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

FORM 10-Q

  ü   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004

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)

420 Montgomery Street, San Francisco, California 94104
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 1-800-292-9932

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   ü         No      

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes   ü         No      

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

FORM 10-Q
CROSS-REFERENCE INDEX

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PART I — FINANCIAL INFORMATION

FINANCIAL REVIEW

SUMMARY FINANCIAL DATA

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This Report on Form 10-Q for the quarter ended June 30, 2004, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly from our forecasts and expectations. Please refer to “Factors that May Affect Future Results” for a discussion of some factors that may cause results to differ.

OVERVIEW

Wells Fargo & Company is a $420 billion diversified financial services company providing banking, insurance, investments, mortgage banking and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states of the U.S. and in other countries. We ranked fourth in assets and in market value of our common stock among U.S. bank holding companies at June 30, 2004. When we refer to “the Company”, “we”, “our” and “us” in this report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the Parent, we mean Wells Fargo & Company.

In second quarter 2004, we achieved diluted earnings per share of $1.00, up 11% from a year ago, with net income of $1.71 billion, up 12% from a year ago. We have historically had one of the highest earning asset yields and one of the lowest average funding costs among large U.S. banks. Taking advantage of market opportunities available during the second quarter, we took a number of actions to increase the yield on our earning assets and to reduce the cost of our long-term funding. We repurchased $2.2 billion of long-term debt with a weighted-average coupon of 6.20%, for a cost of $2.4 billion. This buyback increased second quarter noninterest expenses and reduced pre-tax earnings by $176 million or $.06 per share after-tax. In addition, we recorded losses of $222 million, or $.08 per share after-tax, connected with the sale of $14 billion of securities and adjustable rate mortgages (ARMs) with yields below 4% and replaced most of those assets with newer securities yielding close to 6% and with newly originated higher yielding ARMs. Taken together, these balance sheet repositioning actions reduced after-tax earnings by $.14 per share. To the extent markets remain as volatile as they were in the second quarter, we may take advantage of additional opportunities to further improve asset yields or reduce long-term funding costs in future quarters.

Our corporate vision is to satisfy all the financial needs of our customers, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products we provide to our customers and to focus on providing each customer with all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitates growth in strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us. We estimate that our average banking household now has 4.4 products with us, which we believe is among the highest, if not the highest, in our industry. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our core products grew this quarter compared with a year ago, with average loans up 30% and average core deposits up 9%. Loan growth during the quarter included commercial lending activity such as small business, middle market, commercial real estate, leasing, trade finance, and asset-based lending, and included the first meaningful increase in middle-market loans in nine quarters.

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We believe it is important to maintain a well-controlled environment as we continue to grow our businesses. We manage our credit risk by maintaining prudent credit policies and continuously examining our credit process. In second quarter 2004, nonperforming loans and net charge-offs as a percentage of loans outstanding declined from the prior year. Asset quality improved in second quarter 2004 compared with a year ago, with net charge-offs down 6% and nonperforming assets (including nonaccrual loans and foreclosed assets) down 8%. Loan losses declined to $390 million despite the continued growth in our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. Wells Fargo Bank, N.A. is the only bank in the U.S. to be “Aaa” rated by Moody’s Investors Service, their highest rating. Our stockholder value has increased over time due to customer satisfaction, strong financial results and the prudent way we attempt to manage our business risks.

Our financial results included the following:

Net income for second quarter 2004 was $1.71 billion, up 12%, compared with $1.53 billion for second quarter 2003. Diluted earnings per common share for second quarter 2004 were $1.00, up 11%, compared with $.90 for second quarter 2003. Return on average assets (ROA) increased to 1.68% and return on average common equity (ROE) was 19.57% compared with 19.62% a year ago.

Net income for the first six months of 2004 was $3.48 billion, or $2.03 per share, compared with $3.02 billion, or $1.78 per share, for the first half of 2003. ROA was 1.76% in the first half of 2004, compared with 1.67% for the first half of 2003. ROE was 19.94% in the first half of 2004, compared with 19.71% for the first half of 2003.

Net interest income on a taxable-equivalent basis was $4.25 billion and $8.33 billion for the second quarter and first half of 2004, compared with $3.99 billion and $7.86 billion for the same periods of 2003. Net interest income for second quarter 2004 increased 7% compared with the prior year on 12% earning asset growth, partially offset by a decline in the net interest margin. The net interest margin was 4.83% and 4.89% for the second quarter and first half of 2004, compared with 5.09% and 5.18% for the same periods of 2003.

Noninterest income was $3.20 billion and $6.30 billion for the second quarter and first half of 2004, respectively, compared with $2.96 billion and $5.79 billion for the same periods of 2003. Second quarter 2004 noninterest income was reduced by $222 million of losses taken to reposition the balance sheet to further increase earning asset yields. The growth in fee income reflected strength in trust and investment fees, deposit service charges, credit card fees, loan fees and insurance.

Revenue, the sum of net interest income and noninterest income, increased 7% to $7.43 billion in second quarter 2004 from $6.93 billion in second quarter 2003. Second quarter 2004 revenue was reduced by $222 million, or 3%, by the losses taken on asset repositioning actions taken in the quarter. Revenue growth in the quarter was broad based with strong results from most of our businesses, including consumer deposits and loans, payment processing, insurance brokerage, trust and investments, including private client services, small business, corporate banking, mortgage banking and consumer finance. Revenue increased 7% to $14.57 billion in the first half of 2004 from $13.61 billion in the first half of 2003, including the $222 million reduction in revenue associated with the balance sheet repositioning actions in second quarter 2004.

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Noninterest expense was $4.35 billion and $8.38 billion for the second quarter and first half of 2004, respectively, compared with $4.16 billion and $8.11 billion for the same periods of 2003. Substantially all of the increase in noninterest expense of $195 million from second quarter 2003 to second quarter 2004 was due to the debt repurchase cost of $176 million. The efficiency ratio was 58.6% in second quarter 2004 and 56.4% in first quarter 2004. The reduction in revenue and increase in expenses from the balance sheet repositioning actions taken during the quarter accounted for 400 basis points of the 58.6% efficiency ratio in second quarter 2004.

During second quarter 2004, net charge-offs were $390 million, or .59% of average total loans (annualized), compared with $415 million, or .81%, during second quarter 2003. The provision for loan losses, which exceeded net charge-offs by $50 million, was $440 million and $844 million in the second quarter and first half of 2004, compared with $421 million and $831 million in the second quarter and first half of 2003. The allowance for loan losses was $3.94 billion, or 1.46% of total loans, at June 30, 2004, compared with $3.89 billion, or 1.54%, at December 31, 2003 and $3.85 billion, or 1.82%, at June 30, 2003. The increase in the allowance for loan losses was necessary given the substantial growth of our consumer portfolio, particularly related to Wells Fargo Financial.

At June 30, 2004, total nonaccrual loans were $1.38 billion, or .51% of total loans, compared with $1.46 billion, or .58%, at December 31, 2003 and $1.56 billion, or .74%, at June 30, 2003. Foreclosed assets were $235 million at June 30, 2004, compared with $198 million at December 31, 2003 and $190 million at June 30, 2003.

The ratio of stockholders’ equity to total assets was 8.44% at June 30, 2004, compared with 8.89% at December 31, 2003 and 8.72% at June 30, 2003. Our total risk-based capital (RBC) ratio at June 30, 2004 was 11.86% and our Tier 1 RBC ratio was 8.24%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at June 30, 2003 were 11.50% and 7.98%, respectively. Our Tier 1 leverage ratios were 6.84% and 6.58% at June 30, 2004 and June 30, 2003, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.

Recent Accounting Standards

On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to plan sponsors that provide a benefit that is at least equivalent to Medicare. On January 12, 2004, the Financial Accounting Standards Board (FASB) issued Staff Position 106-1 (FSP 106-1), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which includes a provision that allows a plan sponsor a one-time election to defer accounting for the Act. This election must be made before net periodic postretirement benefit costs for the period that includes the Act’s enactment date are first included in reported financial information. If deferral is elected, that election may not be changed and the deferral continues to apply until authoritative guidance on the accounting for the federal subsidy is issued. We have elected to defer accounting for the Act until authoritative guidance is issued; therefore, the net periodic postretirement benefit cost in our second quarter 2004 financial statements does not reflect the effects of the Act on our postretirement health care plans. Specific authoritative guidance on the accounting for the federal subsidy has been issued through FASB Staff Position 106-2 (FSP 106-2), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and

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Modernization Act of 2003, which was issued in May 2004 and is effective for us in third quarter 2004. When FSP 106-2 becomes effective, it will supersede FSP 106-1. Based on the guidance in FSP 106-2, we estimate that the accounting for the Act will not have a material effect on our financial statements.

On December 12, 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for certain loans acquired in a transfer when it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3 is to be applied prospectively, effective for loans acquired in years beginning after December 15, 2004. We estimate that the adoption of SOP 03-3 will not have a material effect on our financial statements.

At its June 30-July 1, 2004 meeting, the Emerging Issues Task Force of the FASB (EITF) reached a tentative consensus on EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, that is consistent with a proposed amendment of Financial Accounting Standards No. 128 (FAS 128), Earnings Per Share, that, if adopted in its current form by the FASB, would require us to include in total diluted shares those common shares from convertible debt instruments despite our intent to settle the principal amount (accreted value) in cash and despite the fact that all contingencies permitting conversion have not been satisfied. We are currently evaluating whether the proposed amendment to FAS 128 will be applicable to our contingently convertible debentures issued on April 15, 2003, and, if so, the potential impact of the proposed amendment on our financial statements.

On July 16, 2004, the FASB ratified the decisions reached by the EITF with respect to Issue 02-14, Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means. The EITF reached a consensus that an investor should apply the equity method of accounting when it has investments in either common stock or “in-substance common stock” of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. In-substance common stock, as defined in the consensus, is an investment that has risk and reward characteristics, among other factors, that are substantially the same as common stock. The equity method of accounting must be applied for all investments in which the investor exercises significant influence over the investee and that qualify as in-substance common stock for reporting periods beginning after September 15, 2004. We do not anticipate the adoption will have a material effect on our financial statements.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are fundamental to understanding our results of operations and financial condition, because some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Three of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern the allowance for loan losses, the valuation of mortgage servicing rights and pension accounting. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee.

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These policies are described in “Financial Review — Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2003 (2003 Form 10-K).

EARNINGS PERFORMANCE

NET INTEREST INCOME

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding, such as debt. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% marginal tax rate.

Net interest income on a taxable-equivalent basis increased to $4.25 billion in second quarter 2004 from $3.99 billion in second quarter 2003, an increase of 7%. The increase was primarily due to strong growth in loans, particularly in adjustable rate mortgage loans, and lower core deposits costs. These factors were partially offset by reduced loan yields as new loans were added below the portfolio average.

The net interest margin decreased to 4.83% in second quarter 2004 from 5.09% in second quarter 2003. The decrease was primarily due to lower loan yields following strong consumer loan growth, particularly in adjustable rate mortgage loans, which resulted in the addition of new loans with yields below the existing portfolio average. In addition, investment portfolio yields declined from second quarter 2003. The yield in second quarter 2003 included recognition of discounts on mortgage-backed securities that prepaid in that quarter. The net interest margin was down 11 basis points from first quarter 2004 to second quarter 2004, primarily due to substantial growth in earning assets during the quarter, including the mortgage warehouse and renewed growth in commercial and commercial real estate loans.

Individual components of net interest income and the net interest margin are presented in the rate/yield table on pages 8 and 9.

Average earning assets increased $38.2 billion in second quarter 2004 from the same period in 2003 due to an increase in average loans and debt securities available for sale, primarily offset by a decline in average mortgages held for sale. Loans averaged $266.2 billion in second quarter 2004, compared with $204.8 billion in second quarter 2003. Average mortgages held for sale decreased to $36.8 billion in second quarter 2004 from $65.5 billion in second quarter 2003 due to a decline in residential mortgage refinance activity. Debt securities available for sale averaged $32.1 billion in second quarter 2004 and $24.2 billion in second quarter 2003.

Average core deposits are an important contributor to growth in net interest income and the net interest margin. This low-cost source of funding rose 9% from a year ago. Average core deposits were $224.9 billion and $205.4 billion and funded 54.8% of our average total assets in second quarter 2004 and 2003, respectively. Average mortgage escrow deposits were $16.8 billion for second quarter 2004, down $4.0 billion from a year ago. Excluding mortgage escrow deposits, total average core deposits for second quarter 2004 grew $23.5 billion, or 13%, from a year ago. While average savings certificates of deposit declined to $18.7 billion in second quarter 2004

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