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<SEC-DOCUMENT>0000912057-02-010174.txt : 20020415
<SEC-HEADER>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
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2072635z10-k.txt
<DESCRIPTION>10-K
<TEXT>
<PAGE>
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.
<PAGE>
FORM 10-K CROSS-REFERENCE INDEX
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Page(s)
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FORM Annual Proxy
10-K Report (1) Statement (2)
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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 -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------------
2001 OVER 2000 2000 over 1999
---------------------------- --------------------------
(in millions) VOLUME RATE TOTAL Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
====== ======= ====== ====== ====== =======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
REAL ESTATE MORTGAGE LOANS BY STATE AND PROPERTY TYPE
(excluding 1-4 family first mortgages)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
=== === === === ===
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
=== ==== === === ===
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of 43 states; no state had loans in excess of $533 million at
December 31, 2001.
12
<PAGE>
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
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
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== ==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEARS WITH
COMPANY OR
NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS
- -------------------------- ----------------------------------------- --- ------------
<S> <C> <C> <C>
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)
</TABLE>
17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
<TABLE>
<CAPTION>
YEARS WITH
COMPANY OR
NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS
- -------------------------- ----------------------------------------- --- ------------
<S> <C> <C> <C>
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)
</TABLE>
18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
<TABLE>
<CAPTION>
YEARS WITH
COMPANY OR
NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS
- -------------------------- ----------------------------------------- --- ------------
<S> <C> <C> <C>
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)
</TABLE>
19
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
<TABLE>
<CAPTION>
YEARS WITH
COMPANY OR
NAME AND COMPANY POSITION POSITIONS HELD DURING THE PAST FIVE YEARS AGE PREDECESSORS
- -------------------------- ----------------------------------------- --- ------------
<S> <C> <C> <C>
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)
</TABLE>
There is no family relationship among the above officers. All executive officers
serve at the pleasure of the Board of Directors.
20
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit
number Description
------ -----------
<S> <C>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
</TABLE>
(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
<PAGE>
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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(CC)
<SEQUENCE>3
<FILENAME>a2072635zex-10_cc.txt
<DESCRIPTION>EXHIBIT 10(CC)
<TEXT>
<Page>
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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.HH
<SEQUENCE>4
<FILENAME>a2072635zex-10_hh.txt
<DESCRIPTION>EXHIBIT 10(HH)
<TEXT>
<PAGE>
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.
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.A
<SEQUENCE>5
<FILENAME>a2072635zex-12_a.txt
<DESCRIPTION>EXHIBIT 12(A)
<TEXT>
<Page>
EXHIBIT 12(a)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
(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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.B
<SEQUENCE>6
<FILENAME>a2072635zex-12_b.txt
<DESCRIPTION>EXHIBIT 12(B)
<TEXT>
<Page>
EXHIBIT 12(b)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------
(in millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ====== =======
- --------------------------------------------------------------------------------------------------------------------------
</Table>
(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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<FILENAME>a2072635zex-13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<Page>
TABLE OF CONTENTS
<Table>
<S> <C> <C> <C>
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)
</Table>
33
<Page>
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
<Page>
Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (FAS 141), BUSINESS COMBINATIONS, and Statement No. 142
(FAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS.
FAS 141, effective June 30, 2001, requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting; the use of the pooling-of-interests method of accounting is
eliminated. FAS 141 also establishes how the purchase method is to be applied
for business combinations completed after June 30, 2001. This guidance is
similar to previous generally accepted accounting principles (GAAP); however,
FAS 141 establishes additional disclosure requirements for transactions
occurring after the effective date.
FAS 142 eliminates amortization of goodwill associated with business
combinations completed after June 30, 2001. During 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>
<Caption>
TABLE 1 RATIOS AND PER COMMON SHARE DATA
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------
($ in millions, except per share amounts) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
<Table>
<Caption>
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
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
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
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
% Change
Year ended December 31, ----------------
-------------------------------------- 2001/ 2000/
(in millions) 2001 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
======= ====== ====== ==== ===
- -------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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>
<Caption>
TABLE 4 NONINTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------
% Change
Year ended December 31, ---------------
--------------------------------------- 2001/ 2000/
(in millions) 2001 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
======= ======= ======= === ===
- ------------------------------------------------------------------------------------------------------------------
</Table>
(1) Represents amortization of core deposit intangible acquired after February
1992 that is subtracted from stockholders' equity in computing regulatory
capital for bank holding companies.
The increase in 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
<Page>
<Table>
<Caption>
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
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ========
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
<Table>
<Caption>
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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ========
- -------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- -----------------------------------------------------------------------------------
1997
----------------------------
Interest
Average Yields/ income/
balance rates expense
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
<C>
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
========
- -----------------------------------------------------------------------------------
</Table>
(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
<Page>
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 $63 million from December 31, 2000 because
of the favorable impact of lower long-term interests rates on the value of
debt securities not sold during 2001. The weighted average expected maturity
of the debt securities portion of the securities available for sale portfolio
was 5 years and 10 months at December 31, 2001. Since 80% of this portfolio
is held in mortgage-backed securities, the expected remaining maturity may
differ from contractual maturity because the issuers of such securities may
have the right to prepay obligations with or without penalty. The effect of a
200 basis point increase and a 200 basis point decrease on the fair value and
the expected remaining maturity of the mortgage-backed securities available
for sale portfolio is indicated in Table 6.
Table 6 MORTGAGE-BACKED SECURITIES
<Table>
<Caption>
- -----------------------------------------------------------------------------------
($ in billions) Fair Net unrealized Remaining
value gain (loss) maturity
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
- -----------------------------------------------------------------------------------
</Table>
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
<Page>
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
<Table>
<Caption>
- ---------------------------------------------------------------------
(in millions) December 31,
----------------------- %
2001 2000 Change
- ---------------------------------------------------------------------
<S> <C> <C> <C>
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%
======== ======== ===
- ----------------------------------------------------------------------
</Table>
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
<Page>
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
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
(in millions) Long-term Operating
debt (1) leases Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------
</Table>
(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
<Page>
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
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------
(in millions) December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
====== ====== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
(in millions) December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
==== ==== ==== ==== ====
- -------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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
<Table>
<Caption>
- --------------------------------------------------------------------------------
% increase (decrease) in net income
for the year ended December 31,
-----------------------------------
2002 2003
- --------------------------------------------------------------------------------
<S> <C> <C>
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)
- --------------------------------------------------------------------------------
</Table>
(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
<Page>
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
<Page>
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
<Page>
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
<Page>
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.
- --------------------------------------------------------------------------------
<Table>
<Caption>
1999 2000 2001
----------------------
<S> <C> <C> <C>
High $49.94 $56.38 $54.81
Low 32.13 31.00 38.25
End of period 40.44 55.69 43.47
<Caption>
2000 2001
------------------------------ ------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</Table>
- --------------------------------------------------------------------------------
53
<Page>
<Table>
<Caption>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------
(in millions, except per share amounts) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these statements.
54
<Page>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
(in millions, except shares) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======== ========
- ------------------------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these statements.
55
<Page>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------
(in millions, except shares) Unearned Additional
Number of Preferred ESOP Common paid-in Retained
shares stock shares stock capital earnings
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ====== ====== =======
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------
Notes Cumulative Total
receivable other stock-
from Treasury comprehensive holders'
(in millions, except shares) ESOP stock income equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=== ======= ===== =======
- ---------------------------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these statements.
56
<Page>
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------
(in millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these statements.
57
<Page>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
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:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------
(in millions) Date Assets Method of
accounting
<S> <C> <C> <C>
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)
</Table>
62
<Page>
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------
Date Assets Method of
(in millions) accounting
<S> <C> <C> <C>
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
=======
- ----------------------------------------------------------------------------------------------------------------------
</Table>
* 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
<Page>
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.
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ==== ======= ======= ====== ==== =======
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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).
<Table>
<Caption>
- ----------------------------------------------------------------------------
Year ended December 31,
-----------------------------
(in millions) 2001 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gross gains $688 (1) $ 334 $ 91
Realized gross losses (91)(2) (1,056) (319)
---- ------- -----
Realized net gains (losses) $597 $ (722) $(228)
==== ======= =====
- ----------------------------------------------------------------------------
</Table>
(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.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ====== ====== ====== =======
- ----------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) The weighted average yield is computed using the amortized cost of debt
securities available for sale.
65
<Page>
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.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------
2001 2000
--------------------------- ---------------------------
COMMITMENTS Commitments
TO EXTEND to extend
(in millions) OUTSTANDING CREDIT Outstanding credit
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======= ======== =======
- -------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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
<Page>
Changes in the allowance for loan losses were as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
======= ======= =======
- --------------------------------------------------------------------------------------------------------------
</Table>
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:
<Table>
<Caption>
- -----------------------------------------------------------
December 31,
-----------------
(in millions) 2001 2000
- -----------------------------------------------------------
<S> <C> <C>
Impairment measurement based on:
Collateral value method $485 $174
Discounted cash flow method 338 331
Historical loss factors 172 257
---- ----
Total (1) $995 $762
==== ====
- -----------------------------------------------------------
</Table>
(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
<Page>
6. PREMISES, EQUIPMENT, LEASE COMMITMENTS, INTEREST RECEIVABLE AND OTHER ASSETS
The following table presents comparative data for premises and equipment:
<Table>
<Caption>
- --------------------------------------------------------------------
December 31,
-----------------
(in millions) 2001 2000
- --------------------------------------------------------------------
<S> <C> <C>
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
====== ======
- --------------------------------------------------------------------
</Table>
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:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
(in millions) Operating leases Capital leases
<S> <C> <C>
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
====
- ----------------------------------------------------------------------------------------
</Table>
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:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
December 31,
------------------------------
(in millions) 2001 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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
======= =======
- ----------------------------------------------------------------------------------------
</Table>
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
<Page>
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.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
(in millions) December 31, 2001
<S> <C>
2002 $19,533
2003 3,825
2004 1,169
2005 753
2006 472
Thereafter 702
---------
Total $26,454
=========
- ------------------------------------------------------------------------------------------
</Table>
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.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
(in millions) December 31, 2001
<S> <C>
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
========
- ------------------------------------------------------------------------------------------
</Table>
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.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 1999
----------------- ----------------- -----------------
AMOUNT RATE Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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:
<Table>
<Caption>
Maturity Interest
(in millions) date rate(s) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
------- -------
- ----------------------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
(continued from page 71)
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------------
Maturity Interest
(in millions) date rate(s) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
</Table>
(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.
<Table>
<Caption>
- -----------------------------------------------------
(in millions) Parent Company
<S> <C> <C>
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
========= =========
- -----------------------------------------------------
</Table>
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
<Page>
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
<Page>
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:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
(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)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======
- -------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ==== ==== === === ====
</Table>
- -------------------------------------------------------------------------------
(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
<Page>
12. COMMON STOCK AND STOCK PLANS
COMMON STOCK
The following table summarizes common stock reserved, issued and authorized as
of December 31, 2001:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
Number of shares
- --------------------------------------------------------------------------------------------
<S> <C>
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
=============
- --------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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: <Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
The following table is a summary of selected information for the
Company's stock option plans described on the preceding page:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001
------------------------------------------------------
Weighted-
average Weighted-
remaining average
contractual exercise
life (in yrs.) Number price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
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.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------
(in millions, except per common share amounts) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===== ==== =====
- -------------------------------------------------------------------------------------------------------------------
</Table>
The ESOP shares as of December 31, 2001, 2000 and 1999 were as follows:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
ESOP Preferred Stock:
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
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
<Page>
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:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------
2001 2000
------------------------ -------------------------
PENSION OTHER Pension Other
(in millions) BENEFITS BENEFITS benefits benefits
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
====== =====
- --------------------------------------------------------------------------------------------------------------------
</Table>
(1) Reconciliation is not provided for 2000 as no minimum liability was
recognized in that year.
80
<Page>
The following table sets forth the components of net periodic benefit
(income) cost for 2001, 2000 and 1999:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2001 2000 1999
------------------- -------------------- --------------------
PENSION OTHER Pension Other Pension Other
(in millions) BENEFITS BENEFITS benefits benefits benefits benefits
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
===== ==== ===== === ===== ====
- --------------------------------------------------------------------------------------------------------------------
</Table>
(1) Net actuarial gain is generally amortized over five years.
The weighted-average assumptions used in calculating the amounts above were:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ -------------------------
PENSION OTHER Pension Other Pension Other
BENEFITS BENEFITS benefits benefits benefits benefits
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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% --%
- -------------------------------------------------------------------------------------------------------------------
</Table>
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.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
81
<Page>
14. INCOME TAXES
The following is a summary of the components of income tax expense applicable to
income before income taxes:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
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
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------
(in millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
======= =======
- ------------------------------------------------------------------------------------------------------------------
</Table>
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:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- -------------------
(in millions) AMOUNT % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
====== ==== ====== ==== ======= ====
- ---------------------------------------------------------------------------------------------------------------------
</Table>
82
<Page>
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.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------
(in millions, except per share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
</Table>
83
<Page>
16. OTHER COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income and
the related tax effect allocated to each component:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------
(in millions) Before
tax Net of
amount Tax effect tax
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===== ===== =====
- ----------------------------------------------------------------------------------------------------------------
</Table>
The following table presents cumulative other comprehensive income balances:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
(in millions) Minimum Cumulative
pension Net unrealized Net unrealized other
Translation liability gains (losses) gains on comprehensive
adjustments adjustment on securities derivatives income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
===== ===== ====== ====== ========
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
84
<Page>
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
<Page>
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.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
(income/expense in millions,
average balances in billions)
Recon- Consoli-
Community Wholesale Wells Fargo ciliation dated
Banking Banking Financial Column (4) Company
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
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:
<Table>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------------
2001 2000
------------------------------ ------------------------------
Residential Other Residential Other
mortgage financial mortgage financial
(in millions) loans assets loans assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</Table>
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.
<Page>
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:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
- -------------------------------------------------------------------------------