10-Q/A 1 a2063848z10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q/A AMENDMENT NO. 1 TO |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-2979 ---------- WELLS FARGO & COMPANY (Exact name of registrant as specified in its charter) Delaware 41-0449260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Montgomery Street, San Francisco, California 94163 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 1-800-411-4932 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding October 31, 2001 ------------------ Common stock, $1-2/3 par value 1,695,208,263 ITEM AMENDED This Form 10-Q/A amends, in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Securities Available for Sale of the registrant's Form 10-Q for the quarter ended September 30, 2001, the sentence regarding the weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio to read as follows: The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 5 years and 4 months at September 30, 2001. 1 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY FINANCIAL DATA

------------------------------------------------------------------------------------------------------------------------------------ % Change Quarter ended Sept. 30, 2001 from Nine months ended ----------------------------- ------------------- -------------------- SEPT. 30, June 30, Sept. 30, June 30, Sept. 30, SEPT. 30, Sept. 30, % (in millions, except per share amounts) 2001 2001 2000 2001 2000 2001 2000 Change ----------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Net income (loss) $ 1,164 $ (87) $ 821 --% 42% $ 2,242 $ 2,898 (23)% Net income (loss) applicable to common stock 1,160 (91) 816 -- 42 2,229 2,885 (23) Earnings (loss) per common share $ .68 $ (.05) $ .48 -- 42 $ 1.30 $ 1.70 (24) Diluted earnings (loss) per common share .67 (.05) .47 -- 43 1.29 1.68 (23) Dividends declared per common share .26 .24 .22 8 18 .74 .66 12 Average common shares outstanding 1,710.6 1,714.9 1,707.7 -- -- 1,713.8 1,695.8 1 Diluted average common shares outstanding 1,726.9 1,714.9 1,728.0 1 -- 1,732.9 1,713.9 1 Profitability ratios (annualized) Net income to average total assets (ROA) 1.59% --% 1.27% -- 25 1.07% 1.57% (32) Net income applicable to common stock to average common stockholders' equity (ROE) 17.11 -- 13.08 -- 31 11.24 16.00 (30) Total revenue $ 5,484 $ 3,553 $ 4,830 54 14 $ 14,271 $ 14,303 -- Efficiency ratio (1) 58.1% 91.6% 62.6% (37) (7) 66.1% 60.2% 10 Average loans $164,046 $161,269 $149,889 2 9 $161,750 $142,125 14 Average assets 289,461 279,325 256,831 4 13 279,184 246,904 13 Average core deposits 170,710 168,183 147,987 2 15 165,315 143,762 15 Net interest margin 5.40% 5.31% 5.34% 2 1 5.31% 5.36% (1) CASH NET INCOME AND RATIOS (2) Net income applicable to common stock $ 1,339 $ 85 $ 979 -- 37 $ 2,807 $ 3,355 (16) Earnings per common share .78 .05 .57 -- 37 1.64 1.98 (17) Diluted earnings per common share .78 .05 .57 -- 37 1.62 1.96 (17) ROA 1.91% .13% 1.59% -- 20 1.40% 1.90% (26) ROE 32.08 2.09 25.94 -- 24 22.96 30.53 (25) Efficiency ratio 54.6 86.2 58.9 (37) (7) 61.9 56.6 9 AT PERIOD END Securities available for sale $ 40,749 $ 41,290 $ 37,307 (1) 9 $ 40,749 $ 37,307 9 Loans 168,866 164,754 154,305 2 9 168,866 154,305 9 Allowance for loan losses 3,761 3,760 3,665 -- 3 3,761 3,665 3 Goodwill 9,604 9,607 9,221 -- 4 9,604 9,221 4 Assets 298,100 289,758 261,322 3 14 298,100 261,322 14 Core deposits 171,303 171,218 150,077 -- 14 171,303 150,077 14 Common stockholders' equity 27,060 26,802 26,549 1 2 27,060 26,549 2 Stockholders' equity 27,322 27,061 26,814 1 2 27,322 26,814 2 Tier 1 capital (3) 17,752 16,002 15,628 11 14 17,752 15,628 14 Total capital (3) 26,430 24,129 23,896 10 11 26,430 23,896 11 Capital ratios Common stockholders' equity to assets 9.08% 9.25% 10.16% (2) (11) 9.08% 10.16% (11) Stockholders' equity to assets 9.17 9.34 10.26 (2) (11) 9.17 10.26 (11) Risk-based capital (3) Tier 1 capital 7.40 6.95 7.29 6 2 7.40 7.29 2 Total capital 11.02 10.48 11.15 5 (1) 11.02 11.15 (1) Leverage (3) 6.40 5.97 6.40 7 -- 6.40 6.40 -- Book value per common share $ 15.86 $ 15.64 $ 15.53 1 2 $ 15.86 $ 15.53 2 Staff (active, full-time equivalent) 116,268 116,278 105,474 -- 10 116,268 105,474 10 COMMON STOCK PRICE High $ 48.30 $ 50.16 $ 47.13 (4) 2 $ 54.81 $ 47.75 15 Low 40.50 42.65 38.73 (5) 5 40.50 31.00 31 Period end 44.45 46.43 45.94 (4) (3) 44.45 45.94 (3) ------------------------------------------------------------------------------------------------------------------------------------

(1) The efficiency ratio is defined as noninterest expense divided by the total revenue (net interest income and noninterest income). (2) Cash net income and ratios exclude goodwill and nonqualifying core deposit intangible (CDI) amortization and the reduction of unamortized goodwill due to sales of assets. The ratios also exclude the balance of goodwill and nonqualifying CDI. Nonqualifying core deposit intangible amortization and average balance excluded from these calculations are, with the exception of the efficiency and ROA ratios, net of applicable taxes. The pretax amount for the average balance of nonqualifying CDI was $1,042 million and $1,082 million for the quarter and nine months ended September 30, 2001, respectively. The after-tax amounts for the amortization and average balance of nonqualifying CDI were $23 million and $646 million, respectively, for the quarter ended September 30, 2001 and $72 million and $671 million, respectively, for the nine months ended September 30, 2001. Goodwill amortization and the reduction of unamortized goodwill due to the sales of assets and average balance (which are not tax effected) were $156 million, nil and $9,682 million, respectively, for the quarter ended September 30, 2001 and $506 million, $54 million and $9,491 million, respectively, for the nine months ended September 30, 2001. (3) See the Capital Adequacy/Ratios section for additional information. 2 OVERVIEW Wells Fargo & Company is a $298 billion diversified financial services company providing banking, mortgage and consumer finance through the Internet and other distribution channels throughout North America, including all 50 states, and elsewhere internationally. It ranks fifth in assets at September 30, 2001 among U.S. bank holding companies. In this Form 10-Q, Wells Fargo & Company and Subsidiaries are referred to as the Company and Wells Fargo & Company alone is referred to as the Parent. On October 25, 2000, the merger involving the Company and First Security Corporation (the FSCO Merger) was completed, with First Security Corporation (First Security or FSCO) surviving as a wholly owned subsidiary of the Company. The FSCO Merger was accounted for under the pooling-of-interests method of accounting and, accordingly, the information included in this financial review presents the combined results as if the merger had been in effect for all periods presented. Certain amounts in the financial review for prior quarters have been reclassified to conform with the current financial statement presentation. Net income for the third quarter of 2001 was $1,164 million, compared with $821 million for the third quarter of 2000. Diluted earnings per common share for the third quarter of 2001 were $.67, compared with $.47 for the third quarter of 2000. Net income for the first nine months of 2001 was $2,242 million, or $1.29 per share, compared with $2,898 million, or $1.68 per share, for the first nine months of 2000. Return on average assets (ROA) was 1.59% and 1.07% in the third quarter and first nine months of 2001, respectively, compared with 1.27% and 1.57% in the same periods of 2000. Return on average common equity (ROE) was 17.11% and 11.24% in the third quarter and first nine months of 2001, respectively, compared with 13.08% and 16.00% in the same periods of 2000. Diluted earnings excluding goodwill and nonqualifying core deposit intangible amortization and the reduction of unamortized goodwill due to the sales of assets ("cash" earnings) in the third quarter and first nine months of 2001 were $.78 and $1.62 per share, respectively, compared with $.57 and $1.96 per share in the same periods of 2000. On the same basis, ROA was 1.91% and 1.40% in the third quarter and first nine months of 2001, respectively, compared with 1.59% and 1.90% in the same periods of 2000; ROE was 32.08% and 22.96% in the third quarter and first nine months of 2001, respectively, compared with 25.94% and 30.53% in the same periods of 2000. Net interest income on a taxable-equivalent basis was $3,222 million and $9,085 million for the third quarter and first nine months of 2001, respectively, compared with $2,796 million and $8,126 million for the same periods of 2000. The Company's net interest margin was 5.40% and 5.31% for the third quarter and first nine months of 2001, respectively, compared with 5.34% and 5.36% for the same periods of 2000. 3 Noninterest income was $2,283 million and $5,243 million for the third quarter and first nine months of 2001, respectively, compared with $2,055 million and $6,232 million for the same periods of 2000. Noninterest expense totaled $3,187 million and $9,438 million for the third quarter and first nine months of 2001, respectively, compared with $3,024 million and $8,613 million for the same periods of 2000. The Company continued to experience some deterioration in credit quality in the third quarter of 2001. The provision for loan losses was $455 million and $1,243 million in the third quarter and first nine months of 2001, respectively, compared with $425 million and $976 million in the same periods of 2000. During the third quarter of 2001, net charge-offs were $454 million, or 1.10% of average total loans (annualized), compared with $330 million, or .88%, during the third quarter of 2000. The allowance for loan losses was $3,761 million, or 2.23% of total loans, at September 30, 2001, compared with $3,719 million, or 2.31%, at December 31, 2000 and $3,665 million, or 2.38%, at September 30, 2000. The Company expects continued deterioration in asset quality consistent with economic conditions. At September 30, 2001, total nonaccrual and restructured loans were $1,618 million or 1.0% of total loans, compared with $1,195 million, or .7%, at December 31, 2000 and $965 million, or .6%, at September 30, 2000. Foreclosed assets amounted to $166 million at September 30, 2001, $128 million at December 31, 2000 and $134 million at September 30, 2000. At September 30, 2001, the ratio of common stockholders' equity to total assets was 9.08%, compared with 10.16% at September 30, 2000. The Company's total risk-based capital (RBC) ratio at September 30, 2001 was 11.02% and its Tier 1 RBC ratio was 7.40%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company's ratios at September 30, 2000 were 11.15% and 7.29% respectively. The Company's leverage ratio was 6.40% at September 30, 2001 and September 30, 2000, exceeding the minimum regulatory guideline of 3% for bank holding companies. RECENT ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (FAS 141), BUSINESS COMBINATIONS, and Statement No. 142 (FAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS. 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. 4 FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 will continue to be amortized through the income statement. Effective January 1, 2002, all goodwill amortization expense will cease and goodwill will be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value-based test. FAS 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP. After January 1, 2002, under FAS 142 the elimination of goodwill amortization is expected to reduce noninterest expense by approximately $600 million (pretax) and increase net income by approximately $560 million (after tax), for the year ended December 31, 2002, compared with 2001. The Company will also complete an initial goodwill impairment assessment to determine if a transition impairment charge will be recognized under FAS 142. The Company is reassessing goodwill in preparation for implementation of FAS 142. 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 144 (FAS 144), ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes Statement 121 (FAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. FAS 144, which is effective January 1, 2002, 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 is effective January 1, 2002 and is to be applied prospectively. The Company does not expect the adoption of FAS 144 to have a material effect on the financial statements. 5 FACTORS THAT MAY AFFECT FUTURE RESULTS We might make forward-looking statements in this report and in other reports, prospectuses and proxy statements we file with the Securities and Exchange Commission (SEC). In addition, our senior management 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 future value of equity securities; o the impact of new accounting standards for goodwill amortization on future noninterest expense and net income; and o the impact of changes in interest rates on future liquidity. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we might not update them to reflect changes that occur after the date they are made. There are several factors--many of which are beyond our control--that could cause results to differ significantly from our expectations. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate and other risks, are described elsewhere in this report (see, for example, "Balance Sheet Analysis"). Additional factors, including the regulation and supervision of the holding company and its subsidiaries, are 6 described in our report on Form 10-K for the year ended December 31, 2000. When we refer to our Form 10-K for the year ended December 31, 2000, we are referring not only to the information included directly in that report but also to information that is incorporated by reference into that report from our 2000 Annual Report to Stockholders and from our definitive Proxy Statement for our 2001 Annual Meeting of Stockholders. Information incorporated from our 2000 Annual Report to Stockholders is filed as Exhibit 13 to our Form 10-K. Any factor described in this report or in our Form 10-K could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition. There are factors not described in this report or in our Form 10-K that could cause results to differ from our expectations. RECENT 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 likely immediate impact will be decreased demand for air travel, which could adversely affect not only the airline industry but also other travel-related and leisure industries, such as lodging, gaming and tourism. The impact could spread beyond certain industries to the overall U.S. and global economies, further decreasing capital and consumer spending and increasing the risk of a U.S. and/or global recession. Decreased capital and consumer spending and other recessionary trends could adversely affect the Company in a number of ways including decreased demand for our products and services and increased credit losses. INDUSTRY FACTORS AS A FINANCIAL SERVICES COMPANY, OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY GENERAL BUSINESS AND ECONOMIC CONDITIONS. Our business and earnings are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we operate. For example, an economic downturn or higher interest rates could decrease the demand for our loans and other products and services and/or increase the number of customers who fail to repay their loans. Higher interest rates also could increase our cost to borrow funds and increase the rate we pay on deposits. This could more than offset, in the net interest margin, any increase we earn on new or floating rate loans or short-term investments. Lower interest rates could also adversely impact our net interest margin--at least in the short term--insofar as the rates we earn on our loans and investments may fall more rapidly than the rates we pay on deposits. California is an example of a local economy in which we operate. During 2001, California and other western states have experienced an energy crisis, including increased energy costs, repeated episodes of diminished or interrupted electrical power supply and the filing by a 7 California utility for protection under bankruptcy laws. We cannot predict the duration or severity of this situation. Continuation of the situation, however, could disrupt our business and the businesses of our customers who have operations or facilities in those states. It could also trigger an economic slowdown in those states, decreasing the demand for our loans and other products and services and/or increasing the number of customers who fail to repay their loans. The energy crisis could impact other states in which we operate, creating the same or similar concerns for us in those states. We discuss other business and economic conditions in more detail elsewhere in this report and in our Form 10-K for the year ended December 31, 2000. OUR EARNINGS ARE SIGNIFICANTLY AFFECTED BY THE FISCAL AND MONETARY POLICIES OF THE FEDERAL GOVERNMENT AND ITS AGENCIES. The policies of the Board of Governors of the Federal Reserve System impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest paid on interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are hard to predict. Federal Reserve Board policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability to repay its loan. THE FINANCIAL SERVICES INDUSTRY IS HIGHLY COMPETITIVE. We operate in a highly competitive environment in the products and services we offer and the markets in which we operate. The competition among financial services companies to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitor's new products, especially offerings that provide cost savings to the customer. Some of our competitors may be better able to provide a wider range of products and services over a greater geographic area. We believe the financial services industry will become even more competitive as a result of legislative, regulatory and technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Many of our competitors have fewer regulatory constraints and lower cost structures. We expect the consolidation of the financial services industry to result in larger, better capitalized companies offering a wide array of financial services and products. 8 The Gramm-Leach-Bliley Act (the Act) permits banks, securities firms and insurance companies to merge by creating a new type of financial services company called a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Under the Act, securities firms and insurance companies that elect to become a financial holding company can acquire banks and other financial institutions. The Act significantly changes our competitive environment. WE ARE HEAVILY REGULATED BY FEDERAL AND STATE AGENCIES. The holding company, its subsidiary banks and many of its non-bank subsidiaries are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. Also, our failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to our reputation. For more information, refer to the "Regulation and Supervision" section of our report on Form 10-K for the year ended December 31, 2000 and to Notes 3 and 22 to the Financial Statements included in our 2000 Annual Report to Stockholders and incorporated by reference into the Form 10-K. CONSUMERS MAY DECIDE NOT TO USE BANKS TO COMPLETE THEIR FINANCIAL TRANSACTIONS. Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries, known as "disintermediation," could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. COMPANY FACTORS MAINTAINING OR INCREASING OUR MARKET SHARE DEPENDS ON MARKET ACCEPTANCE AND REGULATORY APPROVAL OF NEW PRODUCTS AND SERVICES. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including Internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not successfully 9 introduce new products and services, achieve market acceptance of our products and services, and/or develop and maintain loyal customers. THE HOLDING COMPANY RELIES ON DIVIDENDS FROM ITS SUBSIDIARIES FOR MOST OF ITS REVENUE. The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company's common and preferred stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank and certain of our non-bank subsidiaries may pay to the holding company. Also, the holding company's right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. For more information, refer to "Regulation and Supervision--Dividend Restrictions" and "--Holding Company Structure" in our report on Form 10-K for the year ended December 31, 2000. WE HAVE BUSINESSES OTHER THAN BANKING. We are a diversified financial services company. In addition to banking, we provide insurance, investments, mortgages and consumer finance. Although we believe our diversity helps mitigate the impact to the Company when downturns affect any one segment of our industry, it also means that our earnings could be subject to different risks and uncertainties. For example, our venture capital gains are volatile and unpredictable. They depend not only on the business success of the underlying investments but also on when the holdings become publicly-traded and subsequent market conditions. In recent quarters, we have experienced sustained declines in the market values of our publicly traded and private equity securities, in particular securities of companies in the technology and telecommunications industries. As a result, in the second quarter of 2001, we recognized non-cash charges to reflect other-than-temporary impairment in the valuation of securities. A number of factors, including the continued deterioration in capital spending on technology and telecommunications equipment 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 and, if we determine that the declines are other-than-temporary, additional impairment charges. In addition, we will realize losses to the extent we sell securities at less than book value. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview," "--Earnings Performance--Noninterest Income," "--Balance Sheet Analysis--Securities Available for Sale" and "--Balance Sheet Analysis--Interest Receivable and Other Assets." The home mortgage industry is subject to special interest rate risks. Loan origination fees and loan servicing fees account for a significant portion of mortgage-related revenues. Changes in interest rates can impact both types of fees. For example, we would expect a decline in mortgage rates to increase the demand for mortgage loans as borrowers refinance existing loans at lower interest rates. And, when portions of our servicing portfolio pay off, we would expect to experience lower revenues from our servicing investments. Conversely, in a constant or 10 increasing rate environment, we would expect fewer loans to be refinanced and fewer early payoffs of our servicing portfolio. We manage the impact of interest rate changes on the dynamic between loan origination revenues and loan servicing revenues with derivative financial instruments and other asset/liability management tools. How well we manage this risk impacts our mortgage-related revenues. For more information, refer to the "Balance Sheet Analysis" section later in this report and to the same section included in our 2000 Annual Report to Stockholders and incorporated by reference into our Form 10-K for the year ended December 31, 2000. WE HAVE AN ACTIVE ACQUISITION PROGRAM. We regularly explore opportunities to acquire financial institutions and other financial services providers. We cannot predict the number, size or timing of future acquisitions. We typically do not comment publicly on a possible acquisition or business combination until we have signed a definitive agreement for the transaction. Our ability to successfully complete an acquisition generally is subject to some type of regulatory approval, and we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We typically can decide not to complete a proposed acquisition or business combination if we believe any condition under which a regulatory approval has been granted is unreasonably burdensome to us. Difficulty in integrating an acquired company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. Specifically, the integration process could result in higher than expected deposit attrition (run-off), loss of key employees, the disruption of our business or the business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative impact of any divestitures required by regulatory authorities in connection with acquisitions or business combinations may be greater than expected. OUR BUSINESS COULD SUFFER IF WE FAIL TO ATTRACT AND RETAIN SKILLED PEOPLE. Our success depends, in part, on our ability to attract and retain key people. Competition for the best people--in particular, individuals with technology experience--is intense. We may not be able to hire people or pay them enough to keep them. OUR STOCK PRICE CAN BE VOLATILE. Our stock price can fluctuate widely in response to a variety of factors including o actual or anticipated variations in our quarterly operating results; o new technology used, or services offered, by our competitors; 11 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. 12 OPERATING SEGMENT RESULTS COMMUNITY BANKING'S net income increased to $931 million in the third quarter of 2001 from $617 million in the third quarter of 2000, an increase of 51 percent. Excluding second quarter 2001 impairment and other special charges of $1,089 million (after tax), net income increased to $2,696 million for the first nine months of 2001 from $2,208 million for the first nine months of 2000, an increase of 22 percent. Net interest income increased to $2,306 million in the third quarter of 2001 from $1,969 million in the third quarter of 2000. Net interest income increased to $6,407 million for the first nine months of 2001 from $5,641 million in the first nine months of 2000. The increase in net interest income was due to increases in loans and core deposits, combined with an increase in the net interest margin. Average loans in Community Banking grew 10 percent and average core deposits grew 17 percent from a year ago. The provision for loan losses decreased by $16 million and increased by $91 million for the third quarter and first nine months of 2001, respectively. Noninterest income for the third quarter of 2001 increased by $86 million over the same period in 2000. Primary contributors to the increase in noninterest income were growth in services charges on deposits, mortgage banking, and trust and investment fees from H.D.Vest. WHOLESALE BANKING'S net income was $245 million in the third quarter of 2001, compared with $240 million in the third quarter of 2000. Excluding second quarter 2001 impairment and other special charges of $62 million (after tax), net income was $742 million for the first nine months of 2001, compared with $770 million for the first nine months of 2000. Net interest income was $489 million in the third quarter of 2001 and $467 million in the third quarter of 2000. Net interest income was $1,466 million for the first nine months of 2001 and $1,450 million in the first nine months of 2000. The slight increase in net interest income was due to higher loan volume offset by a slight decline in asset yields. Average outstanding loan balances grew to $50 billion in the third quarter of 2001 from $47 billion in the third quarter of 2000. The provision for loan losses increased by $11 million to $62 million in the third quarter of 2001 and increased by $59 million to $172 million for the first nine months of 2001. Noninterest income increased to $548 million and $1,528 million in the third quarter and first nine months of 2001, respectively, from $439 million and $1,307 million in the same periods of 2000. The increase for both periods was primarily due to higher insurance revenue from Acordia. Noninterest expense increased to $590 million in the third quarter of 2001 and $1,754 million for the first nine months of 2001 from $469 million and $1,404 million for the same periods in the prior year. The increase for the first nine months of 2001 was due to higher personnel costs as a result of the Acordia acquisition and increased sales and service staff. WELLS FARGO FINANCIAL'S net income was $73 million in the third quarter of 2001 and $67 million for the same period in 2000. Net income increased to $214 million for the first nine months of 2001 from $192 million for the same period in 2000, an increase of 11 percent. Net interest income increased 19 percent in the third quarter and 17 percent in the first nine months of 2001, compared with the same periods in 2000. The increase in net interest income was due to growth in average loans. The provision for loan losses increased by $35 million and $116 million in the third quarter and first nine months of 2001, respectively, predominantly 13 due to higher net write-offs in the loan portfolios. The increase in noninterest income of $18 million in the third quarter of 2001 was primarily due to additional fee income originating from businesses acquired in the past year. Noninterest expense increased to $283 million in the third quarter of 2001 and $814 million for the first nine months of 2001 from $246 million and $743 million for the same periods in the prior year. Noninterest expense increased 10 percent in the first nine months of 2001, compared with the same period in 2000, primarily due to higher operating costs resulting from acquisitions in the last year. EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $3,222 million in the third quarter of 2001, compared with $2,796 million in the third quarter of 2000. Net interest income was $9,085 million in the first nine months of 2001, compared with $8,126 million in the first nine months of 2000. The increase for both periods was mostly due to the increase in earning assets and lower short-term and long-term borrowing costs. The Company's net interest margin increased to 5.40% in the third quarter of 2001, compared with 5.34% in the third quarter of 2000 and decreased to 5.31% in the first nine months of 2001, compared with 5.36% in the first nine months of 2000. The decrease in the margin for the first nine months of 2001, compared with the same period of 2000, was largely due to falling loan yields which reset with declining market rates faster than interest-bearing deposits. This decrease was mostly offset by lower short-term and long-term borrowing costs. The increase in the margin for the third quarter of 2001, compared with the third quarter of 2000, was predominantly due to falling short-term and long-term borrowing and deposit costs, which declined to keep pace with declines in earning asset yields earlier in the year. This increase was predominantly offset by decreased loan yields, which continued to fall with market rates. Individual components of net interest income and the net interest margin are presented in the rate/yield table on the following page. Loans averaged $164.0 billion in the third quarter of 2001, compared with $149.9 billion in the third quarter of 2000. For the first nine months of 2001, loans averaged $161.8 billion, compared with $142.1 billion for the same period of 2000. The increase in average loans for the third quarter and first nine months of 2001 was primarily due to loan growth in the real estate 1-4 family first mortgage and real estate 1-4 family junior lien mortgage portfolios. For the first nine months of 2001, debt securities averaged $36.0 billion, compared with $40.2 billion in the same period of 2000. Average core deposits were $170.7 billion and $148.0 billion and funded 59% and 58% of the Company's average total assets in the third quarter of 2001 and 2000, respectively. For the first nine months of 2001 and 2000, average core deposits were $165.3 billion and $143.8 billion, respectively, and funded 59% and 58%, respectively, of the Company's average total assets. 14 AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2) --------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------- Quarter ended Sept. 30, ------------------------------------------------------------ 2001 2000 --------------------------- ------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ (in millions) BALANCE RATES EXPENSE balance rates expense --------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 2,683 3.44% $ 23 $ 2,762 6.33% $ 44 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 2,113 6.28 32 2,955 6.44 48 Securities of U.S. states and political subdivisions 2,018 8.02 39 2,060 7.89 41 Mortgage-backed securities: Federal agencies 29,292 7.19 512 25,404 7.28 466 Private collateralized mortgage obligations 1,801 9.00 40 2,484 7.27 47 -------- ------ -------- ----- Total mortgage-backed securities 31,093 7.29 552 27,888 7.28 513 Other debt securities (4) 3,797 8.06 65 5,633 8.31 73 -------- ------ -------- ----- Total debt securities available for sale (4) 39,021 7.34 688 38,536 7.34 675 Mortgages held for sale (3) 24,958 6.79 425 12,123 8.01 245 Loans held for sale (3) 4,771 5.74 69 4,177 8.88 93 Loans: Commercial 48,501 7.77 950 46,090 9.58 1,110 Real estate 1-4 family first mortgage 20,227 7.05 356 17,892 7.99 358 Other real estate mortgage 24,300 7.86 481 22,927 9.02 519 Real estate construction 8,113 7.80 160 7,258 10.23 187 Consumer: Real estate 1-4 family junior lien mortgage 21,729 9.18 500 15,771 10.44 413 Credit card 6,208 13.44 208 6,156 14.82 228 Other revolving credit and monthly payment 23,558 11.19 660 22,368 12.27 687 -------- ------ -------- ----- Total consumer 51,495 10.61 1,368 44,295 11.97 1,328 Lease financing 9,770 7.60 186 9,784 8.00 196 Foreign 1,640 20.56 84 1,643 20.89 86 -------- ------ -------- ----- Total loans (5) 164,046 8.71 3,585 149,889 10.07 3,784 Other 3,981 4.67 47 3,168 6.48 50 -------- ------ -------- ----- Total earning assets $239,460 8.10 4,837 $210,655 9.34 4,891 ======== ------ ======== ----- FUNDING SOURCES Deposits: Interest-bearing checking $ 1,946 1.95 9 $ 3,252 2.09 17 Market rate and other savings 84,633 1.95 417 64,200 2.92 471 Savings certificates 28,810 4.89 355 30,689 5.54 428 Other time deposits 1,108 4.58 13 4,728 5.86 70 Deposits in foreign offices 5,827 3.49 51 6,560 6.53 107 -------- ------ -------- ----- Total interest-bearing deposits 122,324 2.74 845 109,429 3.97 1,093 Short-term borrowings 35,582 3.52 316 28,616 6.47 466 Long-term debt 34,730 4.96 431 30,128 6.88 518 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,401 6.40 23 935 7.95 18 -------- ------ -------- ----- Total interest-bearing liabilities 194,037 3.31 1,615 169,108 4.93 2,095 Portion of noninterest-bearing funding sources 45,423 -- -- 41,547 -- -- -------- ------ -------- ----- Total funding sources $239,460 2.70 1,615 $210,655 4.00 2,095 ======== ------ ======== ----- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.40% $3,222 5.34% $2,796 ===== ====== ===== ====== NONINTEREST-EARNING ASSETS Cash and due from banks $ 14,237 $ 13,270 Goodwill 9,682 9,094 Other 26,082 23,812 -------- -------- Total noninterest-earning assets $ 50,001 $ 46,176 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 55,321 $ 49,846 Other liabilities 12,962 12,796 Preferred stockholders' equity 259 265 Common stockholders' equity 26,882 24,816 Noninterest-bearing funding sources used to fund earning assets (45,423) (41,547) -------- -------- Net noninterest-bearing funding sources $ 50,001 $ 46,176 ======== ======== TOTAL ASSETS $289,461 $256,831 ======== ======== -----------------------------------------------------------------------------------------------------------------

(1) The average prime rate of the Company was 6.57% and 9.50% for the quarters ended September 30, 2001 and 2000, respectively, and 7.50% and 9.15% for the nine months ended September 30, 2001 and 2000, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 3.45% and 6.62% for the quarters ended September 30, 2001 and 2000, respectively, and 4.33% and 6.46% for the nine months ended September 30, 2001 and 2000, respectively. (2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. (3) Yields are based on amortized cost balances computed on a settlement date basis. (4) Includes certain preferred securities. (5) Nonaccrual loans and related income are included in their respective loan categories. (6) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal and applicable state income taxes. The federal statutory tax rate was 35% for all periods presented. 15

---------------------------------------------------------------------------------------------------------------------- Nine months ended Sept. 30, -------------------------------------------------------------- 2001 2000 ---------------------------- -------------------------- INTEREST Interest AVERAGE YIELDS/ INCOME/ Average Yields/ income/ BALANCE RATES EXPENSE balance rates expense -------------------------------------------------------------- EARNING ASSETS Federal funds sold and securities purchased under resale agreements $ 2,672 4.13% $ 83 $ 2,452 6.17% $ 113 Debt securities available for sale (3): Securities of U.S. Treasury and federal agencies 2,192 6.74 107 3,475 6.08 164 Securities of U.S. states and political subdivisions 2,016 7.94 115 2,113 7.85 126 Mortgage-backed securities: Federal agencies 26,763 7.18 1,405 26,433 7.17 1,448 Private collateralized mortgage obligations 1,641 9.12 110 2,730 7.22 153 -------- ------- -------- ------- Total mortgage-backed securities 28,404 7.29 1,515 29,163 7.18 1,601 Other debt securities (4) 3,388 7.86 195 5,433 7.67 197 -------- ------- -------- ------- Total debt securities available for sale (4) 36,000 7.34 1,932 40,184 7.16 2,088 Mortgages held for sale (3) 20,234 6.93 1,055 10,333 7.90 618 Loans held for sale (3) 4,802 6.98 251 5,085 8.48 322 Loans: Commercial 49,120 8.38 3,078 44,270 9.37 3,106 Real estate 1-4 family first mortgage 18,870 7.33 1,038 15,705 7.94 935 Other real estate mortgage 24,093 8.30 1,496 22,143 9.04 1,498 Real estate construction 8,080 8.59 519 6,718 10.02 504 Consumer: Real estate 1-4 family junior lien mortgage 20,047 9.64 1,448 14,547 10.34 1,127 Credit card 6,229 13.65 638 5,769 14.40 623 Other revolving credit and monthly payment 23,646 11.56 2,048 21,573 11.99 1,938 -------- ------- -------- ------- Total consumer 49,922 11.05 4,134 41,889 11.75 3,688 Lease financing 10,062 7.76 586 9,767 7.73 566 Foreign 1,603 20.89 251 1,633 21.14 259 -------- ------- -------- ------- Total loans (5) 161,750 9.17 11,102 142,125 9.91 10,556 Other 3,760 5.18 146 3,257 6.07 149 -------- ------- -------- ------- Total earning assets $229,218 8.52 14,569 $203,436 9.14 13,846 ======== ------- ======== ------- FUNDING SOURCES Deposits: Interest-bearing checking $ 2,237 2.86 48 $ 3,344 1.74 44 Market rate and other savings 78,256 2.36 1,383 62,964 2.73 1,289 Savings certificates 30,926 5.37 1,243 29,826 5.26 1,175 Other time deposits 1,470 5.21 57 4,271 5.58 178 Deposits in foreign offices 6,422 4.53 218 5,823 6.17 269 -------- ------- -------- ------- Total interest-bearing deposits 119,311 3.30 2,949 106,228 3.72 2,955 Short-term borrowings 31,273 4.44 1,037 28,547 6.13 1,311 Long-term debt 34,460 5.57 1,439 28,216 6.61 1,399 Guaranteed preferred beneficial interests in Company's subordinated debentures 1,091 7.12 59 935 7.90 55 -------- ------- -------- ------- Total interest-bearing liabilities 186,135 3.94 5,484 163,926 4.66 5,720 Portion of noninterest-bearing funding sources 43,083 -- -- 39,510 -- -- -------- ------- -------- ------- Total funding sources $229,218 3.21 5,484 $203,436 3.78 5,720 ======== ------- ======== ------- NET INTEREST MARGIN AND NET INTEREST INCOME ON A TAXABLE-EQUIVALENT BASIS (6) 5.31% $ 9,085 5.36% $ 8,126 ===== ======= ===== ======= NONINTEREST-EARNING ASSETS Cash and due from banks $ 14,506 $ 12,883 Goodwill 9,491 8,675 Other 25,969 21,910 -------- -------- Total noninterest-earning assets $ 49,966 $ 43,468 ======== ======== NONINTEREST-BEARING FUNDING SOURCES Deposits $ 53,896 $ 47,628 Other liabilities 12,387 10,990 Preferred stockholders' equity 260 267 Common stockholders' equity 26,506 24,093 Noninterest-bearing funding sources used to fund earning assets (43,083) (39,510) -------- -------- Net noninterest-bearing funding sources $ 49,966 $ 43,468 ======== ======== TOTAL ASSETS $279,184 $246,904 ======== ======== --------------------------------------------------------------------------------------------------------------

16 NONINTEREST INCOME

------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ----------------- % ---------------- % (in millions) 2001 2000 Change 2001 2000 Change ------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 470 $ 435 8% $1,370 $1,267 8% Trust and investment fees: Asset management and custody fees 181 186 (3) 551 539 2 Mutual fund and annuity sales fees 181 195 (7) 596 563 6 All other 62 31 100 109 101 8 ------ ------ ------ ------ Total trust and investment fees 424 412 3 1,256 1,203 4 Credit card fees 203 194 5 579 534 8 Other fees: Cash network fees 54 49 10 153 141 9 Charges and fees on loans 103 92 12 316 252 25 All other 146 159 (8) 452 426 6 ------ ------ ------ ------ Total other fees 303 300 1 921 819 12 Mortgage banking: Origination and other closing fees 179 100 79 490 258 90 Servicing fees, net of amortization and impairment (127) 176 -- (21) 500 -- Net gains on securities available for sale 2 -- -- 134 -- -- Net gains on sales of mortgage servicing rights -- 39 (100) -- 98 (100) Net gains (losses) on mortgage loans 79 (22) -- 276 (16) -- All other 236 48 392 398 170 134 ------ ------ ------ ------ Total mortgage banking 369 341 8 1,277 1,010 26 Insurance 196 80 145 524 293 79 Net venture capital (losses) gains (124) 535 -- (1,593) 1,740 -- Net gains (losses) on securities available for sale 165 (341) -- 309 (981) -- Net income (loss) from equity investments accounted for by the: Cost method (3) 18 -- (27) 145 -- Equity method 3 12 (75) (82) 88 -- Net gains (losses) on sales of loans 11 (78) -- 10 (149) -- Net gains on dispositions of operations 1 2 (50) 104 8 -- All other 265 145 83 595 255 133 ------ ------ ------ ------ Total $2,283 $2,055 11% $5,243 $6,232 (16)% ====== ====== ==== ====== ====== ===== -------------------------------------------------------------------------------------------------------------------

The increase in trust and investment fees for the third quarter of 2001 was due to an increase in "all other" fees primarily due to the acquisition of H.D. Vest, largely offset by a change in the mutual fund mix from equity funds to money market funds. The Company managed mutual funds with $70 billion of assets at September 30, 2001, compared with $67 billion at September 30, 2000. The Company also managed or maintained personal trust, employee benefit trust and agency assets of $485 billion and $486 billion at September 30, 2001 and 2000, respectively. The increase in mortgage origination and other closing fees was primarily due to increased refinancing activity resulting from the lowering of interest rates by the Federal Reserve in the second and third quarters of 2001. Mortgage servicing fees decreased for the third quarter and nine months ended September 30, 2001, predominantly due to increased amortization and provisions recorded against the book value of the mortgage servicing rights asset. Both are 17 driven by higher prepayment assumptions 3ue to the decline in interest rates. The decrease was predominantly offset by gains representing the ineffective portion of all fair value hedges of mortgage servicing rights due to the adoption of FAS 133 and increased servicing fees due to growth of the servicing portfolio. The increase in gains on sales of mortgage loans for the third quarter was due to increased production volume. The increase in insurance revenue for the third quarter and first nine months of 2001 was predominantly due to the acquisition of Acordia. For the first nine months of 2001, net venture capital losses included approximately $1,500 million of impairment write-downs recognized in the second quarter of 2001 reflecting other-than-temporary impairment in the valuation of publicly traded and private equity securities. Venture capital gains in the third quarter and first nine months of 2000 included net gains on various venture capital securities, including a $560 million gain recognized during the first quarter on the Company's investment in Siara Systems. The net losses on securities available for sale during the third quarter and first nine months of 2000 were predominantly due to the restructuring of the portfolio. For the first nine months of 2001, net losses from equity investments accounted for by the equity method included approximately $215 million of impairment write-downs recognized in the second quarter of 2001. The increase in net gains on dispositions of operations in the first nine months of 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. 18 NONINTEREST EXPENSE

------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, ---------------- % ---------------- % (in millions) 2001 2000 Change 2001 2000 Change ------------------------------------------------------------------------------------------------------------------- Salaries $1,020 $ 945 8% $3,015 $2,732 10% Incentive compensation 315 271 16 784 624 26 Employee benefits 223 241 (7) 737 741 (1) Equipment 217 211 3 672 640 5 Net occupancy 240 236 2 716 707 1 Goodwill 156 136 15 452 389 16 Core deposit intangible: Nonqualifying (1) 38 43 (12) 117 131 (11) Qualifying 3 3 -- 8 11 (27) Net gains on dispositions of premises and equipment (2) (9) (78) (21) (60) (65) Contract services 108 134 (19) 366 364 1 Outside professional services 104 118 (12) 335 297 13 Outside data processing 84 87 (3) 238 245 (3) Advertising and promotion 66 84 (21) 190 223 (15) Telecommunications 91 77 18 260 223 17 Travel and entertainment 67 71 (6) 209 199 5 Postage 56 62 (10) 179 185 (3) Stationery and supplies 58 54 7 181 159 14 Insurance 30 30 -- 145 126 15 Operating losses 50 53 (6) 149 122 22 Security 39 24 63 115 72 60 All other 224 153 46 591 483 22 ------ ------ ------ ------ Total $3,187 $3,024 5% $9,438 $8,613 10% ====== ====== === ====== ====== ==== -------------------------------------------------------------------------------------------------------------------

(1) Represents amortization of core deposit intangible acquired after February 1992 that is subtracted from stockholders' equity in computing regulatory capital for bank holding companies. The increase in noninterest expense was due to higher salaries, resulting from an increase in full-time equivalent staff, and higher incentive compensation, due to additional sales and service team members partially due to high mortgage origination volume, and commission expense resulting from the acquisition of H.D. Vest. INCOME TAXES The Company's effective income tax rate was 37% for the third quarter of 2001, compared with 41% for the same period of 2000. The decrease was predominantly due to the impact of a donation of appreciated securities in the third quarter of 2001 coupled with the effect of a third quarter 2000 charge resulting from a change of intent to repatriate the undistributed earnings of a foreign subsidiary. To date, this charge remains a deferred liability. 19 CASH EARNINGS/RATIOS The following table reconciles reported earnings to net income excluding goodwill and nonqualifying core deposit intangible amortization ("cash" earnings) for the quarter ended September 30, 2001.

------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions, except per share amounts) Sept. 30, 2001 ------------------------------------------------------------------------------------------------------------------- Nonqualifying Reported core deposit "Cash" earnings Goodwill intangible earnings ------------------------------------------------------------------------------------------------------------------- Income before income tax expense $1,842 $156 $38 $2,036 Income tax expense 678 -- 15 693 ------ ---- --- ------ Net income 1,164 156 23 1,343 Preferred stock dividends 4 -- -- 4 ------ ---- --- ------ Net income applicable to common stock $1,160 $156 $23 $1,339 ======= ==== === ====== Earnings per common share $ .68 $ .78 ====== ====== Diluted earnings per common share $ .67 $ .78 ====== ====== -------------------------------------------------------------------------------------------------------------------

The ROA, ROE and efficiency ratios excluding goodwill and nonqualifying core deposit intangible amortization and related balances for the quarter ended September 30, 2001 were calculated as follows:

------------------------------------------------------------------------------------------------------------------- Quarter ended (in millions) Sept. 30, 2001 ------------------------------------------------------------------------------------------------------------------- ROA: A / (C-E-F) = 1.91% ROE: B / (D-E-G) = 32.08% Efficiency: (H-I) / J = 54.6% Net income $ 1,343 (A) Net income applicable to common stock 1,339 (B) Average total assets 289,461 (C) Average common stockholders' equity 26,882 (D) Average goodwill 9,682 (E) Average pretax nonqualifying core deposit intangible 1,042 (F) Average after-tax nonqualifying core deposit intangible 646 (G) Noninterest expense 3,187 (H) Amortization expense for goodwill and nonqualifying core deposit intangible 194 (I) Net interest income plus noninterest income 5,484 (J) -------------------------------------------------------------------------------------------------------------------

These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Also, "cash" earnings are not entirely available for use by management. See the Consolidated Statement of Cash Flows for other information regarding funds available for use by management. 20 BALANCE SHEET ANALYSIS SECURITIES AVAILABLE FOR SALE The following table provides the cost and fair value for the major components of securities available for sale carried at fair value. There were no securities classified as held to maturity at the end of the periods presented.

------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 2001 2000 2000 -------------------- -------------------- ------------------- ESTIMATED Estimated Estimated FAIR fair fair (in millions) COST VALUE Cost value Cost value ------------------------------------------------------------------------------------------------------------------- Securities of U.S. Treasury and federal agencies $ 2,014 $ 2,105 $ 2,739 $ 2,783 $ 3,109 $ 3,141 Securities of U.S. states and political subdivisions 2,198 2,306 2,322 2,400 2,174 2,192 Mortgage-backed securities: Federal agencies 29,818 30,963 26,304 26,995 22,703 22,834 Private collateralized mortgage obligations (1) 1,900 1,959 1,455 1,446 1,326 1,302 ------- ------- ------- ------- ------- ------- Total mortgage-backed securities 31,718 32,922 27,759 28,441 24,029 24,136 Other 2,620 2,642 2,588 2,502 2,706 2,632 ------- ------- ------- ------- ------- ------- Total debt securities 38,550 39,975 35,408 36,126 32,018 32,101 Marketable equity securities 856 774 2,457 2,529 2,690 5,206 ------- ------- ------- ------- ------- ------- Total $39,406 $40,749 $37,865 $38,655 $34,708 $37,307 ======= ======= ======= ======= ======= ======= -------------------------------------------------------------------------------------------------------------------

(1) Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages. The decrease in the cost of marketable equity securities was predominantly due to impairment write-downs reflecting other-than-temporary impairment in valuation. The following table provides the components of the estimated unrealized net gain on securities available for sale. The estimated unrealized net gain or loss on securities available for sale is reported on an after-tax basis as a component of cumulative other comprehensive income.

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Estimated unrealized gross gains $1,711 $1,620 $2,903 Estimated unrealized gross losses (368) (830) (304) ------ ------ ------ Estimated unrealized net gain $1,343 $ 790 $2,599 ====== ====== ====== -------------------------------------------------------------------------------------------------------------------

21 The following table provides the components of the realized net gains (losses) on the sales of securities from the securities available for sale portfolio. (Realized gains (losses) on marketable equity securities from venture capital investments are reported as net venture capital gains (losses).)

------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, --------------------- --------------------- (in millions) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------- Realized gross gains $180 (1) $ 17 $542 (1) $ 54 Realized gross losses (13)(2) (357) (99)(2) (1,035) ---- ----- ---- ------- Realized net gains (losses) $167 $(340) $443 $ (981) ==== ===== ==== ======= -------------------------------------------------------------------------------------------------------------------

(1) Includes $5 million and $148 million of gross gains reported in mortgage banking noninterest income for the third quarter and first nine months of 2001, respectively. (2) Includes $3 million and $14 million of gross losses reported in mortgage banking noninterest income for the third quarter and first nine months of 2001, respectively. The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 5 years and 4 months at September 30, 2001. Expected remaining maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. At September 30, 2001, mortgage-backed securities, including collateralized mortgage obligations, were $32.9 billion, or 81% of the Company's securities available for sale portfolio. As an indication of interest rate risk, the Company has estimated the effect of a 200 basis point increase in interest rates on the value of the mortgage-backed securities and the corresponding expected remaining maturities. Based on that rate scenario, mortgage-backed securities would decrease in fair value from $32.9 billion to $31.9 billion and the expected remaining maturity of these securities would increase from 5 years to 7 years and 9 months. 22 LOAN PORTFOLIO

----------------------------------------------------------------------------------------------------------------------- % Change Sept. 30, 2001 from ---------------------- SEPT. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 2000 2000 ----------------------------------------------------------------------------------------------------------------------- Commercial (1) $ 48,444 $ 50,518 $ 47,300 (4)% 2% Real estate 1-4 family first mortgage 23,308 18,464 19,627 26 19 Other real estate mortgage (2) 24,311 23,972 23,249 1 5 Real estate construction 8,028 7,715 7,457 4 8 Consumer: Real estate 1-4 family junior lien mortgage 23,901 18,218 16,322 31 46 Credit card 6,333 6,616 6,226 (4) 2 Other revolving credit and monthly payment 23,232 23,974 22,343 (3) 4 -------- -------- -------- Total consumer 53,466 48,808 44,891 10 19 Lease financing 9,696 10,023 10,170 (3) (5) Foreign 1,613 1,624 1,611 (1) -- -------- -------- -------- Total loans (net of unearned income, including net deferred loan fees, of $4,188, $4,231 and $4,070) $168,866 $161,124 $154,305 5% 9% ======== ======== ======== === == -----------------------------------------------------------------------------------------------------------------------

(1) Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $3,969 million, $4,206 million and $3,661 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. (2) Includes agricultural loans that are secured by real estate of $1,244 million, $1,280 million and $1,098 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. NONACCRUAL AND RESTRUCTURED LOANS AND OTHER ASSETS (1)

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial (2) $ 863 $ 739 $ 578 Real estate 1-4 family first mortgage 197 127 141 Other real estate mortgage (3) 231 113 117 Real estate construction 113 57 19 Consumer: Real estate 1-4 family junior lien mortgage 18 23 12 Other revolving credit and monthly payment 42 36 35 ------ ------ ------ Total consumer 60 59 47 Lease financing 146 92 53 Foreign 8 7 8 ------ ------ ------ Total nonaccrual loans (4) 1,618 1,194 963 Restructured loans -- 1 2 ------ ------ ------ Nonaccrual and restructured loans 1,618 1,195 965 As a percentage of total loans 1.0% .7% .6% Foreclosed assets 166 128 134 Real estate investments (5) 2 27 28 ------ ------ ------ Total nonaccrual and restructured loans and other assets $1,786 $1,350 $1,127 ====== ====== ====== -------------------------------------------------------------------------------------------------------------------

(1) Excludes loans that are contractually past due 90 days or more as to interest or principal, but are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. (2) Includes commercial agricultural loans of $67 million, $44 million and $40 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. (3) Includes agricultural loans secured by real estate of $48 million, $13 million and $11 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. (4) Of the total nonaccrual loans, $1,031 million, $761 million and $531 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively, were considered impaired under FAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. (5) Represents the amount of real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if such assets were recorded as loans. Real estate investments totaled $25 million, $56 million and $72 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. 23 The Company generally identifies loans to be evaluated for impairment under FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, when such loans are on nonaccrual or have been restructured. However, not all nonaccrual loans are impaired. Generally, a loan is placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off. Real estate 1-4 family loans (both first liens and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. In contrast, under FAS 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, rather than the contractual terms specified by the restructuring agreement. Consequently, not all impaired loans are necessarily placed on nonaccrual status. That is, loans performing under restructured terms beyond a specified performance period are classified as accruing but may still be deemed impaired under FAS 114. For loans covered under FAS 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual, or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the Company will estimate the amount of impairment using discounted cash flows, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of estimating impairment using historical loss factors as a means of measurement. If the measurement of the impaired loan results in a value that is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. FAS 114 does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. 24 In accordance with FAS 114, the table below shows the recorded investment in impaired loans and the related methodology used to measure impairment for the periods presented:

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Impairment measurement based on: Collateral value method $ 416 $174 $190 Discounted cash flow method 369 331 162 Historical loss factors 246 257 181 ------ ---- ---- Total (1) $1,031 $762 $533 ====== ==== ==== -------------------------------------------------------------------------------------------------------------------

(1) Includes $624 million, $345 million and $277 million of impaired loans with a related FAS 114 allowance of $122 million, $74 million and $62 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. The average recorded investment in impaired loans was $955 million and $488 million during the third quarter of 2001 and 2000, respectively, and $893 million and $428 million during the first nine months of 2001 and 2000, respectively. Total interest income recognized on impaired loans was $4 million and $1 million during the third quarter of 2001 and 2000, respectively, and $12 million and $4 million during the first nine months of 2001 and 2000, respectively, most of which was recorded using the cash method. The Company uses either the cash or cost recovery method to record cash receipts on impaired loans that are on nonaccrual. Under the cash method, contractual interest is credited to interest income when received. This method is used when the ultimate collectibility of the total principal is not in doubt. Under the cost recovery method, all payments received are applied to principal. This method is used when the ultimate collectibility of the total principal is in doubt. Loans on the cost recovery method may be changed to the cash method when the application of the cash payments has reduced the principal balance to a level where collection of the remaining recorded investment is no longer in doubt. The Company anticipates changes in the amount of nonaccrual loans that result from increases in lending activity and reductions due to resolutions of loans in the nonaccrual portfolio. The Company expects that nonaccrual loans will increase during the year consistent with current economic conditions. The performance of any individual loan can be affected by external factors, such as the interest rate environment or factors particular to a borrower such as actions taken by a borrower's management. In addition, from time to time, the Company may acquire loans from other financial institutions that may be classified as nonaccrual based on the Company's policies. 25 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING The following table shows loans contractually past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are both well-secured and in the process of collection or are real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. Notwithstanding, real estate 1-4 family loans (first liens and junior liens) are placed on nonaccrual within 120 days of becoming past due and such nonaccrual loans are excluded from the following table.

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Commercial $ 97 $ 90 $ 60 Real estate 1-4 family first mortgage 115 66 39 Other real estate mortgage 52 24 20 Real estate construction 65 12 12 Consumer: Real estate 1-4 family junior lien mortgage 59 27 40 Credit card 117 96 137 Other revolving credit and monthly payment 295 263 239 ---- ---- ---- Total consumer 471 386 416 ---- ---- ---- Total $800 $578 $547 ==== ==== ==== -------------------------------------------------------------------------------------------------------------------

26 ALLOWANCE FOR LOAN LOSSES

------------------------------------------------------------------------------------------------------------------- Quarter Nine months ended Sept. 30, ended Sept. 30, -------------------- --------------------- (in millions) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $3,760 $3,519 $ 3,719 $ 3,344 Allowances related to business combinations -- 51 41 212 Provision for loan losses 455 425 1,243 976 Loan charge-offs: Commercial (178) (117) (460) (314) Real estate 1-4 family first mortgage (14) (4) (20) (12) Other real estate mortgage (3) (10) (12) (26) Real estate construction (7) (3) (10) (7) Consumer: Real estate 1-4 family junior lien mortgage (11) (6) (33) (23) Credit card (100) (90) (320) (264) Other revolving credit and monthly payment (195) (168) (563) (456) ------ ------ ------- ------- Total consumer (306) (264) (916) (743) Lease financing (23) (9) (67) (31) Foreign (20) (20) (56) (65) ------ ------ ------- ------- Total loan charge-offs (551) (427) (1,541) (1,198) ------ ------ ------- ------- Loan recoveries: Commercial 19 18 57 71 Real estate 1-4 family first mortgage 1 1 3 3 Other real estate mortgage 4 3 12 10 Real estate construction -- 1 2 3 Consumer: Real estate 1-4 family junior lien mortgage 2 2 8 10 Credit card 10 9 32 29 Other revolving credit and monthly payment 50 54 151 170 ------ ------ ------- ------- Total consumer 62 65 191 209 Lease financing 7 3 20 9 Foreign 4 6 14 26 ------ ------ ------- ------- Total loan recoveries 97 97 299 331 ------ ------ ------- ------- Total net loan charge-offs (454) (330) (1,242) (867) ------ ------ ------- ------- BALANCE, END OF PERIOD $3,761 $3,665 $ 3,761 $ 3,665 ====== ====== ======= ======= Total net loan charge-offs as a percentage of average total loans (annualized) 1.10% .88% 1.03% .81% ====== ====== ======= ======= Allowance as a percentage of total loans 2.23% 2.38% 2.23% 2.38% ====== ====== ======= ======= -------------------------------------------------------------------------------------------------------------------

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 September 30, 2001. The Company's determination of the level of the allowance for loan 27 losses rests upon various judgements and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. INTEREST RECEIVABLE AND OTHER ASSETS

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Nonmarketable equity investments: Venture capital cost method investments $ 1,711 $ 2,033 $ 1,882 Federal Reserve Bank stock 1,254 1,237 1,300 All other 879 872 856 ------ ------ ----- Total nonmarketable equity investments 3,844 4,142 4,038 Trading assets 6,224 3,777 2,390 Interest receivable 1,430 1,516 1,491 Government National Mortgage Association (GNMA) pool buy outs 2,601 1,510 1,400 Certain identifiable intangible assets 192 227 229 Foreclosed assets 166 128 134 Interest-earning deposits 330 95 103 Due from customers on acceptances 110 85 110 All other 10,586 10,449 9,988 ------ ------ ----- Total interest receivable and other assets $25,483 $21,929 $19,883 ======= ======= ======= -------------------------------------------------------------------------------------------------------------------

The decrease in venture capital cost method investments was due to impairment write-downs reflecting other-than-temporary impairment in the valuation of private equity securities. Trading assets consist largely of securities, including corporate debt, U.S. government agency obligations and derivative instruments held for customer accommodation purposes. Interest income from trading assets was $27 million in the third quarter of 2001 and 2000, and $87 million and $72 million in the first nine months of 2001 and 2000, respectively. Noninterest income from trading assets was $94 million and $40 million in the third quarter of 2001 and 2000, respectively, and $298 million and $161 million in the first nine months of 2001 and 2000, respectively. GNMA pool buy outs are advances made to GNMA mortgage pools that are guaranteed by the Federal Housing Administration or by the Department of Veterans Affairs (collectively, "the guarantors"). These advances are made to buy out government agency-guaranteed delinquent loans, pursuant to the Company's servicing agreements. The Company, on behalf of the guarantors, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances, by the guarantors. Amortization expense for certain identifiable intangible assets included in other assets was $10 million and $11 million in the third quarter of 2001 and 2000, respectively. 28 DEPOSITS

------------------------------------------------------------------------------------------------------------------- SEPT. 30, Dec. 31, Sept. 30, (in millions) 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 56,271 $ 55,096 $ 51,404 Interest-bearing checking 1,700 3,699 2,718 Market rate and other savings 85,331 66,859 65,137 Savings certificates 28,001 31,056 30,818 -------- -------- -------- Core deposits 171,303 156,710 150,077 Other time deposits 1,082 5,137 4,739 Deposits in foreign offices 4,377 7,712 9,457 -------- -------- -------- Total deposits $176,762 $169,559 $164,273 ======== ======== ======= -------------------------------------------------------------------------------------------------------------------

CAPITAL ADEQUACY/RATIOS The Company and each of the subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the Office of the Comptroller of the Currency. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.

------------------------------------------------------------------------------------------------------------------- To be well capitalized under the FDICIA For capital prompt corrective Actual adequacy purposes action provisions ----------------- -------------------- ------------------- (in billions) Amount Ratio Amount Ratio Amount Ratio --------------------------------------- -------- ----- -------- ----- ------- ----- As of September 30, 2001: Total capital (to risk-weighted assets) Wells Fargo & Company $26.4 11.02% > $19.2 > 8.00% - - Wells Fargo Bank Minnesota, N.A. 3.2 11.41 > 2.2 > 8.00 > $ 2.8 > 10.00% - - - - Wells Fargo Bank, N.A. 15.1 13.17 > 9.1 > 8.00 > 11.4 > 10.00 - - - - Tier 1 capital (to risk-weighted assets) Wells Fargo & Company $17.8 7.40% > $ 9.6 > 4.00% - - Wells Fargo Bank Minnesota, N.A. 2.9 10.40 > 1.1 > 4.00 > $ 1.7 > 6.00% - - - - Wells Fargo Bank, N.A. 9.1 7.97 > 4.6 > 4.00 > 6.9 > 6.00 - - - - Tier 1 capital (to average assets) (Leverage ratio) Wells Fargo & Company $17.8 6.40% > $11.1 > 4.00% (1) - - Wells Fargo Bank Minnesota, N.A. 2.9 6.45 > 1.8 > 4.00 (1) > $ 2.2 > 5.00% - - - - Wells Fargo Bank, N.A. 9.1 7.62 > 4.8 > 4.00 (1) > 6.0 > 5.00 - - - - -------------------------------------------------------------------------------------------------------------------

(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations. 29 LIQUIDITY AND CAPITAL MANAGEMENT The Company manages its liquidity and capital at both the parent and subsidiary levels. Liquidity for the Company is also provided by interest income, deposit-raising activities, and potential disposition of readily marketable assets and through its ability to raise funds in a variety of domestic and international money and capital markets. The Company accesses the capital markets for long-term funding through the issuance of registered debt, private placements and asset-based secured funding. In October 2000, the Parent filed a shelf registration statement with the SEC under which the Parent may issue up to $10 billion in debt and equity securities, excluding common stock, other than common stock issuable upon the exercise or conversion of debt and equity securities. The Parent issued $750 million in subordinated notes in July 2001 and issued $1 billion in medium-term notes in August 2001. The remaining issuance authority at September 30, 2001 under the October 2000 registration statement, together with the $50 million issuance authority remaining on the Parent's registration statement filed in 1999, was $6.10 billion. Proceeds from the issuance of the debt securities listed above were, and with respect to any such securities issued in the future, are expected to be used for general corporate purposes. In February 2001, Wells Fargo Financial, Inc. (WFFI) filed a shelf registration statement with the SEC, under which WFFI may issue up to $4 billion in senior or subordinated debt securities. In July 2001, WFFI issued a total of $600 million in senior notes. As of September 30, 2001, the remaining issuance authority under that registration statement and the WFFI shelf registration statements filed in 2000 and 1999 was $4.35 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 $100 million under the long-term portion in August 2001. As of September 2001, the remaining issuance authority under the long-term portion was $9.9 billion. In October 2001, Wells Fargo Bank, N.A. issued $425 million under the long-term portion of the bank note program. In August 2001, the Company filed a registration statement 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. Following effectiveness of the registration statement with the SEC, on August 29, 2001, Wells Fargo Capital IV (the Trust), 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 pursuant to the August 2001 registration statement in the 30 form of its 7% Capital Securities and approximately $40 million of trust common securities to the Company. At September 30, 2001, there is currently $200 million in issuance authority remaining on the August 2001 registration statement. In February 2001, the Board of Directors authorized the repurchase of up to 25 million additional shares of the Company's outstanding common stock and in September 2001, authorized the repurchase of up to 30 million additional shares. As of September 30, 2001, the total remaining common stock repurchase authority was approximately 34 million shares. In July 2001, the Board of Directors approved an increase in the Company's quarterly common stock dividend to 26 cents per share from 24 cents per share, representing an 8% increase in the quarterly dividend rate. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. The majority of the Company's interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available for sale, deposit liabilities, short-term borrowings, long-term debt and derivative financial instruments used for asset/liability management. Interest rate risk occurs when assets and liabilities reprice at different times as market interest rates change. For example, if fixed-rate assets are funded with floating-rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. The Company refers to this type of risk as "term structure risk." There is, however, another source of interest rate risk which results from changing spreads between asset and liability rates. The Company calls this type of risk "basis risk"; it is a significant source of interest rate risk for the Company and is more difficult to quantify and manage than term structure risk. Two primary components of basis risk for the Company are (1) the spread between prime-based loans and market rate account (MRA) savings deposits and (2) the rate paid on savings and interest-bearing checking accounts as compared to LIBOR-based loans. Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage the exposure interest rate fluctuations have on net income and cash flows and to enhance profitability in ways that promise sufficient reward for understood and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates in the other-than-trading portfolio. The Company's net interest income simulation includes all other-than-trading financial assets, financial liabilities, derivative financial instruments and leases where the Company is the lessor. It captures the dynamic nature of the balance sheet by anticipating probable balance sheet and off-balance sheet strategies and volumes under different interest rate scenarios over the course of a one-year period. This simulation measures both the term structure risk and the basis risk in the Company's positions. The simulation also captures the option characteristics of products, such as caps and floors on floating-rate loans, the right to prepay mortgage loans without penalty and the 31 ability of customers to withdraw deposits on demand. These options are modeled directly in the simulation either through the use of caps and floors on loans, or through statistical analysis of historical customer behavior, in the case of mortgage loan prepayments or non-maturity deposits. The simulation model is used to measure the impact on net income, relative to a base case scenario, of interest rates increasing or decreasing 100 basis points over the next 12 months. The simulation for September 30, 2001 showing the largest drop in net income relative to the base case scenario is a 100 basis point decrease in rates that will result in a decrease in net income of $120 million over the next twelve months, largely based on the assumption that at some level of open market interest rates the banking industry's ability to further reduce deposits costs could be limited. In the simulation that was run at December 31, 2000, the largest drop in net income relative to the base case scenario over the next twelve months was a 100 basis point increase in rates that was projected to result in a decrease in net income of $60 million. The Company uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures indicated by the net income simulation described above. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable cash flow. Additionally, receive-fixed rate swaps are used to convert floating-rate loans into fixed rates to better match the liabilities that fund the loans. The Company also uses derivatives including floors, forwards and swaps, futures contracts and options on futures contracts and swaps to hedge the Company's mortgage servicing rights as well as forwards, futures and options on futures and forwards to hedge the Company's 1-4 family real estate first mortgage loan commitments and mortgage loans held for sale. The Company is also exposed to equity price risk principally arising through its venture capital investments. The Company does not actively trade these investments but conducts an orderly sale considering restriction periods and market conditions. Where economic, the Company may use hedging strategies to mitigate the equity price risk. The Company considers the fair values and the potential near term losses to future earnings related to its customer accommodation derivative financial instruments to be immaterial. 32 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 14, 2001 WELLS FARGO & COMPANY By: LES L. QUOCK ------------------------------------- Les L. Quock Senior Vice President and Controller (Principal Accounting Officer) 33