% 1.76 100% 1.87 100% === === === === === Unallocated component of the allowance (1) .65 .91 1.08 1.00 .90 ---- ---- ---- ---- ---- Total 2.18% 2.31% 2.51% 2.76% 2.77% ==== ==== ==== ==== ==== - -----------------------------------------------------------------------------------------------------------------------------------
(1) This amount and any unabsorbed portion of the allocated allowance are also available for any of the above listed loan categories. See Note 5 (Loans and Allowance for Loan Losses) to Financial Statements included in the 2001 Annual Report to Stockholders for the description of the process used by the Company to determine the adequacy and the components (allocated and unallocated) of the allowance for loan losses. 14 At December 31, 2001, the allowance for loan losses was $3,761 million, or 2.18% of total loans, compared with $3,719 million, or 2.31%, at December 31, 2000. During 2001, the net provision for loan losses approximated charge-offs. The components of the allowance, allocated and unallocated, are shown in the table on the previous page. The allocated component increased to $2,632 million at December 31, 2001 from $2,254 million at December 31, 2000, while the unallocated decreased to $1,129 million at December 31, 2001 from $1,465 million at December 31, 2000. At December 31, 2001, the unallocated portion of the allowance amounted to 30% of the total allowance, compared with 39% at December 31, 2000. The $378 million increase in the allocated component of the allowance was attributable to growth in the loan portfolio along with a shift in the composition of risk in the portfolio during 2001. Approximately $160 million of this increase is attributable to loan growth. The remaining $218 million increase reflects additions to allocated allowances caused by a change in risk assumptions in the commercial and wholesale lines of business and higher estimated loss rates in the retail line of business. Changes in allocated loan loss allowances arrived at through this methodology reflect management's judgment concerning the effect of recent economic activity on portfolio performance. Analyzing the movements in the allocated allowance strictly from a loan volume perspective indicates that, had the ratio of allocated allowance to loans outstanding remained flat with the 2000 ratio of 1.40%, the allocated allowance would have increased by approximately $161 million, as loans outstanding grew by $11 billion during the year. There were no material changes in estimation methods and assumptions for the allowance that took place during 2001. The Company considers the allowance for loan losses of $3,761 million adequate to cover losses inherent in loans, loan commitments, and standby and other letters of credit at December 31, 2001. The foregoing discussion contains forward-looking statements about the adequacy of the Company's allowance for loan losses. These forward-looking statements are inherently subject to risks and uncertainties. A number of factors--many of which are beyond the Company's control--could cause actual losses to be more than estimated losses. For a discussion of some of the other factors that could cause actual losses to be more than estimated losses, see "Factors That May Affect Future Results" in the "Financial Review" section of the 2001 Annual Report to Stockholders. 15 PROPERTIES The Company owns its corporate headquarters building in San Francisco, California as well as regional headquarters buildings in Phoenix, Arizona and Portland, Oregon and data processing support and administrative facilities in Tempe, Arizona; Minneapolis, Minnesota; Billings, Montana and Salt Lake City, Utah. In addition, the Company leases office space for data processing support and various administrative departments in major locations in Alaska, Arizona, California, Colorado, Minnesota, Oregon, Texas, and Utah. As of December 31, 2001, the Company provided banking, mortgage and consumer finance through more than 5,400 stores under various types of ownership and leasehold agreements. Wells Fargo Home Mortgage (WFHM) owns its headquarters in Des Moines, Iowa and servicing centers located in Minneapolis, Minnesota and Riverside, California. In addition, WFHM leases servicing centers in Minneapolis, Minnesota and Charlotte, North Carolina, other offices in Springfield, Illinois; St. Louis, Missouri and San Bernardino, California, an operations center in Frederick, Maryland and all mortgage production offices nationwide. Wells Fargo Financial owns its headquarters in Des Moines, Iowa, and leases all branch locations. The Company is also a joint venture partner in one office building in downtown Los Angeles, California, and one office building in downtown Minneapolis, Minnesota. For further information with respect to premises and equipment and commitments under noncancelable leases for premises and equipment, refer to Note 6 (Premises, Equipment, Lease Commitments, Interest Receivable and Other Assets) to Financial Statements included in the 2001 Annual Report to Stockholders. 16 EXECUTIVE OFFICERS OF THE REGISTRANT
YEARS WITH COMPANY OR NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - -------------------------- ----------------------------------------- --- ------------ Howard I. Atkins Executive Vice President and Chief Financial Officer (August 2001 to 51 0 Executive Vice Present); Executive Vice President and Chief Financial Officer of New President and Chief York Life Insurance Co. (April 1996 to July 2001) Financial Officer John A. Berg Group Executive Vice President (North Central Banking) (November 2000 56 26 Group Executive to Present); Group Executive Vice President (Central Banking) Vice President (North (November 1998 to November 2000); Senior Vice President and Regional Central Banking) Group Head of former Norwest (March 1998 to November 1998); Regional President (Greater Minnesota/La Crosse Region) (January 1990 to March 1998) Leslie S. Biller Vice Chairman and Chief Operating Officer (November 1998 to Present); 54 14 Vice Chairman and President and Chief Operating Officer of former Norwest (February Chief Operating Officer 1997 to November 1998); Executive Vice President (South Central Community Banking) (July 1990 to February 1997) Patricia R. Callahan Executive Vice President (Human Resources) (November 1998 to 48 24 Executive Vice President Present); Executive Vice President of former Wells Fargo (Personnel) (Human Resources) (September 1998 to November 1998); Executive Vice President (Wholesale Banking) (July 1997 to September 1998); Executive Vice President (Personnel) (March 1993 to July 1997) James R. Campbell Group Executive Vice President (January 2002 to Present); Group 59 37 Group Executive Executive Vice President (Minnesota Banking and Investments Group) Vice President (November 2000 to January 2002); Group Executive Vice President (Minnesota Banking) (November 1998 to November 2000); Executive Vice President (North Central Banking) of former Norwest (August 1997 to November 1998); Executive Vice President (Commercial Banking Services, Specialized Lending and Nebraska) (January 1996 to August 1997)
17 EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
YEARS WITH COMPANY OR NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - -------------------------- ----------------------------------------- --- ------------ C. Webb Edwards Executive Vice President (Technology and Operations) (November 1998 54 17 Executive Vice President to Present); Executive Vice President of the former Norwest (April (Technology and Operations) 1995 to November 1998); and President and Chief Executive Officer of Wells Fargo Services Company (formerly known as Norwest Services, Inc. and Norwest Technical Services, Inc.) (May 1995 to Present) David A. Hoyt Group Executive Vice President (Wholesale Banking) (November 1998 to 46 20 Group Executive Present); Vice Chair (Real Estate, Capital Markets, International) of Vice President (Wholesale former Wells Fargo (May 1997 to November 1998); Executive Vice Banking) President (Capital Markets, Special Loans) (September 1994 to May 1997) Michael R. James Group Executive Vice President (Business Banking and Consumer 50 28 Group Executive Vice Lending) (July 2000 to Present); Executive Vice President of Wells President (Business Banking Fargo Bank, N.A. (Business Banking Group Head) (July 1997 to July and Consumer Lending) 2000); Executive Vice President (Business Banking Group Division Manager) (June 1992 to July 1997) Richard M. Kovacevich Chairman, President and Chief Executive Officer (April 2001 to 58 16 Chairman, President and Present); President and Chief Executive Officer (November 1998 to Chief Executive Officer April 2001); Chairman and Chief Executive Officer of former Norwest (February 1997 to November 1998); Chairman, President and Chief Executive Officer (May 1995 to January 1997) Dennis J. Mooradian Group Executive Vice President (Private Client Services) (July 1999 54 5 Group Executive Vice to Present); Executive Vice President of Wells Fargo Bank, N.A. (May President (Private Client 1996 to July 1999) Services) David J. Munio Executive Vice President (Chief Credit Officer) (November 2001 to 57 28 Executive Vice Present); Executive Vice President and Deputy Chief Credit Officer of President (Chief Wells Fargo Bank, N.A. (September 1999 to November 2001); Executive Credit Officer) Vice President (Loan Supervision) (April 1996 to September 1999)
18 EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
YEARS WITH COMPANY OR NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - -------------------------- ----------------------------------------- --- ------------ Mark C. Oman Group Executive Vice President (Mortgage and Home Equity) (November 47 22 Group Executive 1998 to Present); Executive Vice President (Mortgage Services and Vice President (Mortgage Iowa Community Banking) of former Norwest (February 1997 to November and Home Equity) 1998); and Chairman of Wells Fargo Home Mortgage, Inc. (formerly known as Norwest Mortgage, Inc.) (February 1997 to Present); Chief Executive Officer (August 1989 to January 2001); President (August 1989 to February 1997) Clyde W. Ostler Group Executive Vice President (Internet Services) (October 1999 to 55 31 Group Executive Present); Group Executive Vice President (Investments) (November 1998 Vice President (Internet to October 1999); Vice Chair (Trust and Investment Services) of Services) former Wells Fargo (May 1993 to November 1998) Daniel W. Porter Group Executive Vice President (Wells Fargo Financial) and Chairman 46 2 Group Executive Vice and Chief Executive Officer of Wells Fargo Financial, Inc. President (Wells Fargo (December 1999 to Present); various positions with GE Capital since Financial) 1986 including Managing Director of GE Capital Europe in London (European Transportation Group) (March 1998 to December 1999); President of Global Consumer Development (September 1997 to March 1998); and President and Chief Executive Officer of Retailer Financial Services (April 1994 to September 1997) Les L. Quock, CPA Senior Vice President and Controller (November 1998 to Present); 48 22 Senior Vice President and Senior Vice President (Payment Systems Services Group) of former Controller (Principal Wells Fargo (February 1997 to November 1998); Senior Vice President Accounting Officer) (Business Banking Group) (November 1993 to February 1997) Stanley S. Stroup Executive Vice President and General Counsel (November 1998 to 58 18 Executive Vice President Present); Executive Vice President and General Counsel of former and General Counsel Norwest (February 1993 to November 1998) John G. Stumpf Group Executive Vice President (Western Banking) (May 2000 to 48 20 Group Executive Present); Group Executive Vice President (Southwestern Banking) Vice President (Western (November 1998 to May 2000); Regional President (Texas) of former Banking) Norwest (July 1994 to November 1998)
19 EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
YEARS WITH COMPANY OR NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS - -------------------------- ----------------------------------------- --- ------------ Carrie L. Tolstedt Group Executive Vice President (California and Border Banking) 42 12 Group Executive Vice (January 2001 to Present); Regional President of Wells Fargo Bank, President (California and N.A. (Central California Banking) (December 1998 to January 2001); Border Banking) Regional Manager of Norwest Bank Minnesota, N.A. (Greater Minnesota Community Banking) (May 1998 to December 1998); Executive Vice President of FirstMerit Corporation and President and Chief Executive Officer of Citizens National Bank and Peoples National Bank (August 1996 to May 1998)
There is no family relationship among the above officers. All executive officers serve at the pleasure of the Board of Directors. 20 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits: (1) The consolidated financial statements and related notes, the independent auditors' report thereon and supplementary data that appear on pages 54 through 98 of the 2001 Annual Report to Stockholders are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits: The Company's SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214. First Security Corporation filed documents under SEC file number 001-6906.
Exhibit number Description ------ ----------- 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 21 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 (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 22 3(p) 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(p) (b) Rights Agreement, dated as of October 21, 1998, between the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A dated October 21, 1998 (c) The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. 10*(a) Long-Term Incentive Compensation Plan, as amended effective November 23, 1999 (including Forms of Award Term Sheet for grants of restricted share rights), incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Amendment to Long-Term Incentive Compensation Plan, effective November 1, 2000, filed as paragraph (1) of Exhibit 10(ff) hereto. Forms of Non-Qualified Stock Option and Restricted Stock Agreements for grants subsequent to November 2, 1998, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Forms of Non-Qualified Stock Option and Restricted Stock Agreements for grants prior to November 2, 1998, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 *(b) Long-Term Incentive Plan, incorporated by reference to Exhibit A to the former Wells Fargo's Proxy Statement filed March 14, 1994 *(c) Wells Fargo Bonus Plan, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 *(d) Performance-Based Compensation Policy, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 *(e) 1990 Equity Incentive Plan, incorporated by reference to Exhibit 10(f) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1995 *(f) 1982 Equity Incentive Plan, incorporated by reference to Exhibit 10(g) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1993 23 10*(g) Employees' Stock Deferral Plan, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. Amendment to Employees' Stock Deferral Plan, effective November 1, 2000, filed as paragraph (2) of Exhibit 10(ff) hereto *(h) Deferred Compensation Plan, incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 *(i) 1999 Directors Stock Option Plan, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. *(j) 1990 Director Option Plan for directors of the former Wells Fargo, incorporated by reference to Exhibit 10(c) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1997 *(k) 1987 Director Option Plan for directors of the former Wells Fargo, incorporated by reference to Exhibit A to the former Wells Fargo's Proxy Statement filed March 10, 1995, and as further amended by the amendment adopted September 16, 1997, incorporated by reference to Exhibit 10 to the former Wells Fargo's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 *(l) First Security Corporation Comprehensive Management Incentive Plan, incorporated by reference to Exhibit 10.1 to First Security Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(m) Deferred Compensation Plan for Non-Employee Directors of the former Norwest, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. Amendment to Deferred Compensation Plan for Non-Employee Directors, effective November 1, 2000, filed as paragraph (4) of Exhibit 10(ff) hereto *(n) Directors' Stock Deferral Plan for directors of the former Norwest, incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. Amendment to Directors' Stock Deferral Plan, effective November 1, 2000, filed as paragraph (5) of Exhibit 10(ff) hereto *(o) Directors' Formula Stock Award Plan for directors of the former Norwest, incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. Amendment to Directors' Formula Stock Award Plan, effective November 1, 2000, filed as paragraph (6) of Exhibit 10(ff) hereto *(p) Deferral Plan for Directors of the former Wells Fargo, incorporated by reference to Exhibit 10(b) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1997 24 10*(q) 1999 Deferral Plan for Directors, incorporated by reference to Exhibit 10(q) of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Amendment to 1999 Deferral Plan for Directors, effective November 1, 2000, filed as paragraph (7) of Exhibit 10(ff) hereto *(r) 1999 Directors Formula Stock Award Plan, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 *(s) Supplemental 401(k) Plan, incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. Amendment to Supplemental 401(k) Plan, effective November 1, 2000, filed as paragraph (9) of Exhibit 10(ff) hereto. *(t) Supplemental Cash Balance Plan, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 *(u) Supplemental Long Term Disability Plan, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. Amendment to Supplemental Long Term Disability Plan, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 *(v) Agreement between the Company and Richard M. Kovacevich dated March 18, 1991, incorporated by reference to Exhibit 19(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991. Amendment effective January 1, 1995, to the March 18, 1991 agreement between the Company and Richard M. Kovacevich, incorporated by reference to Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 *(w) Agreement, dated July 11, 2001, between the Company and Howard I. Atkins, incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 *(x) Amended and Restated Employment Agreement, dated as of October 18, 2000, between the Company and Spencer F. Eccles, incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 *(y) Agreement between the Company and Mark C. Oman, dated May 7, 1999 and agreements between the Company and two other executive officers, dated October 7, 1998, and October 25, 1999, respectively, incorporated by reference to Exhibit 10(y) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 25 10*(z) Form of severance agreement between the Company and seven executive officers, including Richard M. Kovacevich, Les S. Biller, Mark C. Oman and C. Webb Edwards, incorporated by reference to Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Amendment effective January 1, 1995, to the March 11, 1991 agreement between the Company and Richard M. Kovacevich, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 *(aa) Description of Supplemental Retirement Benefit Arrangement for C. Webb Edwards, incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 *(bb) Consulting Agreement dated January 25, 1999, between the Company and Chang-Lin Tien, incorporated by reference to Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 *(cc) Description of Relocation Program, filed herewith *(dd) Description of Executive Financial Planning Program, incorporated by reference to Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 *(ee) Executive Loan Plan, incorporated by reference to Exhibit 10(i) to the former Wells Fargo's Annual Report on Form 10-K for the year ended December 31, 1994 *(ff) Amendments to Long-Term Incentive Compensation Plan, Employees' Stock Deferral Plan, Deferred Compensation Plan for Non-Employee Directors, Directors' Stock Deferral Plan, Directors' Formula Stock Award Plan, 1999 Deferral Plan for Directors, and Supplemental 401(k) Plan, incorporated by reference to Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (gg) Agreement between the Company and an executive officer, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (hh) PartnerShares Stock Option Plan, as amended through February 26, 2002, filed herewith - --------------- * Management contract or compensatory plan or arrangement Stockholders may obtain a copy of any of the foregoing exhibits, upon payment of a reasonable fee, by writing Wells Fargo & Company, Office of the Secretary, Wells Fargo Center, N9305-173, Sixth and Marquette, Minneapolis, Minnesota 55479. 26 12(a) Computation of Ratios of Earnings to Fixed Charges -- the ratios of earnings to fixed charges, including interest on deposits, were 1.79, 1.82, 2.07, 1.62 and 1.79 for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 2.64, 2.67, 3.29, 2.51 and 3.02 for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. (b) Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends -- the ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 1.79, 1.81, 2.05, 1.60 and 1.77 for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 2.62, 2.65, 3.22, 2.45 and 2.93 for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively. 13 2001 Annual Report to Stockholders, pages 33 through 98 21 Subsidiaries of the Company 23 Consent of Independent Accountants 24 Powers of Attorney
(b) The Company filed the following reports on Form 8-K during the fourth quarter of 2001: (1) October 16, 2001, under Item 5, containing the Company's financial results for the quarter ended September 30, 2001 STATUS OF PRIOR DOCUMENTS The Wells Fargo & Company Annual Report on Form 10-K for the year ended December 31, 2001, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents filed prior to January 1, 2002 pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 (other than the Current Report on Form 8-K filed October 14, 1997, containing a description of the Company's common stock) for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 15, 2002. WELLS FARGO & COMPANY By: RICHARD M. KOVACEVICH ------------------------------------- Richard M. Kovacevich Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. By: HOWARD I. ATKINS ------------------------------------ Howard I. Atkins Executive Vice President and Chief Financial Officer (Principal Financial Officer) By: LES L. QUOCK ------------------------------------ Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) The Directors of Wells Fargo & Company listed below have duly executed powers of attorney empowering Philip J. Quigley to sign this document on their behalf. Leslie S. Biller Richard D. McCormick J.A. Blanchard III Cynthia H. Milligan Michael R. Bowlin Benjamin F. Montoya David A. Christensen Donald B. Rice Spencer F. Eccles Judith M. Runstad Robert L. Joss Susan G. Swenson Reatha Clark King Michael W. Wright Richard M. Kovacevich By: PHILIP J. QUIGLEY ------------------------------------ Philip J. Quigley Director and Attorney-in-fact March 15, 2002 28 EX-10.(CC) 3 a2072635zex-10_cc.txt EXHIBIT 10(CC) EXHIBIT 10 (cc) RELOCATION PROGRAM DESCRIPTION The Company offers a relocation program (the "Relocation Program") for employees who relocate at the Company's request, and in appropriate circumstances, to new employees who relocate in connection with their employment by the Company. The Company believes this program is an attractive incentive to attract and retain key employees. The Relocation Program provides a relocating employee who is eligible for benefits under the Program with financial assistance, both in selling his or her existing home and in purchasing a new residence. Under the Relocation Program, an employee who relocates to a designated high-cost area (or in certain limited circumstances, to a location not designated as a high-cost area) is eligible to receive a first mortgage loan (subject to applicable lending guidelines) from Wells Fargo Home Mortgage, Inc., and a 30-year, interest-free second mortgage down payment loan in an amount up to 100% of his or her annual base salary to purchase a new primary residence. The Company may also provide a mortgage interest subsidy on the first mortgage loan of up to 25% of the employee's annual base salary, payable over a period not less than the first three years of the first mortgage loan. The second mortgage loan must be repaid in full if the employee terminates employment with the Company or retires, or if the employee sells the residence. In addition to first mortgage and down payment loan assistance, the Company may provide a transfer bonus of up to 30% of the eligible relocating employee's base salary. From time to time, benefits under the Relocation Program are made available, subject to management approval, to new and existing employees who are asked to relocate to an area not designated as a high-cost area if necessary to assist the Company in attracting and retaining highly qualified employees. For any relocation, the Company will generally pay all related home purchase closing costs and household goods moving expenses for the relocating employee. With the exception of expenses paid to or on behalf of the employee to move household goods, the benefits described above (other than the mortgage loans) are treated as taxable income to the employee. The Relocation Program also includes, as an additional benefit, reimbursement of the amount of taxes paid on the taxable portion of amounts received by the employee under the Relocation Program. The Relocation Program also assists eligible relocating employees in defraying costs associated with selling their current residences. Available benefits may include payment of selling costs customarily incurred by a seller of residential real estate (such as real estate commissions, title and appraisal fees, and other routine closing costs), purchase of the relocating employee's home at its appraised market value by a third party relocation company using Company funds, and certain cash incentives to employees who locate buyers for their homes directly. EX-10.HH 4 a2072635zex-10_hh.txt EXHIBIT 10(HH) EXHIBIT 10(hh) WELLS FARGO & COMPANY PARTNERSHARES STOCK OPTION PLAN (includes amendments through February 26, 2002) ARTICLE I PURPOSE OF THE PLAN The Wells Fargo & Company PartnerShares Stock Option Plan is intended to enhance the profitability and value of the Company by providing performance-based incentives and additional equity ownership opportunities to Eligible Employees of the Company and its Affiliates. ARTICLE II DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION 2.1 GENERAL DEFINITIONS. As used herein, the following capitalized terms have the following respective meanings. (A) "AFFILIATE" means any corporation or limited liability company, a majority of the voting stock or membership interest of which is directly or indirectly owned by the Company, and any partnership or joint venture designated by the Committee in which any such corporation or limited liability company is a partner or joint venturer. (B) "AWARD" means any Option and any Stock Right granted to an Eligible Employee pursuant to Section 6.1 of the Plan, including all rights and interests that arise out of or are otherwise related to such Option or Stock Right. (C) "AWARD NOTICE" means the document or other communication provided to or otherwise made available to a Participant which describes the Award granted to the Participant and sets forth the terms, conditions and restrictions specific to the Award. (D) "BOARD" means the Company's board of directors. (E) "COMMITTEE" means any PartnerShares Committee or PartnerShares Committees, each consisting of one or more members of the Board, as designated from time to time by the Board to administer the Plan. (F) "COMMON STOCK" means the Company's common stock, par value $1-2/3 per share. (G) "COMPANY" means Wells Fargo & Company. (H) "DISABILITY" means a disability which would entitle a Participant to receive a disability benefit under any long-term disability plan maintained by the Company or an Affiliate, as from time to time in effect, whether or not the Participant is then participating in such plan. (I) "ELIGIBLE EMPLOYEE" means, unless otherwise provided herein, any employee of the Company or an Affiliate other than (i) an employee who is subject to Section 16 of the Securities Exchange Act of 1934, as amended from time to time, (ii ) a leased employee, (iii ) any person classified by the Company or an Affiliate as an independent contractor as of the date of an Award regardless of whether the person is subsequently determined by any court or governmental agency to then have been an employee , and (iv) any other employees excluded by the Committee in its discretion. Notwithstanding the foregoing, the definition of Eligible Employee in effect at the time of any prior Award shall apply to that Award. If a Participant's employer ceases to be an Affiliate, the Participant shall thereupon cease to be an Eligible Employee and a Participant. (J) "FAIR MARKET VALUE" as of any date means the immediately preceding trading day's New York Stock Exchange-only closing price of a share of Common Stock. (K) "OPTION" means an option granted under the Plan to purchase shares of Common Stock and having such terms, conditions and restrictions as the Committee determines. (L) "PARTICIPANT" means an Eligible Employee who is granted an Award under the Plan. (M) "PLAN" means the Wells Fargo & Company PartnerShares Stock Option Plan, as amended from time to time. (N) "RETIREMENT" means termination of employment after reaching the earlier of (i) age 55 with 10 completed years of service, or (ii) age 65, or (iii) 80 points (with one point credited for each completed age year and one point credited for each completed year of service). For purposes of this definition, a Participant is credited with one year of service after completion of each full 12-month period of employment with the Company or an Affiliate as determined by the Company or Affiliate. (O) "SHARE" means a share of Common Stock. -2- (P) "STOCK RIGHT" means an award under the Plan of Common Stock or cash measured by the value of Common Stock and in each case subject to such terms, conditions and restrictions as the Committee determines. 2.2 OTHER DEFINITIONS. Other capitalized terms used herein and not defined above are defined where they first appear. 2.3 CONFLICTING PROVISIONS. In the event of any conflict or other inconsistency between the terms of the Plan and the terms of any Award Notice, the terms of the Plan will control. ARTICLE III SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN 3.1 NUMBER OF SHARES. An aggregate of 74,000,000 Shares (as adjusted to reflect a 1997 stock split, consisting of 14,000,000 Shares authorized on July 23, 1996, 24,000,000 Shares authorized on September 23, 1997, 24,000,000 Shares authorized on November 2, 1998, 5,000,000 Shares authorized on September 26, 2000, and 7,000,000 Shares authorized on February 26, 2002) are available for Awards and as a basis for calculating Awards under the Plan. Shares issued with respect to Awards may be treasury or new issue Common Stock or a combination of treasury or new issue Common Stock, as the Company determines. 3.2 REUSAGE OF SHARES. Shares identified with Awards that for any reason terminate or expire unexercised will thereafter be available for other Awards under the Plan. Shares that are used to pay any portion of the purchase price of an Award or any portion of a Participant's income tax withholding resulting from an Award, and Shares used as a basis for calculating cash amounts that are used to pay any portion of the purchase price of an Award or any portion of a Participant's income tax withholding resulting from an Award, will also thereafter be available for Awards or as a basis for calculating Awards under the Plan. 3.3 ADJUSTMENTS. Any change in the number of outstanding shares of Common Stock occurring by reason of a stock split, stock dividend, spin-off, split-up, recapitalization or other similar event will be reflected proportionally in (a) the aggregate number of Shares available for Awards under the Plan as set forth in Section 3.1, (b) the number of Shares identified with Awards then outstanding, and (c) the purchase price and such other terms, as appropriate, of Awards then outstanding. The number of Shares, if any, identified with an Award, after giving effect to any such adjustment, will be rounded down to the nearest whole Share, and the purchase price of each Award, after giving effect to any such adjustment, will be rounded down to the nearest whole cent. ARTICLE IV PARTICIPATION IN THE PLAN -3- The Committee will have discretionary authority to select Participants from among Eligible Employees and determine the Award or Awards each Participant will receive. The Award or Awards to each Participant need not be identical. In making such selections and determinations, the Committee will consider such factors as it deems relevant to effect the purpose of the Plan. No Eligible Employee will be entitled to receive any additional Awards or otherwise further participate in the Plan solely because the Eligible Employee was previously granted an Award. ARTICLE V ADMINISTRATION OF THE PLAN Subject to the terms of the Plan, the Committee: (a) will have discretionary authority to determine which Eligible Employees will be Participants to whom Awards will be granted, the type and amount of each Award to be granted, the date of issuance and duration of each Award, the purchase price of each Award, and such other Award terms, conditions and restrictions and any subsequent amendments to the terms, conditions and restrictions as the Committee deems advisable; (b) may adopt such rules or guidelines as it deems appropriate to determine Eligible Employees, Participants, the terms of Awards and what other conditions or restrictions should apply to Awards made under the Plan; and (c) shall have the sole authority and responsibility to interpret and construe the terms of the Plan, including but not limited to, the entitlement of employees, Participants and beneficiaries to Options and Shares under the Plan. ARTICLE VI AWARDS 6.1 TYPES. The Committee may grant Options and Stock Rights under the Plan having such terms, conditions and restrictions as the Committee determines. 6.2. PRICE. The Committee will determine the purchase price of each Share subject to an Option, PROVIDED that such purchase price will not be less than the Fair Market Value on the date the Option is granted and in any event will not be less than the par value of the Share subject to the Option. 6.3 EXERCISE TERM. The Committee will determine the term of each Award, PROVIDED that (a) no Award will be exercisable after ten years from the date of grant, (b) no Award will be exercisable unless a registration statement for the Shares, if any, underlying the Award is then in effect under the Securities Act of 1933, as amended, or unless in the opinion of legal counsel registration under such Act is not required, (c) except pursuant to Section 7.3 of the Plan or as determined by the Committee in the case of death, Disability or Retirement pursuant to Section 7.1.1 of the Plan, no Award shall become exercisable within six months after the date of grant, and (d) the Committee may delay exercise of an Award to the extent the Committee deems it in the best interests of the Company. -4- 6.4 PAYMENT OF PURCHASE PRICE. Upon exercise of an Option or Stock Right that requires a payment from the Participant to the Company, the amount due the Company must be paid by cash unless the Committee determines otherwise. The Committee may, either at the time an Option is granted or any time before it is exercised, subject to such limitations as the Committee may determine, authorize payment of the Option purchase price by delivery to the Company of irrevocable instructions to a broker, or some other communication as is authorized by the Company's Executive Vice President of Human Resources, requiring prompt delivery to the Company of the amount of sale proceeds to pay the Option purchase price and all applicable withholding taxes resulting from the exercise of the Option. 6.5 AWARD NOTICE. Each Award will be evidenced by an Award Notice containing the following: (a) the terms, conditions and restrictions of the Award; (b) if an Option, the purchase price and acceptable methods of payment of the purchase price; (c) the Award's duration; (d) the effect on the Award of the Participant's death, Disability, Retirement or other termination of employment; and (c) the restrictions against transfer, if any, on the Award or the Shares subject to the Award. The form of the Award Notice may be different for each Option grant or other Award. 6.6 WITHHOLDING TAXES. The Company and its Affiliates have the right to withhold, at the time any distribution is made under the Plan, whether in cash or in Shares, or at the time any Award is exercised, all amounts necessary to satisfy federal, state and local withholding requirements related to such distribution or exercise. Any required withholding may be satisfied by cash or, if permitted by the Committee, by the Company's withholding of Shares having a Fair Market Value equal to the amount required to be withheld. ARTICLE VII MISCELLANEOUS PROVISIONS 7.1 TERMINATION OF EMPLOYMENT. 7.1.1 DUE TO DEATH, DISABILITY OR RETIREMENT. If a Participant ceases to be an Eligible Employee by reason of the Participant's Disability or Retirement, the Participant's Awards will be exercisable for such period or periods as the Committee determines. If a Participant ceases to be an Eligible Employee by reason of the Participant's death, the person or persons surviving at the time of the Participant's death in the first of the following classes of beneficiaries in which there is a survivor, shall be entitled to exercise the Participant's Awards for such period or periods as the Committee determines. If a person in the class surviving dies before exercising the Participant's Awards, that person's right to receive and exercise the Awards will lapse and the exercise entitlement will be determined as if that person predeceased the Participant. (a) Participant's surviving spouse; -5- (b) Equally to the Participant's children, except that if any of the Participant's children predecease the Participant but leave descendants surviving, such descendants shall take by right of representation the share their parent would have taken if living; (c) Participant's surviving parents equally; (d) Participant's surviving brothers and sisters equally; or (e) Representative of the Participant's estate. 7.1.2 OTHER THAN DUE TO DEATH, DISABILITY OR RETIREMENT. Except as otherwise determined by the Committee, if a Participant ceases to be an Eligible Employee for any reason other than death, Disability or Retirement, including because the Participant's employer is no longer an Affiliate, all of the Participant's Awards will terminate without notice of any kind. 7.1.3 INTERCOMPANY TRANSFERS. Transfers of a Participant's employment between the Company and an Affiliate or between Affiliates will not by itself constitute termination of the Participant's Eligible Employee status for purposes of any Award. 7.2 NONTRANSFERABILITY. Except as otherwise determined by the Committee, (a) an Award may be exercised during a Participant's lifetime only by the Participant or the Participant's legal guardian or legal representative, (b) an Award may be exercised after the Participant's death only as provided in Section 7.1.1 of the Plan, and (c) no Award may be assigned or otherwise transferred by the Participant to whom it was granted. 7.3 CHANGE IN CONTROL. On the date that (a) substantially all of the assets of the Company are acquired by another corporation, (b) there is a reorganization of the Company involving an acquisition of the Company by another entity, or (c) a majority of the Board shall be persons other than persons (i) for whose election proxies shall have been solicited by the Board or (ii) who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships, then (1) all Options and other Awards that require exercise by Participants and/or payment by Participants to the Company will become immediately exercisable in full and (2) with respect to all other Awards, all conditions or restrictions to the receipt thereof will immediately terminate. 7.4 NO EMPLOYMENT CONTRACT. Neither the adoption of the Plan nor the grant of any Award will (a) confer upon any Eligible Employee any right to continued employment with the Company or any Affiliate or (b) interfere in any way with the right of the Company or any Affiliate to terminate at any time the employment of any Eligible Employee. -6- 7.5 AMENDMENT OR TERMINATION OF PLAN. The Board or the Human Resources Committee of the Board may at any time terminate, suspend or amend the Plan. 7.6 DURATION OF THE PLAN. The Plan will become effective upon its approval by the Board and, unless earlier terminated, will remain in effect until all Shares available for issuance under the Plan have been issued. 7.7 RESERVATION OF BOARD AUTHORITY. Any action under the Plan required or permitted to be taken by the Committee may be taken by the Board or any other duly authorized committee of the Board. 7/23/96 9/23/97 10/2/97 11/3/98 10/1/00 10/31/00 2/26/02 -7- EX-12.A 5 a2072635zex-12_a.txt EXHIBIT 12(A) EXHIBIT 12(a) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------------------------------------- (in millions) 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 5,479 $ 6,549 $ 6,350 $3,665 $ 4,521 Fixed charges 6,893 8,022 5,943 5,935 5,736 ------- ------- ------- ------- ------- $12,372 $14,571 $12,293 $9,600 $10,257 ======= ======= ======= ======= ======= Fixed charges (1): Interest expense $ 6,741 $ 7,860 $ 5,818 $5,782 $ 5,541 Estimated interest component of net rental expense 152 162 125 153 195 ------- ------- ------- ------- ------- $ 6,893 $ 8,022 $ 5,943 $5,935 $ 5,736 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (2) 1.79 1.82 2.07 1.62 1.79 ======= ======= ======= ======= ======= EARNINGS EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 5,479 $ 6,549 $ 6,350 $3,665 $ 4,521 Fixed charges 3,340 3,933 2,777 2,420 2,233 ------- ------- ------- ------- ------- $ 8,819 $10,482 $ 9,127 $6,085 $ 6,754 ======= ======= ======= ======= ======= Fixed charges: Interest expense $ 6,741 $ 7,860 $ 5,818 $5,782 $ 5,541 Less interest on deposits 3,553 4,089 3,166 3,515 3,503 Estimated interest component of net rental expense 152 162 125 153 195 ------- ------- ------- ------- ------- $ 3,340 $ 3,933 $ 2,777 $2,420 $ 2,233 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (2) 2.64 2.67 3.29 2.51 3.02 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-12.B 6 a2072635zex-12_b.txt EXHIBIT 12(B) EXHIBIT 12(b) WELLS FARGO & COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
- -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------------------- (in millions) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- EARNINGS, INCLUDING INTEREST ON DEPOSITS (1): Income before income tax expense $ 5,479 $ 6,549 $ 6,350 $3,665 $ 4,521 Fixed charges 6,893 8,022 5,943 5,935 5,736 ------- ------- ------- ------ ------- $12,372 $14,571 $12,293 $9,600 $10,257 ======= ======= ======= ====== ======= Preferred dividend requirement $ 14 $ 17 $ 35 $ 35 $ 43 Ratio of income before income tax expense to net income 1.60 1.63 1.59 1.69 1.68 ------- ------- ------- ------ ------- Preferred dividends (2) $ 22 $ 28 $ 56 $ 59 $ 72 ------- ------- ------- ------ ------- Fixed charges (1): Interest expense 6,741 7,860 5,818 5,782 5,541 Estimated interest component of net rental expense 152 162 125 153 195 ------- ------- ------- ------ ------- 6,893 8,022 5,943 5,935 5,736 ------- ------- ------- ------ ------- Fixed charges and preferred dividends $ 6,915 $ 8,050 $ 5,999 $5,994 $ 5,808 ======= ======= ======= ====== ======= Ratio of earnings to fixed charges and preferred dividends (3) 1.79 1.81 2.05 1.60 1.77 ======= ======= ======= ====== ======= EARNINGS EXCLUDING INTEREST ON DEPOSITS: Income before income tax expense $ 5,479 $ 6,549 $ 6,350 $3,665 $ 4,521 Fixed charges 3,340 3,933 2,777 2,420 2,233 ------- ------- ------- ------ ------- $ 8,819 $10,482 $ 9,127 $6,085 $ 6,754 ======= ======= ======= ====== ======= Preferred dividends (2) $ 22 $ 28 $ 56 $ 59 $ 72 ------- ------- ------- ------ ------- Fixed charges: Interest expense 6,741 7,860 5,818 5,782 5,541 Less interest on deposits 3,553 4,089 3,166 3,515 3,503 Estimated interest component of net rental expense 152 162 125 153 195 ------- ------- ------- ------ ------- 3,340 3,933 2,777 2,420 2,233 ------- ------- ------- ------ ------- Fixed charges and preferred dividends $ 3,362 $ 3,961 $ 2,833 $2,479 $ 2,305 ======= ======= ======= ====== ======= Ratio of earnings to fixed charges and preferred dividends (3) 2.62 2.65 3.22 2.45 2.93 ======= ======= ======= ====== ======= - --------------------------------------------------------------------------------------------------------------------------
(1) As defined in Item 503(d) of Regulation S-K. (2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements. (3) These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates. EX-13 7 a2072635zex-13.txt EXHIBIT 13 TABLE OF CONTENTS FINANCIAL REVIEW 34 Overview 49 Asset/Liability and 36 Factors That May Affect Future Results Market Risk Management 40 Earnings Performance 49 Interest Rate Risk 40 Net Interest Income 49 Mortgage Banking Interest Rate Risk 40 Noninterest Income 50 Market Risk - Trading Activities 41 Noninterest Expense 50 Market Risk - Equity Markets 44 Operating Segment Results 50 Liquidity and Funding 44 Balance Sheet Analysis 52 Capital Management 44 Securities Available for Sale 53 Comparison of 2000 to 1999 (table on page 64) 53 Additional Information 45 Loan Portfolio (table on page 66) 45 Deposits FINANCIAL STATEMENTS 45 Off Balance Sheet Transactions 54 Consolidated Statement of Income 45 Off Balance Sheet Arrangements 55 Consolidated Balance Sheet 46 Contractual Obligations and 56 Consolidated Statement of Other Commitments Changes in Stockholders' Equity 46 Transactions with Related Parties and Comprehensive Income 57 Consolidated Statement of Cash Flows 46 Risk Management 58 Notes to Financial Statements 46 Credit Risk Management Process 47 Nonaccrual and Restructured Loans 97 INDEPENDENT AUDITORS' REPORT and Other Assets 48 Allowance for Loan Losses 98 QUARTERLY FINANCIAL DATA (table on page 68)
33 FINANCIAL REVIEW OVERVIEW Wells Fargo & Company is a $308 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 fifth in assets and third in market capitalization among U.S. bank holding companies at December 31, 2001. In this Annual Report, Wells Fargo & Company and Subsidiaries (consolidated) is referred to as the Company and Wells Fargo & Company alone is referred to as the Parent. On October 25, 2000, the Company completed its merger with First Security Corporation (the FSCO Merger). First Security Corporation (First Security or FSCO) survived as a wholly owned subsidiary of the Company. The FSCO Merger was accounted for under the pooling-of-interests method of accounting and, accordingly, the information included in the financial review presents the combined results as if the merger had been in effect for all periods presented. Certain amounts in the financial review for prior years have been reclassified to conform with the current financial statement presentation. Net income in 2001 was $3.42 billion, compared with $4.03 billion in 2000. Diluted earnings per common share were $1.97, compared with $2.33 in 2000. The decreases in net income and earnings per share were due to second quarter 2001 non-cash impairment of public and private equity securities and other special charges of $1.16 billion (after tax), or $.67 per share. Apart from these charges, very strong growth in business revenue more than offset the impact of higher credit losses on 2001 profits. Return on average assets (ROA) was 1.20% and return on average common equity (ROE) was 12.79% in 2001, compared with 1.61% and 16.31%, respectively, in 2000. Excluding non-cash impairment and other special charges ROA was 1.60% and ROE was 17.13%. Net interest income on a taxable-equivalent basis was $12.54 billion in 2001, compared with $10.93 billion a year ago. The Company's net interest margin was 5.36% for 2001, compared with 5.35% in 2000. Noninterest income was $7.69 billion in 2001, compared with $8.84 billion in 2000. The decrease was due to approximately $1.72 billion (before tax) of impairment write-downs in the second quarter of 2001 reflecting other-than-temporary impairment in the valuation of publicly traded securities and private equity investments, partially offset by increases in gains on sales of securities available for sale and mortgage banking income. Revenue, the total of net interest income and noninterest income adjusted for the $1.72 billion (before tax) of non-cash impairment, increased from $19.71 billion to $21.87 billion, or 11%. Noninterest expense totaled $12.89 billion in 2001, compared with $11.83 billion in 2000, an increase of 9%. The increase was primarily due to an increase in salaries and incentive compensation resulting from increases in full-time equivalent staff and higher commissions due to record mortgage originations. Expense growth also included the effect of acquisitions, particularly Acordia, the fifth largest insurance broker in the U.S. The provision for loan losses was $1.78 billion in 2001, compared with $1.33 billion in 2000. During 2001, net charge-offs were $1.78 billion, or 1.09% of average total loans, compared with $1.22 billion, or .84%, during 2000. The allowance for loan losses was $3.76 billion, or 2.18% of total loans, at December 31, 2001, compared with $3.72 billion, or 2.31%, at December 31, 2000. At December 31, 2001, total nonaccrual and restructured loans were $1.64 billion, or 1.0% of total loans, compared with $1.20 billion, or .7%, at December 31, 2000. Foreclosed assets were $171 million at December 31, 2001, compared with $128 million at December 31, 2000. The ratio of common stockholders' equity to total assets was 8.83% at December 31, 2001, compared with 9.63% at December 31, 2000. The Company's total risk-based capital (RBC) ratio at December 31, 2001 was 10.45% and its Tier 1 RBC ratio was 6.99%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's RBC ratios at December 31, 2000 were 10.43% and 7.29%, respectively. The Company's leverage ratios were 6.25% and 6.49% at December 31, 2001 and 2000, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies. 34 Recent Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (FAS 141), BUSINESS COMBINATIONS, and Statement No. 142 (FAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS. FAS 141, effective June 30, 2001, requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated. FAS 141 also establishes how the purchase method is to be applied for business combinations completed after June 30, 2001. This guidance is similar to previous generally accepted accounting principles (GAAP); however, FAS 141 establishes additional disclosure requirements for transactions occurring after the effective date. FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During the transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 continued to be amortized through the income statement. Effective January 1, 2002, goodwill amortization expense ceased and goodwill will be assessed for impairment at least annually at the reporting unit level by applying a fair-value-based test. FAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP. After January 1, 2002, the elimination of goodwill amortization under FAS 142 is expected to reduce noninterest expense by approximately $600 million (pretax) and increase net income by approximately $560 million (after tax), for the year ended December 31, 2002, compared with 2001. The Company expects to complete its initial goodwill impairment assessment to determine if a transition impairment charge will be recognized under FAS 142 and record any transition adjustment in first quarter 2002. At December 31, 2001, the Company had $9.53 billion of goodwill, $5.50 billion of which related to the 1996 purchase of First Interstate Bancorp. The Company has determined that impairment of the remaining First Interstate goodwill is not permitted under FAS 142 since the former First Interstate operations must be combined with other similar banking operations for impairment testing. 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 applies to legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development or the normal operation of a long-lived asset. FAS 143 requires that the fair value of an asset retirement obligation be recognized as a liability in the period in which it is incurred. The asset retirement obligation is to be capitalized as part of the carrying amount of the long-lived asset and the expense is to be recognized over the useful life of the long-lived asset. 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 August 2001, the FASB issued Statement No. 144 (FAS 144), ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes Statement No. 121 (FAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. FAS 144 carries forward from FAS 121 the fundamental guidance related to the recognition and measurement of an impairment loss related to assets to be held and used and provides guidance related to the disposal of long-lived assets to be abandoned or disposed of by sale. FAS 144 became effective January 1, 2002 and was required to be applied prospectively. Adoption of FAS 144 did not have a material effect on the financial statements.
TABLE 1 RATIOS AND PER COMMON SHARE DATA - ----------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------- ($ in millions, except per share amounts) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS Net income to average total assets (ROA) 1.20% 1.61% 1.78% Net income applicable to common stock to average common stockholders' equity (ROE) 12.79 16.31 17.55 Net income to average stockholders' equity 12.75 16.20 17.35 EFFICIENCY RATIO (1) 64.0% 60.0% 58.8% CAPITAL RATIOS At year end: Common stockholders' equity to assets 8.83% 9.63% 9.79% Stockholders' equity to assets 8.85 9.72 9.90 Risk-based capital (2) Tier 1 capital 6.99 7.29 8.00 Total capital 10.45 10.43 10.93 Leverage (2) 6.25 6.49 6.76 Average balances: Common stockholders' equity to assets 9.33 9.83 10.07 Stockholders' equity to assets 9.41 9.93 10.27 PER COMMON SHARE DATA Dividend payout (3) 50.25% 38.14% 33.83% Book value $16.01 $15.29 $13.91 Market prices (4): High $54.81 $56.38 $49.94 Low 38.25 31.00 32.13 Year end 43.47 55.69 40.44 - -----------------------------------------------------------------------------------------------------------------
(1) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income). (2) See Note 22 to Financial Statements for additional information. (3) Dividends declared per common share as a percentage of earnings per common share. (4) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System. 35
TABLE 2 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA - ----------------------------------------------------------------------------------------------------------------------------- % Change Five-year (in millions, 2001/ compound except per share amounts) 2001 2000 1999 1998 1997 1996 2000 growth rate - ----------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 12,460 $ 10,865 $ 10,116 $ 9,673 $ 9,258 $ 8,776 15 % 7% Provision for loan losses 1,780 1,329 1,104 1,617 1,203 541 34 27 Noninterest income 7,690 8,843 7,975 6,920 6,046 5,075 (13) 9 Noninterest expense 12,891 11,830 10,637 11,311 9,580 9,256 9 7 Net income 3,423 4,026 4,012 2,191 2,712 2,411 (15) 7 Earnings per common share $ 1.99 $ 2.36 $ 2.32 $ 1.28 $ 1.57 $ 1.44 (16) 7 Diluted earnings per common share 1.97 2.33 2.29 1.26 1.55 1.42 (15) 7 Dividends declared per common share 1.00 .90 .785 .70 .615 .525 11 14 BALANCE SHEET (at year end) Securities available for sale $ 40,308 $ 38,655 $ 43,911 $ 36,660 $ 32,151 $ 33,077 4 % 4% Loans 172,499 161,124 133,004 119,662 116,435 115,119 7 8 Allowance for loan losses 3,761 3,719 3,344 3,307 3,220 3,202 1 3 Goodwill 9,527 9,303 8,046 7,889 8,237 8,307 2 3 Assets 307,569 272,426 241,053 224,135 203,819 204,075 13 9 Core deposits 182,295 156,710 138,247 144,179 133,051 137,409 16 6 Long-term debt 36,095 32,046 26,866 22,662 18,820 18,936 13 14 Guaranteed preferred beneficial interests in Company's subordinated debentures 2,435 935 935 935 1,449 1,300 160 13 Common stockholders' equity 27,150 26,221 23,600 21,869 20,700 20,466 4 6 Stockholders' equity 27,214 26,488 23,871 22,332 21,164 21,256 3 5 - -----------------------------------------------------------------------------------------------------------------------------
Factors That May Affect Future Results - -------------------------------------------------------------------------------- We make forward-looking statements in this report and in other reports and proxy statements we file with the Securities and Exchange Commission (SEC). In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include: o projections of our revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items; o descriptions of plans or objectives of our management for future operations, products or services, including pending acquisitions; o forecasts of our future economic performance; and o descriptions of assumptions underlying or relating to any of the foregoing. In this report, for example, we make forward-looking statements discussing our expectations about: o future credit losses and non-performing assets; o the future value of equity securities, including those in our venture capital portfolios; o the impact of new accounting standards, including the impact of FAS 142 on future noninterest expense and net income; and o future short-term and long-term interest rate levels and their impact on our net interest margin, net income, liquidity and capital. 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, "Financial Review--Balance Sheet Analysis"). 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. 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 condition. There are factors not described in this report or in our Form 10-K that could cause results to differ from our expectations. 36 Industry Factors AS A FINANCIAL SERVICES COMPANY, OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY GENERAL BUSINESS AND ECONOMIC CONDITIONS. Our business and earnings are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we operate. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company's loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. TERRORIST ATTACKS. We cannot predict at this time the severity or duration of the impact on the general economy or the Company of the September 11, 2001 terrorist attacks or any subsequent terrorist activities or any actions taken in response to or as a result of those attacks or activities. The most immediate impact has been decreased demand for air travel, which has adversely affected not only the airline industry but also other travel-related and leisure industries, such as lodging, gaming and tourism. To the extent the impact has spread or might spread to the overall U.S. and global economies, it could further decrease capital and consumer spending and deepen the U.S. and/or global recession. Decreased capital and consumer spending and other recessionary effects could adversely affect the Company in a number of ways including decreased demand for our products and services and increased credit losses. CALIFORNIA ENERGY CRISIS. California is an example of a local economy in which we operate. During 2001, California and other western states experienced an energy crisis, including increased energy costs, repeated episodes of diminished or interrupted electrical power supply and the filing by a California utility for protection under bankruptcy laws. We cannot predict whether this situation will continue in 2002 and, if it does, how severe the situation will be. Continuation or reoccurrence of the situation, however, could disrupt our business and the businesses of our customers who have operations or facilities in those states. It could also trigger an economic slowdown in those states, decreasing the demand for our loans and other products and services and/or increasing the number of customers who fail to repay their loans. Continuation or reoccurrence of the situation could also impact other states in which we operate, creating the same or similar concerns for us in those states. We discuss other business and economic conditions in more detail elsewhere in this report. OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY THE FISCAL AND MONETARY POLICIES OF THE FEDERAL GOVERNMENT AND ITS AGENCIES. The policies of the Board of Governors of the Federal Reserve System impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are hard to predict. Federal Reserve Board policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability to repay its loan. THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE. We operate in a highly competitive environment in the products and services we offer and the markets in which we operate. The competition among financial services companies to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitor's new products, especially offerings that provide cost savings to the customer. Some of our competitors may be better able to provide a wider range of products and services over a greater geographic area. We believe the financial services industry will become even more competitive as a result of legislative, regulatory and technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Recently, a number of foreign banks have acquired financial services companies in the United States, further increasing competition in the U.S. market. Many of our competitors have fewer regulatory constraints and some have lower cost structures. We expect the consolidation of the financial services industry to result in larger, better capitalized companies offering a wide array of financial services and products. The Gramm-Leach-Bliley Act (the Act) permits banks, securities firms and insurance companies to merge by creating a new type of financial services company called a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company can acquire banks and other financial institutions. The Act significantly changes our competitive environment. 37 WE ARE HEAVILY REGULATED BY FEDERAL AND STATE AGENCIES. The holding company, its subsidiary banks and many of its non-bank subsidiaries are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. Also, our failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to our reputation. For more information, refer to the "Regulation and Supervision" section of our 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 this report. 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. In addition, the widespread adoption of new technologies, including internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not successfully introduce new products and services, achieve market acceptance of our products and services, and/or develop and maintain loyal customers. THE HOLDING COMPANY RELIES ON DIVIDENDS FROM ITS SUBSIDIARIES FOR MOST OF ITS REVENUE. The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company's common and preferred stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank and certain of our non-bank subsidiaries may pay to the holding company. Also, the holding company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. For more information, refer to "Regulation and Supervision--Dividend Restrictions" and "--Holding Company Structure" in our Annual Report on Form 10-K for the year ended December 31, 2001. 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. In addition, it is difficult to predict the timing of any gains from these activities. For example, 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. Early in 2001, we experienced sustained declines in the market values of some of our publicly traded and private equity securities, in particular securities of companies in the technology and telecommunications industries. In the second quarter of 2001, we recognized non-cash charges to reflect other-than-temporary impairment in the valuation of securities. A number of factors, including the continued deterioration in capital spending on technology and telecommunications equipment and/or the impact of the recent terrorist attacks and other terrorist activities and actions taken in response to or as a result of those attacks and activities, could result in additional declines in the market values of our publicly traded and private equity securities. If we determine that the declines are other-than-temporary, additional impairment charges would be recognized. In addition, we will realize losses to the extent we sell securities at less than book value. For more information, see in this report "Financial Review--Overview," "--Earnings Performance--Noninterest Income," "--Balance Sheet Analysis--Securities Available for Sale" and Note 4 to Financial Statements. 38 MORTGAGE BANKING. The impact of interest rates on our mortgage banking business can be large and complex. Loan origination fees and loan servicing fees account for a significant portion of mortgage-related revenues. Changes in interest rates can impact both types of fees. For example, we would expect a decline in mortgage rates to increase the demand for mortgage loans as borrowers refinance, but 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 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 "Financial Review--Risk Management--Mortgage Banking Interest Rate Risk." WE HAVE AN ACTIVE ACQUISITION PROGRAM. We regularly explore opportunities to acquire financial institutions and other financial services providers. We cannot predict the number, size or timing of future acquisitions. We typically do not comment publicly on a possible acquisition or business combination until we have signed a definitive agreement for the transaction. Our ability to successfully complete an acquisition generally is subject to 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. OUR BUSINESS COULD SUFFER IF WE FAIL TO ATTRACT AND RETAIN SKILLED PEOPLE. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense. We may not be able to hire people or to keep them. OUR STOCK PRICE CAN BE VOLATILE. Our stock price can fluctuate widely in response to a variety of factors including: o actual or anticipated variations in our quarterly operating results; o new technology used, or services offered, by our competitors; o significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; o failure to integrate our acquisitions or realize anticipated benefits from our acquisitions; and o changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and events, such as the recent terrorist attacks, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, also could cause our stock price to decrease regardless of our operating results. 39 EARNINGS PERFORMANCE - -------------------------------------------------------------------------------- NET INTEREST INCOME Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable-equivalent basis was $12.54 billion in 2001, compared with $10.93 billion in 2000, an increase of 15%. The increase was primarily due to a 14% increase in earning assets. Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. For 2001, the net interest margin was 5.36%, compared with 5.35% in 2000. On average for the year 2001, earning asset yields declined approximately the same as the decline in the average cost of all funding sources, about 95 basis points. During 2001, the net interest margin widened on a sequential quarterly basis from 5.21% in the first quarter to 5.50% in the fourth quarter. Three factors account for the margin increase during the year: (a) a greater proportion of consumer loans in the total loan mix, (b) an increase in lower cost core deposits, particularly mortgage escrow deposits as mortgage origination activity expanded, and (c) a faster decline in deposit and borrowing costs than in loan yields as the general level of market rates declined throughout the year. Table 5 presents the individual components of net interest income and the net interest margin. NONINTEREST INCOME Table 3 shows the major components of noninterest income. TABLE 3 NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------- % Change Year ended December 31, ---------------- -------------------------------------- 2001/ 2000/ (in millions) 2001 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 1,876 $1,704 $1,580 10% 8% Trust and investment fees: Asset management and custody fees 731 735 784 (1) (6) Mutual fund and annuity sales fees 803 763 472 5 62 All other 176 126 110 40 15 ------- ------ ------ Total trust and investment fees 1,710 1,624 1,366 5 19 Credit card fees 796 721 694 10 4 Other fees: Cash network fees 202 187 151 8 24 Charges and fees on loans 445 347 314 28 11 All other 597 579 505 3 15 ------- ------ ------ Total other fees 1,244 1,113 970 12 15 Mortgage banking: Origination and other closing fees 737 350 406 111 (14) Servicing fees, net of amortization and impairment (260) 665 404 -- 65 Net gains on securities available for sale 134 -- -- -- -- Net gains on sales of mortgage servicing rights -- 159 193 (100) (18) Net gains on mortgage loan origination/sales activities 705 38 117 -- (68) All other 355 232 287 53 (19) ------- ------ ------ Total mortgage banking 1,671 1,444 1,407 16 3 Insurance 745 411 395 81 4 Net venture capital (losses) gains (1,630) 1,943 1,008 -- 93 Net gains (losses) on securities available for sale 463 (722) (228) -- 217 Net income (loss) from equity investments accounted for by the: Cost method (55) 170 138 -- 23 Equity method (51) 94 81 -- 16 Net gains (losses) on sales of loans 35 (134) 68 -- -- Net gains on dispositions of operations 122 23 107 430 (79) All other 764 452 389 69 16 ------- ------ ------ Total $ 7,690 $8,843 $7,975 (13)% 11% ======= ====== ====== ==== === - -------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts increased in line with the growth in core consumer deposit balances and account activity. The increase in trust and investment fees for 2001 was primarily due to the acquisition of H.D. Vest and an increase in mutual fund fees resulting from the overall growth in mutual fund assets. The Company managed mutual funds with $77 billion of assets at December 31, 2001, compared with $69 billion at December 31, 2000. The Company also managed or maintained personal trust, employee benefit trust and agency assets of approximately $525 billion at December 31, 2001, compared with $480 billion at December 31, 2000. The increase in mortgage origination and other closing fees was predominantly due to increased refinancing activity resulting from the decline in fixed-rate mortgage rates during the last three quarters of 2001. Mortgage servicing fees before amortization and impairment provision increased in 2001 in line with substantial growth in the servicing portfolio. However, these additional fees were more than offset by increased amortization and impairment provisions for mortgage servicing rights and other retained interests. Such valuation adjustments are driven by higher estimated prepayments assumed to be associated with the lower prevailing level of interest rates. (For additional disclosures related to assumptions used to value mortgage servicing rights, see Note 1 (Transfers and Servicing of Financial Assets) and Note 19 to Financial Statements.) The increase in gains on mortgage loan origination/sales activities in 2001 was due to increased production volume. The increase in insurance fees was predominantly due to the acquisition of Acordia in the second quarter of 2001 and subsequent growth in that business. Net venture capital losses for 2001 included approximately $1,500 million (pretax) of non-cash impairment write-downs recognized in the second quarter of 2001 reflecting other-than-temporary impairment in the valuation of publicly traded securities and private equity investments. Venture capital gains in 2000 included a $560 million (pretax) non-cash gain recognized during the first quarter on the Company's investment in Siara Systems. 40 Net losses for 2001 from equity investments included approximately $215 million of non-cash impairment write-downs recognized in the second quarter of 2001. The Company routinely recognizes impairment in its venture capital portfolios. During second quarter 2001, based on general economic and market conditions, including those events occurring in the technology and telecommunications industries, adverse changes occurred that impacted venture capital financing. While the impairment recognized is based on all of the information available at the time of the assessment, other information or economic developments in the future could lead to further impairment. The net losses on securities available for sale in 2000 were predominantly due to the sales of securities associated with the restructuring of the debt securities portion of the securities available for sale portfolio during the first nine months of 2000. Net losses on sales of loans in 2000 were due to sales of loans and loan asset securitizations by First Security prior to the FSCO Merger. The increase in net gains on dispositions of operations in 2001 was predominantly due to a $96 million net gain in the first quarter of 2001, which included a $54 million reduction of unamortized goodwill, related to the divestiture of 39 stores (as a condition to the First Security merger) in Idaho, New Mexico, Nevada and Utah. "All other" noninterest income included writedowns of auto lease residuals of about $80 million recorded in 2001, related to the portfolios acquired as part of the FSCO Merger, compared with about $180 million in 2000. In 2000, the Company began acquiring residual loss insurance, which is intended to cover most of the risk of additional declines in residual values for the auto lease portfolio in the foreseeable future. NONINTEREST EXPENSE Table 4 shows the major components of noninterest expense.
TABLE 4 NONINTEREST EXPENSE - ------------------------------------------------------------------------------------------------------------------ % Change Year ended December 31, --------------- --------------------------------------- 2001/ 2000/ (in millions) 2001 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Salaries $ 4,027 $ 3,652 $ 3,307 10% 10% Incentive compensation 1,195 846 643 41 32 Employee benefits 960 989 901 (3) 10 Equipment 909 948 928 (4) 2 Net occupancy 975 953 813 2 17 Goodwill 610 530 459 15 15 Core deposit intangible: Nonqualifying (1) 155 173 186 (10) (7) Qualifying 10 13 20 (23) (35) Net gains on dispositions of premises and equipment (21) (58) (16) (64) 263 Outside professional services 486 447 381 9 17 Contract services 472 536 473 (12) 13 Telecommunications 355 303 286 17 6 Outside data processing 319 343 312 (7) 10 Travel and entertainment 286 287 262 -- 10 Advertising and promotion 276 316 251 (13) 26 Postage 242 252 239 (4) 5 Stationery and supplies 242 223 191 9 17 Operating losses 234 179 150 31 19 Insurance 167 157 152 6 3 Security 156 98 95 59 3 All other 836 643 604 30 6 ------- ------- ------- Total $12,891 $11,830 $10,637 9% 11% ======= ======= ======= === === - ------------------------------------------------------------------------------------------------------------------
(1) Represents amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The increase in salaries in 2001 was due to a 10% increase in active full-time equivalent staff, including employees from newly acquired companies. The increase in incentive compensation was predominantly due to additional sales and service team members, partially to originate record mortgage volume. The slight decrease in employee benefits was due to the Company recognizing net pension income of $49 million in 2001, compared with net pension cost of $49 million in 2000. This decrease was substantially offset by the increase in other employee benefits related to additional active full-time equivalent staff and rising benefit costs. The net pension income in 2001 was due to amortization of gains on pension plan assets due primarily to strong equity and bond market performance in 2000. The Company expects to recognize increased pension cost in 2002. 41
TABLE 5 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) - ---------------------------------------------------------------------------------------------------------------------- (in millions) 2001 2000 ---------------------------- ---------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense - ---------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 2,583 3.69% $ 95 $ 2,370 6.01% $ 143 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 2,158 6.55 137 3,322 6.16 210 Securities of U.S. states and political subdivisions 2,026 7.98 154 2,080 7.74 162 Mortgage-backed securities: Federal agencies 27,433 7.19 1,917 26,054 7.22 1,903 Private collateralized mortgage obligations 1,766 8.55 148 2,379 7.61 187 -------- ------- -------- ------- Total mortgage-backed securities 29,199 7.27 2,065 28,433 7.25 2,090 Other debt securities (4) 3,343 7.80 254 5,049 7.93 261 -------- ------- -------- ------- Total debt securities available for sale (4) 36,726 7.32 2,610 38,884 7.24 2,723 Mortgages held for sale (3) 23,677 6.72 1,595 10,725 7.85 849 Loans held for sale (3) 4,820 6.58 317 4,915 8.50 418 Loans: Commercial 48,648 8.01 3,896 45,352 9.40 4,263 Real estate 1-4 family first mortgage 19,715 7.18 1,416 16,356 7.95 1,300 Other real estate mortgage 24,194 7.99 1,934 22,509 8.99 2,023 Real estate construction 8,073 8.10 654 6,934 10.02 695 Consumer: Real estate 1-4 family junior lien mortgage 21,232 9.25 1,965 15,292 10.43 1,595 Credit card 6,270 13.36 838 5,867 14.58 856 Other revolving credit and monthly payment 23,459 11.40 2,674 21,824 12.06 2,631 -------- ------- -------- ------- Total consumer 50,961 10.75 5,477 42,983 11.82 5,082 Lease financing 9,930 7.67 761 9,822 7.66 752 Foreign 1,603 20.82 333 1,621 21.15 343 -------- ------- -------- ------- Total loans (5)(6) 163,124 8.87 14,471 145,577 9.93 14,458 Other 4,000 4.77 191 3,206 6.21 199 -------- ------- -------- ------- Total earning assets $234,930 8.24 19,279 $205,677 9.19 18,790 ======== ------- ======== ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 2,178 2.51 55 $ 3,424 1.88 64 Market rate and other savings 80,585 2.05 1,655 63,577 2.81 1,786 Savings certificates 29,850 5.13 1,530 30,101 5.37 1,616 Other time deposits 1,332 5.04 67 4,438 5.69 253 Deposits in foreign offices 6,209 3.96 246 5,950 6.22 370 -------- ------- -------- ------- Total interest-bearing deposits 120,154 2.96 3,553 107,490 3.80 4,089 Short-term borrowings 33,885 3.76 1,273 28,222 6.23 1,758 Long-term debt 34,501 5.29 1,826 29,000 6.69 1,939 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,394 6.40 89 935 7.92 74 -------- ------- -------- ------- Total interest-bearing liabilities 189,934 3.55 6,741 165,647 4.75 7,860 Portion of noninterest-bearing funding sources 44,996 -- -- 40,030 -- -- -------- ------- -------- ------- Total funding sources $234,930 2.88 6,741 $205,677 3.84 7,860 ======== ------- ======== ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (7) 5.36% $12,538 5.35% $10,930 ===== ======= ==== ======= NONINTEREST-EARNING ASSETS Cash and due from banks $ 14,608 $ 13,103 Goodwill 9,514 8,811 Other 26,369 22,597 -------- -------- Total noninterest-earning assets $ 50,491 $ 44,511 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 55,333 $ 48,691 Other liabilities 13,301 11,000 Preferred stockholders' equity 210 266 Common stockholders' equity 26,643 24,584 Noninterest-bearing funding sources used to fund earning assets (44,996) (40,030) -------- -------- Net noninterest-bearing funding sources $ 50,491 $ 44,511 ======== ======== TOTAL ASSETS $285,421 $250,188 ======== ======== - ----------------------------------------------------------------------------------------------------------------------
(1) The average prime rate of the Company was 6.91%, 9.24%, 8.00%, 8.35% and 8.44% for 2001, 2000, 1999, 1998 and 1997, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 3.78%, 6.52%, 5.42%, 5.56% and 5.74% for the same years, 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. 42
TABLE 5 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2) - -------------------------------------------------------------------------------------------------------------------------- 1999 1998 ------------------------------- ---------------------------- Interest Interest Average Yields/ Income/ Average Yields/ income/ Balance Rates Expense balance rates expense - -------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,673 5.11% $ 86 $ 1,770 5.57% $ 99 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 6,124 5.51 348 5,916 6.02 353 Securities of U.S. states and political subdivisions 2,119 8.12 168 1,855 8.39 148 Mortgage-backed securities: Federal agencies 23,542 6.77 1,599 20,079 6.99 1,376 Private collateralized mortgage obligations 3,945 6.77 270 3,072 6.72 205 -------- ------- -------- ------- Total mortgage-backed securities 27,487 6.77 1,869 23,151 6.95 1,581 Other debt securities (4) 3,519 7.49 209 1,570 7.94 105 -------- ------- -------- ------- Total debt securities available for sale (4) 39,249 6.69 2,594 32,492 6.90 2,187 Mortgages held for sale (3) 13,559 6.96 951 14,712 6.85 1,008 Loans held for sale (3) 5,154 7.31 377 4,876 7.71 376 Loans: Commercial 38,932 8.66 3,370 35,805 8.85 3,169 Real estate 1-4 family first mortgage 13,315 7.78 1,036 13,870 7.92 1,098 Other real estate mortgage 18,822 8.74 1,645 17,539 9.40 1,648 Real estate construction 5,260 9.56 503 4,270 9.71 415 Consumer: Real estate 1-4 family junior lien mortgage 11,656 9.96 1,161 10,708 10.43 1,117 Credit card 5,686 13.77 783 6,322 14.99 948 Other revolving credit and monthly payment 19,561 11.88 2,324 19,992 12.15 2,428 -------- ------- -------- ------- Total consumer 36,903 11.57 4,268 37,022 12.13 4,493 Lease financing 8,852 7.81 691 7,039 8.13 572 Foreign 1,554 20.65 321 1,353 20.65 279 -------- ------- -------- ------- Total loans (5)(6) 123,638 9.57 11,834 116,898 9.99 11,674 Other 3,252 5.01 162 3,092 5.86 181 -------- ------- -------- ------- Total earning assets $186,525 8.60 16,004 $173,840 8.97 15,525 ======== ------- ======== ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 3,120 .99 31 $ 3,034 1.35 41 Market rate and other savings 60,901 2.30 1,399 56,724 2.63 1,492 Savings certificates 30,088 4.86 1,462 31,905 5.29 1,686 Other time deposits 3,957 4.94 196 4,565 5.47 250 Deposits in foreign offices 1,658 4.76 79 948 4.84 46 -------- ------- -------- ------- Total interest-bearing deposits 99,724 3.17 3,167 97,176 3.62 3,515 Short-term borrowings 22,559 5.00 1,127 17,927 5.36 963 Long-term debt 24,646 5.90 1,453 19,294 6.29 1,214 Guaranteed preferred beneficial interests in Company's subordinated debentures 935 7.73 72 1,160 8.12 94 -------- ------- -------- ------- Total interest-bearing liabilities 147,864 3.94 5,819 135,557 4.27 5,786 Portion of noninterest-bearing funding sources 38,661 -- -- 38,283 -- -- -------- ------- -------- ------- Total funding sources $186,525 3.13 5,819 $173,840 3.34 5,786 ======== ------- ======== ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (7) 5.47% $10,185 5.63% $ 9,739 ===== ======= ===== ======= NONINTEREST-EARNING ASSETS Cash and due from banks $ 12,252 $ 11,410 Goodwill 7,983 8,069 Other 18,339 14,255 -------- -------- Total noninterest-earning assets $ 38,574 $ 33,734 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 45,201 $ 43,229 Other liabilities 8,909 7,314 Preferred stockholders' equity 461 463 Common stockholders' equity 22,664 21,011 Noninterest-bearing funding sources used to fund earning assets (38,661) (38,283) -------- -------- Net noninterest-bearing funding sources $ 38,574 $ 33,734 ======== ======== TOTAL ASSETS $225,099 $207,574 ======== ======== - -------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------- 1997 ---------------------------- Interest Average Yields/ income/ balance rates expense - ----------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 1,207 5.40% $ 65 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 5,987 6.22 371 Securities of U.S. states and political subdivisions 1,630 8.35 133 Mortgage-backed securities: Federal agencies 22,173 7.08 1,559 Private collateralized mortgage obligations 3,083 6.80 210 -------- ------- Total mortgage-backed securities 25,256 7.05 1,769 Other debt securities (4) 1,192 5.71 71 -------- ------- Total debt securities available for sale (4) 34,065 6.91 2,344 Mortgages held for sale (3) 7,314 7.27 532 Loans held for sale (3) 3,900 8.10 316 Loans: Commercial 31,939 9.22 2,943 Real estate 1-4 family first mortgage 16,924 8.46 1,432 Other real estate mortgage 17,603 9.61 1,692 Real estate construction 3,858 10.13 391 Consumer: Real estate 1-4 family junior lien mortgage 9,882 9.61 950 Credit card 6,960 14.59 1,015 Other revolving credit and monthly payment 20,188 11.88 2,398 -------- ------- Total consumer 37,030 11.78 4,363 Lease financing 5,467 8.32 455 Foreign 1,042 20.40 212 -------- ------- Total loans (5)(6) 113,863 10.09 11,488 Other 2,558 5.93 152 -------- ------- Total earning assets $162,907 9.16 14,897 ======== ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 3,491 1.72 60 Market rate and other savings 54,753 2.62 1,433 Savings certificates 32,143 5.32 1,711 Other time deposits 4,112 5.61 231 Deposits in foreign offices 1,386 4.83 67 -------- ------- Total interest-bearing deposits 95,885 3.65 3,502 Short-term borrowings 14,038 5.36 756 Long-term debt 18,335 6.40 1,173 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,437 7.89 113 -------- ------- Total interest-bearing liabilities 129,695 4.27 5,544 Portion of noninterest-bearing funding sources 33,212 -- -- -------- ------- Total funding sources $162,907 3.41 5,544 ======== ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (7) 5.75% $ 9,353 ===== ======= NONINTEREST-EARNING ASSETS Cash and due from banks $ 12,297 Goodwill 8,325 Other 14,689 -------- Total noninterest-earning assets $ 35,311 ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 39,903 Other liabilities 7,688 Preferred stockholders' equity 555 Common stockholders' equity 20,377 Noninterest-bearing funding sources used to fund earning assets (33,212) -------- Net noninterest-bearing funding sources $ 35,311 ======== TOTAL ASSETS $198,218 ======== - -----------------------------------------------------------------------------------
(4) Includes certain preferred securities. (5) Interest income includes loan fees, net of deferred costs, of approximately $146 million, $194 million, $210 million, $148 million and $126 million in 2001, 2000, 1999, 1998 and 1997, respectively. (6) Nonaccrual loans and related income are included in their respective loan categories. (7) 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 years presented. 43 OPERATING SEGMENT RESULTS COMMUNITY BANKING net income was $2,568 million in 2001, compared with $3,106 million in 2000. Excluding second quarter 2001 impairment and other special charges of $1,089 million (after tax), net income was $3,657 million in 2001, an increase of 18% from 2000. Net interest income increased by $1,324 million, or 17%, compared with 2000, primarily due to an increase in mortgages held for sale and mortgage loans, as well as lower borrowing costs. The provision for loan losses increased by $166 million from 2000 due to higher charge-offs and growth in the loan portfolio. Noninterest income was $5,189 million in 2001, compared with $6,685 million in 2000. Excluding second quarter 2001 impairment and other special charges of $1,742 million (before tax), noninterest income was up $246 million in 2001, or 4%, compared with 2000, due to increases in trust and investment fees, service charges on deposit accounts, mortgage banking and credit card fees. Also, noninterest income in 2000 included losses on sales of loans and securitizations by First Security prior to the FSCO Merger. These improvements, plus a significant increase in gains on securities available for sale more than offset the decrease in venture capital gains, excluding approximately $1,500 million of impairment charges taken in second quarter 2001. Noninterest expense increased by $576 million over 2000 due to an increase in sales and services staff related expenses as a result of record mortgage origination volume. WHOLESALE BANKING net income was $928 million in 2001, compared with $1,007 million in 2000. Excluding second quarter 2001 impairment and other special charges of $62 million (after tax), net income was $990 million in 2001, a decrease of 2% from 2000. Net interest income increased $20 million, or 1%, from 2000, due to higher loan volume, which was offset by the lower interest rate environment that existed during 2001. Average outstanding loan balances increased $4 billion, or 9%, from 2000. Noninterest income increased by $345 million, or 20%, compared with 2000, due to higher insurance revenue related to the acquisition of Acordia in the second quarter of 2001. Noninterest expense increased by $399 million, or 21%, compared with 2000, primarily as a result of the Acordia acquisition along with increased personnel expenses related to increased sales and service staff. The provision for loan losses increased to $278 million in 2001, compared with $151 million in 2000. WELLS FARGO FINANCIAL net income was $288 million in 2001, compared with $258 million in 2000, an increase of 12%. Net interest income increased by 18% from 2000, due to growth in average loans. The provision for loan losses was $487 million in 2001, compared with $329 million in 2000. The increase was predominantly due to growth in average loans and higher net write-offs in the loan portfolios. For a further discussion of operating segments see Note 17 to Financial Statements. BALANCE SHEET ANALYSIS A comparison between the year-end 2001 and 2000 balance sheets is presented below. SECURITIES AVAILABLE FOR SALE The Company holds both debt and marketable equity securities in its securities available for sale portfolio. Debt securities available for sale are primarily held for liquidity, interest rate risk management and yield enhancement purposes. Given these purposes, the portfolio is primarily comprised of very liquid, high quality federal agency debt securities. At December 31, 2001, the Company held $38.7 billion of debt securities available for sale, up from $35.4 billion at December 31, 2000. The Company had a net unrealized gain of $655 million at December 31, 2001 compared with a net unrealized gain of $718 million at December 31, 2000. Although the Company realized $597 million in gains on securities sold during 2001, the net unrealized gain declined only $63 million from December 31, 2000 because of the favorable impact of lower long-term interests rates on the value of debt securities not sold during 2001. The weighted average expected maturity of the debt securities portion of the securities available for sale portfolio was 5 years and 10 months at December 31, 2001. Since 80% of this portfolio is held in mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because the issuers of such securities may have the right to prepay obligations with or without penalty. The effect of a 200 basis point increase and a 200 basis point decrease on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale portfolio is indicated in Table 6. Table 6 MORTGAGE-BACKED SECURITIES
- ----------------------------------------------------------------------------------- ($ in billions) Fair Net unrealized Remaining value gain (loss) maturity - ----------------------------------------------------------------------------------- At December 31, 2001 $32.4 $ .5 5 yrs., 6 mos. At December 31, 2001, assuming a 200 basis point: Increase in interest rates 29.2 (2.7) 7 yrs., 4 mos. Decrease in interest rates 34.2 2.3 2 yrs., 8 mos. - -----------------------------------------------------------------------------------
Equity securities available for sale are comprised of marketable common stocks, largely distributed from the Company's private equity investment activities. The decrease of $1.64 billion in cost between December 31, 2000 and December 31, 2001 was due to sales and dispositions and the non-cash impairment charges taken in the second quarter of 2001. The fair value of this portfolio exceeded cost by $176 million at December 31, 2001 and $72 million at December 31, 2000. See Note 4 to Financial Statements for securities available for sale by security type. 44 LOAN PORTFOLIO A comparative schedule of average loan balances is presented in Table 5; year-end balances are presented in Note 5 to Financial Statements. Loans averaged $163.1 billion in 2001, compared with $145.6 billion in 2000, an increase of 12%. Total loans at December 31, 2001 were $172.5 billion, compared with $161.1 billion at year-end 2000, an increase of 7%. The increase in average loans is due to increased consumer demand, particularly for home finance. Mortgages held for sale increased from $11.8 billion to $30.4 billion due to record originations, including significant refinancing activity. These increases were partially offset by a slow down in commercial loan demand in line with the weakening U.S. economy. DEPOSITS Comparative detail of average deposit balances is presented in Table 5. Average core deposits funded 58.8% and 58.3% of the Company's average total assets in 2001 and 2000, respectively. Year-end deposit balances are presented in Table 7. Total average interest-bearing deposits rose from $107.5 billion in 2000 to $120.2 billion in 2001. For the same periods, total average noninterest-bearing deposits rose from $48.7 billion to $55.3 billion. While savings certificates of deposits declined on average from $30.1 billion in 2000 to $29.9 billion in 2001, noninterest-bearing checking accounts and other core deposit categories increased substantially in 2001 reflecting the Company's success in growing customer accounts and balances and reflecting growth in mortgage escrow deposits associated with the record amount of mortgages originated in 2001. Deposit growth in 2001 was also partly due to sweep accounts moved onto the balance sheet. Table 7 DEPOSITS
- --------------------------------------------------------------------- (in millions) December 31, ----------------------- % 2001 2000 Change - --------------------------------------------------------------------- Noninterest-bearing $ 65,362 $ 55,096 19% Interest-bearing checking 2,228 3,699 (40) Market rate and other savings 89,251 66,859 33 Savings certificates 25,454 31,056 (18) -------- -------- Core deposits 182,295 156,710 16 Other time deposits 839 5,137 (84) Deposits in foreign offices 4,132 7,712 (46) -------- -------- Total deposits $187,266 $169,559 10% ======== ======== === - ----------------------------------------------------------------------
OFF-BALANCE SHEET TRANSACTIONS OFF-BALANCE SHEET ARRANGEMENTS The Company consolidates majority-owned subsidiaries that it controls. Other affiliates, including certain joint ventures, in which there is generally 20% ownership are accounted for by the equity method of accounting and not consolidated; those in which there is less than 20% ownership are generally carried at cost. The Company's mortgage operation, in the routine course of business, originates a portion of its mortgage loans through joint ventures. Such joint ventures are used as a means to generate loans that are funded by Wells Fargo Home Mortgage, Inc. or an affiliated entity and are subject to established underwriting criteria. The Company has also entered into joint ventures to provide title, escrow, appraisal and other real estate-related services. These joint ventures were formed to provide certain operational efficiencies due to scale and are managed by the Company's joint venture partner, an unrelated third party. The Company has also formed alliances with other unrelated third parties to gain economies of scale through other joint ventures in areas such as credit card processing and related activities. These joint ventures are accounted for under the equity method and the assets and liabilities of such ventures are not significant. The Company does not dispose of troubled loans or problem assets by means of unconsolidated special purpose entities. In the ordinary course of business, 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, which are sold to customers to meet their specialized investment needs. Typically, all securitizations are structured without recourse to the Company, without other financial commitments from the Company and without restrictions on the retained interests. At December 31, 2001, with respect to these securitizations, the Company had issued a total of $15.6 million in liquidity commitments in the form of demand notes and had committed to provide a total of $19.8 million in credit enhancements related to four of these securitizations. At December 31, 2001, the Company retained servicing rights and other beneficial interests from these sales of approximately $1.6 billion, consisting of $415 million in securities, $330 million of mortgage and other servicing assets and $825 million in other retained interests. Refer to Note 18 to Financial Statements for additional information regarding securitization activities. 45 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 directly 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 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 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 initiatives undertaken by the Company. Table 8 summarizes significant contractual obligations and other commitments: Table 8 CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
- --------------------------------------------------------------------------------------- (in millions) Long-term Operating debt (1) leases Total - --------------------------------------------------------------------------------------- 2002 $10,115 $ 383 $10,498 2003 6,904 304 7,208 2004 3,915 253 4,168 2005 4,273 190 4,463 2006 3,359 158 3,517 Thereafter 7,529 736 8,265 ------- ------ ------- Total $36,095 $2,024 $38,119 ======= ====== ======= Other commitments: Commitments to extend credit $99,652 Standby letters of credit and financial guarantees (2) 5,467 Commercial and similar letters of credit 577 Credit lines to mortgage joint ventures 410 Securitization liquidity commitments and related credit enhancements 35 Equity and other investments 1,227 - ---------------------------------------------------------------------------------------
(1) Includes capital leases of $27 million (2) Net of participations sold to other institutions of $736 million The Company enters into derivative financial instruments as part of its interest rate risk management process, customer accommodation or other trading activities. See "Asset/Liability and Market Risk Management" herein and refer to Note 23 to Financial Statements for additional information regarding derivative financial instruments. TRANSACTIONS WITH RELATED PARTIES There are no related party transactions required to be disclosed in accordance with FASB Statement No. 57, RELATED PARTY DISCLOSURES. Loans to executive officers and directors of the Company and its banking subsidiaries were made in the ordinary course of business and were made on substantially the same terms as comparable transactions. RISK MANAGEMENT CREDIT RISK MANAGEMENT PROCESS The Company's credit risk management is structured as an integrated process that stresses decentralized line of business group management and accountability, supported by the Chief Credit Officer's oversight, consistent credit policies, and frequent and comprehensive risk measurement and modeling. The process is also examined regularly by the Company's Chief Loan Examiner and Chief Auditor. Credit risk (including counterparty risk) is managed within the framework and guidance of comprehensive company-wide policies. Credit policies are in place for all banking and non-banking operations that have exposure to credit risk. These policies provide a consistent and prudent approach to credit risk management across the enterprise. They are routinely reviewed and modified as appropriate. The Chief Credit Officer provides company-wide credit oversight. Each business group with credit risks has a designated credit officer and retains the primary responsibility for managing that risk. The Chief Credit Officer delegates authority, limits, and requirements to the business units. All portfolios of credit risk are subject to periodic reviews, to ensure that the risk identification processes are functioning properly and that credit standards are being adhered to. Such reviews are conducted by the business units themselves and by the office of the Chief Credit Officer. In addition, all such portfolios are subject to the independent review of the Chief Loan Examiner and/or the Chief Auditor. 46 Quarterly asset quality forecasts are completed to quantify each business group's intermediate-term outlook for loan losses and recoveries, non-performing loans and market trends. Periodic stress tests are conducted using a portfolio loss simulation model, which correlates the performance of the Company's various sub-portfolios to validate the adequacy of the overall allowance for loan losses. In addition, the Company routinely reviews and evaluates downside scenarios for risks that are not borrower specific but that may influence the behavior of a particular credit, group of credits, or entire sub-portfolios. This evaluation includes assessments related to particular industries and specific macroeconomic trends. NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS Table 9 presents comparative data for nonaccrual and restructured loans and other assets. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Table 9 excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. This information is presented in Table 10. Notwithstanding, 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 Table 9. (Note 1 to Financial Statements describes the Company's accounting policy relating to nonaccrual and restructured loans.) Table 9 NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS
- ----------------------------------------------------------------------------------------------------------------- (in millions) December 31, -------------------------------------------------------------- 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (1) $ 827 $ 739 $374 $302 $224 Real estate 1-4 family first mortgage 203 127 144 138 177 Other real estate mortgage (2) 210 113 118 204 263 Real estate construction 145 57 11 23 32 Consumer: Real estate 1-4 family junior lien mortgage 24 23 17 17 17 Other revolving credit and monthly payment 59 36 27 41 18 ------ ------ ---- ---- ---- Total consumer 83 59 44 58 35 Lease financing 163 92 24 13 12 Foreign 9 7 9 17 -- ------ ------ ---- ---- ---- Total nonaccrual loans (3) 1,640 1,194 724 755 743 Restructured loans -- 1 4 1 9 ------ ------ ---- ---- ---- Nonaccrual and restructured loans 1,640 1,195 728 756 752 As a percentage of total loans 1.0% .7% .5% .6% .6% Foreclosed assets 171 128 161 152 216 Real estate investments (4) 2 27 33 1 4 ------ ------ ---- ---- ---- Total nonaccrual and restructured loans and other assets $1,813 $1,350 $922 $909 $972 ====== ====== ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------
(1) Includes commercial agricultural loans of $68 million, $44 million, $49 million, $41 million and $32 million at December 31, 2001, 2000, 1999, 1998 and 1997, respectively. (2) Includes agricultural loans secured by real estate of $43 million, $13 million, $17 million, $12 million and $18 million at December 31, 2001, 2000, 1999, 1998 and 1997, respectively. (3) Of the total nonaccrual loans, $995 million, $761 million, $372 million, $389 million and $416 million at December 31, 2001, 2000, 1999, 1998 and 1997, respectively, were considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. (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 $24 million, $56 million, $89 million, $128 million and $172 million at December 31, 2001, 2000, 1999, 1998 and 1997, respectively. The Company anticipates changes in the amount of nonaccrual loans that result from increases in lending activity or from resolutions of loans in the nonaccrual portfolio. The performance of any individual loan can be affected by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company purchases loans from other financial institutions that may be classified as nonaccrual based on the Company's policies. The Company generally identifies loans to be evaluated for impairment under FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. 47 In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, rather than the contractual terms specified by the restructuring agreement. Consequently, not all impaired loans are necessarily placed on nonaccrual status. That is, loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the Company will estimate the amount of impairment using discounted cash flows, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of estimating impairment using historical loss factors as a means of measurement, 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 by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. If interest that was due on the book balances of all nonaccrual and restructured loans (including loans that were but are no longer on nonaccrual or were restructured at year end) had been accrued under their original terms, $123 million of interest would have been recorded in 2001, compared with $29 million actually recorded. Foreclosed assets at December 31, 2001 were $171 million, compared with $128 million at December 31, 2000. Most of the foreclosed assets at December 31, 2001 have been in the portfolio three years or less. LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Table 10 shows loans that are contractually past due 90 days or more as to interest or principal, but are not included in Table 9, Nonaccrual and Restructured Loans and Other Assets. Table 10 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
- ------------------------------------------------------------------------------------------------------------------ (in millions) December 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Commercial $ 60 $ 90 $ 27 $ 33 $ 37 Real estate 1-4 family first mortgage 152 66 45 42 58 Other real estate mortgage 22 24 18 18 17 Real estate construction 47 12 4 6 14 Consumer: Real estate 1-4 family junior lien mortgage 56 27 36 65 75 Credit card 117 96 105 145 165 Other revolving credit and monthly payment 289 263 198 171 212 ---- ---- ---- ---- ---- Total consumer 462 386 339 381 452 ---- ---- ---- ---- ---- Total $743 $578 $433 $480 $578 ==== ==== ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is presented in Note 5 to Financial Statements. At December 31, 2001, the allowance for loan losses was $3.76 billion, or 2.18% of total loans, compared with $3.72 billion, or 2.31%, at December 31, 2000 and $3.34 billion, or 2.51%, at December 31, 1999. The provision for loan losses totaled $1.78 billion in 2001, $1.33 billion in 2000 and $1.10 billion in 1999. Net charge-offs in 2001 were $1.78 billion, or 1.09% of average total loans, compared with $1.22 billion, or .84%, in 2000 and $1.12 billion, or .90%, in 1999. Loan loss recoveries were $421 million in 2001, compared with $428 million in 2000 and $473 million in 1999. Any loan that is past due as to principal or interest and that is not both well-secured and in the process of collection is generally charged off (to the extent that it exceeds the fair value of any related collateral) after a predetermined period of time that is based on loan category. Additionally, loans are charged off when classified as a loss by either internal loan examiners or regulatory examiners. The Company considers the allowance for loan losses of $3.76 billion adequate to cover losses inherent in loans, commitments to extend credit and standby and other letters of credit at December 31, 2001. The process for determining the adequacy for loan losses is critical to the financial results of the Company and requires subjective and complex judgement by management, as a result of the need to make estimates about the effect of matters that are inherently uncertain. Therefore, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of the factors then prevailing, including economic conditions and the ongoing examination process by the Company and its regulators, will not require significant increases in the allowance for loan losses. For discussion of the process by which the Company determines the adequacy of the allowance for loan losses, see Note 5 to Financial Statements. 48 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 Corporate Asset/Liability Management Committee (ALCO) maintains oversight of these risks. The Committee 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. It can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times (for example, if assets re-price faster than liabilities and interest rates are generally falling, Company earnings will initially decline); (b) assets and liabilities may re-price at the same time but by different amounts (when the general level of interest rates is falling, the Company may choose for customer management, competitive, or other reasons to reduce the rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates); (c) short-term and long-term market interest rates may change by different amounts (i.e. the shape of the yield curve may impact new loan yields and funding costs differently); or (d) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, mortgage-backed securities held in the securities available for sale portfolio may prepay significantly earlier than anticipated - with an associated reduction in portfolio yield and income - if long-term mortgage interest rates decline sharply). In addition to the direct impact of interest rate changes on net interest income through these channels, interest rates indirectly impact earnings through their effect on loan demand, credit losses, mortgage origination fees, the value of mortgage servicing rights and other sources of Company earnings. The principal tool used to evaluate Company interest rate risk is a simulation of net income under various economic and interest rate scenarios. Table 11 depicts the Company's estimated net income at risk at December 31, 2001, expressed as the variance from the Company's base net income forecast. Table 11 ESTIMATED NET INCOME AT RISK
- -------------------------------------------------------------------------------- % increase (decrease) in net income for the year ended December 31, ----------------------------------- 2002 2003 - -------------------------------------------------------------------------------- Short-term interest rates increase 200 basis points by end of 2002; 400 basis points by end of 2003 (4.4)% (5.3)% Short-term interest rates decline 100 basis points by end of 2002, then remain flat in 2003 --(1) --(1) - --------------------------------------------------------------------------------
(1) Less than 1%. These estimates are highly assumption-dependent, will change regularly as the Company's asset-liability structure and business evolves from one period to the next, will vary as different interest rate scenarios are used and are measured relative to a base net income scenario that may change. At December 31, 2001, the principal sources of risk from much higher interest rates were the modeled slowdown in mortgage origination activity and the flatter yield curve assumed in that higher interest rate scenario. The principal sources of risk in the lower rate scenario were assumed slower loan demand and assumed higher credit losses. (Any provision for impairment for mortgage servicing rights is assumed to be offset by higher mortgage origination fees and non-mortgage sources of earnings - see "Mortgage Banking Interest Rate Risk" below and Note 19 to Financial Statements for analysis of mortgage company earnings sensitivities to key interest rate risk model assumptions.) As indicated in Table 11, the Company's modeling indicates these risks would largely be offset by additional earnings from other sources in each rate scenario. The Company uses exchange-traded and over-the-counter interest rate derivatives to hedge its interest rate exposures. The notional or contractual amount, credit risk amount and estimated net fair values of these derivatives as of December 31, 2001 and 2000 are indicated in Note 23 to Financial Statements. Derivatives are used for asset/liability management in three 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, and (c) the Mortgage Company actively uses swaptions, futures, forwards and rate options to hedge the Company's mortgage pipeline, funded mortgage loans, and mortgage servicing rights asset. MORTGAGE BANKING INTEREST RATE RISK The home mortgage industry is subject to complex risks. Because Wells Fargo Home Mortgage Company sells or securitizes most of the mortgage loans it originates, credit risk is contained. Changes in interest rates, however, may have a potentially large impact on Mortgage Banking earnings. In general, high or rising interest rates may reduce mortgage loan demand and hence origination and servicing fees, but may also lead to reduced servicing prepayments and hence reduced amortization costs. Conversely, low or declining interest rates may lead to increased origination and servicing fees, but would likely increase servicing portfolio prepayments and, therefore, accelerate servicing amortization costs. If large enough, declining mortgage rates and any associated increase in refinancings may also require provisions for impairment of mortgage servicing rights. These provisions may be offset by higher future origination fees but the amount of provision and higher fees may not be exactly equal; the provision is charged to net income immediately whereas the higher fees would occur over time, and the size of any provision could be material to earnings in any one quarter even if there are offsetting other sources of earnings 49 over a full twelve month period. Wells Fargo dynamically 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 process for the valuation of mortgage servicing rights is critical to the financial results of the Company and requires subjective and complex judgement by management as a result of the need to make estimates about the effect of matters that are inherently uncertain. Both mortgage loans held on the Company's balance sheet and off-balance sheet derivative instruments are used to maintain these risks within parameters established by Corporate ALCO. 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 purpose of this business 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. The notional or contractual amount, credit risk amount and estimated net fair value of all customer accommodation derivatives as of December 31, 2001 and 2000 are indicated in Note 23 to Financial Statements. Open, "at risk" positions for all trading business are monitored by Corporate ALCO. During the 90 day period ending December 31, 2001 the maximum daily "value at risk", the worst expected loss over a given time interval within a given confidence range (99%), for all trading positions did not exceed $25 million. MARKET RISK - EQUITY MARKETS Equity markets impact the Company in both direct and indirect ways. 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. Business developments, key risks and historical returns for the private equity investments are reviewed with the Board at least annually. Management reviews these investments at least quarterly and assesses for possible other-than-temporary impairment. Other-than-temporary impairment is subject to considerable judgment and analysis. 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. At December 31, 2001, the private equity investments were carried on the Company's balance sheet at a total of $1.7 billion, compared with $2.0 billion at December 31, 2000. Most of the decline was due to the $330 million in other-than-temporary impairment recognized during second quarter 2001; new investments made during 2001 were very selective and in the aggregate immaterial. The Company also has marketable equity securities in its available for sale investment portfolio, including shares distributed from the Company's venture capital activities. These investments are managed within capital risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net income when realized and, in addition, other- than-temporary impairment may be periodically recorded. The initial indicator of impairment for marketable equity securities is a sustained decline in market price below the amount recorded for that investment. The Company considers such factors as the length of time and the extent to which the market value has been less than cost; the financial condition, capital strength, and near-term prospects of the issuer; any recent events specific to that issuer and economic conditions of its industry; and, to a lesser degree, the Company's investment horizon in relationship to an anticipated near-term recovery in the stock price, if any. The decline in cost of the portfolio during 2001 of $1.64 billion was largely due to the second quarter impairment writedown and dispositions. At December 31, 2001, the fair value of the marketable equity securities held as available for sale was $991 million, exceeding cost by $176 million. Changes in equity market prices may also indirectly impact the Company's net income by impacting the value of third party assets under management and hence fee income, by impacting particular borrowers whose ability to repay principal and/or interest may be impacted by the stock market, or by impacting other business activities. These indirect risks are monitored and managed as part of the operations of each business line. 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 Company specifically to ensure that the Parent Company is a source of strength for its regulated, deposit taking banking subsidiaries. 50 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 which is comprised of marketable securities. The weighted average expected remaining maturity of the debt securities within this portfolio was 5 years and 10 months at December 31, 2001. Of the $38.7 billion of debt securities in this portfolio at December 31, 2001, $5.4 billion, or 14%, is expected to mature or be prepaid in 2002 and an additional $3.9 billion, or 10%, is expected to mature or be prepaid in 2003. Asset liquidity is further enhanced by the Company's ability to sell loans in secondary markets through whole-loan sales and securitizations. In 2001, the Company sold residential mortgage loans of approximately $139 billion and securitized residential mortgage loans, commercial mortgage loans, student loans and auto receivables of approximately $19 billion. The amount of such assets, as well as home equity loans and certain commercial loans, available to be securitized totaled approximately $35 billion at December 31, 2001. Core customer deposits have historically provided the Company with a sizeable source of relatively stable and low-cost funds. The Company's average core deposits and stockholders' equity funded 68.3% and 68.2% of its average total assets in 2001 and 2000, respectively. The remaining funding of average total assets was mostly provided by long-term debt, deposits in foreign offices, short-term borrowings (federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Short-term borrowings averaged $33.9 billion and $28.2 billion in 2001 and 2000, respectively. Long-term debt averaged $34.5 billion and $29.0 billion in 2001 and 2000, respectively. Trust preferred securities averaged $1.4 billion and $.9 billion in 2001 and 2000, respectively. 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. The Company accesses the capital markets for long-term funding through the issuance of registered debt, private placements and asset-based secured funding. Approximately $50 billion of the Company's debt is rated by Fitch, Inc. and Moody's Investors Service as "AA" or equivalent, which is among the highest ratings given to a company in the financial services sector. The rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings and other tools. Material changes in these factors could result in a different debt rating. During 2001, the Parent issued $3.75 billion in senior debt and $750 million in subordinated notes under registration statements filed in 2000 and 1999. The remaining issuance authority at December 31, 2001 was $6.05 billion under the 2000 registration statement. Proceeds from the issuance in 2001 of the debt securities were, and with respect to any such securities issued in the future are expected to be used for general corporate purposes. The Parent issues commercial paper and has two back-up credit facilities amounting to $2 billion. In February 2001, Wells Fargo Financial, Inc. (WFFI) filed a shelf registration statement with the SEC, under which WFFI may issue up to $4 billion in senior or subordinated debt securities. In 2001, WFFI issued a total of $2.25 billion in senior notes. As of December 31, 2001, the remaining issuance authority under that registration statement and the WFFI shelf registration statements filed in 2000 and 1999 was $3.70 billion. In October 2001, a subsidiary of WFFI filed a shelf registration statement with the Canadian provincial securities authorities for the issuance of up to $1.5 billion (Canadian) in debt securities. In October 2001, the subsidiary issued $200 million (Canadian) in debt securities. 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. Wells Fargo Bank, N.A. began issuing under the short-term portion of the program in July 2001 and issued $2.3 billion under the long-term portion in 2001. During 2001, Wells Fargo Bank, N.A. called $750 million of subordinated notes. As of December 31, 2001, the remaining issuance authority under the long-term portion was $8.4 billion. In August 2001, the Company filed a registration statement with the SEC to register an aggregate of $1.5 billion in the Company's debt and equity securities, 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. Following effectiveness of the registration statement in August 2001, Wells Fargo Capital IV, a business trust established by the Company for the purpose of issuing trust preferred securities pursuant to the registration statement, issued $1.3 billion in trust preferred securities to the public. In December 2001, Wells Fargo Capital V, a business trust identical to Wells Fargo Capital IV, issued the remaining $200 million in trust preferred securities to the public. Both offerings were pursuant to the August 2001 registration statement. In late February 2002, the Company filed a universal shelf registration statement to register an aggregate of $10.0 billion in the Company's debt and equity securities, and certain other securities, including 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. 51 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 costs of doing so is perceived to be low. Uses of capital include investments for organic growth, acquisitions of banks and non-bank companies, dividends and share repurchases. During 2001, the Company's consolidated assets increased $35 billion, or 13%. Capital used for acquisitions in 2001 totaled $803 million. During 2001, the Board of Directors authorized the repurchase of up to 85 million additional shares of the Company's outstanding common stock. At December 31, 2001 total remaining common stock repurchase authority was approximately 50 million shares. Effective July 1, 2001, FAS 141 eliminated pooling-of-interests accounting for business combinations. Prior to this date, purchases of the Company's common stock for unspecified purposes could have precluded pooling-of-interests method of accounting treatment for acquisitions. On July 24, 2001, in response to FAS 141, the Board of Directors authorized the repurchase of shares of the Company's outstanding common stock for general corporate purposes including capital management. Total common stock dividend payments in 2001 were $1.7 billion. In July 2001, the Board of Directors approved an increase in the Company's quarterly common stock dividend to 26 cents per share from 24 cents per share, representing an 8% increase in the quarterly dividend rate. Sources of capital include retained earnings, common stock issuance and issuance of subordinated debt and preferred stock. In 2001, total net income was $3.4 billion and retained earnings were $16.0 billion after payment of $1.7 billion in common stock dividends. Total common stock issued in 2001 under various employee benefit and director plans and under the Company's dividend reinvestment program amounted to 21 million shares. At the annual meeting of stockholders held on April 24, 2001, the stockholders of the Company approved an increase in the number of shares of common stock authorized for issuance from 4 billion to 6 billion shares. Issuance of subordinated debt amounted to $750 million, and two placements of trust preferred securities amounting to $1.5 billion were completed late in 2001. On October 1, 2001, the Company called all of the Adjustable-Rate Noncumulative Preferred Stock, Series H. The redemption was completed at $50 per share plus accrued and unpaid dividends in accordance with its terms. The Company has a capital expenditure program to accommodate future growth and current business needs. Capital expenditures for 2002 are estimated to be approximately $575 million for equipment for stores, relocation and remodeling of Company facilities, routine replacement of furniture and equipment, and servers and other networking equipment related to expansion of the Company's internet services business. The Company will fund these expenditures from various sources, including retained earnings of the Company and borrowings of various maturities. The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the Office of the Comptroller of the Currency. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. At December 31, 2001, the Company and each of the covered subsidiary banks were "well capitalized" under regulatory standards. (See Note 22 to Financial Statements for additional information.) 52 COMPARISON OF 2000 TO 1999 Net income in 2000 was $4.03 billion, which included a loss of $220 million (after tax) for First Security for the first three quarters of 2000 and First Security related integration and conversion costs of $110 million (after tax) in the fourth quarter, compared with $4.01 billion in 1999. Diluted earnings per common share were $2.33, compared with $2.29 in 1999, an increase of 2%. Return on average assets (ROA) was 1.61% and return on average common equity (ROE) was 16.31% in 2000, compared with 1.78% and 17.55%, respectively, in 1999. Net interest income on a taxable-equivalent basis was $10.93 billion in 2000, compared with $10.19 billion in 1999. The Company's net interest margin was 5.35% for 2000, compared with 5.47% in 1999. The decrease was mostly due to the impact of funding strong loan growth with higher costing short- and long-term borrowings, partially offset by improved yields within the investment securities portfolio from the restructuring that occurred during the fourth quarter of 1999 and the first nine months of 2000. Noninterest income increased to $8.84 billion in 2000 from $7.98 billion in 1999, an increase of 11%, largely due to higher net venture capital gains, increased trust and investment fees and service charges on deposit accounts, primarily offset by net losses on sales of securities incurred in restructuring the Company's securities available for sale portfolio and net losses on sales of loans and securitizations associated with First Security prior to the FSCO Merger. Noninterest expense totaled $11.83 billion in 2000, compared with $10.64 billion in 1999, an increase of 11%. The increase was primarily due to integration and conversion costs related to the WFC Merger, the FSCO Merger and other acquisitions. The provision for loan losses was $1.33 billion in 2000, compared with $1.10 billion in 1999. During 2000, net charge-offs were $1.22 billion, or .84% of average total loans, compared with $1.12 billion, or .90%, during 1999. The allowance for loan losses was $3.72 billion, or 2.31% of total loans, at December 31, 2000, compared with $3.34 billion, or 2.51%, at December 31, 1999. At December 31, 2000, total nonaccrual and restructured loans were $1,195 million, or .7% of total loans, compared with $728 million, or .5%, at December 31, 1999. Foreclosed assets were $128 million at December 31, 2000, compared with $161 million at December 31, 1999. The ratio of common stockholders' equity to total assets was 9.63% at December 31, 2000 and 9.79% at December 31, 1999. The Company's total risk-based capital (RBC) ratio at December 31, 2000 was 10.43% and its Tier 1 RBC ratio was 7.29%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's RBC ratios at December 31, 1999 were 10.93% and 8.00%, respectively. The Company's leverage ratios were 6.49% and 6.76% at December 31, 2000 and 1999, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies. ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- Common stock of the Company is traded on the New York Stock Exchange and the Chicago Stock Exchange. The high, low and end-of-period annual and quarterly prices of the Company's common stock as reported on the New York Stock Exchange Composite Transaction Reporting System are presented in the graphs. The number of holders of record of the Company's common stock was 98,598 as of January 31, 2002. - --------------------------------------------------------------------------------
1999 2000 2001 ---------------------- High $49.94 $56.38 $54.81 Low 32.13 31.00 38.25 End of period 40.44 55.69 43.47 2000 2001 ------------------------------ ------------------------------ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q ------------------------------ ------------------------------ High $43.75 $47.75 $47.13 $56.38 $54.81 $50.16 $48.30 $45.14 Low 31.00 37.31 38.73 39.63 42.55 42.65 40.50 38.25 End of period 40.75 38.75 45.94 55.69 49.47 46.43 44.45 43.47
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WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - ------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------- (in millions, except per share amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Securities available for sale $ 2,544 $ 2,671 $ 2,533 Mortgages held for sale 1,595 849 951 Loans held for sale 317 418 377 Loans 14,461 14,446 11,823 Other interest income 284 341 250 -------- -------- -------- Total interest income 19,201 18,725 15,934 -------- -------- -------- INTEREST EXPENSE Deposits 3,553 4,089 3,166 Short-term borrowings 1,273 1,758 1,127 Long-term debt 1,826 1,939 1,452 Guaranteed preferred beneficial interests in Company's subordinated debentures 89 74 73 -------- -------- -------- Total interest expense 6,741 7,860 5,818 -------- -------- -------- NET INTEREST INCOME 12,460 10,865 10,116 Provision for loan losses 1,780 1,329 1,104 -------- -------- -------- Net interest income after provision for loan losses 10,680 9,536 9,012 -------- -------- -------- NONINTEREST INCOME Service charges on deposit accounts 1,876 1,704 1,580 Trust and investment fees 1,710 1,624 1,366 Credit card fees 796 721 694 Other fees 1,244 1,113 970 Mortgage banking 1,671 1,444 1,407 Insurance 745 411 395 Net venture capital (losses) gains (1,630) 1,943 1,008 Net gains (losses) on securities available for sale 463 (722) (228) Other 815 605 783 -------- -------- -------- Total noninterest income 7,690 8,843 7,975 -------- -------- -------- NONINTEREST EXPENSE Salaries 4,027 3,652 3,307 Incentive compensation 1,195 846 643 Employee benefits 960 989 901 Equipment 909 948 928 Net occupancy 975 953 813 Goodwill 610 530 459 Core deposit intangible 165 186 206 Net gains on dispositions of premises and equipment (21) (58) (16) Other 4,071 3,784 3,396 -------- -------- -------- Total noninterest expense 12,891 11,830 10,637 -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 5,479 6,549 6,350 Income tax expense 2,056 2,523 2,338 -------- -------- -------- NET INCOME $ 3,423 $ 4,026 $ 4,012 ======== ======== ======== NET INCOME APPLICABLE TO COMMON STOCK $ 3,409 $ 4,009 $ 3,977 ======== ======== ======== EARNINGS PER COMMON SHARE $ 1.99 $ 2.36 $ 2.32 ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $ 1.97 $ 2.33 $ 2.29 ======== ======== ======== DIVIDENDS DECLARED PER COMMON SHARE $ 1.00 $ .90 $ .785 ======== ======== ======== Average common shares outstanding 1,709.5 1,699.5 1,714.0 ======== ======== ======== Diluted average common shares outstanding 1,726.9 1,718.4 1,735.4 ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 54 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------ December 31, ----------------------------------- (in millions, except shares) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 16,968 $ 16,978 Federal funds sold and securities purchased under resale agreements 2,530 1,598 Securities available for sale 40,308 38,655 Mortgages held for sale 30,405 11,812 Loans held for sale 4,745 4,539 Loans 172,499 161,124 Allowance for loan losses 3,761 3,719 -------- -------- Net loans 168,738 157,405 -------- -------- Mortgage servicing rights 6,241 5,609 Premises and equipment, net 3,549 3,415 Core deposit intangible 1,013 1,183 Goodwill 9,527 9,303 Interest receivable and other assets 23,545 21,929 -------- -------- Total assets $307,569 $272,426 ======== ======== LIABILITIES Noninterest-bearing deposits $ 65,362 $ 55,096 Interest-bearing deposits 121,904 114,463 -------- -------- Total deposits 187,266 169,559 Short-term borrowings 37,782 28,989 Accrued expenses and other liabilities 16,777 14,409 Long-term debt 36,095 32,046 Guaranteed preferred beneficial interests in Company's subordinated debentures 2,435 935 STOCKHOLDERS' EQUITY Preferred stock 218 385 Unearned ESOP shares (154) (118) -------- -------- Total preferred stock 64 267 Common stock - $1 2/3 par value, authorized 6,000,000,000 shares; issued 1,736,381,025 shares and 1,736,381,025 shares 2,894 2,894 Additional paid-in capital 9,436 9,337 Retained earnings 16,005 14,541 Cumulative other comprehensive income 752 524 Treasury stock - 40,886,028 shares and 21,735,182 shares (1,937) (1,075) -------- -------- Total stockholders' equity 27,214 26,488 -------- -------- Total liabilities and stockholders' equity $307,569 $272,426 ======== ======== - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 55 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------------- (in millions, except shares) Unearned Additional Number of Preferred ESOP Common paid-in Retained shares stock shares stock capital earnings - -------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1998 $ 547 $(84) $2,882 $8,981 $10,256 Comprehensive income ----- ----- ------ ------ ------- Net income-1999 4,012 Other comprehensive income, net of tax: Translation adjustments Net unrealized gains on securities available for sale, net of reclassification of $136 million of net losses included in net income Total comprehensive income Common stock issued 21,793,709 1 119 (269) Common stock issued for acquisitions 11,059,131 11 113 2 Common stock repurchased 48,974,800 Preferred stock redeemed (191) Preferred stock issued to ESOP 75 (80) 5 Preferred stock released to ESOP 91 (5) Preferred stock (86,358) converted to common shares 2,200,716 (87) Preferred stock dividends (35) Common stock dividends (1,401) Cash payments received on notes receivable from ESOP Change in Rabbi trust assets (classified as treasury stock) ----- ----- ------ ------ ------- Net change (203) 11 12 232 2,309 ----- ----- ------ ------ ------- BALANCE DECEMBER 31, 1999 344 (73) 2,894 9,213 12,565 Comprehensive income ----- ----- ------ ------ ------- Net income-2000 4,026 Other comprehensive income, net of tax: Translation adjustments Net unrealized losses on securities available for sale, net of reclassification of $90 million of net gains included in net income Total comprehensive income Common stock issued 17,614,859 1 295 (458) Common stock issued for acquisitions 75,554,229 (185) (6) Common stock repurchased 78,573,812 (1) (42) Stock appreciation rights 48 Preferred stock repurchased (1) Preferred stock issued to ESOP 170 (181) 11 Preferred stock released to ESOP 136 (8) Preferred stock (122,288) converted to common shares 3,036,660 (128) 5 Preferred stock dividends (17) Common stock dividends (1,569) Cash payments received on notes receivable from ESOP Change in Rabbi trust assets (classified as treasury stock) ----- ----- ------ ------ ------- Net change 41 (45) -- 124 1,976 ----- ----- ------ ------ ------- BALANCE DECEMBER 31, 2000 385 (118) 2,894 9,337 14,541 COMPREHENSIVE INCOME ----- ----- ------ ------ ------- NET INCOME - 2001 3,423 OTHER COMPREHENSIVE INCOME, NET OF TAX: TRANSLATION ADJUSTMENTS MINIMUM PENSION LIABILITY ADJUSTMENT NET UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE, NET OF RECLASSIFICATION OF $373 MILLION OF NET LOSSES INCLUDED IN NET INCOME CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES AND HEDGING ACTIVITIES NET UNREALIZED GAINS ON DERIVATIVES AND HEDGING ACTIVITIES, NET OF RECLASSIFICATION OF $76 MILLION OF NET LOSSES ON CASH FLOW HEDGES INCLUDED IN NET INCOME TOTAL COMPREHENSIVE INCOME COMMON STOCK ISSUED 16,472,042 92 (236) COMMON STOCK ISSUED FOR ACQUISITIONS 428,343 1 1 COMMON STOCK REPURCHASED 39,474,053 PREFERRED STOCK (192,000) ISSUED TO ESOP 192 (207) 15 PREFERRED STOCK RELEASED TO ESOP 171 (12) PREFERRED STOCK (158,517) CONVERTED TO COMMON SHARES 3,422,822 (159) 3 PREFERRED STOCK REDEEMED (200) PREFERRED STOCK DIVIDENDS (14) COMMON STOCK DIVIDENDS (1,710) CHANGE IN RABBI TRUST ASSETS (CLASSIFIED AS TREASURY STOCK) ----- ----- ------ ------ ------- NET CHANGE (167) (36) -- 99 1,464 ----- ----- ------ ------ ------- BALANCE DECEMBER 31, 2001 $ 218 $(154) $2,894 $9,436 $16,005 ===== ===== ====== ====== ======= - ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- Notes Cumulative Total receivable other stock- from Treasury comprehensive holders' (in millions, except shares) ESOP stock income equity - --------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1998 $(3) $ (740) $ 493 $22,332 --- ------- ----- ------- Comprehensive income Net income-1999 4,012 Other comprehensive income, net of tax: Translation adjustments 4 4 Net unrealized gains on securities available for sale, net of reclassification of $136 million of net losses included in net income 263 263 ------- Total comprehensive income 4,279 Common stock issued 781 632 Common stock issued for acquisitions 200 326 Common stock repurchased (2,141) (2,141) Preferred stock redeemed (191) Preferred stock issued to ESOP -- Preferred stock released to ESOP 86 Preferred stock (86,358) converted to common shares 87 -- Preferred stock dividends (35) Common stock dividends (1,401) Cash payments received on notes receivable from ESOP 2 2 Change in Rabbi trust assets (classified as treasury stock) (18) (18) --- ------- ----- ------- Net change 2 (1,091) 267 1,539 --- ------- ----- ------- BALANCE DECEMBER 31, 1999 (1) (1,831) 760 23,871 Comprehensive income --- ------- ----- ------- Net income-2000 4,026 Other comprehensive income, net of tax: Translation adjustments (2) (2) Net unrealized losses on securities available for sale, net of reclassification of $90 million of net gains included in net income (234) (234) ------- Total comprehensive income 3,790 Common stock issued 716 554 Common stock issued for acquisitions 3,128 2,937 Common stock repurchased (3,195) (3,238) Stock appreciation rights 48 Preferred stock repurchased (1) Preferred stock issued to ESOP -- Preferred stock released to ESOP 128 Preferred stock (122,288) converted to common shares 123 -- Preferred stock dividends (17) Common stock dividends (1,569) Cash payments received on notes receivable from ESOP 1 1 Change in Rabbi trust assets (classified as treasury stock) (16) (16) --- ------- ----- ------- Net change 1 756 (236) 2,617 --- ------- ----- ------- BALANCE DECEMBER 31, 2000 -- (1,075) 524 26,488 --- ------- ----- ------- COMPREHENSIVE INCOME NET INCOME - 2001 3,423 OTHER COMPREHENSIVE INCOME, NET OF TAX: TRANSLATION ADJUSTMENTS (3) (3) MINIMUM PENSION LIABILITY ADJUSTMENT (42) (42) NET UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE, NET OF RECLASSIFICATION OF $373 MILLION OF NET LOSSES INCLUDED IN NET INCOME 10 10 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 $76 MILLION OF NET LOSSES ON CASH FLOW HEDGES INCLUDED IN NET INCOME 192 192 ------- TOTAL COMPREHENSIVE INCOME 3,651 COMMON STOCK ISSUED 738 594 COMMON STOCK ISSUED FOR ACQUISITIONS 20 22 COMMON STOCK REPURCHASED (1,760) (1,760) PREFERRED STOCK (192,000) ISSUED TO ESOP -- PREFERRED STOCK RELEASED TO ESOP 159 PREFERRED STOCK (158,517) CONVERTED TO COMMON SHARES 156 -- PREFERRED STOCK REDEEMED (200) PREFERRED STOCK DIVIDENDS (14) COMMON STOCK DIVIDENDS (1,710) CHANGE IN RABBI TRUST ASSETS (CLASSIFIED AS TREASURY STOCK) (16) (16) --- ------- ----- ------- NET CHANGE -- (862) 228 726 --- ------- ----- ------- BALANCE DECEMBER 31, 2001 $-- $(1,937) $ 752 $27,214 === ======= ===== ======= - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 56 WELLS FARGO & COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------- (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,423 $ 4,026 $ 4,012 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 1,780 1,329 1,104 Depreciation and amortization 2,961 1,790 1,971 Net (gains) losses on securities available for sale (597) 722 228 Net venture capital losses (gains) 1,630 (1,943) (1,008) Net gains on mortgage loan origination/sales activities (705) (38) (117) Net (gains) losses on sales of loans (35) 134 (68) Net gains on dispositions of premises and equipment (21) (58) (16) Net gains on dispositions of operations (122) (23) (107) Release of preferred shares to ESOP 159 128 86 Net increase in trading assets (1,219) (1,087) (462) Deferred income tax (benefit) expense (589) 873 1,611 Net decrease (increase) in accrued interest receivable 232 (230) (113) Net (decrease) increase in accrued interest payable (269) 290 (36) Originations of mortgages held for sale (179,475) (62,095) (94,988) Proceeds from sales of mortgages held for sale 157,884 62,873 105,159 Net increase in loans held for sale (206) (1,498) (874) Other assets, net (349) (2,060) (1,428) Other accrued expenses and liabilities, net 4,292 2,436 1,321 --------- ------- -------- Net cash (used) provided by operating activities (11,226) 5,569 16,275 --------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 19,586 23,624 15,150 Proceeds from prepayments and maturities 6,730 6,247 8,757 Purchases (29,053) (19,770) (29,917) Net cash (paid for) acquired from acquisitions (459) 469 (69) Net decrease (increase) in banking subsidiaries' loans resulting from originations and collections (11,596) (36,076) (11,494) Proceeds from sales (including participations) of banking subsidiaries' loans 2,305 11,898 3,986 Purchases (including participations) of banking subsidiaries' loans (1,104) (409) (1,246) Principal collected on nonbank subsidiaries' loans 9,964 8,305 4,844 Nonbank subsidiaries' loans originated (11,651) (9,300) (9,002) Proceeds from (paid for) dispositions of operations 1,191 13 (731) Proceeds from sales of foreclosed assets 279 255 234 Net (increase) decrease in federal funds sold and securities purchased under resale agreements (932) 124 25 Net increase in mortgage servicing rights (3,405) (1,460) (2,094) Other, net 512 (4,688) (2,366) --------- ------- -------- Net cash used by investing activities (17,633) (20,768) (23,923) --------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 17,707 20,745 (4,868) Net increase (decrease) in short-term borrowings 8,793 (3,511) 11,912 Proceeds from issuance of long-term debt 14,658 15,544 13,325 Repayment of long-term debt (10,625) (9,849) (8,981) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 1,500 -- -- Proceeds from issuance of common stock 484 422 528 Redemption of preferred stock (200) -- (191) Repurchase of common stock (1,760) (3,238) (2,141) Payment of cash dividends on preferred and common stock (1,724) (1,586) (1,436) Other, net 16 (468) (34) --------- ------- -------- Net cash provided by financing activities 28,849 18,059 8,114 --------- ------- -------- NET CHANGE IN CASH AND DUE FROM BANKS (10) 2,860 466 Cash and due from banks at beginning of year 16,978 14,118 13,652 --------- ------- -------- CASH AND DUE FROM BANKS AT END OF YEAR $ 16,968 $16,978 $ 14,118 ========= ======= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 6,472 $ 8,150 $ 5,855 Income taxes $ 2,552 $ 817 $ 1,022 Noncash investing and financing activities: Transfers from mortgages held for sale to loans $ 1,230 $ 129 $ 67 Transfers from loans held for sale to loans $ -- $ 1,388 $ 1,221 Transfers from loans to foreclosed assets $ 325 $ 189 $ 220 - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 57 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Wells Fargo & Company and Subsidiaries (consolidated) (the Company) is a 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. Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP) and prevailing practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the financial statements for prior years have been reclassified to conform with the current financial statement presentation. The following is a description of the significant accounting policies of the Company. CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Parent, and its majority-owned subsidiaries, which are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other subsidiaries in which there is generally 20% ownership are accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost, except for marketable equity securities, which are carried at fair value with changes in fair value included in other comprehensive income. These assets that are accounted for by either the equity or cost method are included in other assets. SECURITIES Securities are accounted for according to their purpose and holding period. SECURITIES AVAILABLE FOR SALE Debt securities that may not be held until maturity and marketable equity securities are classified as securities available for sale and are reported at fair value, with unrealized gains and losses, after applicable taxes, reported as a component of cumulative other comprehensive income. The estimated fair value of a security is determined based on current quotations, where available. Where current quotations are not available, the estimated fair value is determined based primarily on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. Declines in the value of debt securities and marketable equity securities that are considered other than temporary are recorded in noninterest income. Realized gains and losses are recorded in noninterest income using the identified certificate method. For certain debt securities (for example, Government National Mortgage Association securities), the Company anticipates prepayments of principal in the calculation of the effective yield. TRADING SECURITIES Securities acquired for short-term appreciation or other trading purposes are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in noninterest income. NONMARKETABLE EQUITY SECURITIES Nonmarketable equity securities include the venture capital equity securities that are not publicly traded and securities acquired for various purposes, such as troubled debt restructurings or to meet regulatory requirements (for example, Federal Reserve Bank stock). These assets are reviewed at least quarterly for possible other-than-temporary impairment. Management's review typically includes an analysis of the facts and circumstances of each individual investment, the expectations for that investment's performance and the Company's exit strategy. These securities are generally accounted for at cost and are included in other assets. The asset value is reduced when declines in value are considered to be other than temporary and the estimated loss is recorded in noninterest income as a loss from equity investments along with income recognized on these assets. MORTGAGES HELD FOR SALE Mortgages held for sale are stated at the lower of aggregate cost or market value. The determination of any write-down to market value includes consideration of all open positions, outstanding commitments from investors and interest rate lock commitment value already recorded. LOANS HELD FOR SALE Loans held for sale include those student loans which are classified as held for sale because the Company does not intend to hold these loans until maturity or sales of the loans are pending. Such loans are carried at the lower of aggregate cost or market value. Gains and losses are recorded in noninterest income, based on the difference between sales proceeds and carrying value. LOANS Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees net of deferred direct incremental loan origination costs, is amortized to interest income generally over the contractual life of the loan using an interest method or the straight-line method if it is not materially different. 58 NONACCRUAL LOANS Generally, loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. Generally, consumer loans not secured by real estate are placed on nonaccrual status only when a portion of the principal has been charged off. Such loans are entirely charged off when deemed uncollectible or when they reach a predetermined number of days past due depending upon loan product, industry practice, country, terms and other factors. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well-secured and in the process of collection and collectibility is no longer doubtful. IMPAIRED LOANS Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. This assessment for impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement, which approximates the discounted cash flow method. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. RESTRUCTURED LOANS In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired loans in the calendar years subsequent to the restructuring if they are not impaired based on the modified terms. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a valuation allowance for probable losses inherent in the portfolio as of the balance sheet date. 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. The Company considers the allowance for loan losses adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit. TRANSFERS AND SERVICING OF FINANCIAL ASSETS A transfer of financial assets is accounted for as a sale when control is surrendered over the assets transferred. Servicing rights and other retained interests in the assets sold are recorded by allocating the previous recorded investment between the asset sold and the interest retained based on their relative fair values, if practicable to determine, at the date of transfer. Fair values of servicing rights and other retained interests are determined using present value of estimated future cash flows valuation techniques, incorporating assumptions that market participants would use in their estimates of values. 59 The Company recognizes as assets the rights to service mortgage loans for others, whether the servicing rights are acquired through purchases or retained upon sales of loan originations. For purposes of evaluating and measuring impairment of mortgage servicing rights, the Company stratifies its portfolio on the basis of certain risk characteristics including loan type and note rate. Based upon current fair values, mortgage servicing rights are periodically assessed for impairment. Any such indicated impairment is recognized in income, during the period in which it occurs, in a mortgage servicing rights valuation account which is adjusted each subsequent period to reflect any increase or decrease in the indicated impairment. The current fair values of mortgage servicing rights and other retained interests are determined using present value of estimated future cash flows valuation techniques, incorporating assumptions that market participants would use in their estimates of values. Mortgage servicing rights are amortized over the period of estimated net servicing income and take into account appropriate prepayment assumptions. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment at the capitalized amount less accumulated amortization. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, up to 10 years for furniture and equipment, and the shorter of the estimated useful life or lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases, which generally range from 20 to 35 years. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Goodwill, representing the excess of purchase price over the fair value of net assets acquired, results from purchase acquisitions made by the Company. Substantially all of the Company's goodwill is being amortized using the straight-line method over 25 years. Goodwill resulting from acquisitions with effective dates after June 30, 2001 has not been amortized. Core deposit intangibles are amortized on an accelerated basis based on an estimated useful life of 10 to 15 years. Certain identifiable intangible assets that are included in other assets are generally amortized using an accelerated method over an original life of 10 to 15 years. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. INCOME TAXES The Company files a consolidated federal income tax return. Federal income tax is generally allocated to individual subsidiaries as if each had filed a separate return. Combined state tax returns are filed in certain states. State taxes are also allocated to individual subsidiaries. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Foreign taxes paid are applied as credits to reduce federal income taxes payable. EARNINGS PER COMMON SHARE Earnings per common share are presented under two formats: earnings per common share and diluted earnings per common share. Earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year. Diluted earnings per common share are computed by dividing net income (after deducting dividends on preferred stock) by the average number of common shares outstanding during the year, plus the impact of those common stock equivalents (i.e., stock options, restricted share rights and convertible subordinated debentures) that are dilutive. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On January 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133 (FAS 133), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and FASB Statement No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES-AN AMENDMENT OF FASB STATEMENT NO. 133. All derivative instruments are recognized on the balance sheet at fair value. On the date the Company enters into a derivative contract the Company designates the derivative instrument as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge) or (3) held for trading, customer accommodation or not qualifying for hedge accounting ("free-standing derivative instruments"). For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period net income in the same financial statement category as the hedged item. For a cash flow hedge, changes in the fair value of the derivative instrument to the extent that it is effective are recorded in other comprehensive income within stockholders' equity and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income in the same financial statement category as the hedged item. For free-standing derivative instruments, changes in the fair values are reported in current period noninterest income. 60 The Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether the derivative instruments used are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued. The Company discontinues hedge accounting prospectively when (1) it determines that a derivative instrument is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) a derivative instrument expires or is sold, terminated, or exercised; (3) a derivative instrument is dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; or (4) management determines that designation of a derivative instrument as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that a derivative instrument no longer qualifies as an effective fair value hedge, the derivative instrument will continue to be carried on the balance sheet at its fair value with changes in fair value included in earnings, and the previously hedged asset or liability will no longer be adjusted for changes in fair value. Previous adjustments to the hedged item will be accounted for in the same manner as other components of the carrying amount of the asset or liability. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative instrument will continue to be carried on the balance sheet at its fair value with changes in fair value included in earnings, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued because the hedging instrument is sold, terminated, or dedesignated the amount reported in other comprehensive income to the date of sale, termination, or dedesignation will continue to be reported in other comprehensive income until the forecasted transaction impacts earnings. In all other situations in which hedge accounting is discontinued, the derivative instrument will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings. The Company occasionally purchases or originates financial instruments that contain an embedded derivative instrument. At inception of the financial instrument, the Company assesses whether the economic characteristics of the embedded derivative instrument are clearly and closely related to the economic characteristics of the financial instrument (host contract), whether the financial instrument that embodies both the embedded derivative instrument and the host contract is currently measured at fair value with changes in fair value reported in earnings, and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If the embedded derivative instrument is determined not to be clearly and closely related to the host contract, is not currently measured at fair value with changes in fair value reported in earnings, and the embedded derivative instrument would qualify as a derivative instrument, the embedded derivative instrument is separated from the host contract and carried at fair value with changes recorded in current period earnings. The Company has elected to not apply FAS 133, as permitted by the FASB, to all embedded derivative instruments that existed on January 1, 2001 and were issued or acquired before January 1, 1999 and not substantially modified thereafter. Prior to the adoption of FAS 133, the Company primarily used interest rate derivative contracts to hedge mismatches in the rate maturity of loans and their funding sources and the price risk of interest-rate sensitive assets. Interest rate derivative contracts were accounted for by the deferral or accrual method if designated as hedges and expected to be effective in reducing risk. The resulting gains or losses were deferred and recognized in income along with effects of related hedged asset or liability. If the hedge was no longer deemed to be effective, hedge accounting was discontinued; previously unrecognized hedge results and the net settlement upon close-out were deferred and amortized over the life of the hedged asset or liability. If the hedged asset or liability settled before maturity of the interest rate derivative contract and the derivative contract was closed out or settled, the net settlement amount was accounted for as part of the gains and losses on the hedged item. The Company also entered into various derivative contracts to provide derivative products as customer accommodations. Derivative contracts used for this purpose were marked to market and recorded as a component of noninterest income. FOREIGN CURRENCY TRANSLATION The accounts of the Company's foreign consumer finance subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated into United States dollars at period-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translation are excluded from net income and included as a component of cumulative other comprehensive income. 61 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. Excluding the FSCO Merger, the table below includes transactions completed in the years ended December 31, 2001, 2000 and 1999:
- --------------------------------------------------------------------------------------------------------------------- (in millions) Date Assets Method of accounting 2001 Conseco Finance Vendor Services Corporation January 31 $ 860 Purchase of assets Buffalo Insurance Agency Group, Inc. March 1 1 Purchase SCI Financial Group, Inc. March 29 21 Purchase Midland Trust Company, National Association April 7 10 Purchase ACO Brokerage Holdings Corporation (Acordia Group of Insurance Agencies) May 1 866 Purchase H.D. Vest, Inc. July 2 182 Purchase CarFinance America, Inc. July 25 6 Purchase of assets H & R Phillips, Inc. December 6 4 Purchase ------- $ 1,950 ======= 2000 First Place Financial Corporation, Farmington, New Mexico January 18 $ 733 Purchase North County Bancorp, Escondido, California January 27 413 Purchase Prime Bancshares, Inc., Houston, Texas January 28 1,366 Purchase Ragen MacKenzie Group Incorporated, Seattle, Washington March 16 901 Purchase Napa National Bancorp, Napa, California March 17 188 Purchase Servus Financial Corporation, Herndon, Virginia March 17 168 Purchase Michigan Financial Corporation, Marquette, Michigan March 30 975 Purchase Bryan, Pendleton, Swats & McAllister, LLC, Nashville, Tennessee March 31 12 Purchase Black & Company, Inc., Portland, Oregon May 1 4 Purchase 1st Choice Financial Corp., Greeley, Colorado June 13 483 Purchase First Commerce Bancshares, Inc., Lincoln, Nebraska June 16 2,868 Purchase National Bancorp of Alaska, Inc., Anchorage, Alaska July 14 3,518 Purchase Charter Financial, Inc., New York, New York September 1 532 Purchase Buffalo National Bancshares, Inc., Buffalo, Minnesota September 28 123 Purchase Brenton Banks, Inc., Des Moines, Iowa December 1 2,191 Purchase Paragon Capital, LLC, Needham, Massachusetts December 15 13 Purchase Flagship Credit Corporation, Philadelphia, Pennsylvania December 21 841 Purchase of assets ------- $15,329 ======= - --------------------------------------------------------------------------------------------------------------------- (continued)
62
- --------------------------------------------------------------------------------------------------------------------- Date Assets Method of (in millions) accounting 1999 Mid-Penn Consumer Discount Company, Philadelphia, Pennsylvania January 21 $ 11 Purchase Century Business Credit Corporation, New York, New York February 1 342 Purchase Van Kasper & Company, San Francisco, California February 12 20 Purchase Metropolitan Bancshares, Inc., Aurora, Colorado February 23 64 Purchase Mercantile Financial Enterprises, Inc., Brownsville, Texas February 26 779 Pooling of interests* Riverton State Bank Holding Company, Riverton, Wyoming March 12 81 Purchase Comstock Bancorp, Reno, Nevada June 1 208 Purchase Greater Midwest Leasing Company, Minneapolis, Minnesota June 3 24 Purchase XEON Financial Corporation, Stateline, Nevada June 14 122 Purchase Mustang Financial Corporation, Rio Vista, Texas June 25 254 Purchase Eastern Heights Bank, St. Paul, Minnesota July 1 453 Purchase Goodson Insurance Agency, Denver, Colorado August 1 -- Purchase of assets SB Insurance Company, Marshall, Minnesota October 15 -- Purchase Allied Leasing Company, Burnsville, Minnesota November 1 17 Purchase Eastdil Realty Company, L.L.C., New York, New York November 16 9 Purchase Texas Bancshares, Inc., San Antonio, Texas December 16 370 Purchase ------- $ 2,754 ======= - ----------------------------------------------------------------------------------------------------------------------
* Pooling-of-interests transaction was not material to the Company's consolidated financial statements; accordingly, previously reported results were not restated. In connection with the foregoing transactions, the Company paid cash in the aggregate amount of $803 million, $396 million and $541 million in 2001, 2000 and 1999, respectively, and issued aggregate common shares of .4 million, 75.6 million and 11.1 million in 2001, 2000 and 1999, respectively. In the second quarter of 2001, the Company completed its acquisitions of H.D. Vest, Inc. and ACO Brokerage Holdings Corporation, parent company of Acordia, Inc. H.D. Vest, Inc. provides comprehensive financial planning services, including securities, insurance, money management and business advice, through approximately 6,000 independent tax and financial advisors. Acordia, Inc. is a property and casualty insurance agency with over $400 million in annual revenue and 112 offices in 29 states. As of December 31, 2001, the Company had 4 pending transactions with total assets of approximately $6 billion and anticipates that approximately 12 million common shares will be issued and approximately $500 million in cash will be paid upon consummation of these transactions. MERGER INVOLVING THE COMPANY AND FIRST SECURITY CORPORATION (FSCO) On October 25, 2000 the merger involving the Company and First Security Corporation (FSCO Merger) was completed as a pooling-of-interests. Under the terms of the merger agreement, stockholders of First Security received .355 shares of common stock of the Company for each share of common stock owned. As a condition to the merger, the Company was required by regulatory agencies to divest 39 stores in Idaho, New Mexico, Nevada and Utah having aggregate deposits of approximately $1.5 billion. These sales were completed in the first quarter of 2001 and the Company realized a net gain of $96 million, which included a $54 million reduction of goodwill. 63 3. CASH, LOAN AND DIVIDEND RESTRICTIONS Federal Reserve Board (FRB) regulations require reserve balances on deposits to be maintained with the Federal Reserve Banks by each of the banking subsidiaries. The average required reserve balance was $2.1 billion and $2.0 billion in 2001 and 2000, respectively. Federal law prevents the Company and its nonbank subsidiaries from borrowing from its subsidiary banks unless the loans are secured by specified collateral. Such secured loans by any subsidiary bank are generally limited to 10% of the subsidiary bank's capital and surplus (which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) and aggregate loans to the Company and its nonbank subsidiaries are limited to 20% of the subsidiary bank's capital and surplus. (For further discussion of risk-based capital, see Note 22 to Financial Statements.) The payment of dividends by subsidiary banks is subject to various federal and state regulatory limitations. Dividends payable by a national bank without the express approval of the Office of the Comptroller of the Currency (OCC) are limited to that bank's retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits are defined by the OCC as net income less dividends declared during the period as determined based on regulatory accounting principles. The Company also has state-chartered subsidiary banks that are subject to state regulations that limit dividends. Under those provisions, the Company's national and state-chartered subsidiary banks could have declared dividends of $1,026 million and $650 million in 2001 and 2000, respectively, without obtaining prior regulatory approval. In addition, the Company's non-bank subsidiaries could have declared dividends of $1,292 million and $1,889 million at December 31, 2001 and 2000, respectively. 4. 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 2001 or 2000.
- -------------------------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------------------------------------------------------- 2001 2000 -------------------------------------------- -------------------------------------------- ESTIMATED ESTIMATED Estimated Estimated UNREALIZED UNREALIZED ESTIMATED unrealized unrealized Estimated GROSS GROSS FAIR gross gross fair (in millions) COST GAINS LOSSES VALUE Cost gains losses value - ------------------------------------------------------------------------------ -------------------------------------------- Securities of U.S. Treasury and federal agencies $ 1,983 $ 66 $ 2 $ 2,047 $ 2,739 $ 49 $ 5 $ 2,783 Securities of U.S. states and political subdivisions 2,146 90 13 2,223 2,322 90 12 2,400 Mortgage-backed securities: Federal agencies 29,280 449 8 29,721 26,304 838 147 26,995 Private collateralized mortgage obligations (1) 2,628 49 19 2,658 1,455 43 52 1,446 ------- ------ ---- ------- ------- ------ ---- ------- Total mortgage-backed securities 31,908 498 27 32,379 27,759 881 199 28,441 Other 2,625 86 43 2,668 2,588 37 123 2,502 ------- ------ ---- ------- ------- ------ ---- ------- Total debt securities 38,662 740 85 39,317 35,408 1,057 339 36,126 Marketable equity securities 815 264 88 991 2,457 563 491 2,529 ------- ------ ---- ------- ------- ------ ---- ------- Total (2) $39,477 $1,004 $173 $40,308 $37,865 $1,620 $830 $38,655 ======= ====== ==== ======= ======= ====== ==== ======= - --------------------------------------------------------------------------------------------------------------------------------
(1) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. (2) At December 31, 2001, the Company held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of stockholders' equity. The decrease in marketable equity securities of $1.64 billion in cost between December 31, 2000 and December 31, 2001 was due to dispositions and the non-cash impairment charges taken in the second quarter of 2001 primarily in the venture capital portfolio. The Company experienced sustained declines in the market values of publicly traded securities, particularly in the technology and telecommunication industries. In the second quarter of 2001, the Company recognized non-cash charges of $1.18 billion to reflect other-than-temporary impairment. (See Note 1(Securities Available for Sale) for further information.) Securities pledged where the secured party has the right to sell or repledge totaled $6.2 billion at December 31, 2001 and $1.3 billion at December 31, 2000. Securities pledged where the secured party does not have the right to sell or repledge totaled $15.7 billion at December 31, 2001 and $17 billion at December 31, 2000 and are primarily pledged to secure trust and public deposits and for other purposes as required or permitted by law. The Company has accepted collateral in the form of securities that it has the right to sell or repledge of $2.7 billion at December 31, 2001 and $1.6 billion at December 31, 2000. 64 The table to the right provides the components of the realized net gains (losses) on securities from the securities available for sale portfolio. Realized gains (losses) on securities are also reported in mortgage banking noninterest income. Realized gains (losses) on marketable equity securities from venture capital investments, which include other-than-temporary impairment, are reported as net venture capital gains (losses) (not included in the table to the right).
- ---------------------------------------------------------------------------- Year ended December 31, ----------------------------- (in millions) 2001 2000 1999 - ---------------------------------------------------------------------------- Realized gross gains $688 (1) $ 334 $ 91 Realized gross losses (91)(2) (1,056) (319) ---- ------- ----- Realized net gains (losses) $597 $ (722) $(228) ==== ======= ===== - ----------------------------------------------------------------------------
(1) Includes $148 million of gross gains reported in mortgage banking noninterest income. (2) Includes $14 million of gross losses reported in mortgage banking noninterest income. The table below provides the remaining contractual principal maturities and yields (taxable-equivalent basis) of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Expected remaining maturities will differ from contractual maturities because debt issuers may have the right to prepay obligations with or without penalties.
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 ----------------------------------------------------------------------------------------- Remaining contractual principal maturity ----------------------------------------------------------------------- After one year After five years Weighted Within one year through five years through ten years After ten years Total average --------------- ------------------ ----------------- --------------- (in millions) amount yield Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------------------- Securities of U.S. Treasury and federal agencies $ 2,047 6.55% $ 698 6.35% $1,146 6.64% $ 188 6.70% $ 15 6.81% Securities of U.S. states and political subdivisions 2,223 7.98 143 8.46 341 8.22 171 7.91 1,568 7.89 Mortgage-backed securities: Federal agencies 29,721 7.19 55 8.23 134 8.37 395 8.91 29,137 7.16 Private collateralized mortgage obligations 2,658 8.55 897 7.03 1 10.75 97 9.17 1,663 9.33 ------- ------ ------ ------ ------- Total mortgage-backed securities 32,379 7.31 952 7.10 135 8.39 492 8.96 30,800 7.28 Other 2,668 7.80 26 6.90 94 6.22 166 7.17 2,382 7.91 ------- ------ ------ ------ ------- ESTIMATED FAIR VALUE OF DEBT SECURITIES (1) $39,317 7.46% $1,819 7.06% $1,716 7.27% $1,017 8.23% $34,765 7.47% ======= ==== ====== ==== ====== ===== ====== ==== ======= ==== TOTAL COST OF DEBT SECURITIES $38,662 $1,781 $1,668 $ 997 $34,216 ======= ====== ====== ====== ======= - ----------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yield is computed using the amortized cost of debt securities available for sale. 65 5. LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of the major categories of loans outstanding and related unfunded commitments is shown in the table below. Unfunded commitments are defined as all legally binding agreements to extend credit, net of all funds lent, and all standby and commercial letters of credit issued under the terms of those commitments. At December 31, 2001 and 2000, the commercial loan category and related unfunded commitments did not have a concentration in any industry that exceeded 10% of total loans and unfunded commitments. At December 31, 2001 and 2000, the real estate 1-4 family first mortgage and junior lien mortgage categories and related unfunded commitments did not have a concentration in any state that exceeded 10% of total loans and unfunded commitments.
- --------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------------------- 2001 2000 --------------------------- --------------------------- COMMITMENTS Commitments TO EXTEND to extend (in millions) OUTSTANDING CREDIT Outstanding credit - --------------------------------------------------------------------------------------------------------------- Commercial $ 47,547 $52,682 $ 50,518 $47,597 Real estate 1-4 family first mortgage 25,588 479 18,464 238 Other real estate mortgage 24,808 2,081 23,972 3,134 Real estate construction 7,806 4,237 7,715 6,181 Consumer: Real estate 1-4 family junior lien mortgage 25,530 14,038 18,218 7,899 Credit card 6,700 16,817 6,616 19,004 Other revolving credit and monthly payment 23,502 9,104 23,974 6,549 -------- ------- -------- ------- Total consumer 55,732 39,959 48,808 33,452 Lease financing 9,420 -- 10,023 1,847 Foreign 1,598 214 1,624 260 -------- ------- -------- ------- Total loans (1) $172,499 $99,652 $161,124 $92,709 ======== ======= ======== ======= - -------------------------------------------------------------------------------------------------------------------
(1) Outstanding loan balances at December 31, 2001 and 2000 are net of unearned income, including net deferred loan fees, of $4,143 million and $4,231 million, respectively. In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company has the same collateral policy for loans whether they are funded immediately or on a delayed basis (commitment). A commitment to extend credit is a legally binding agreement to lend funds to a customer usually at a stated interest rate and for a specified purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit shown in the table above because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate; by monitoring the size and maturity structure of these portfolios; and by applying the same credit standards maintained for all of its related credit activities. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses. Standby letters of credit totaled $5.5 billion and $5.6 billion at December 31, 2001 and 2000, respectively. Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The liquidity risk to the Company arises from its obligation to make payment in the event of a customer's contractual default. The credit risk involved in issuing standby letters of credit and the Company's management of that credit risk is considered in management's determination of the allowance for loan losses. Standby letters of credit are reported net of participations sold to other institutions of $736 million in 2001 and $623 million in 2000. 66 Included in standby letters of credit are those that back financial instruments (financial guarantees). The Company had issued or purchased participations in financial guarantees of approximately $1.6 billion and $2.3 billion at December 31, 2001 and 2000, respectively. The Company also had commitments for commercial and similar letters of credit of $577 million and $729 million at December 31, 2001 and 2000, respectively. Substantially all fees received from the issuance of financial guarantees are deferred and amortized on a straight-line basis over the term of the guarantee. The Company has an established process to determine the adequacy of the allowance for loan losses which assesses the risk and losses inherent in its portfolio. This process provides an allowance consisting of two components, allocated and unallocated. To arrive at the allocated component of the allowance, the Company combines estimates of the allowances needed for loans analyzed individually (including impaired loans subject to Statement of Financial Accounting Standards No. 114 (FAS 114), ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN) and loans analyzed on a pool basis. The determination of the allocated allowance for portfolios of larger commercial and commercial real estate loans involves a review of individual higher-risk transactions, focusing on the accuracy of loan grading, assessments of specific loss content, and, in some cases, strategies for resolving problem credits. These considerations supplement the application of loss factors delineated by individual loan grade to the existing distribution of risk exposures, thus framing an assessment of inherent losses across the entire wholesale lending portfolio segment which is responsive to shifts in portfolio risk content. The loss factors used for this analysis have been derived from migration models which track actual portfolio movements from problem asset loan grades to loss over a 5 to 10 year period. In the case of pass loan grades, the loss factors are derived from analogous loss experience in public debt markets, calibrated to the long-term average loss experience of the Company's portfolios. The loan loss allocations arrived at through this factor methodology are adjusted by management's judgment concerning the effect of recent economic events on portfolio performance. In the case of more homogeneous portfolios, such as consumer loans and leases, residential mortgage loans, and some segments of small business lending, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. For such portfolios, the risk assessment process emphasizes the development of rigorous forecasting models, which focus on recent delinquency and loss trends in different portfolio segments to project relevant risk metrics over an intermediate-term horizon. Such analyses are updated frequently to capture the most recent behavioral characteristics of the subject portfolios, as well as any changes in management's loss mitigation or customer solicitation strategies, in order to reduce the differences between estimated and observed losses. An amount which approximates one year of projected net losses is provided as the baseline allocation for most homogeneous portfolios, to which management will add certain adjustments to help ensure that a prudent amount of conservatism is present in the specific assumptions underlying that forecast. While coverage of one year's losses is often adequate (particularly for homogeneous pools of loans and leases), the time period covered by the allowance may vary by portfolio, based on the Company's best estimate of the inherent losses in the entire portfolio as of the evaluation date. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component includes management's judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors; correspondingly, the relationship of the unallocated component to the total allowance for loan losses may fluctuate from period to period. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. The Company's determination of the level of the allowance and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its examinations to executive management and the Board of Directors. Such reviews also assist management in establishing the level of the allowance. Like all national banks, subsidiary national banks continue to be subject to examination by their primary regulator, the Office of the Comptroller of the Currency (OCC), and some have OCC examiners in residence. These examinations occur throughout the year and target various activities of the subsidiary national banks, including specific segments of the loan portfolio (for example, commercial real estate and shared national credits). In addition to the subsidiary national banks being examined by the OCC, the Parent and its nonbank subsidiaries are examined by the Federal Reserve Board. The Company considers the allowance for loan losses of $3.76 billion adequate to cover losses inherent in loans, loan commitments and standby and other letters of credit at December 31, 2001. 67 Changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------- (in millions) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 3,719 $ 3,344 $ 3,307 Allowances related to business combinations 41 265 48 Provision for loan losses 1,780 1,329 1,104 Loan charge-offs: Commercial (692) (429) (395) Real estate 1-4 family first mortgage (29) (16) (14) Other real estate mortgage (32) (32) (28) Real estate construction (37) (8) (2) Consumer: Real estate 1-4 family junior lien mortgage (47) (34) (33) Credit card (421) (367) (403) Other revolving credit and monthly payment (770) (623) (585) ------- ------- ------- Total consumer (1,238) (1,024) (1,021) Lease financing (94) (52) (38) Foreign (78) (86) (90) ------- ------- ------- Total loan charge-offs (2,200) (1,647) (1,588) ------- ------- ------- Loan recoveries: Commercial 96 98 90 Real estate 1-4 family first mortgage 3 4 6 Other real estate mortgage 22 13 38 Real estate construction 3 4 5 Consumer: Real estate 1-4 family junior lien mortgage 11 14 15 Credit card 40 39 49 Other revolving credit and monthly payment 203 213 243 ------- ------- ------- Total consumer 254 266 307 Lease financing 25 13 12 Foreign 18 30 15 ------- ------- ------- Total loan recoveries 421 428 473 ------- ------- ------- Total net loan charge-offs (1,779) (1,219) (1,115) ------- ------- ------- BALANCE, END OF YEAR $ 3,761 $ 3,719 $ 3,344 ======= ======= ======= Total net loan charge-offs as a percentage of average total loans 1.09% .84% .90% ======= ======= ======= Allowance as a percentage of total loans 2.18% 2.31% 2.51% ======= ======= ======= - --------------------------------------------------------------------------------------------------------------
In accordance with FAS 114, the following table shows the recorded investment in impaired loans and the related methodology used to measure impairment at December 31, 2001 and 2000:
- ----------------------------------------------------------- December 31, ----------------- (in millions) 2001 2000 - ----------------------------------------------------------- Impairment measurement based on: Collateral value method $485 $174 Discounted cash flow method 338 331 Historical loss factors 172 257 ---- ---- Total (1) $995 $762 ==== ==== - -----------------------------------------------------------
(1) Includes $529 million and $345 million of impaired loans with a related FAS 114 allowance of $91 million and $74 million at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans during 2001, 2000 and 1999 was $937 million, $470 million and $376 million, respectively. Total interest income recognized on impaired loans during 2001, 2000 and 1999 was $17 million, $4 million and $7 million, respectively, which was primarily recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. 68 6. PREMISES, EQUIPMENT, LEASE COMMITMENTS, INTEREST RECEIVABLE AND OTHER ASSETS The following table presents comparative data for premises and equipment:
- -------------------------------------------------------------------- December 31, ----------------- (in millions) 2001 2000 - -------------------------------------------------------------------- Land $ 463 $ 440 Buildings 2,593 2,553 Furniture and equipment 3,012 2,942 Leasehold improvements 874 761 Premises leased under capital leases 54 75 ------ ------ Total 6,996 6,771 Less accumulated depreciation and amortization 3,447 3,356 ------ ------ Net book value $3,549 $3,415 ====== ====== - --------------------------------------------------------------------
Depreciation and amortization expense was $561 million, $560 million and $499 million in 2001, 2000 and 1999, respectively. The Company is obligated under a number of noncancelable operating leases for premises (including vacant premises) and equipment with terms, including renewal options, up to 100 years, many of which provide for periodic adjustment of rentals based on changes in various economic indicators. The following table shows future minimum payments under noncancelable operating leases and capital leases, net of sublease rentals, with terms in excess of one year as of December 31, 2001:
- ----------------------------------------------------------------------------------------- (in millions) Operating leases Capital leases Year ended December 31, 2002 $ 383 $ 8 2003 304 6 2004 253 4 2005 190 3 2006 158 3 Thereafter 736 21 ------ ---- Total minimum lease payments $2,024 45 ====== Executory costs (1) Amounts representing interest (17) ---- Present value of net minimum lease payments $ 27 ==== - ----------------------------------------------------------------------------------------
Rental expense, net of rental income, for all operating leases was $473 million, $499 million and $418 million in 2001, 2000 and 1999, respectively. The components of interest receivable and other assets at December 31, 2001 and 2000 were as follows:
- ---------------------------------------------------------------------------------------- December 31, ------------------------------ (in millions) 2001 2000 - ---------------------------------------------------------------------------------------- Trading assets $ 4,996 $ 3,777 Nonmarketable equity investments: Venture capital cost method investments 1,696 2,033 Federal Reserve Bank stock 1,295 1,237 All other 1,071 872 ------- ------- Total nonmarketable equity investments 4,062 4,142 Government National Mortgage Association (GNMA) pool buy-outs 2,815 1,510 Interest receivable 1,284 1,516 Interest-earning deposits 206 95 Foreclosed assets 171 128 Certain identifiable intangible assets 119 227 Due from customers on acceptances 104 85 Other 9,788 10,449 ------- ------- Total interest receivable and other assets $23,545 $21,929 ======= ======= - ----------------------------------------------------------------------------------------
Trading assets consist largely of securities, including corporate debt, U.S. government agency obligations and derivative instruments held for customer accommodation purposes. Interest income from trading assets was $114 million, $98 million and $81 million in 2001, 2000 and 1999, respectively. Noninterest income from trading assets was $400 million, $238 million and $112 million in 2001, 2000 and 1999, respectively. Noninterest (loss) income from nonmarketable equity investments accounted for using the cost method was $(55) million, $170 million and $138 million in 2001, 2000 and 1999, respectively. The decreases from 2000 to 2001 in noninterest income and the balance of venture capital cost method investments was primarily due to a $330 million second quarter 2001 impairment write-down of certain venture capital cost method investments. GNMA pool buy-outs are advances made to GNMA mortgage pools that are guaranteed by the Federal Housing Administration or by the Department of Veterans Affairs (collectively, "the guarantors"). These advances are made to buy out government agency-guaranteed delinquent loans, pursuant to the Company's servicing agreements. The Company, on behalf of the guarantors, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances, by the guarantors. Amortization expense for certain identifiable intangible assets included in other assets was $38 million, $42 million and $68 million in 2001, 2000 and 1999, respectively. 69 7. DEPOSITS The aggregate amount of time certificates of deposit and other time deposits issued by domestic offices was $26,454 million and $36,207 million at December 31, 2001 and 2000, respectively. Substantially all of those deposits were interest bearing. The contractual maturities of those deposits are shown in the following table.
- ------------------------------------------------------------------------------------------ (in millions) December 31, 2001 2002 $19,533 2003 3,825 2004 1,169 2005 753 2006 472 Thereafter 702 --------- Total $26,454 ========= - ------------------------------------------------------------------------------------------
Of the total above, the amount of time deposits with a denomination of $100,000 or more was $6,427 million and $9,741 million at December 31, 2001 and 2000, respectively. The contractual maturities of these deposits are shown in the following table.
- ------------------------------------------------------------------------------------------ (in millions) December 31, 2001 Three months or less $2,534 After three months through six months 1,282 After six months through twelve months 1,172 After twelve months 1,439 -------- Total $6,427 ======== - ------------------------------------------------------------------------------------------
Time certificates of deposit and other time deposits issued by foreign offices with a denomination of $100,000 or more represent most of the foreign deposit liabilities of $4,132 million and $7,712 million at December 31, 2001 and 2000, respectively. Demand deposit overdrafts that have been reclassified as loan balances were $638 million and $749 million at December 31, 2001 and 2000, respectively. 8. SHORT-TERM BORROWINGS - ------------------------------------------------------------------------------- The table below shows selected information for short-term borrowings. These borrowings generally mature in less than 30 days.
- ------------------------------------------------------------------------------------------------------------------- (in millions) 2001 2000 1999 ----------------- ----------------- ----------------- AMOUNT RATE Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, Commercial paper and other short-term borrowings $13,965 2.01% $15,844 6.64% $17,246 6.06% Federal funds purchased and securities sold under agreements to repurchase 23,817 1.53 13,145 5.81 14,481 4.73 -------- -------- -------- Total $37,782 1.71 $28,989 6.26 $31,727 5.45 ======== ======== ======== YEAR ENDED DECEMBER 31, AVERAGE DAILY BALANCE Commercial paper and other short-term borrowings $13,561 4.12% $14,375 6.43% $10,272 5.40% Federal funds purchased and securities sold under agreements to repurchase 20,324 3.51 13,847 6.03 12,287 4.69 -------- -------- -------- Total $33,885 3.76 $28,222 6.23 $22,559 5.00 ======== ======== ======== MAXIMUM MONTH-END BALANCE Commercial paper and other short-term borrowings (1) $19,818 N/A $17,730 N/A $17,246 N/A Federal funds purchased and securities sold under agreements to repurchase (2) 26,346 N/A 16,535 N/A 15,147 N/A - -------------------------------------------------------------------------------------------------------------------
N/A - Not applicable. (1) Highest month-end balance in each of the last three years appeared in October 2001, January 2000 and December 1999, respectively. (2) Highest month-end balance in each of the last three years appeared in September 2001, August 2000 and August 1999, respectively. At December 31, 2001, the Company had available lines of credit totaling $4.3 billion, of which $2.3 billion was obtained through a subsidiary, Wells Fargo Financial, Inc. The remaining $2.0 billion was in the form of a revolving credit facility. A portion of these financing arrangements require the maintenance of compensating balances or payment of fees, which are not material. 70 9. LONG-TERM DEBT The following is a summary of long-term debt (reflecting unamortized debt discounts and premiums, where applicable) owed by the Parent and its subsidiaries:
Maturity Interest (in millions) date rate(s) 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- WELLS FARGO & COMPANY (PARENT ONLY) SENIOR Global Notes (1) 2002-2006 6.50-7.25% $ 4,996 $ 3,986 Global Notes 2002 Various 1,250 1,997 Medium-Term Notes (1) 2002-2006 5.75-6.875% 1,596 2,095 Medium-Term Notes 2002-2027 3.375-7.75% 1,670 620 Floating-Rate Medium-Term Notes 2002-2004 Various 2,300 2,100 Floating-Rate Euro Medium-Term Notes 2001 Various -- 300 Notes 2004 6.00% 1 1 Extendable Notes (2) 2005 Various 1,497 1,497 ------- ------- Total senior debt 13,310 12,596 ------- ------- SUBORDINATED Global Notes (1) 2011 6.375% 748 -- Notes (1) 2003 6.625% 200 199 Debentures 2023 6.65% 198 198 Other notes (1) 2003 6.625-6.75% -- 1 ------- ------- Total subordinated debt 1,146 398 ------- ------- Total long-term debt - Parent 14,456 12,994 ------- ------- WFC HOLDINGS CORPORATION SENIOR Medium-Term Notes (1) 2002 10.00% 2 220 Medium-Term Notes 2002 9.04-10.00% 2 15 ------- ------- Total senior debt 4 235 ------- ------- SUBORDINATED Medium-Term Notes (1)(3) 2013 6.50-6.625% 50 173 Medium-Term Notes 2002 9.375% 30 30 Notes 2002-2003 6.125-8.75% 732 732 Notes (1) 2004-2006 6.875-9.125% 933 933 Notes (1)(3) 2008 6.25% 199 199 ------- ------- Total subordinated debt 1,944 2,067 ------- ------- Total long-term debt - WFC Holdings $ 1,948 $ 2,302 ------- ------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) The Company entered into interest rate swap agreements for substantially all of these notes, whereby the Company receives fixed-rate interest payments approximately equal to interest on the notes and makes interest payments based on an average three-month or six-month LIBOR rate. (2) The extendable notes are a floating rate security with an initial maturity of 13 months, which can be extended on a rolling basis, at the investor's option to a final maturity of 5 years. (3) The interest rate swap agreement for these notes is callable by the counterparty prior to the maturity of the notes. (4) The Company entered into an interest rate swap agreement for these notes, whereby the Company receives interest payments based on an average three-month LIBOR rate and makes fixed-rate interest payments ranging from 5.625% to 5.65%. (5) The notes are tied to low-income housing funding. (continued on page 72) 71 (continued from page 71)
- ---------------------------------------------------------------------------------------------------------------------------------- Maturity Interest (in millions) date rate(s) 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- WELLS FARGO FINANCIAL, INC. AND ITS SUBSIDIARIES (WFFI) SENIOR Medium-Term Notes 2002-2008 5.1-7.47% $ 801 $ 881 Floating-Rate Notes 2002-2003 Various 950 1,020 Notes 2002-2009 5.375-8.56% 6,395 5,068 ------- ------- Total long-term debt - WFFI 8,146 6,969 ------- ------- FIRST SECURITY CORPORATION AND ITS SUBSIDIARIES SENIOR Medium-Term Notes 2003 6.40% 15 24 Floating-Rate Euro Medium-Term Notes (4) 2002 Various 300 300 Floating-Rate Euro Medium-Term Notes 2003 Various 285 285 Federal Home Loan Bank (FHLB) Notes and Advances 2002-2010 2.02-6.47% 351 796 Notes 2003-2006 5.875-6.875% 473 475 Other notes (5) 2002-2007 3 5 ------- ------- Total senior debt 1,427 1,885 ------- ------- SUBORDINATED Notes (1) 2002-2006 7.00-7.50% 234 234 ------- ------- Total subordinated debt 234 234 ------- ------- Total long-term debt - FSCO 1,661 2,119 ------- ------- WELLS FARGO BANK, N.A. SENIOR Floating Rate Bank Notes 2002 Various 1,525 -- Notes payable by subsidiaries 2003-2009 8.25-13.50% 52 48 Other notes 2003 8.5% 3 3 Obligations of subsidiaries under capital leases (Note 6) 8 11 ------- ------- Total senior debt 1,588 62 ------- ------- SUBORDINATED Floating-Rate Notes (6) 2005 Various -- 750 FixFloat Notes (callable 6/15/2005) (1) 2010 7.8% through 2005, various 997 996 Notes (1) 2010-2011 6.45-7.55% 2,496 747 ------- ------- Total subordinated debt 3,493 2,493 ------- ------- Total long-term debt - WFB, N.A. 5,081 2,555 ------- ------- OTHER CONSOLIDATED SUBSIDIARIES SENIOR FHLB Notes and Advances (7) 2002-2027 3.15-8.38% 2,211 367 Floating-Rate FHLB Advances (7) 2002-2011 1.824-2.174% 2,334 4,409 Other notes and debentures 2001-2015 3.00-12.00% 239 316 Capital lease obligations (Note 6) 19 15 ------- ------- Total long-term debt - other consolidated subsidiaries 4,803 5,107 ------- ------- Total consolidated long-term debt $36,095 $32,046 ======= ======= - ----------------------------------------------------------------------------------------------------------------------------------
(6) The notes were called in May 2001 at par. (7) The maturities of the FHLB advances are determined quarterly, based on the outstanding balance, the then current LIBOR rate, and the maximum life of the advance. Advances maturing within the next year are expected to be refinanced, extending the maturity of such borrowings beyond one year. At December 31, 2001, the principal payments, including sinking fund payments, on long-term debt are due as noted in the following table.
- ----------------------------------------------------- (in millions) Parent Company 2002 $ 3,125 $10,115 2003 3,398 6,904 2004 2,000 3,915 2005 2,993 4,273 2006 1,596 3,359 Thereafter 1,344 7,529 --------- --------- Total $14,456 $36,095 ========= ========= - -----------------------------------------------------
The interest rates on floating-rate notes are determined periodically by formulas based on certain money market rates, subject, on certain notes, to minimum or maximum interest rates. As part of its long-term and short-term borrowing arrangements, the Company was subject to various financial and operational covenants. Certain of the agreements under which debt has been issued contain provisions that may limit the merger or sale of certain subsidiary banks and the issuance of capital stock or convertible securities by certain subsidiary banks. At December 31, 2001, the Company was in compliance with all the covenants. 72 10. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The special purpose trusts, identified in the table on the next page, were established by the Parent in 2001, and by WFC Holdings Corporation (the former Wells Fargo & Company) in 1996 and 1997, and by First Security in 1996 (both of which are now direct subsidiaries of the Parent) (the holding company subsidiaries) for the purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated debentures (debentures) of the Parent or the debentures of the applicable holding company subsidiary, which are the sole assets of each trust. Concurrently with the issuance of the trust preferred securities, the Parent or the holding company subsidiary, as applicable, issued guarantees for the benefit of the holders of the trust preferred securities. These trust preferred securities are treated by the Company as Tier 1 regulatory capital and provide the Company with a more cost-effective means of obtaining Tier 1 capital for regulatory purposes than if the Company itself were to issue additional preferred stock. The sole assets of these special purpose trusts are the debentures issued by the Parent, (for the 2001 trusts) or the debentures issued by a holding company subsidiary, as applicable. The Parent and the holding company subsidiaries own all of the common securities of their related trusts. The trust preferred securities issued by the trusts rank senior to the common securities. The common securities and debentures, along with the related income effects, are eliminated within the consolidated financial statements of the Company. The respective obligations of the Parent and the holding company subsidiaries under the debentures, indentures, the trust agreements, and the guarantees relating to the trusts established by each of them and identified in the table below in each case constitute the full and unconditional guarantee by the Parent or the holding company subsidiary, as applicable, of the obligations of the trusts with respect to the trust preferred securities and rank subordinate and junior in right of payment to all of their other liabilities. The Parent also guaranteed the obligations previously issued by the former Wells Fargo & Company and assumed by WFC Holdings with respect to the 1996 and 1997 trusts. 73 The trust preferred securities are subject to mandatory redemption at the stated maturity date of the debentures, upon repayment of the debentures, or earlier, pursuant to the terms of the trust agreements. The table below summarizes the outstanding preferred securities issued by each special purpose trust and the debentures issued by the Parent or the holding company subsidiary to each trust as of December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------- (in millions) Trust preferred securities and debentures Interest Trust preferred securities Principal -------------------------- payable/ -------------------------- balance of Stated Annualized distribution Trust name Issuance date Amount debentures maturity coupon rate dates(4) - -------------------------------------------------------------------------------------------------------------------- Wells Fargo Capital A(1) November 1996 $ 85 $ 94 December 1, 2026 8.13% Semi-annual- June 1 and December 1 Wells Fargo Capital B(1) November 1996 153 159 December 1, 2026 7.95% Semi-annual- June 1 and December 1 Wells Fargo Capital C(1) November 1996 186 194 December 1, 2026 7.73% Semi-annual- June 1 and December 1 Wells Fargo Capital I(1) December 1996 212 224 December 15, 2026 7.96% Semi-annual- June 15 and December 15 Wells Fargo Capital II(1) January 1997 149 155 January 30, 2027 LIBOR + .5% Quarterly- January 30, April 30, July 30 and October 30 Wells Fargo Capital IV(2)(3) August 2001 1,300 1,300 September 1, 2031 7.00% Quarterly- March 1, June 1, September 1 and December 1 Wells Fargo Capital V(2)(3) December 2001 200 200 December 1, 2031 7.00% Quarterly- March 1, June 1, September 1 and December 1 First Security Capital I December 1996 150 150 December 15, 2026 8.41% Semi-annual June 15 and December 15 ------ Total $2,435 ====== - -------------------------------------------------------------------------------------------------------------------
(1) Established by WFC Holdings (the former Wells Fargo). (2) Established by the Parent. (3) The Parent has the right to extend the stated maturity dates of the debentures held by the indicated trusts for a period of up to 19 years. (4) All distributions are cumulative. The debentures held by the trusts may be redeemed at the option of the Parent or the holding company subsidiaries as applicable, and the corresponding trust preferred securities will also be redeemed, subject to any applicable regulatory approvals, at the redemption prices specified under the terms of the debentures and trust preferred securities on or after certain stated dates occurring in August 2006 for Wells Fargo Capital IV, in December 2006 for Wells Fargo Capital A, Wells Fargo Capital B, Wells Fargo Capital C, Wells Fargo Capital I, Wells Fargo Capital V, and First Security Capital I, and in January 2007 for Wells Fargo Capital II. Prior to the applicable stated redemption date, the trust preferred securities may be redeemed at the option of the Parent or the applicable holding company subsidiary, and the related trust preferred securities will be redeemed after the occurrence of certain events that would have a negative tax effect on the Parent, the holding company subsidiaries or their applicable trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in a trust being treated as an investment company. The ability of each trust to pay timely distributions on its trust preferred securities depends upon the Parent or the applicable holding company subsidiary making the related payment on the debentures when due. The Parent or the holding company subsidiaries have the right to defer payment of interest on the debentures and, therefore, distributions on the trust preferred securities for up to five years. 74 11. 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 following table is a summary of preferred stock:
- -------------------------------------------------------------------------------------------------------------------------------- Shares issued Carrying amount Dividends declared and outstanding (in millions) (in millions) ------------------- -------------- Adjustable ----------------------- December 31, December 31, dividend rate Year ended December 31, ------------------- -------------- ------------------ ----------------------- 2001 2000 2001 2000 Minimum Maximum 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Adjustable-Rate Cumulative, Series B (1) 1,460,000 1,460,000 $ 73 $ 73 5.50% 10.50% $ 4 $ 4 $ 4 6.59%/Adjustable-Rate Noncumulative Preferred Stock, Series H (1)(2) -- 4,000,000 -- 200 7.00 13.00 10 13 13 Cumulative Tracking (3) -- -- -- -- -- -- -- -- 18 2001 ESOP Cumulative Convertible (4) 61,800 -- 62 -- 10.50 11.50 -- -- -- 2000 ESOP Cumulative Convertible (4) 39,962 55,273 40 55 11.50 12.50 -- -- -- 1999 ESOP Cumulative Convertible (4) 15,552 18,206 15 18 10.30 11.30 -- -- -- 1998 ESOP Cumulative Convertible (4) 6,145 7,631 6 8 10.75 11.75 -- -- -- 1997 ESOP Cumulative Convertible (4) 7,576 9,542 8 10 9.50 10.50 -- -- -- 1996 ESOP Cumulative Convertible (4) 7,707 10,211 8 10 8.50 9.50 -- -- -- 1995 ESOP Cumulative Convertible (4) 5,543 8,285 5 8 10.00 10.00 -- -- -- ESOP Cumulative Convertible (4) 1,002 2,656 1 3 9.00 9.00 -- -- -- Unearned ESOP shares (5) -- -- (154) (118) -- -- -- -- -- -------- -------- ----- ----- ----- ----- ----- Total 1,605,287 5,571,804 $ 64 $267 $14 $17 $35 ========= ========= ==== ==== === === ====
- ------------------------------------------------------------------------------- (1) Liquidation preference $50. (2) Annualized dividend rate was 6.59% until October 1, 2001. On October 1, 2001 all shares were redeemed at the stated liquidation price plus accrued dividends. (3) In December 1999, the Company redeemed all shares of its Cumulative Tracking preferred stock. (4) Liquidation preference $1,000. (5) 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. For information on dividends declared, see Note 12. ADJUSTABLE-RATE CUMULATIVE PREFERRED STOCK, SERIES B These shares are redeemable at the option of the Company at $50 per share plus accrued and unpaid dividends. Dividends are cumulative and payable quarterly on the 15th of February, May, August and November. For each quarterly period, the dividend rate is 76% of the highest of the three-month Treasury bill discount rate, 10-year constant maturity Treasury security yield or 20-year constant maturity Treasury bond yield, but limited to a minimum of 5.5% and a maximum of 10.5% per year. The average dividend rate was 5.6% during 2001 and 2000 and 5.5% in 1999. ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of the Company's 2001, 2000, 1999, 1998, 1997, 1996 and 1995 ESOP Cumulative Convertible Preferred Stock and ESOP Cumulative Convertible Preferred Stock (collectively, ESOP Preferred Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan (formerly known as the Norwest Corporation Savings Investment Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of initial issuance and are payable quarterly at annual rates ranging from 8.50 percent to 12.50 percent, depending upon the year of issuance. Each share of ESOP Preferred Stock released from the unallocated reserve of the Plan is converted into shares of common stock of the Company based on the stated value of the ESOP Preferred Stock and the then current market price of the Company's common stock. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. The ESOP Preferred Stock may be redeemed at any time, in whole or in part, at the option of the Company at a redemption price per share equal to the higher of (a) $1,000 per share plus accrued and unpaid dividends or (b) the fair market value, as defined in the Certificates of Designation of the ESOP Preferred Stock. 75 12. COMMON STOCK AND STOCK PLANS COMMON STOCK The following table summarizes common stock reserved, issued and authorized as of December 31, 2001:
- -------------------------------------------------------------------------------------------- Number of shares - -------------------------------------------------------------------------------------------- Convertible subordinated debentures 24,400 Acquisition contingencies 139,337 Dividend reinvestment and common stock purchase plans 2,126,970 Director plans 1,323,541 Stock plans (1) 219,541,353 ------------- Total shares reserved 223,155,601 Shares issued 1,736,381,025 Shares not reserved 4,040,463,374 ------------- Total shares authorized 6,000,000,000 ============= - --------------------------------------------------------------------------------------------
(1) Includes employee option, 401(k), profit sharing and compensation deferral plans. Each share of the Company's common stock includes one preferred share purchase right. These rights will become exercisable only if a person or group acquires or announces an offer to acquire 15 percent or more of the Company's common stock. When exercisable, each right will entitle the holder to buy one one-thousandth of a share of a new series of junior participating preferred stock at a price of $160 for each one one-thousandth of a preferred share. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's common stock or shares in an "acquiring entity" at one-half of the then current market value. The Company will generally be entitled to redeem the rights at one cent per right at any time before they become exercisable. The rights will expire on November 23, 2008, unless extended, previously redeemed or exercised. The Company has reserved 1.7 million shares of preferred stock for issuance upon exercise of the rights. DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLANS The Company's dividend reinvestment and common stock direct purchase plans permit participants to purchase at fair market value shares of the Company's common stock by reinvestment of dividends and/or optional cash payments, subject to the terms of the plan. DIRECTOR PLANS Under the Company's director plans, non-employee directors receive stock as part of their annual retainer. These plans provide for annual grants of options to purchase common stock to each non-employee director elected or re-elected at the annual meeting of stockholders. Options granted become exercisable after six months and may be exercised until the tenth anniversary of the date of grant. Compensation expense for the options is measured as the quoted market price of the stock at the date of exercise less the grant price and is accrued over the vesting period. EMPLOYEE STOCK PLANS LONG-TERM INCENTIVE PLANS The Company's stock incentive plans provide for awards of incentive and nonqualified stock options, stock appreciation rights, restricted shares, restricted share rights, performance awards and stock awards without restrictions. Employee stock options can be granted with exercise prices at or above the fair market value (as defined in the plan) of the stock at the date of grant and with terms of up to ten years. The options generally become fully exercisable over three years from the date of grant. Except as otherwise permitted under the plan, upon termination of employment for reasons other than retirement, permanent disability or death, the option period is reduced or the options are canceled. Options also may include the right to acquire a "reload" stock option. If an option contains the reload feature and if a participant pays all or part of the exercise price of the option with shares of stock purchased in the market or held by the participant for at least six months, upon exercise of the option, the participant is granted a new option to purchase, at the fair market value of the stock as of the date of the reload, the number of shares of stock equal to the sum of the number of shares used in payment of the exercise price and a number of shares with respect to related taxes. No compensation expense was recorded for the options granted under the plans, as the exercise price was equal to the quoted market price of the stock at the date of grant. The total number of shares of common stock available for grant under the plans as of December 31, 2001 was 50,271,203. 76 Holders of restricted shares and restricted share rights are entitled at no cost to the related shares of common stock generally over three to five years after the restricted shares or restricted share rights were granted. Upon grant of the restricted shares or restricted share rights, holders generally are entitled to receive quarterly cash payments equal to the cash dividends that would be paid on common stock equal to the number of restricted shares or restricted share rights. Except in limited circumstances, restricted shares and restricted share rights are canceled upon termination of employment. In 2001, 2000 and 1999, 107,000, 56,636 and 204,868 restricted shares and restricted share rights were granted, respectively, with a weighted-average grant-date per share fair value of $46.73, $40.61 and $43.24, respectively. As of December 31, 2001, 2000 and 1999, there were 888,234, 1,450,074 and 2,423,999 restricted shares and restricted share rights outstanding, respectively. The compensation expense for the restricted shares and restricted share rights equals the quoted market price of the related stock at the date of grant and is accrued over the vesting period. The total compensation expense recognized for the restricted shares and restricted share rights was $6 million in 2001 and 2000 and $21 million in 1999. In connection with various acquisitions and mergers since 1992, the Company converted employee and director stock options of acquired or merged companies into stock options to purchase the Company's common stock based on the terms of the original stock option plan and the agreed-upon exchange ratio. BROAD-BASED PLANS In 1996, the Company adopted the Best Practices PARTNERSHARES(R) Plan, a broad-based employee stock option plan covering full- and part-time employees who were not participants in the long-term incentive plans described above. The total number of shares of common stock authorized for issuance under the plan since inception through December 31, 2001 was 67,000,000, including 14,936,350 shares available for grant. Options granted under the PARTNERSHARES Plan have an exercise date that generally is the earlier of five years after the date of grant or when the quoted market price of the stock reaches a predetermined price. Those options generally expire ten years after the date of grant. Because the exercise price of each PARTNERSHARES grant has been equal to or higher than the quoted market price of the Company's common stock at the date of grant, no compensation expense is recognized. The following table summarizes the Company's stock option activity and related information for the three years ended December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------- Director Plans Long-Term Incentive Plans Broad-Based Plans (5) ------------------------ ----------------------------- -------------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Number price Number price Number price - ------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1998 562,590 $21.02 64,131,146 $24.78 41,805,980 $33.60 -------- ------------ ----------- 1999: Granted 38,253 (1) 42.60 17,492,150 (2)(3) 39.59 -- -- Canceled -- -- (2,198,973) 28.30 (7,836,842) 34.76 Exercised (75,745) 16.57 (12,817,198) 19.63 (1,454,838) 24.40 -------- ------------ ----------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 1999 525,098 23.24 66,607,125 29.53 32,514,300 33.72 -------- ------------ ----------- 2000: Granted 28,080 (1) 42.75 23,183,070 (2)(3) 35.63 23,160,800 (4) 46.50 Canceled (5,005) 25.04 (1,896,001) 35.74 (4,827,800) 36.81 Exercised (115,495) 12.94 (13,906,642) 22.93 (390,695) 18.19 Acquisitions -- -- 797,076 20.43 -- -- -------- ------------ ----------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 2000 432,678 27.23 74,784,628 32.39 50,456,605 39.41 2001: GRANTED 49,635 (1) 47.55 19,930,772 (2) (3) 49.52 353,600 (4) 41.84 CANCELED -- -- (1,797,865) 43.21 (5,212,550) 41.81 EXERCISED (169,397) 19.42 (10,988,267) 25.61 (191,440) 21.43 -------- ------------ ----------- OPTIONS OUTSTANDING AS OF DECEMBER 31, 2001 312,916 $34.69 81,929,268 $37.23 45,406,215 $39.23 ======== ====== ============ ====== =========== ====== Outstanding options exercisable as of: December 31, 1999 511,225 $22.06 39,582,781 $24.86 1,646,500 $17.64 December 31, 2000 432,678 27.23 44,893,948 30.36 1,309,005 18.33 DECEMBER 31, 2001 312,916 34.69 46,937,295 33.44 1,264,015 20.29 - -------------------------------------------------------------------------------------------------------------------
(1) The weighted-average per share fair value of options granted was $13.87, $12.60 and $12.09 for 2001, 2000 and 1999, respectively. (2) The weighted-average per share fair value of options granted was $14.16, $10.13 and $10.16 for 2001, 2000 and 1999, respectively. (3) Includes 1,791,852, 2,029,063 and 2,285,910 reload grants at December 31, 2001, 2000 and 1999, respectively. (4) The weighted-average per share fair value of options granted was $5.90 and $4.60 for 2001 and 2000, respectively. (5) Activity for broad-based plans in 1999 includes the options related to the Employee Stock Purchase Plan, which was discontinued in 2000. The Employee Stock Purchase Plan allowed eligible employees of the former Wells Fargo to purchase common stock at a price of the lower of (1) the quoted market price of the stock at the date of grant or (2) 85% of the quoted market price at the end of the one-year option term. 77 The following table is a summary of selected information for the Company's stock option plans described on the preceding page:
- ------------------------------------------------------------------------------------------------------------------- December 31, 2001 ------------------------------------------------------ Weighted- average Weighted- remaining average contractual exercise life (in yrs.) Number price - ------------------------------------------------------------------------------------------------------------------- RANGE OF EXERCISE PRICES DIRECTOR PLANS $.10 Options outstanding/exercisable 3.01 2,390 $ .10 $7.84-$13.48 Options outstanding/exercisable 2.36 8,210 11.49 $13.49-$16.00 Options outstanding/exercisable 3.27 30,940 15.10 $16.01-$25.04 Options outstanding/exercisable 3.94 64,788 21.98 $25.05-$38.29 Options outstanding/exercisable 5.90 74,620 33.47 $38.30-$51.00 Options outstanding/exercisable 8.12 131,968 48.27 LONG-TERM INCENTIVE PLANS $3.37-$5.06 Options outstanding/exercisable 5.95 92,900 4.32 $5.07-$7.60 Options outstanding/exercisable 1.65 150,461 7.49 $7.61-$11.41 Options outstanding/ exercisable 1.84 300,936 10.60 $11.42-$17.13 Options outstanding 2.95 3,369,121 14.11 Options exercisable 2.92 3,233,969 14.03 $17.14-$25.71 Options outstanding 2.62 3,021,351 19.98 Options exercisable 2.68 2,909,873 19.96 $25.72-$38.58 Options outstanding 6.80 47,336,583 33.81 Options exercisable 6.26 31,679,923 33.39 $38.59-$71.30 Options outstanding 8.19 27,657,916 48.35 Options exercisable 6.05 8,569,233 47.08 BROAD-BASED PLANS $16.56 Options outstanding/exercisable 4.56 1,022,815 16.56 $24.85-$37.81 Options outstanding 6.25 24,686,600 34.40 Options exercisable 6.18 200,800 34.01 $37.82-$46.50 Options outstanding 8.85 19,696,800 46.47 Options exercisable 8.84 40,400 46.50 - -------------------------------------------------------------------------------------------------------------------
In accordance with FAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to continue applying the provisions of Accounting Principles Board Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for the stock plans described above. Had compensation cost for those stock plans been determined based on the (optional) fair value method established by FAS 123, the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated in the table below.
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------- (in millions, except per common share amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Net income As reported $3,423 $4,026 $4,012 Pro forma 3,277 3,914 3,909 Earnings per common share As reported $ 1.99 $ 2.36 $ 2.32 Pro forma 1.91 2.29 2.26 Diluted earnings per common share As reported $ 1.97 $ 2.33 $ 2.29 Pro forma 1.89 2.27 2.23 - -------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated based on the date of grant using an option-pricing model. The following weighted-average assumptions were used in 2001, 2000 and 1999: expected dividend yield ranging from 1.4% to 3.4%; expected volatility ranging from 20.0% to 42.0%; risk-free interest rates ranging from 2.2% to 7.8% and expected life ranging from .1 to 6.6 years. 78 EMPLOYEE STOCK OWNERSHIP PLAN The Wells Fargo & Company 401(k) Plan (the 401(k) Plan) is a defined contribution employee stock ownership plan (ESOP) under which the 401(k) Plan may borrow money to purchase the Company's common or preferred stock. Beginning in 1994, the Company has loaned money to the 401(k) Plan which has been used to purchase shares of the Company's ESOP Preferred Stock. As ESOP Preferred Stock is released and converted into common shares, compensation expense is recorded equal to the current market price of the common shares. Dividends on the common shares allocated as a result of the release and conversion of the ESOP Preferred Stock are recorded as a reduction of retained earnings and the shares are considered outstanding for purposes of earnings per share computations. Dividends on the unallocated ESOP Preferred Stock are not recorded as a reduction of retained earnings, and the shares are not considered to be common stock equivalents for purposes of earnings per share computations. Loan principal and interest payments are made from the Company's contributions to the 401(k) Plan, along with dividends paid on the ESOP Preferred Stock. With each principal and interest payment, a portion of the ESOP Preferred Stock is released and, after conversion of the ESOP Preferred Stock into common shares, allocated to the 401(k) Plan participants. Total dividends paid to the 401(k) Plan on ESOP shares were as follows:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------ (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- ESOP Preferred Stock: Common dividends $15 $11 $ 7 Preferred dividends 19 14 11 1989 ESOP shares: Common dividends 11 11 11 ----- ---- ----- Total $45 $36 $29 ===== ==== ===== - -------------------------------------------------------------------------------------------------------------------
The ESOP shares as of December 31, 2001, 2000 and 1999 were as follows:
- ------------------------------------------------------------------------------------------------------------------- December 31, --------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- ESOP Preferred Stock: Allocated shares (common) 17,233,798 13,716,692 10,784,773 Unreleased shares (preferred) 145,287 111,804 69,221 1989 ESOP shares: Allocated shares 9,809,875 10,988,083 13,016,033 Unreleased shares 3,042 39,558 76,070 Fair value of unearned ESOP shares (in millions) $ 145 $ 112 $ 69 - -------------------------------------------------------------------------------------------------------------------
DEFERRED COMPENSATION PLAN FOR INDEPENDENT SALES AGENTS WF Deferred Compensation Holdings, Inc. is a non-operating, wholly-owned subsidiary of the Parent formed solely to sponsor a deferred compensation plan for independent sales agents who provide investment, financial and other qualifying services for or with respect to participating affiliates. The plan, which became effective January 1, 2002, allows participants to defer all or part of their eligible compensation payable to them by a participating affiliate. The Parent has fully and unconditionally guaranteed WF Deferred Compensation Holdings, Inc.'s deferred compensation obligations under the plan. Effective January 1, 2002, the H.D. Vest, Inc. Representatives' Deferred Compensation Plan was merged into the plan. 79 13. EMPLOYEE BENEFITS AND OTHER EXPENSES EMPLOYEE BENEFITS The Company sponsors noncontributory qualified defined benefit retirement plans including the Cash Balance Plan and the First Security Corporation Retirement Plan. The Cash Balance Plan is an active plan and it covers eligible employees of the Company except certain subsidiaries. The FSCO Retirement Plan is an inactive plan, which provides benefits to eligible employees of First Security. All benefits under the FSCO Retirement Plan were frozen effective December 31, 2000. Under the Cash Balance Plan, eligible employees' Cash Balance Plan accounts are allocated a compensation credit based on a certain percentage of their certified compensation. The compensation credit percentage is based on age and years of credited service. In addition, participants are allocated at the end of each quarter investment credits on their accumulated balances. Employees become vested in their Cash Balance Plan accounts after completion of five years of vesting service or attainment of age 65, if earlier. Pension benefits accrued prior to the conversion to the Cash Balance Plan are guaranteed. In addition, certain employees are eligible for a special transition benefit comparison. The Company's policy is to fund the actuarially computed retirement cost accrued for the Cash Balance Plan. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Company sponsors defined contribution retirement plans including the 401(k) Plan and the First Security Incentive Savings Plan and Trust (the FSCO 401(k) Plan). Under the 401(k) Plan, eligible employees who have completed one month of service are eligible to contribute up to 18% of their pretax certified compensation, although a lower limit may be applied to certain highly compensated employees in order to maintain the qualified status of the 401(k) Plan. Eligible employees who complete one year of service are eligible for matching company contributions, which are generally a dollar for dollar match up to 6% of an employee's certified compensation. The Company's matching contributions are generally subject to a four-year vesting schedule. Under the FSCO 401(k) Plan, eligible employees who were 21 or older with one year of service were eligible to contribute up to 17% of their pretax certified compensation, although a lower limit may be applied to certain employees in order to maintain the qualified status of the FSCO 401(k) Plan. Eligible employees were eligible for matching company contributions, which are generally equal to 50% of the first 6% of an employee's certified compensation. The Company's matching contributions were fully vested upon enrollment. The FSCO 401(k) Plan was merged into the Wells Fargo 401(k) Plan effective January 1, 2001. The Company provides health care and life insurance benefits for certain retired employees and reserves the right to terminate or amend any of the benefits described above at any time. The following table shows the changes in the benefit obligation and the fair value of plan assets during 2001 and 2000 and the amounts included in the Company's Consolidated Balance Sheet as of December 31, 2001 and 2000 for the Company's defined benefit pension and other postretirement benefit plans:
- ------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------- 2001 2000 ------------------------ ------------------------- PENSION OTHER Pension Other (in millions) BENEFITS BENEFITS benefits benefits - ------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $2,656 $ 578 $2,503 $ 567 Service cost 161 16 154 16 Interest cost 191 42 186 43 Plan participants' contributions -- 12 -- 6 Amendments (47) -- -- -- Plan mergers -- (10) 25 -- Actuarial gain (loss) 165 (28) (24) (22) Benefits paid (192) (64) (176) (32) Settlement -- -- (12) -- ------ ----- ------ ----- Benefit obligation at end of year $2,934 $ 546 $2,656 $ 578 ====== ===== ====== ===== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $3,270 $ 236 $2,867 $ 209 Actual return on plan assets (331) (12) 550 26 Plan mergers -- -- 28 -- Employer contribution 14 54 13 27 Plan participants' contributions -- 12 -- 6 Benefits paid (192) (64) (176) (32) Settlement -- -- (12) -- ------ ----- ------ ----- Fair value of plan assets at end of year $2,761 $ 226 $3,270 $ 236 ====== ===== ====== ===== Funded status $ (175) $(319) $ 612 $(336) Unrecognized net actuarial loss (gain) 228 (23) (667) (29) Unrecognized net transition asset 1 4 (4) 4 Unrecognized prior service cost (27) (12) 21 (2) ------ ----- ------ ----- Accrued benefit income (cost) $ 27 $(350) $ (38) $(363) ====== ===== ====== ===== Amounts recognized in the balance sheet consist of: (1) Prepaid benefit cost $ 156 $(287) Accrued benefit liability (197) (63) Intangible asset -- -- Accumulated other comprehensive income 68 -- ------ ----- Accrued benefit income (cost) $ 27 $(350) ====== ===== - --------------------------------------------------------------------------------------------------------------------
(1) Reconciliation is not provided for 2000 as no minimum liability was recognized in that year. 80 The following table sets forth the components of net periodic benefit (income) cost for 2001, 2000 and 1999:
- -------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- 2001 2000 1999 ------------------- -------------------- -------------------- PENSION OTHER Pension Other Pension Other (in millions) BENEFITS BENEFITS benefits benefits benefits benefits - -------------------------------------------------------------------------------------------------------------------- Service cost $ 161 $ 16 $ 154 $16 $ 120 $ 25 Interest cost 191 42 186 43 144 35 Expected return on plan assets (287) (20) (249) (18) (200) (6) Recognized net actuarial gain (1) (112) (2) (46) (1) (3) (8) Amortization of prior service cost -- (1) 2 -- 3 -- Amortization of unrecognized transition asset (1) -- (2) -- (2) -- Settlement (1) -- 4 -- -- -- ----- ---- ----- --- ----- ---- Net periodic benefit (income) cost $ (49) $ 35 $ 49 $40 $ 62 $ 46 ===== ==== ===== === ===== ==== - --------------------------------------------------------------------------------------------------------------------
(1) Net actuarial gain is generally amortized over five years. The weighted-average assumptions used in calculating the amounts above were:
- -------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------ ------------------------ ------------------------- PENSION OTHER Pension Other Pension Other BENEFITS BENEFITS benefits benefits benefits benefits - ------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.5% 7.5% 7.5% 7.5-8.0% 7.5-8.0% Expected return on plan assets 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Rate of compensation increase 5.0% --% 4.5-5.0% --% 4.5-5.0% --% - -------------------------------------------------------------------------------------------------------------------
Accounting for postretirement health care plans uses a health care cost trend rate to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. Average annual increases of 8.0% for HMOs and for all other types of coverage in the per capita cost of covered health care benefits were assumed for 2001. By 2006 and thereafter, rates were assumed at 5.5% for HMOs and for all other types of coverage. Increasing the assumed health care trend by one percentage point in each year would increase the benefit obligation as of December 31, 2001 by $43 million and the aggregate of the interest cost and service cost components of the net periodic benefit cost for 2001 by $5 million. Decreasing the assumed health care trend by one percentage point in each year would decrease the benefit obligation as of December 31, 2001 by $39 million and the aggregate of the interest cost and service cost components of the net periodic benefit cost for 2001 by $5 million. Expenses for defined contribution retirement plans were $206 million, $169 million and $155 million in 2001, 2000 and 1999, respectively. OTHER EXPENSES The following table shows expenses which exceeded 1% of total interest income and noninterest income and which are not otherwise shown separately in the financial statements or notes thereto.
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ----------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Outside professional services $486 $447 $381 Contract services 472 536 473 Telecommunications 355 303 286 Outside data processing 319 343 312 Travel and entertainment 286 287 262 Advertising and promotion 276 316 251 Postage 242 252 239 - -------------------------------------------------------------------------------------------------------------------
81 14. INCOME TAXES The following is a summary of the components of income tax expense applicable to income before income taxes:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ------------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Current: Federal $2,329 $1,446 $ 628 State and local 282 158 46 Foreign 34 46 53 ------ ------ ------ 2,645 1,650 727 ------ ------ ------ Deferred: Federal (518) 783 1,416 State and local (71) 90 195 ------ ------ ------ (589) 873 1,611 ------ ------ ------ Total $2,056 $2,523 $2,338 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, ---------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ DEFERRED TAX ASSETS Allowance for loan losses $ 1,429 $ 1,414 Net tax-deferred expenses 907 747 Other 168 63 ------- ------- Total deferred tax assets 2,504 2,224 ------- ------- DEFERRED TAX LIABILITIES Core deposit intangible 338 376 Leasing 2,061 1,853 Mark to market 307 712 Mortgage servicing 1,838 1,799 FAS 115 adjustment 312 295 FAS 133 adjustment 162 -- Other 100 486 ------- ------- Total deferred tax liabilities 5,118 5,521 ------- ------- NET DEFERRED TAX LIABILITY $(2,614) $(3,297) ======= ======= - ------------------------------------------------------------------------------------------------------------------
The Company's tax benefit related to the exercise of employee stock options that was recorded in stockholders' equity was $88 million, $112 million and $88 million for 2001, 2000 and 1999, respectively. The Company had a net deferred tax liability of $2,614 million and $3,297 million at December 31, 2001 and 2000, respectively. The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2001 and 2000 are presented in the table to the right. The Company has determined that a valuation reserve is not required for any of the deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income and tax planning strategies. The Company's conclusion that it is "more likely than not" that the deferred tax assets will be realized is based on federal taxable income in excess of $10 billion in the carryback period, substantial state taxable income in the carryback period, as well as a history of growth in earnings and the prospects for continued earnings growth. The deferred tax liability related to 2001, 2000 or 1999 unrealized gains and losses on securities available for sale along with the deferred tax liability related to derivatives and hedging activities for 2001, had no impact on income tax expense as these gains and losses, net of taxes, were recorded in cumulative other comprehensive income. The table below is a reconciliation of the statutory federal income tax expense and rate to the effective income tax expense and rate:
- --------------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------------------------------------- 2001 2000 1999 -------------------- -------------------- ------------------- (in millions) AMOUNT % Amount % Amount % - --------------------------------------------------------------------------------------------------------------------- Statutory federal income tax expense and rate $1,918 35.0% $2,292 35.0% $2,222 35.0% Change in tax rate resulting from: State and local taxes on income, net of federal income tax benefit 137 2.5 161 2.5 158 2.5 Amortization of goodwill not deductible for tax return purposes 196 3.6 165 2.5 133 2.1 Tax-exempt income (87) (1.6) (76) (1.2) (71) (1.1) Other (108) (2.0) (19) (.3) (104) (1.7) ------ ---- ------ --- ------- ---- Effective income tax expense and rate $2,056 37.5% 2,523 38.5% $2,338 36.8% ====== ==== ====== ==== ======= ==== - ---------------------------------------------------------------------------------------------------------------------
82 15. 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.
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, ------------------------------------------- (in millions, except per share amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Net income $ 3,423 $ 4,026 $ 4,012 Less: Preferred stock dividends 14 17 35 -------- -------- -------- Net income applicable to common stock $ 3,409 $ 4,009 $ 3,977 ======== ======== ======== EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 3,409 $ 4,009 $ 3,977 ======== ======== ======== Average common shares outstanding (denominator) 1,709.5 1,699.5 1,714.0 ======== ======== ======== Per share $ 1.99 $ 2.36 $ 2.32 ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE Net income applicable to common stock (numerator) $ 3,409 $ 4,009 $ 3,977 ======== ======== ======== Average common shares outstanding 1,709.5 1,699.5 1,714.0 Add: Stock options 16.8 17.7 19.7 Restricted share rights .6 1.2 1.6 Convertible preferred -- -- .1 -------- -------- -------- Diluted average common shares outstanding (denominator) 1,726.9 1,718.4 1,735.4 ======== ======== ======== Per share $ 1.97 $ 2.33 $ 2.29 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------
83 16. OTHER COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effect allocated to each component:
- ---------------------------------------------------------------------------------------------------------------- (in millions) Before tax Net of amount Tax effect tax - ---------------------------------------------------------------------------------------------------------------- 1999: Translation adjustments $ 6 $ 2 $ 4 ----- ----- ----- Net unrealized gains on securities available for sale arising during the year 205 78 127 Reclassification of net losses on securities available for sale included in net income 219 83 136 ----- ----- ----- Net unrealized gains on securities available for sale arising during the year 424 161 263 ----- ----- ----- Other comprehensive income $ 430 $ 163 $ 267 ===== ===== ===== 2000: Translation adjustments $ (3) $ (1) $ (2) ----- ----- ----- Net unrealized losses on securities available for sale arising during the year (232) (88) (144) Reclassification of net gains on securities available for sale included in net income (145) (55) (90) ------ ------ ----- Net unrealized losses on securities available for sale arising during the year (377) (143) (234) ----- ----- ----- Other comprehensive income $(380) $(144) $(236) ===== ===== ===== 2001: TRANSLATION ADJUSTMENTS $ (5) $ (2) $ (3) ----- ----- ----- MINIMUM PENSION LIABILITY ADJUSTMENT (68) (26) (42) ----- ----- ----- NET UNREALIZED LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE YEAR (574) (211) (363) RECLASSIFICATION OF NET LOSSES ON SECURITIES AVAILABLE FOR SALE INCLUDED IN NET INCOME 601 228 373 ----- ----- ----- NET UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE YEAR 27 17 10 ----- ----- ----- CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES AND HEDGING ACTIVITIES 109 38 71 ----- ----- ----- NET UNREALIZED GAINS ON DERIVATIVES AND HEDGING ACTIVITIES ARISING DURING THE YEAR 196 80 116 RECLASSIFICATION OF NET LOSSES ON CASH FLOW HEDGES INCLUDED IN NET INCOME 120 44 76 ----- ----- ----- NET UNREALIZED GAINS ON DERIVATIVES AND HEDGING ACTIVITIES ARISING DURING THE YEAR 316 124 192 ----- ----- ----- OTHER COMPREHENSIVE INCOME $ 379 $ 151 $ 228 ===== ===== ===== - ----------------------------------------------------------------------------------------------------------------
The following table presents cumulative other comprehensive income balances:
- --------------------------------------------------------------------------------------------------------------------------- (in millions) Minimum Cumulative pension Net unrealized Net unrealized other Translation liability gains (losses) gains on comprehensive adjustments adjustment on securities derivatives income - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ (14) $ -- $ 507 $ -- $ 493 ----- ----- ------ ------ ------- Net change 4 -- 263 -- 267 ----- ----- ------ ------ ------ Balance, December 31, 1999 (10) -- 770 -- 760 ----- ----- ------ ------ ------ Net change (2) -- (234) -- (236) ----- ----- ------ ------ ------ Balance, December 31, 2000 (12) -- 536 -- 524 ----- ----- ------ ------ ------ NET CHANGE (3) (42) 10 263 228 ----- ----- ------ ------ ------ BALANCE, DECEMBER 31, 2001 $ (15) $ (42) $ 546 $ 263 $ 752 ===== ===== ====== ====== ======== - ---------------------------------------------------------------------------------------------------------------------------
84 17. OPERATING SEGMENTS The Company has identified three lines of business for the purposes of management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. The results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and somewhat subjective. Wells Fargo Home Mortgage activities are included in the Community Banking Group due to the integration of Home Mortgage into Community Banking and the reorganization of Wells Fargo Home Mortgage as a subsidiary of Wells Fargo Bank, N.A. In 2001, there were various reorganizations resulting in the integration into Wholesale Banking from Community Banking of certain units of First Security, certain Community Banking Offices that were reorganized as Regional Commercial Banking Offices, the Insurance Group and Correspondent Banking. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial services company. The Company's operating segments are defined by product type and customer segments. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated to allow comparability. THE COMMUNITY BANKING GROUP offers a complete line of diversified financial products and services to individual consumers and small businesses with annual sales up to $10 million in which the owner is also the principal financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, insurance and securities brokerage through affiliates and venture capital financing. These products and services include WELLS FARGO FUNDS(SM), a family of mutual funds, as well as personal trust, employee benefit trust and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation (auto, recreational vehicle and marine) loans, origination and purchase of residential mortgage loans for sale to investors and servicing of mortgage loans. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, cash management, payroll services, retirement plans, medical savings accounts and credit and debit card processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs) and time deposits. Community Banking provides access to customers through a wide range of channels, which encompass a network of traditional banking stores, banking centers, in-store banking centers, business centers and ATMs. Additionally, 24-hour telephone service is provided by PHONEBANK(SM) centers and the National Business Banking Center. Online banking services include the Wells Fargo Internet Services Group and BUSINESS GATEWAY(R), a personal computer banking service exclusively for the small business customer. THE WHOLESALE BANKING GROUP serves businesses with annual sales in excess of $10 million across the United States. 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, 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. 85 WELLS FARGO FINANCIAL includes consumer finance and auto finance operations. Consumer finance operations make direct loans to consumers and purchase sales finance contracts from retail merchants from offices throughout the United States and Canada and in the Caribbean and Latin America. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles in the United States and Puerto Rico. Credit cards are offered to consumer finance customers through two credit card banks. Wells Fargo Financial also provides lease and other commercial financing and provides information services to the consumer finance industry. THE RECONCILIATION COLUMN includes unallocated goodwill, the net impact of transfer pricing loan and deposit balances, the cost of external debt, and any residual effects of unallocated systems and other support groups. It also includes the impact of asset/liability strategies the Company has put in place to manage interest rate sensitivity at the consolidated level.
- ------------------------------------------------------------------------------------------------------- (income/expense in millions, average balances in billions) Recon- Consoli- Community Wholesale Wells Fargo ciliation dated Banking Banking Financial Column (4) Company - ------------------------------------------------------------------------------------------------------ 2001 NET INTEREST INCOME (1) $ 8,910 $1,969 $1,679 $ (98) $12,460 PROVISION FOR LOAN LOSSES 1,015 278 487 -- 1,780 NONINTEREST INCOME 5,189 2,113 371 17 7,690 NONINTEREST EXPENSE 9,118 2,345 1,096 332 12,891 ------- ------ ------ ----- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 3,966 1,459 467 (413) 5,479 INCOME TAX EXPENSE (BENEFIT) (2) 1,398 531 179 (52) 2,056 ------- ------ ------ ----- ------- NET INCOME (LOSS) 2,568 928 288 (361) 3,423 LESS: IMPAIRMENT AND OTHER SPECIAL CHARGES (AFTER TAX) (3) (1,089) (62) -- (6) (1,157) ------- ------ ------ ----- ------- NET INCOME (LOSS) EXCLUDING IMPAIRMENT AND OTHER SPECIAL CHARGES $ 3,657 $ 990 $ 288 $(355) $ 4,580 ======= ====== ====== ===== ======= 2000 Net interest income (1) $ 7,586 $1,949 $1,424 $ (94) $10,865 Provision for loan losses 849 151 329 -- 1,329 Noninterest income 6,685 1,768 304 86 8,843 Noninterest expense 8,542 1,946 986 356 11,830 ------- ------ ------ ----- ------- Income (loss) before income tax expense (benefit) 4,880 1,620 413 (364) 6,549 Income tax expense (benefit) (2) 1,774 613 155 (19) 2,523 ------- ------ ------ ------ ------- Net income (loss) $ 3,106 $1,007 $ 258 $(345) $ 4,026 ======= ====== ====== ===== ======= 1999 Net interest income (1) $ 7,479 $1,403 $1,314 $ (80) $10,116 Provision for loan losses 712 102 288 2 1,104 Noninterest income 6,371 1,194 311 99 7,975 Noninterest expense 8,194 1,154 952 337 10,637 ------- ------ ------ ----- ------- Income (loss) before income tax expense (benefit) 4,944 1,341 385 (320) 6,350 Income tax expense (benefit) (2) 1,700 500 142 (4) 2,338 ------- ------ ------ ----- ------- Net income (loss) $ 3,244 $ 841 $ 243 $(316) $ 4,012 ======= ====== ====== ===== ======= 2001 AVERAGE LOANS $ 100 $ 50 $ 13 $ -- $ 163 AVERAGE ASSETS 198 66 15 6 285 AVERAGE CORE DEPOSITS 152 16 -- -- 168 2000 Average loans $ 89 $ 46 $ 11 $ -- $ 146 Average assets 173 58 12 7 250 Average core deposits 131 15 -- -- 146 - ------------------------------------------------------------------------------------------------------
(1) Net interest income is the difference between actual interest earned on assets (and interest paid on liabilities) owned by a group and a funding charge (and credit) based on the Company's cost of funds. Community Banking and Wholesale Banking are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The interest spread is the difference between the interest rate earned on an asset or paid on a liability and the Company's cost of funds rate. (2) Taxes vary by geographic concentration of revenue generation. Taxes as presented may differ from the consolidated Company's effective tax rate as a result of taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The offsets for these adjustments are found in the reconciliation column. (3) Non-cash impairment and other special charges recognized 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 $14 million, $63 million and $83 million; and unallocated items of $(95) million, $(71) million, and $(64) million for 2001, 2000 and 1999, respectively. Net income includes Treasury activities of $6 million, $38 million and $51 million; and unallocated items of $(367) million, $(383) million and $(367) million for 2001, 2000 and 1999, respectively. The material item in the reconciliation column related to noninterest expense is amortization of unallocated goodwill of $329 million, $327 million and $318 million for 2001, 2000 and 1999, respectively. The material item in the reconciliation column related to average assets is unallocated goodwill of $6 billion and $7 billion for 2001 and 2000, respectively . 86 18. SECURITIZATIONS The Company routinely originates, securitizes and sells mortgage loans and, from time to time, other financial assets, including student loans, auto receivables and securities, into the secondary market. As a result of this process, the Company typically retains the servicing rights and may retain other beneficial interests from the sales. These securitizations are usually structured without recourse to the Company and without restrictions on the retained interest. The retained interests do not contain significant credit risks. The Company recognized gains from sales of financial assets in securitizations of $623 million in 2001, compared with $298 million in 2000. Additionally, the Company had the following cash flows with securitization trusts: - ------------------------------------------------------------------------------------------------------------------- Year ended December 31, ----------------------------------------------------------------- 2001 2000 ------------------------------ ------------------------------ Residential Other Residential Other mortgage financial mortgage financial (in millions) loans assets loans assets - ------------------------------------------------------------------------------------------------------------------- Proceeds from new securitizations $16,410 $3,024 $4,397 $4,540 Servicing fees 65 42 58 34 Cash flows on interest-only strips 144 112 115 112 - -------------------------------------------------------------------------------------------------------------------
In the normal course of creating securities for investors, the Company may sponsor the special purpose entities which hold, for the benefit of the investors, the loans or leases that are the source of payment to the investors. Those special purpose entities are consolidated unless they meet the criteria for a qualifying special purpose entity in accordance with FASB Statement No. 140 (FAS 140), ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, or they have a substantial residual equity investment by an unaffiliated entity and the Company does not retain a controlling interest as a result of the Company's ownership of residual equity. 19. 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 following table presents the components of mortgage banking noninterest income:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Origination and other closing fees $ 737 $ 350 $ 406 Servicing fees, net of amortization and impairment (260) 665 404 Net gains on securities available for sale 134 -- -- Net gains on sales of mortgage servicing rights -- 159 193 Net gains on mortgage loan origination/sales activities 705 38 117 All other 355 232 287 ------ ------ ------ Total mortgage banking noninterest income $1,671 $1,444 $1,407 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
The managed servicing portfolio totaled $514 billion at December 31, 2001, $468 billion at December 31, 2000 and $308 billion at December 31, 1999, which included loans subserviced for others of $63 billion, $85 billion and $9 billion, respectively. The following table summarizes the changes in capitalized mortgage loan servicing rights:
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, --------------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $5,609 $4,652 $3,294 Originations 1,883 702 1,110 Purchases 962 1,212 695 Sales -- (58) (172) Amortization (914) (554) (721) Other (includes changes in mortgage servicing rights due to hedging) (175) (345) 446 ------ ------ ------ 7,365 5,609 4,652 Less: Valuation allowance 1,124 -- -- ------ ------ ------ Balance, end of year $6,241 $5,609 $4,652 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
87 The key economic assumptions used in determining the fair value of mortgage servicing rights and other retained interests related to residential mortgage loan securitizations at the date of securitization resulting from securitizations completed in 2001 and 2000 were as follows:
- ------------------------------------------------------------------------------------------------------------------- Mortgage servicing rights Other retained interests ------------------------- ------------------------ 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Prepayment speed (annual CPR) (1) 13.41% 12.8% 16.41% 10.2% Weighted average life (in years) 7.1 7.9 6.1 8.2 Discount rates (1) 8.9% 10.6% 11.2% 12.0% CPR - Constant prepayment rate - -------------------------------------------------------------------------------------------------------------------
(1) Discount rates and prepayment speeds represent weighted averages for all retained interests resulting from residential mortgage securitizations completed in 2001 and 2000. At December 31, 2001, key economic assumptions and the sensitivity of the current fair value of mortgage servicing rights, both purchased and retained, and other retained interests related to residential mortgage loan securitizations to immediate 10% and 25% adverse changes in those assumptions are presented in the table to the right. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.
- ------------------------------------------------------------------------------------------------------------------- (in millions) Mortgage servicing rights Other retained interests - ------------------------------------------------------------------------------------------------------------------- Fair value of retained interests $6,397 $1,470 Expected weighted average life (in years) 5.6 5.3 Prepayment speed assumption (annual CPR) 16.5% 15.9% Decrease in fair value from 10% adverse change $ 333 $ 86 Decrease in fair value from 25% adverse change 772 199 Discount rate assumption 7.41% 7.41% Decrease in fair value from 100 basis point adverse change $ 270 $ 59 Decrease in fair value from 200 basis point adverse change 504 108 - -------------------------------------------------------------------------------------------------------------------
Not included in the table above are mortgage servicing rights, both purchased and retained, with a fair value of $14 million and other retained interests with a fair value of $150 million related to commercial mortgage loan securitizations and other retained interests of $325 million related to securitizations of student loans, auto receivables and securities. 20. PARENT COMPANY Condensed financial information of the Parent follows. For information regarding the Parent's long-term debt, see Note 9. CONDENSED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, ---------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ INCOME Dividends from subsidiaries: Bank $2,360 $2,318 $2,378 Nonbank 218 1,139 153 Interest income from subsidiaries 566 701 616 Service fees from subsidiaries 49 45 104 Other income 180 369 95 ------ ------ ------ Total income 3,373 4,572 3,346 ------ ------ ------ EXPENSE Interest on: Short-term borrowings 305 464 350 Long-term debt 691 739 514 Noninterest expense 148 116 380 ------ ------ ------ Total expense 1,144 1,319 1,244 ------ ------ ------ Income before income tax benefit and undistributed income of subsidiaries 2,229 3,253 2,102 Income tax benefit (expense) 230 114 (161) Equity in undistributed income of subsidiaries 964 659 2,071 ------ ------ ------ NET INCOME $3,423 $4,026 $4,012 ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------
88 CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------- (in millions) 2001 2000 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and noninterest-bearing balances due from: Subsidiary banks $ 2 $ -- Non-affiliates 74 50 Interest-bearing balances due from subsidiary banks 2,834 1,759 Securities available for sale 1,531 1,982 Loans and advances to subsidiaries: Bank 200 200 Nonbank 10,439 10,862 Investment in subsidiaries (1): Bank 28,741 26,386 Nonbank 4,781 4,845 Other assets 2,326 1,257 ------- ------- Total assets $50,928 $47,341 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 4,969 $ 5,848 Other liabilities 1,086 900 Long-term debt 14,456 12,994 Indebtedness to subsidiaries 1,657 1,111 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,546 -- Stockholders' equity 27,214 26,488 ------- ------- Total liabilities and stockholders' equity $50,928 $47,341 ======= ======= - -------------------------------------------------------------------------------------------------------------------
(1) The double leverage ratio, which represents the ratio of the Parent's total equity investment in subsidiaries to its total stockholders' equity, was 123% and 118% at December 31, 2001 and 2000, respectively. CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, ------------------------------------------- (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,423 $ 4,026 $ 4,012 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (964) (659) (2,071) Depreciation and amortization 19 18 26 Release of preferred shares to ESOP 159 127 86 Other assets, net (848) 295 114 Accrued expenses and other liabilities 143 (127) 536 ------- ------- ------- Net cash provided by operating activities 1,932 3,680 2,703 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Securities available for sale: Proceeds from sales 626 739 348 Proceeds from prepayments and maturities 85 112 120 Purchases (462) (1,067) (872) Net advances to nonbank subsidiaries (722) (2,499) 724 Principal collected on notes/loans of subsidiaries 1,304 1,487 1,108 Capital notes and term loans made to subsidiaries (159) (2,007) (505) Net increase in investment in subsidiaries (979) (1,804) (1,003) ------- ------- ------- Net cash used by investing activities (307) (5,039) (80) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in short-term borrowings and indebtedness to subsidiaries (331) (743) 1,059 Proceeds from issuance of long-term debt 4,527 6,590 6,574 Repayment of long-term debt (3,066) (4,400) (1,780) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures 1,546 -- -- Proceeds from issuance of common stock 484 422 517 Repurchases of common stock (1,760) (3,235) (2,122) Preferred stock redeemed (200) -- -- Net decrease in ESOP loans -- -- 2 Payment of cash dividends (1,724) (1,586) (1,436) ------- ------- ------- Net cash (used) provided by financing activities (524) (2,952) 2,814 ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,101 (4,311) 5,437 Cash and cash equivalents at beginning of year 1,809 6,120 683 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,910 $ 1,809 $ 6,120 ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------
89 21. LEGAL ACTIONS In the normal course of business, the Company is at all times subject to numerous pending and threatened legal actions, some for which the relief or damages sought are substantial. After reviewing pending and threatened actions with counsel, management believes that the outcome of such actions will not have a material adverse effect on the results of operations or stockholders' equity of the Company. The Company is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and its relationship to the future results of operations are not known. 22. RISK-BASED CAPITAL The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC, respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that the Company and each of the subsidiary banks maintain minimum ratios (set forth in the table on the following page) of capital to risk-weighted assets. There are three categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity, qualifying preferred stock and trust preferred securities, less goodwill and certain other deductions (including the unrealized net gains and losses, after applicable taxes, on securities available for sale carried at fair value). Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, subordinated debt, the allowance for loan losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Tier 3 capital includes certain qualifying unsecured subordinated debt. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments and derivative financial instruments, are also applied a risk weight after calculating balance sheet equivalent amounts. One of four credit conversion factors (0%, 20%, 50% and 100%) is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. (See Notes 5 and 23 for further discussion of off-balance sheet items.) The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 2001, the Company and each of the covered subsidiary banks met all capital adequacy requirements to which they are subject. Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the OCC categorized each of the covered subsidiary banks as well capitalized. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the risk-based capital category of any of the covered subsidiary banks. 90
- ------------------------------------------------------------------------------------------------------------------------------ To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions ----------------- --------------------------- --------------------------- (in billions) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------- ------ ------ ------------ ----------- ------------ ------------ As of December 31, 2001: Total capital (to risk-weighted assets) Wells Fargo & Company $27.3 10.45% > or = $20.9 > or = 8.00% Wells Fargo Bank, N.A. 15.7 11.79 > or = 10.7 > or = 8.00 > or = $13.3 > or = 10.00% Wells Fargo Bank Minnesota, N.A. 3.3 11.14 > or = 2.4 > or = 8.00 > or = 3.0 > or = 10.00 Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $18.2 6.99% > or = $10.4 > or = 4.00% Wells Fargo Bank, N.A. 9.5 7.16 > or = 5.3 > or = 4.00 > or = $ 8.0 > or = 6.00% Wells Fargo Bank Minnesota, N.A. 3.0 10.19 > or = 1.2 > or = 4.00 > or = 1.8 > or = 6.00 Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $18.2 6.25% > or = $11.7 > or = 4.00%(1) Wells Fargo Bank, N.A. 9.5 7.31 > or = 5.2 > or = 4.00 (1) > or = $ 6.5 > or = 5.00% Wells Fargo Bank Minnesota, N.A. 3.0 5.99 > or = 2.0 > or = 4.00 (1) > or = 2.5 > or = 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. 23. DERIVATIVE FINANCIAL INSTRUMENTS The Company adopted FAS 133 on January 1, 2001. The effect on net income from the adoption was an increase of $13 million (after tax). The pretax amount of $22 million was recorded as a component of other noninterest income. In accordance with the transition provisions of FAS 133, the Company recorded a transition adjustment of $71 million, net of tax, (increase in equity) in other comprehensive income in a manner similar to a cumulative effect of a change in accounting principle. The transition adjustment was the initial amount necessary to adjust the carrying values of certain derivative instruments (that qualified as cash flow hedges) to fair value to the extent that the related hedge transactions had not yet been recognized. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings, fair values of assets and liabilities, and cash flows caused by interest rate volatility. The Company's interest rate risk management strategy involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. In a fair value hedging strategy, the effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. In a cash flow hedging strategy, the variability of cash payments due to interest rate fluctuations is managed by the effective use of derivative instruments that are linked to hedged assets and liabilities. Derivative instruments that the Company uses as part of its interest rate risk management strategy include interest rate swaps and floors, interest rate futures and forward contracts, and options. The Company also offers various derivative contracts, which include interest rate, commodity and foreign exchange contracts to its customers but usually offsets such contracts by purchasing other financial contracts. The customer accommodations are treated as free-standing derivatives held for trading. The free-standing derivative instruments also include derivative transactions entered into for risk management purposes that do not otherwise qualify for hedge accounting. To a lesser extent, the Company takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. By using derivative instruments, the Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. If a counterparty fails to perform, credit risk is equal to the fair value gain in a derivative. The Company minimizes the credit risk through credit approvals, limits and monitoring procedures. Credit risk related to derivative contracts is considered and, if material, provided for separately. As the Company generally enters into transactions only with counterparties that carry quality credit ratings, losses associated with counterparty nonperformance on derivative contracts have been immaterial. Further, the Company obtains collateral where appropriate and uses master netting arrangements in accordance with FASB Interpretation No. 39, OFFSETTING OF AMOUNTS RELATED TO CERTAIN CONTRACTS, as amended by FASB 91 Interpretation No. 41, OFFSETTING OF AMOUNTS RELATED TO CERTAIN REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Company's derivative activities are monitored by the Asset/Liability Committee. The Company's Treasury function, which includes asset/liability management, is responsible for implementing various hedging strategies that are developed through its analysis of data from financial models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company's overall interest rate risk management and trading strategies. FAIR VALUE HEDGES The Company enters into interest rate swaps to convert a majority of its fixed-rate long-term debt to floating-rate debt. The decisions to convert fixed-rate debt to floating takes into consideration the asset/liability repricing characteristics, the desired asset/liability sensitivity and current level of interest rates. Additionally, the Company enters into a combination of derivative instruments (futures, floors, forwards, swaps and options) to hedge changes in fair value of its mortgage servicing rights as it relates to changes in London Interbank Offered Rate (LIBOR) interest rates and changes in the credit risk. In determining the portion of mortgage servicing rights to hedge, the Company takes into account natural offsets from the mortgage loan production franchise. The Company recognized a net gain of $11 million for 2001, as an offset to interest expense, representing the ineffective portion of fair value hedges of long-term debt. For long-term debt, in some instances all components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness, whereas, in other instances, only the benchmark interest rate is included in the assessment of hedge effectiveness. Additionally, for 2001, the Company recognized a net gain of $521 million in noninterest income, which represents the ineffective portion of all fair value hedges of mortgage servicing rights. For mortgage servicing rights, all components of each derivative instrument's gain or loss are included in the measurement of hedge ineffectiveness, as reflected in the statement of income, while the time decay and the volatility components of an option's change in value are excluded from the assessment of hedge effectiveness. As of December 31, 2001, all designated hedges continued to qualify as fair value hedges. CASH FLOW HEDGES The Company enters into interest rate swaps and floors to convert floating-rate loans to fixed rates. The loans are typically grouped by the same risk exposure for which they are being hedged. Specific types of loans and amounts that are hedged are determined based on prevailing market conditions, the asset/liability mix of the Company and the current shape of the yield curve. Additionally, to hedge the forecasted sale of its mortgage loans, the Company enters into futures contracts and mandatory forward contracts, including options on futures and forward contracts. For 2001, the Company recognized a net loss of $120 million, which represents the total ineffectiveness of all cash flow hedges. Gains and losses on derivative contracts that are reclassified from cumulative other comprehensive income to current period earnings are included in the line item in which the hedged item's effect in earnings is recorded. All components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness, except for derivative instruments hedging commercial loans indexed to LIBOR, where only the benchmark interest rate is included in the assessment of hedge effectiveness. For the period ended December 31, 2001, all designated hedges continued to qualify as cash flow hedges. Further, all designated forecasted transactions remain probable of occurring. As of December 31, 2001, $110 million of deferred net gains on derivative instruments included in other comprehensive income are expected to be reclassified to net income during the next twelve months. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions, excluding those related to payments of variable interest in existing financial instruments, is ten years for hedges converting floating-rate loans to fixed and one year for hedges of forecasted sales of mortgage loans. FREE-STANDING DERIVATIVE INSTRUMENTS The Company enters into various derivative contracts which primarily focus on providing derivative products to customers. To a lesser extent, the Company takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivative contracts are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions and, therefore, do not qualify for hedge accounting. Interest rate lock commitments issued on residential mortgage loans intended to be held for resale are considered free-standing derivative instruments. The interest rate exposure on these commitments is economically hedged primarily with options and forwards. The commitments and free-standing derivative instruments are marked to market and recorded as a component of mortgage banking noninterest income in the statement of income. Derivative instruments utilized by the Company and classified as free-standing instruments include interest rate swaps, futures, forwards, floors and caps purchased and written, options purchased and written, and warrants. 92 The following table summarizes the aggregate notional or contractual amounts, credit risk amount and estimated net fair value for the Company's derivative financial instruments at December 31, 2001 and 2000.
- --------------------------------------------------------------------------------------------------------------------------------- December 31, --------------------------------------------------------------------------------------- 2001 2000 ----------------------------------------- ----------------------------------------- NOTIONAL OR CREDIT ESTIMATED Notional or Credit Estimated CONTRACTUAL RISK NET FAIR contractual risk net fair (in millions) AMOUNT AMOUNT (3) VALUE amount amount (3) value - --------------------------------------------------------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT HEDGES Interest rate contracts: Swaps (1) $ 27,868 $1,594 $1,559 $25,817 $391 $368 Futures 264 -- -- 71,484 -- 141 Floors and caps (1) 500 27 27 20,139 191 191 Options (1) (2) (4) 499,430 286 184 20,620 275 267 Forwards (1) 113,620 290 (263) 21,392 69 (93) Foreign exchange contracts: Forwards (1) -- -- -- 72 -- (2) CUSTOMER ACCOMMODATIONS AND TRADING Interest rate contracts: Swaps (1) 68,332 1,657 148 40,934 635 58 Futures 22,762 -- -- 17,890 -- -- Floors and caps purchased (1) 24,255 440 440 14,196 107 107 Floors and caps written 24,309 -- (385) 15,310 -- (76) Options purchased (1) 2,435 18 18 1,205 12 12 Options written 23,117 -- (162) 71 -- (3) Forwards (1) 41,837 248 173 150 2 (1) Commodity contracts: Swaps (1) 66 10 1 167 57 1 Floors and caps purchased (1) 104 8 8 58 8 8 Floors and caps written 105 -- (8) 57 -- (8) Equity contracts: Swaps 3,464 13 (1) -- -- -- Options purchased 704 33 33 -- -- -- Options written 529 -- (29) -- -- -- Foreign exchange contracts: Forwards (1) 8,968 227 65 7,283 150 31 Options purchased (1) 275 18 18 42 1 1 Options written 260 -- (17) 42 -- (1) - ---------------------------------------------------------------------------------------------------------------------------------
(1) The Company anticipates performance by substantially all of the counterparties for these contracts or the underlying financial instruments. (2) At December 31, 2001, the purchased option contracts were predominantly options on futures contracts, which are exchange traded for which the exchange assumes counterparty risk. (3) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. (4) Includes purchased options with notional or contractual amounts, credit risk amounts and estimated net fair value of $263,617 million, $286 million, and $286 million, respectively, at December 31, 2001. Includes written options with notional or contractual amounts, credit risk amounts and estimated net fair values of $235,813 million, nil and $(102) million, respectively, at December 31, 2001. 93 24. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions set forth below for the Company's financial instruments are made solely to comply with the requirements of this Statement and should be read in conjunction with the financial statements and notes in this Annual Report. The carrying amounts in the table on page 96 are recorded in the Consolidated Balance Sheet under the indicated captions, except for the derivative financial instruments which are recorded in other assets. Fair values are based on estimates or calculations using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit, credit card and trust customers, since these intangibles are not financial instruments. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. FINANCIAL ASSETS SHORT-TERM FINANCIAL ASSETS Short-term financial assets include cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 2001 and 2000 are set forth in Note 4. MORTGAGES HELD FOR SALE The fair value of mortgages held for sale is based on quoted market prices. LOANS HELD FOR SALE The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. LOANS The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. The fair value of commercial loans, other real estate mortgage loans and real estate construction loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates, using discount rates based on current industry pricing for loans of similar size, type, remaining maturity and repricing characteristics. For consumer finance and credit card loans, the portfolio's yield is equal to the Company's current pricing and, therefore, the fair value is equal to book value. For other consumer loans, the fair value is calculated by discounting the contractual cash flows, adjusted for prepayment estimates, based on the current rates offered by the Company for loans with similar characteristics. For auto lease financing, the fair value is calculated by discounting the contractual cash flows at the Company's current pricing for items with similar remaining terms, not including tax benefits. Commitments, standby letters of credit and commercial and similar letters of credit not included in the table on page 96 have contractual values of $99.7 billion, $5.5 billion and $577 million, respectively, at December 31, 2001, and $92.7 billion, $5.6 billion and $729 million, respectively, at December 31, 2000. These instruments generate ongoing fees at the Company's current pricing levels. Of the commitments at December 31, 2001, 38% mature within one year. TRADING ASSETS Trading assets, which are carried at fair value, are set forth in Note 6. 94 NONMARKETABLE EQUITY INVESTMENTS There are restrictions on the sale and/or liquidation of the Company's nonmarketable equity investments, including Federal Reserve Bank Stock. For the Federal Reserve Bank Stock carrying value equals fair value. The Company uses all facts and circumstances available to estimate the fair value of its cost method investments. Typical considerations include: access to and need for capital (including recent or projected financing activity), qualitative assessments of the viability of the investee, and prospects for its future. FINANCIAL LIABILITIES DEPOSIT LIABILITIES FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and market rate and other savings, is equal to the amount payable on demand at the measurement date. Although the FASB's requirement for these categories is not consistent with the market practice of using prevailing interest rates to value these amounts, the amount included for these deposits in the following table is their carrying value at December 31, 2001 and 2000. The fair value of other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. SHORT-TERM FINANCIAL LIABILITIES Short-term financial liabilities include federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short period of time between the origination of the instrument and its expected realization. LONG-TERM DEBT The fair value of the Company's underwritten long-term debt is estimated based on the quoted market prices of the instruments. The fair value of the medium-term note programs, which are part of long-term debt, is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for new notes with similar remaining maturities. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES The fair value of the Company's trust preferred securities is estimated based on the quoted market prices of the instruments. DERIVATIVE FINANCIAL INSTRUMENTS The fair value of derivative financial instruments is based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. LIMITATIONS These fair value disclosures are made solely to comply with the requirements of FAS 107. The calculations represent management's best estimates; however, due to the lack of broad markets and the significant items excluded from this disclosure, the calculations do not represent the underlying value of the Company. The information presented is based on fair value calculations and market quotes as of December 31, 2001 and 2000. These amounts have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. As discussed above, certain of the Company's asset and liability financial instruments are short-term, and therefore, the carrying amounts in the Consolidated Balance Sheet approximate fair value. Other significant assets and liabilities, which are not considered financial assets or liabilities and for which fair values have not been estimated, include premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. 95 The following table presents a summary of the Company's remaining financial instruments, as defined by FAS 107:
- ------------------------------------------------------------------------------------------------------------------- December 31, -------------------------------------------------------- 2001 2000 -------------------------- ------------------------- CARRYING ESTIMATED Carrying Estimated (in millions) AMOUNT FAIR VALUE amount fair value - ------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Mortgages held for sale $ 30,405 $ 30,405 $ 11,812 $ 11,812 Loans held for sale 4,745 4,828 4,539 4,637 Loans, net (1) 168,725 167,400 157,396 154,379 Nonmarketable equity investments 4,062 4,239 4,142 4,435 FINANCIAL LIABILITIES Deposits $187,266 $187,520 $169,559 $169,535 Long-term debt (2) 36,068 37,610 32,019 31,869 Guaranteed preferred beneficial interests in Company's subordinated debentures 2,435 2,830 935 967 DERIVATIVE FINANCIAL INSTRUMENTS (3) Interest rate contracts: Floors and caps purchased $ 467 $ 467 $ 184 $ 298 Floors and caps written (385) (385) (76) (76) Options purchased 298 298 106 287 Options written (258) (258) (13) (11) Swaps 1,707 1,707 177 427 Futures -- -- 141 141 Forwards (90) (90) (245) (94) Foreign exchange contracts 66 66 31 29 Equity derivatives 3 3 -- -- Commodity contracts 1 1 1 1 - -------------------------------------------------------------------------------------------------------------------
(1) Loans are net of deferred fees on loan commitments and standby letters of credit of $13 million and $9 million at December 31, 2001 and 2000, respectively. (2) The carrying amount and fair value exclude obligations under capital leases of $27 million at December 31, 2001 and 2000. (3) The 2001 carrying amounts are at estimated fair value in accordance with FAS 133. The 2000 carrying amounts include unamortized fees paid or received and gains or losses on derivative financial instruments receiving mark-to-market treatment. 96 INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------- The Board of Directors and Stockholders of Wells Fargo & Company: We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Fargo & Company and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP San Francisco, California January 15, 2002 97 QUARTERLY FINANCIAL DATA CONDENSED CONSOLIDATED STATEMENT OF INCOME - QUARTERLY (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------- 2001 2000 Quarter ended Quarter ended ------------------------------------------ ------------------------------------------ (in millions, except per share amounts) DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Dec. 31 Sept. 30(1) June 30(1) Mar. 31(1) - ------------------------------------------------------------------------------------- ------------------------------------------ INTEREST INCOME $ 4,690 $ 4,816 $ 4,816 $ 4,881 $ 4,934 $ 4,870 $ 4,543 $ 4,378 INTEREST EXPENSE 1,258 1,615 1,808 2,061 2,140 2,095 1,879 1,746 ------- ------- ------- ------- ------- ------- ------- ------- NET INTEREST INCOME 3,432 3,201 3,008 2,820 2,794 2,775 2,664 2,632 Provision for loan losses 536 455 427 361 352 425 275 276 ------- ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses 2,896 2,746 2,581 2,459 2,442 2,350 2,389 2,356 ------- ------- ------- ------- ------- ------- ------- ------- NONINTEREST INCOME Service charges on deposit accounts 506 470 471 428 437 435 428 404 Trust and investment fees 454 424 417 415 421 412 394 397 Credit card fees 216 203 196 181 187 194 175 167 Other fees 323 303 311 307 295 300 266 251 Mortgage banking 394 369 517 391 434 341 336 334 Insurance 221 196 210 118 119 80 117 95 Net venture capital (losses) gains (37) (124) (1,487) 17 203 535 320 885 Net gains (losses) on securities available for sale 154 165 27 117 259 (341) (39) (601) Other 216 277 (117) 440 256 99 138 111 ------- ------- ------- ------- ------- ------- ------- ------- Total noninterest income 2,447 2,283 545 2,414 2,611 2,055 2,135 2,043 ------- ------- ------- ------- ------- ------- ------- ------- NONINTEREST EXPENSE Salaries 1,012 1,020 1,018 977 920 945 906 881 Incentive compensation 411 315 265 204 222 271 185 168 Employee benefits 223 223 236 278 247 241 245 255 Equipment 237 217 217 237 307 211 208 221 Net occupancy 259 240 239 237 247 236 233 238 Goodwill 158 156 152 144 141 136 136 117 Core deposit intangible 40 41 41 43 45 46 47 48 Net (gains) losses on dispositions of premises and equipment -- (2) -- (19) 3 (9) (17) (34) Other 1,114 977 1,087 895 1,086 947 909 842 ------- ------- ------- ------- ------- ------- ------- ------- Total noninterest expense 3,454 3,187 3,255 2,996 3,218 3,024 2,852 2,736 ------- ------- ------- ------- ------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE 1,889 1,842 (129) 1,877 1,835 1,381 1,672 1,663 Income tax expense (benefit) 708 678 (42) 712 707 560 635 623 ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME (LOSS) $ 1,181 $ 1,164 $ (87) $ 1,165 $ 1,128 $ 821 $ 1,037 $ 1,040 ======= ======= ======= ======= ======= ======= ======= ======= NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 1,180 $ 1,160 $ (91) $ 1,161 $ 1,124 $ 816 $ 1,033 $ 1,036 ======= ======= ======= ======= ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE $ .70 $ .68 $ (.05) $ .68 $ .66 $ .48 $ .61 $ .61 ======= ======= ======= ======= ======= ======= ======= ======= DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .69 $ .67 $ (.05) $ .67 $ .65 $ .47 $ .61 $ .61 ======= ======= ======= ======= ======= ======= ======= ======= DIVIDENDS DECLARED PER COMMON SHARE $ .26 $ .26 $ .24 $ .24 $ .24 $ .22 $ .22 $ .22 ======= ======= ======= ======= ======= ======= ======= ======= Average common shares outstanding 1,696.7 1,710.6 1,714.9 1,715.9 1,710.5 1,707.7 1,682.8 1,696.7 ======= ======= ======= ======= ======= ======= ======= ======= Diluted average common shares outstanding 1,709.2 1,726.9 1,714.9 1,738.7 1,732.4 1,728.0 1,702.6 1,711.3 ======= ======= ======= ======= ======= ======= ======= ======= - -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the pooling-of-interests accounting treatment of the FSCO Merger. The restated amounts include adjustments to conform the accounting policies of First Security and Wells Fargo. 98 EX-21 8 a2072635zex-21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE PARENT The following is a list of the direct and indirect subsidiaries of the Parent as of December 31, 2001:
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- 1st Choice Financial Corp. Colorado ACO Brokerage Holdings Corporation Delaware Acordia Capital Advisors, Inc. Indiana Acordia International, Ltd. Bermuda Acordia IP Group, Inc. Delaware Acordia National, Inc. West Virginia Acordia Northeast, Inc. Pennsylvania Acordia Northeast, Inc. New Jersey Acordia Northwest, Inc. Washington Acordia of California Insurance Services, Inc. California Acordia of Colorado, Inc. Colorado Acordia of Illinois, Inc. Illinois Acordia of Indiana, Inc. Indiana Acordia of Indiana, LLC Indiana Acordia of Kentucky, Inc. Kentucky Acordia of Michigan, Inc. Michigan Acordia of Minnesota, Inc. Minnesota Acordia of Nevada, Inc. Nevada Acordia of North Carolina, Inc. North Carolina Acordia of Ohio, LLC Ohio Acordia of Oregon, Inc. Oregon Acordia of Phoenix, Inc. Arizona Acordia of Tennessee, Inc. Tennessee Acordia of Virginia Insurance Agency, Inc. Virginia Acordia of West Virginia, Inc. West Virginia Acordia of West Virginia-Granville, Inc. Ohio Acordia Securities, Inc. Ohio Acordia Services, Inc. Delaware Acordia Southeast, Inc. Florida Acordia Southeast, Inc. Mississippi Acordia Southeast, Inc. Alabama Acordia West Texas, Inc. North Carolina Acordia, Inc. Delaware Allied Business Systems, Inc. Iowa AMAN Collection Service 1, Inc. Nevada AMAN Collection Service, Inc. South Dakota Amber Asset Management Inc. Maryland American Commercial Capital LLC California American E & S Insurance Brokers California, Inc. California American E & S Insurance Brokers New York, Inc. New York American Securities Company California American Securities Company of Missouri Missouri American Securities Company of Nevada Nevada Asset Recovery, Inc. Utah ATC Realty Fifteen, Inc. California ATC Realty Nine, Inc. California
1
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- ATC Realty Seventeen, Inc. California ATC Realty Sixteen, Inc. California ATC Realty, Inc. California Atlanta Insurance Broking Services, Inc. Georgia Augustus Ventures, L.L.C. Nevada Azalea Asset Management, Inc. Delaware Bancshares Insurance Company Vermont Bitterroot Asset Management, Inc. Delaware Blackhawk Bancorporation Iowa Blue Jay Asset Management, Inc. Delaware Blue Spirit Insurance Company Vermont Bluebonnet Asset Management, Inc. Delaware Brenton Banks, Inc. Iowa Brenton Investments, Inc. Iowa Brenton Realty Services, Ltd. Iowa Bryan, Pendleton, Swats & McAllister, LLC Tennessee Buffalo National Bancshares, Inc. Minnesota Cardinal Asset Management, Inc. Delaware Carnation Asset Management, Inc. Delaware Centurion Agencies, Co. Iowa Centurion Agency Nevada, Inc. Nevada Centurion Casualty Company Iowa Centurion Life Insurance Company Missouri Century Business Credit Corporation New York CGT Insurance Company LTD. Barbados Charter Equipment Lease 1999-1, LLC Delaware Charter Funding Corporation V New York Charter Holdings, Inc. Nevada Chesnut Asset Management, Inc. Delaware Collin Equities, Inc. Texas Columbine Asset Management, Inc. Delaware CommercialRevolution LLC Delaware Commonwealth Leasing Corporation Minnesota Copper Asset Management, Inc. Delaware Coronado Advisors LLC California Crane Asset Management, Inc. Delaware Crocker Grande, Inc. California Crocker Life Insurance Company California Crocker Properties, Inc. California DAG Management, Inc. Colorado Dial National Community Benefits, Inc. Nevada Eastdil Advisors, Inc. Delaware Eastdil Broker Services, Inc. Delaware Eastdil Realty Company, L.L.C. New York Eastdil U.S., Inc. California Eastdil, Inc. Delaware Elleven Corp. Nebraska Ellis Advertising, Inc. Iowa EZG Associates Limited Partnership Delaware Falcon Asset Management, Inc. Delaware FCC Holdings Limited California FF Capital Corp. Delaware Fidelity Acceptance Holding, Inc. Nevada
2
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Fidelity Bancorporation, Inc. Delaware Fidelity National Life Insurance Company Arizona Financiera El Sol, S.A. Panama Finvercon S.A. Compania Financiera Delaware Finvercon USA, Inc. Nevada First City Life Insurance Company Arizona First Commerce Bancshares of Colorado, Inc. Colorado First Commerce Bancshares, Inc. Nebraska First DialWest Escrow Company, Inc. California First Interstate Commercial Mortgage Company Delaware First Interstate Mortgage Holding Company Arizona First Place Financial Corporation New Mexico First Security Business Investment Corporation Utah First Security Capital I Delaware First Security Corporation Delaware First Security Information Technology, Inc. Utah First Security Investment Management, Inc. Utah First Security Investment Services Utah First Security Life Insurance Company of Arizona Arizona First Security Processing Services, Inc. Utah First Security Service Company Utah First Valley Delaware Financial Corporation Delaware Foothill Capital Corporation California FPFC Management LLC New Mexico Galliard Capital Management, Inc. Minnesota Golden Asset Management Inc. Delaware Golden Funding Company Cayman Islands, B.W.I. Golden Pacific Insurance Company Vermont Goldenrod Asset Management, Inc. Delaware Great Plains Insurance Company Vermont GST Co. Delaware Gwaltney & Gwaltney, Inc. Alaska H & R Phillips, Inc. New York H.D. Vest Advisory Services, Inc. Texas H.D. Vest Insurance Agency, Inc. Nevada H.D. Vest Insurance Agency, Inc. Pennsylvania H.D. Vest Insurance Agency, L.L.C. Alabama H.D. Vest Insurance Agency, L.L.C. Colorado H.D. Vest Insurance Agency, L.L.C. Louisiana H.D. Vest Insurance Agency, L.L.C. Massachusetts H.D. Vest Insurance Agency, L.L.C. New Mexico H.D. Vest Insurance Agency, L.L.C. New York H.D. Vest Insurance Agency, L.L.C. North Dakota H.D. Vest Insurance Agency, L.L.C. Texas H.D. Vest Insurance Agency, L.L.C. Virginia H.D. Vest Insurance Agency, L.L.C. Montana H.D. Vest Insurance Agency, L.L.C. Oklahoma H.D. Vest Investment Securities, Inc. Texas H.D. Vest Technology Services, Inc. Texas H.D. Vest, Inc. Texas Hogg Robinson of New York, Inc. New York Home Services Title Reinsurance Company Vermont IBID, Inc. Delaware
3
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Insurance Risk Managers, Ltd. Illinois IntraWest Asset Management, Inc. Delaware IntraWest Insurance Company Arizona Iris Asset Management, Inc. Delaware Island Finance (Aruba) N.V. Aruba Island Finance (Bonaire) N.V. Netherland Antilles Island Finance (Curacao) N.V. Netherland Antilles Island Finance (St. Maarten) N.V. Netherland Antilles Island Finance Credit Services, Inc. New York Island Finance Holding Company, LLC Cayman Islands, B.W.I. Island Finance New York, Inc. New York Island Finance Puerto Rico, Inc. Delaware Island Finance Sales Finance Corporation, LLC Cayman Islands, B.W.I. Island Finance Virgin Islands, Inc. Delaware Lilac Asset Management, Inc. Delaware Lily Asset Management, Inc. Delaware Lincoln Building Corporation Colorado Lowry Hill Investment Advisors, Inc. Minnesota Magnolia Asset Management, Inc. Delaware Maier/Hauswirth Investment Advisors, L.L.C. Wisconsin Marigold Asset Management, Inc. Delaware MCIG Pennsylvania, Inc. Pennsylvania Mercury Marine Finance, Inc. Iowa Michigan Financial Corporation Michigan Midwest Credit Life Insurance Company Arizona Montgomery Estates, Inc. Texas Mulberry Asset Management, Inc. Delaware National Bancorp of Alaska, Inc. Delaware National Bank of Alaska Insurance Services, LLC Alaska National Bank of Alaska Leasing Corporation Alaska National Letter Service Co., Inc. Minnesota National Retail Credit Services Company Nova Scotia NB Aviation, Inc. Delaware NEP VII - SBIC, LLC Minnesota Nero Limited, LLC Delaware NISI Nevada Insurance, Inc. Nevada NISI Wyoming Insurance Wyoming North Star Mortgage Guaranty Reinsurance Company Vermont Northern Prairie Indemnity Limited Cayman Islands, B.W.I. Northland Credit Corporation Alaska Northland Escrow Services, Inc. Alaska Norwest Asset Acceptance Corporation Delaware Norwest Auto Finance, Inc. Minnesota Norwest Do Brasil Servicos LTDA. Brazil Norwest Equity Capital, L.L.C. Minnesota Norwest Equity Partners IV, a Minnesota Limited Partnership Minnesota Norwest Equity Partners V, a Minnesota Limited Partnership Minnesota Norwest Equity Partners VI, LP Minnesota Norwest Equity Partners VII, LP Minnesota Norwest Escrow Funding, Inc. Delaware Norwest Financial Canada DE 1, Inc. Delaware Norwest Financial Canada DE, Inc. Delaware Norwest Financial Coast, Inc. California
4
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Norwest Financial Funding, Inc. Nevada Norwest Financial Investment 1, Inc. Nevada Norwest Financial Investment, Inc. Nevada Norwest Financial Massachusetts Massachusetts Norwest Financial New Hampshire 1, Inc. New Hampshire Norwest Financial New Hampshire, Inc. New Hampshire Norwest Home Improvement, Inc. Texas Norwest Investment Management, Inc. Minnesota Norwest Limited LP, LLLP Delaware Norwest Mezzanine Partners I, LP Minnesota Norwest Mortgage of New York, Inc. New York Norwest Venture Capital Management, Inc. Minnesota Norwest Venture Partners VI, LP Minnesota Norwest Venture Partners VII, LP Minnesota Norwest Venture Partners VIII, LP Delaware Old Henry, Inc. Illinois Orchid Asset Management, Inc. Delaware Osprey Asset Management, Inc. Delaware Pacific Rim Healthcare Solutions, Inc. Hawaii Pelican Asset Management, Inc. Delaware Peoples Mortgage and Investment Company Iowa Peregrine Capital Management, Inc. Minnesota Pheasant Asset Management, Inc. Delaware Premium Financial Services, Inc. Kentucky Prestige Claims Service, Inc. West Virginia Prime Bancshares, Inc. Texas Primrose Asset Management, Inc. Delaware Ragen MacKenzie Group, Inc. Delaware Ragen MacKenzie Investment Services, LLC Delaware Raven Asset Management, Inc. Delaware Regency Insurance Agency, Inc. Minnesota REI Investors, Inc. Delaware Reliable Finance Holding Company, LLC Nevada Reliable Financial Services, Inc. Puerto Rico Reliable Insurance Services Corp. Puerto Rico Residential Home Mortgage Investment, L.L.C. Delaware Route 60 Company West Virginia Ruby Asset Management Inc. Maryland Rural Community Insurance Agency, Inc. Minnesota Rural Community Insurance Company Minnesota RWF Mortgage Company California Sagebrush Asset Management, Inc. Delaware Saguaro Asset Management, Inc. Delaware Sapphire Asset Management Inc. Maryland SCI Capital Management, Inc. Iowa Scott Life Insurance Company Arizona Securities Corporation of Iowa Iowa SelectNet Plus, Inc. West Virginia Servus Financial Corporation Delaware Silver Asset Management, Inc. Delaware Southwest Partners, Inc. California Spring Cypress Water Supply Corporation Texas Stagecoach Insurance Agency, Inc. California
5
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Statewide Acceptance Corporation Texas Sunflower Asset Management, Inc. Delaware Superior Asset Management, Inc. Delaware Superior Guaranty Insurance Company Vermont Superior Health Care Management, Inc. Delaware Sutter Advisors LLC Delaware Texas Bancshares Subsidiary Corporation Delaware Texas Bancshares, Inc. Texas The Bank of New Mexico Holding Company New Mexico The Foothill Group, Inc. Delaware The United Group, Inc. North Carolina Tiberius Ventures, L.L.C. Nevada Topaz Asset Management Inc. Maryland Tower Pension Specialists, Inc Iowa Trans Canada Credit Corporation Nova Scotia UFS Life Reinsurance Company Arizona United California Bank Realty Corporation California United New Mexico Real Estate Services, Inc. New Mexico Valley Asset Management, Inc. Delaware Van Kasper Advisers California Violet Asset Management, Inc. Delaware W.C.A. Service Corporation, Inc. California Wells Capital Management Incorporated California Wells Fargo Alternative Asset Management, LLC Delaware Wells Fargo Asia Limited Hong Kong Wells Fargo Asia-Pacific Limited Hong Kong Wells Fargo Asset Company Iowa Wells Fargo Asset Management Corporation Minnesota Wells Fargo Asset Securities Corporation Delaware Wells Fargo Auto Receivables Corporation Delaware Wells Fargo Bank Alaska, National Association United States Wells Fargo Bank Arizona, National Association United States Wells Fargo Bank Grand Junction, National Association United States Wells Fargo Bank Grand Junction-Downtown, National Association United States Wells Fargo Bank Illinois, National Association United States Wells Fargo Bank Indiana, National Association United States Wells Fargo Bank International United States Wells Fargo Bank Iowa, National Association United States Wells Fargo Bank Michigan, National Association United States Wells Fargo Bank Minnesota, National Association United States Wells Fargo Bank Montana, National Association United States Wells Fargo Bank Nebraska, National Association United States Wells Fargo Bank Nevada, National Association United States Wells Fargo Bank New Mexico, National Association United States Wells Fargo Bank North Dakota, National Association United States Wells Fargo Bank Northwest, National Association United States Wells Fargo Bank Ohio, National Association United States Wells Fargo Bank South Dakota, National Association United States Wells Fargo Bank Texas, National Association United States Wells Fargo Bank West, National Association United States Wells Fargo Bank Wisconsin, National Association United States Wells Fargo Bank Wyoming, National Association United States Wells Fargo Bank, Ltd. California
6
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Wells Fargo Bank, National Association United States Wells Fargo Bill Presentment Venture Member, LLC Delaware Wells Fargo Brokerage Services, LLC Delaware Wells Fargo Business Credit, Inc. Minnesota Wells Fargo Capital A Delaware Wells Fargo Capital B Delaware Wells Fargo Capital C Delaware Wells Fargo Capital I Delaware Wells Fargo Capital II Delaware Wells Fargo Capital IV Delaware Wells Fargo Capital V Delaware Wells Fargo Card Services, Inc. Iowa Wells Fargo Cash Centers, Inc. Nevada Wells Fargo Central Bank California Wells Fargo Corporate Services, Inc. California Wells Fargo Credit, Inc. Minnesota Wells Fargo Energy Capital, Inc. Texas Wells Fargo Equipment Finance Company Nova Scotia Wells Fargo Equipment Finance, Inc. Minnesota Wells Fargo Equity Capital, Inc. California Wells Fargo Escrow Company, LLC. Iowa Wells Fargo Financial Acceptance Alabama, Inc. Alabama Wells Fargo Financial Acceptance America, Inc. Pennsylvania Wells Fargo Financial Acceptance Arizona, Inc. Arizona Wells Fargo Financial Acceptance Arkansas, Inc. Arkansas Wells Fargo Financial Acceptance California, Inc. California Wells Fargo Financial Acceptance Colorado, Inc. Colorado Wells Fargo Financial Acceptance Connecticut, Inc. Connecticut Wells Fargo Financial Acceptance Delaware, Inc. Delaware Wells Fargo Financial Acceptance Florida, Inc. Florida Wells Fargo Financial Acceptance Georgia, Inc. Georgia Wells Fargo Financial Acceptance Idaho, Inc. Idaho Wells Fargo Financial Acceptance Illinois, Inc. Illinois Wells Fargo Financial Acceptance Indiana, Inc. Indiana Wells Fargo Financial Acceptance Iowa 1, Inc. Iowa Wells Fargo Financial Acceptance Iowa, Inc. Iowa Wells Fargo Financial Acceptance Kansas, Inc. Kansas Wells Fargo Financial Acceptance Kentucky 1, Inc. Kentucky Wells Fargo Financial Acceptance Kentucky, Inc. Kentucky Wells Fargo Financial Acceptance Louisiana, Inc. Louisiana Wells Fargo Financial Acceptance Maine, Inc. Maine Wells Fargo Financial Acceptance Maryland 1, Inc. Maryland Wells Fargo Financial Acceptance Maryland, Inc. Maryland Wells Fargo Financial Acceptance Massachusetts, Inc. Massachusetts Wells Fargo Financial Acceptance Michigan, Inc. Michigan Wells Fargo Financial Acceptance Mississippi, Inc. Mississippi Wells Fargo Financial Acceptance Missouri, Inc. Missouri Wells Fargo Financial Acceptance Nebraska, Inc. Nebraska Wells Fargo Financial Acceptance Nevada 1, Inc. Nevada Wells Fargo Financial Acceptance Nevada, Inc. Nevada Wells Fargo Financial Acceptance New Jersey, Inc. New Jersey Wells Fargo Financial Acceptance New Mexico, Inc. New Mexico Wells Fargo Financial Acceptance New York, Inc. New York
7
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Wells Fargo Financial Acceptance North Carolina 1, Inc. North Carolina Wells Fargo Financial Acceptance North Carolina, Inc. North Carolina Wells Fargo Financial Acceptance Ohio 1, Inc. Ohio Wells Fargo Financial Acceptance Ohio, Inc. Ohio Wells Fargo Financial Acceptance Oklahoma, Inc. Oklahoma Wells Fargo Financial Acceptance Oregon, Inc. Oregon Wells Fargo Financial Acceptance Pennsylvania, Inc. Pennsylvania Wells Fargo Financial Acceptance Rhode Island, Inc. Rhode Island Wells Fargo Financial Acceptance South Carolina, Inc. South Carolina Wells Fargo Financial Acceptance System Florida, Inc. Florida Wells Fargo Financial Acceptance Tennessee, Inc. Tennessee Wells Fargo Financial Acceptance Texas, Inc. Texas Wells Fargo Financial Acceptance Utah, Inc. Utah Wells Fargo Financial Acceptance Vermont, Inc. Vermont Wells Fargo Financial Acceptance Washington, Inc. Washington Wells Fargo Financial Acceptance West Virginia, Inc. West Virginia Wells Fargo Financial Acceptance Wisconsin, Inc. Wisconsin Wells Fargo Financial Acceptance, Inc. Minnesota Wells Fargo Financial Alabama, Inc. Alabama Wells Fargo Financial Alaska, Inc. Alaska Wells Fargo Financial America, Inc. Pennsylvania Wells Fargo Financial Arizona, Inc. Arizona Wells Fargo Financial Bank South Dakota Wells Fargo Financial California, Inc. Colorado Wells Fargo Financial Canada Corporation Nova Scotia Wells Fargo Financial Colorado, Inc. Colorado Wells Fargo Financial Connecticut, Inc. Connecticut Wells Fargo Financial Credit Services New York, Inc. New York Wells Fargo Financial Delaware, Inc. Delaware Wells Fargo Financial Florida, Inc. Florida Wells Fargo Financial Georgia, Inc. Iowa Wells Fargo Financial Guam 1, Inc. Colorado Wells Fargo Financial Guam, Inc. Delaware Wells Fargo Financial Hawaii, Inc. Hawaii Wells Fargo Financial Idaho, Inc. Idaho Wells Fargo Financial Illinois, Inc. Iowa Wells Fargo Financial Indiana, Inc. Indiana Wells Fargo Financial Information Services, Inc. Iowa Wells Fargo Financial Iowa 1, Inc. Iowa Wells Fargo Financial Iowa 3, Inc. Iowa Wells Fargo Financial Kansas, Inc. Kansas Wells Fargo Financial Kentucky 1, Inc. Kentucky Wells Fargo Financial Kentucky, Inc. Kentucky Wells Fargo Financial Leasing, Inc. Iowa Wells Fargo Financial Louisiana, Inc. Louisiana Wells Fargo Financial Maine, Inc. Maine Wells Fargo Financial Maryland 1, Inc. Maryland Wells Fargo Financial Maryland, Inc. Maryland Wells Fargo Financial Massachusetts 1, Inc. Massachusetts Wells Fargo Financial Massachusetts, Inc. Massachusetts Wells Fargo Financial Michigan, Inc. Michigan Wells Fargo Financial Minnesota, Inc. Minnesota Wells Fargo Financial Mississippi, Inc. Mississippi
8
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Wells Fargo Financial Missouri 1, Inc. Missouri Wells Fargo Financial Missouri, Inc. Missouri Wells Fargo Financial Montana, Inc. Montana Wells Fargo Financial National Bank United States Wells Fargo Financial Nebraska, Inc. Nebraska Wells Fargo Financial Nevada 1, Inc. Nevada Wells Fargo Financial Nevada 2, Inc. Nevada Wells Fargo Financial Nevada, Inc. Nevada Wells Fargo Financial New Jersey, Inc. New Jersey Wells Fargo Financial New Mexico, Inc. New Mexico Wells Fargo Financial New York, Inc. New York Wells Fargo Financial North Carolina 1, Inc. North Carolina Wells Fargo Financial North Carolina 2, Inc. North Carolina Wells Fargo Financial North Carolina 3, Inc. North Carolina Wells Fargo Financial North Carolina, Inc. North Carolina Wells Fargo Financial North Dakota, Inc. North Dakota Wells Fargo Financial Ohio 1, Inc. New Hampshire Wells Fargo Financial Ohio, Inc. Ohio Wells Fargo Financial Oklahoma, Inc. Oklahoma Wells Fargo Financial Oregon, Inc. Oregon Wells Fargo Financial Pennsylvania, Inc. Pennsylvania Wells Fargo Financial Preferred Capital, Inc. Iowa Wells Fargo Financial Puerto Rico, Inc. Delaware Wells Fargo Financial Resources, Inc. Iowa Wells Fargo Financial Retail Credit, Inc. Iowa Wells Fargo Financial Retail Services, Inc. Iowa Wells Fargo Financial Rhode Island, Inc. Rhode Island Wells Fargo Financial Saipan, Inc. Delaware Wells Fargo Financial Security Services, Inc. Iowa Wells Fargo Financial Services Virginia, Inc. Virginia Wells Fargo Financial Services, Inc. Delaware Wells Fargo Financial South Carolina 1, Inc. North Carolina Wells Fargo Financial South Carolina, Inc. South Carolina Wells Fargo Financial South Dakota, Inc. South Dakota Wells Fargo Financial System Florida, Inc. Florida Wells Fargo Financial System Minnesota, Inc. Minnesota Wells Fargo Financial System Virginia, Inc. Virginia Wells Fargo Financial Tennessee, Inc. Tennessee Wells Fargo Financial Texas, Inc. Texas Wells Fargo Financial Utah, Inc. Utah Wells Fargo Financial Virginia, Inc. Virginia Wells Fargo Financial Washington 1, Inc. Washington Wells Fargo Financial Washington, Inc. Washington Wells Fargo Financial West Virginia, Inc. West Virginia Wells Fargo Financial Wisconsin, Inc. Wisconsin Wells Fargo Financial Wyoming, Inc. Wyoming Wells Fargo Financial, Inc. Iowa Wells Fargo Financing Corporation California Wells Fargo Fleet Services, Inc. Minnesota Wells Fargo Funding III, Inc. Minnesota Wells Fargo Funding, Inc. Minnesota Wells Fargo Funds Management, LLC Delaware Wells Fargo Home Mortgage of Hawaii, LLC Delaware
9
Jurisdiction of Incorporation Subsidiary or Organization - ------------------------------------------------------------------- ----------------------------- Wells Fargo Home Mortgage of New Mexico, Inc. New Mexico Wells Fargo Home Mortgage, Inc. California Wells Fargo Housing Advisors, Inc. California Wells Fargo HSBC Trade Bank, National Association United States Wells Fargo Institutional Funding, LLC Delaware Wells Fargo Institutional Securities, LLC Delaware Wells Fargo Insurance Nevada, Inc. Nevada Wells Fargo Insurance New Mexico, Inc. New Mexico Wells Fargo Insurance Texas Agency, Inc. Texas Wells Fargo Insurance Wyoming, Inc. Wyoming Wells Fargo Insurance, Inc. Minnesota Wells Fargo International Commercial Services Limited Hong Kong Wells Fargo International Limited Cayman Islands, B.W.I. Wells Fargo Investment Group, Inc. Delaware Wells Fargo Investments, LLC Delaware Wells Fargo Leasing Corporation California Wells Fargo Mondex Inc. Arizona Wells Fargo Private Client Funding, Inc. Delaware Wells Fargo Properties, Inc. Minnesota Wells Fargo Real Estate Tax Services, LLC Delaware Wells Fargo Retail Finance, LLC Delaware Wells Fargo Retirement Plan Services, Inc. Wisconsin Wells Fargo Rural Insurance Agency, Inc. Minnesota Wells Fargo Services Company Minnesota Wells Fargo Small Business Investment Company, Inc. California Wells Fargo Student Loans Receivables I, LLC Delaware Wells Fargo Trust Company, Cayman Islands Cayman Islands, B.W.I. Wells Fargo Van Kasper, LLC Delaware Wells Fargo Ventures, LLC Delaware Wells Fargo West Community Development Corporation Colorado Wells Fargo, Ltd. Hawaii WF Deferred Compensation Holdings, Inc. Delaware WF National Bank South Central United States WFC Holdings Corporation Delaware WFFI Auto Loan Funding LLC 1999-I Delaware WFFI Auto Loan Funding LLC 1999-II Delaware WFFI Auto Loan Funding LLC 2000-A Delaware WFFI Manager, Inc. Delaware WFFLI Lease Finance 1998-1, LLC Delaware WFFLI Lease Finance 2000-1, LLC Delaware WFFLI Lease Finance II, LLC Delaware WFS Insurance Agency Inc. Washington WFS Insurance Agency Inc. Wyoming WFS Insurance Agency Inc. Montana WFS Insurance Agency Inc. Nevada WFS Insurance Agency Inc. Oregon WFS Insurance Agency New Mexico, Inc. New Mexico Yucca Asset Management, Inc. Delaware
10 EX-23 9 a2072635zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Wells Fargo & Company: We consent to the incorporation by reference in the registration statements noted below on Forms S-3, S-4 and S-8 of Wells Fargo & Company of our report dated January 15, 2002, with respect to the consolidated balance sheet of Wells Fargo & Company and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001, which report is incorporated by reference in the December 31, 2001 Annual Report on Form 10-K of Wells Fargo & Company.
Registration Statement Number Form Description - ---------------- ---- ----------- 333-58674 S-3 Wells Fargo Direct Purchase and Dividend Reinvestment Plan 333-47336 S-3 Universal Shelf 2000 333-76330 S-3 Deferred Compensation Plan for Independent Contractors 333-83566 S-3 Universal Shelf 2002 333-68512 S-4 Acquisition Registration Statement 333-83604 S-4 Tejas Bancshares, Inc. 033-57904 S-4/S-8 Financial Concepts Bancorp, Inc. 333-02485 S-4/S-8 Benson Financial Corporation 333-63247 S-4/S-8 Former Wells Fargo & Company 333-96511 S-4/S-8 Ragen MacKenzie Group Incorporated 333-37862 S-4/S-8 First Security Corporation 333-45384 S-4/S-8 Brenton Banks, Inc. 033-42198 S-8 1985 Long-Term Incentive Compensation Plan 033-50309 S-8 1985 Long-Term Incentive Compensation Plan 033-65007 S-8 Stock Direct Purchase Plan 333-12423 S-8 Long-Term Incentive Compensation Plan 333-62877 S-8 Long-Term Incentive Compensation Plan 333-09413 S-8 PartnerShares Plan 333-50789 S-8 PartnerShares Plan 333-74655 S-8 PartnerShares Plan 333-63508 S-8 401(k) Plan 333-33800 S-8 1999 Directors Stock Option Plan 333-52600 S-8 Wells Fargo Financial Thrift and Profit Sharing Plan 333-54354 S-8 Deferred Compensation Plan and 1999 Deferral Plan for Directors
/s/ KPMG LLP San Francisco, California March 15, 2002 EX-24 10 a2072635zex-24.txt EXHIBIT 24 EXHIBIT 24 WELLS FARGO & COMPANY Power of Attorney of Director KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of WELLS FARGO & COMPANY, a Delaware corporation, does hereby make, constitute, and appoint PHILIP J. QUIGLEY, a director and Chairman of the Audit and Examination Committee of the Board of Directors, and CYNTHIA H. MILLIGAN, a director and member of the Audit and Examination Committee of the Board of Directors, and each or either of them, the undersigned's true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned's name, place, and stead, to sign and affix the undersigned's name as such director of said Company to an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and all amendments thereto, to be filed by said Company with the Securities and Exchange Commission, Washington, D.C. under the Securities Exchange Act of 1934, and the rules and regulations of said Commission, and to file the same, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 26th day of February, 2002. /s/ Les Biller /s/ Richard D. McCormick /s/ J.A. Blanchard III /s/ Cynthia H. Milligan /s/ Michael R. Bowlin /s/ Benjamin F. Montoya /s/ David A. Christensen /s/ Philip J. Quigley /s/ Spencer F. Eccles /s/ Donald B. Rice /s/ Robert L. Joss /s/ Judith M. Runstad /s/ Reatha Clark King /s/ Susan G. Swenson /s/ Richard M. Kovacevich /s/ Michael W. Wright -----END PRIVACY-ENHANCED MESSAGE-----