WELLS FARGO & CO/MN - 10-Q Quarterly Report

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004

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

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)

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.

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

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



													% Change
	Quarter ended									Mar. 31, 2004 from
	Mar. 31		,	Dec. 31		,	Mar. 31		,	Dec. 31		,	Mar. 31		,
(in millions, except per share amounts)	2004			2003			2003			2003			2003

For the Quarter
Net income	$	1,767		$	1,624		$	1,492			9	%		18	%
Diluted earnings per common share		1.03			.95			.88			8			17
Profitability ratios (annualized)
Net income to average total assets (ROA)		1.84	%		1.67	%		1.70	%		10			8
Net income applicable to common stock to average common stockholders’ equity (ROE)		20.31			19.20			19.80			6			3
Efficiency ratio (1)		56.4			60.5			59.2			(7	)		(5	)
Total revenue	$	7,147		$	7,445		$	6,682			(4	)		7
Dividends declared per common share		.45			.45			.30			—			50
Average common shares outstanding		1,699.3			1,690.2			1,681.5			1			1
Diluted average common shares outstanding		1,721.2			1,712.6			1,694.1			1			2
Average loans	$	256,448		$	235,986		$	195,057			9			31
Average assets		386,614			384,744			355,108			—			9
Average core deposits (2)		213,146			210,026			196,802			1			8
Net interest margin		4.94	%		4.97	%		5.27	%		(1	)		(6	)
At Quarter End
Securities available for sale	$	32,857		$	32,953		$	26,168			—			26
Loans		264,216			253,073			201,822			4			31
Allowance for loan losses		3,891			3,891			3,840			—			1
Goodwill		10,403			10,371			9,799			—			6
Assets		397,354			387,798			369,607			2			8
Core deposits		220,105			211,271			203,185			4			8
Common stockholders’ equity		35,474			34,484			30,684			3			16
Stockholders’ equity		35,442			34,469			30,732			3			15
Tier 1 capital (3)		26,570			25,704			21,951			3			21
Total capital (3)		38,170			37,267			32,577			2			17
Capital ratios
Common stockholders’ equity to assets		8.93	%		8.89	%		8.30	%		—			8
Stockholders’ equity to assets		8.92			8.89			8.31			—			7
Risk-based capital (3)
Tier 1 capital		8.48			8.42			7.37			1			15
Total capital		12.18			12.21			10.94			—			11
Tier 1 leverage (3)		7.13			6.93			6.42			3			11
Book value per common share	$	20.90		$	20.31		$	18.32			3			14
Team members (active, full-time equivalent)		139,900			140,000			131,600			—			6
Common Stock Price
High	$	58.98		$	59.18		$	49.13			—			20
Low		55.97			51.68			43.27			8			29
Period end		56.67			58.89			44.99			(4	)		26

This Report on Form 10-Q for the quarter ended March 31, 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.

Wells Fargo & Company is a $397 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 fifth in assets and third in market value of our common stock among U.S. bank holding companies at March 31, 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 first quarter 2004, we achieved record diluted earnings per share of $1.03, up 17 % from a year ago, and record net income of $1.77 billion, up 18% from a year ago. First quarter 2004 revenue grew 7% from a year ago, while expenses increased 2% — better than our long-term goal of growing revenue twice as fast as expenses. We had 15% revenue growth compared with a year ago in businesses other than Wells Fargo Home Mortgage (Home Mortgage). Revenue growth was broad-based, including double-digit growth in consumer lending, consumer finance, deposit services, asset-based lending, trade finance, small business lending, private client services and capital markets-related activities.

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 each of our current customers has an average of over four of our products. 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 31% and average core deposits up 8%.

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. In first quarter 2004, nonperforming loans and net charge-offs as a percentage of loans outstanding declined from the prior year. Asset quality improved in first quarter 2004 compared with a year ago, with net charge-offs down 3% and nonperforming assets (including nonaccrual loans and foreclosed assets) down 9%. At March 31, 2004 nonperforming assets were less than 1% of total assets. Loan losses declined to $404 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 continued to increase due to customer satisfaction, strong financial results and the prudent way we attempt to manage our business risks.

Net income for the first quarter of 2004 was $1.77 billion, up 18%, compared with $1.49 billion for first quarter 2003. Diluted earnings per common share for first quarter 2004 were $1.03, up 17%, compared with $.88 for first quarter 2003. Return on average assets (ROA) increased to 1.84% and return on average common equity (ROE) increased to 20.31% for first quarter 2004, our best returns since the November 1998 Norwest-Wells Fargo merger.

Net interest income on a taxable-equivalent basis increased 5% from $4.07 billion for first quarter 2004, compared with $3.87 billion for first quarter 2003, based on 12% growth in earning assets, offset in part by a modest decline in the net interest margin. The net interest margin was 4.94% for first quarter 2004, compared with 5.27% for first quarter 2003.

Noninterest income increased 9% to $3.10 billion for first quarter 2004, compared with $2.83 billion for first quarter 2003. Excluding mortgage banking income, noninterest income increased 22%. The growth in our non-mortgage banking activities reflected improved business conditions and our broad-based growth, including particular strength in deposit service fees, insurance income, trust and investment fees, credit card fees and other fees. During the quarter, we also realized $95 million in equity gains.

Revenue, the sum of net interest income and noninterest income, increased 7% to $7.15 billion in first quarter 2004 from $6.68 billion in first quarter 2003. Due to the increase in mortgage interest rates late in 2003, Home Mortgage revenue declined from $1.2 billion in first quarter 2003 to $.8 billion in first quarter 2004. Apart from Home Mortgage, revenue growth accelerated to 15%.

Noninterest expense was $4.03 billion for first quarter 2004, up $72 million, or 2%, from first quarter 2003. Home Mortgage expenses declined approximately $115 million from first quarter 2003 reflecting lower production and staffing costs. Our operating efficiency improved to 56.4% in first quarter 2004 from 59.2% a year ago.

During first quarter 2004, net charge-offs were $404 million, or .63% of average total loans (annualized), compared with $415 million, or .86%, during first quarter 2003. The provision for loan losses was $404 million in first quarter 2004, compared with $411 million in first quarter 2003. The allowance for loan losses was $3.89 billion, or 1.47% of total loans, at March 31, 2004, compared with $3.89 billion, or 1.54%, at December 31, 2003 and $3.84 billion, or 1.90%, at March 31, 2003.

At March 31, 2004, total nonaccrual loans were $1.39 billion, or .52% of total loans, compared with $1.46 billion, or .58%, at December 31, 2003 and $1.56 billion, or .77%, at March 31, 2003. Foreclosed assets were $222 million at March 31, 2004, compared with $198 million at December 31, 2003 and $193 million at March 31, 2003.

The ratio of common stockholders’ equity to total assets was 8.93% at March 31, 2004, compared with 8.89% at December 31, 2003 and 8.30% at March 31, 2003. Our total risk-based capital (RBC) ratio at March 31, 2004 was 12.18% and our Tier 1 RBC ratio was 8.48%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at March 31, 2003 were 10.94% and 7.37%, respectively. Our Tier 1 leverage ratios were 7.13% and 6.42% at March 31, 2004 and March 31, 2003, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.

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, 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 that 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 chosen to defer accounting for the Act until authoritative guidance is issued; therefore, the net periodic postretirement benefit cost in our first 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 proposed through FASB Staff Position 106-b, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Based on this proposed guidance, we estimate that accounting for the impact of the Act will not have a material effect on our financial statements. The proposed guidance is expected to be issued in the second quarter of 2004, and would be effective for us in the third quarter of 2004.

On March 9, 2004, Securities and Exchange Commission (SEC) Staff Accounting Bulletin 105 (SAB 105), Application of Accounting Principles to Loan Commitments, was issued. SAB 105 summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The adoption of SAB 105 did not have a material effect on our financial results.

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. 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).

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, 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 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 $4.07 billion in first quarter 2004 from $3.87 billion in first quarter 2003, an increase of 5%. The increase was primarily due to strong growth in loans, increases in core deposits and significantly lower wholesale funding rates. These factors were partially offset by reduced loan yields as floating-rate loans repriced and fixed-rate loans matured or were prepaid and replaced with new loans at lower rates. In addition, a decline in investment portfolio yield occurred as higher yielding mortgage-backed securities were sold, prepaid or matured.

The net interest margin decreased to 4.94% in first quarter 2004 from 5.27% in first quarter 2003. The decrease was primarily due to lower average loan yields as new loans were added to the portfolio at yields below existing loans due to a lower interest rate environment. The net interest margin was essentially unchanged (down 3 basis points) from fourth quarter 2003 to first quarter 2004, with the benefit of the strategic actions taken in the second half of last year offsetting the impact of continued low interest rates on the margin.

Individual components of net interest income and the net interest margin are presented in the rate/yield table on page 6.

Average earning assets increased $35.3 billion 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 $256.4 billion in first quarter 2004, compared with $195.1 billion in first quarter 2003. Average mortgages held for sale decreased to $25.0 billion from $58.4 billion due to a decline in residential mortgage refinance activity. Debt securities available for sale averaged $31.5 billion during first quarter 2004 and $26.1 billion in first 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 8% from a year ago. Average core deposits were $213.1 billion and $196.8 billion and funded 55.1% and 55.4% of our average total assets in first quarter 2004 and 2003, respectively. Average mortgage escrow deposits were



	Quarter ended March 31																	,
	2004									2003
							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	$	2,671			.95	%	$	6		$	3,101			1.32	%	$	10
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies		1,224			4.16			12			1,294			5.31			16
Securities of U.S. states and political subdivisions		3,338			7.92			62			2,040			8.76			42
Mortgage-backed securities:
Federal agencies		20,635			6.01			298			17,709			7.82			321
Private collateralized mortgage obligations		2,713			5.29			35			2,025			7.27			35

Total mortgage-backed securities		23,348			5.93			333			19,734			7.76			356
Other debt securities (4)		3,543			7.60			60			3,013			7.56			56

Total debt securities available for sale (4)		31,453			6.24			467			26,081			7.69			470
Mortgages held for sale (3)		25,023			5.34			334			58,422			5.57			814
Loans held for sale (3)		7,911			3.19			63			7,002			3.88			67
Loans:
Commercial and commercial real estate:
Commercial		47,305			5.87			690			47,007			6.26			727
Other real estate mortgage		27,801			5.19			359			25,385			5.68			357
Real estate construction		8,264			4.94			101			7,908			5.27			103
Lease financing		5,053			6.51			82			4,234			6.15			64

Total commercial and commercial real estate		88,423			5.60			1,232			84,534			5.99			1,251
Consumer:
Real estate 1-4 family first mortgage		86,375			5.34			1,151			45,193			5.96			671
Real estate 1-4 family junior lien mortgage		38,328			5.10			486			28,596			6.19			436
Credit card		8,338			11.92			249			7,400			12.44			230
Other revolving credit and installment		32,477			9.03			730			27,383			9.69			656

Total consumer		165,518			6.34			2,616			108,572			7.40			1,993
Foreign		2,507			17.71			111			1,951			18.60			91

Total loans (5)		256,448			6.20			3,959			195,057			6.90			3,335
Other		8,538			2.50			53			7,115			2.92			52

Total earning assets	$	332,044			5.92			4,882		$	296,778			6.48			4,748

FUNDING SOURCES
Deposits:
Interest-bearing checking	$	2,962			.32			2		$	2,406			.36			2
Market rate and other savings		117,373			.61			179			100,816			.75			187
Savings certificates		19,495			2.25			109			22,004			2.76			150
Other time deposits		22,719			1.08			61			20,531			1.36			69
Deposits in foreign offices		7,171			1.04			19			6,337			1.22			19

Total interest-bearing deposits		169,720			.88			370			152,094			1.14			427
Short-term borrowings		25,630			.99			63			31,473			1.22			95
Long-term debt		64,416			2.33			375			46,662			2.84			330
Guaranteed preferred beneficial interests in Company’s subordinated debentures		—			—			—			2,885			3.83			27

Total interest-bearing liabilities		259,766			1.25			808			233,114			1.52			879
Portion of noninterest-bearing funding sources		72,278			—			—			63,664			—			—

Total funding sources	$	332,044			.98			808		$	296,778			1.21			879

Net interest margin and net interest income on a taxable-equivalent basis (6)					4.94	%	$	4,074						5.27	%	$	3,869

NONINTEREST-EARNING ASSETS
Cash and due from banks	$	13,152								$	13,691
Goodwill		10,394									9,789
Other		31,024									34,850

Total noninterest-earning assets	$	54,570								$	58,330

NONINTEREST-BEARING FUNDING SOURCES
Deposits	$	73,316								$	71,576
Other liabilities		18,572									19,810
Preferred stockholders’ equity		(20	)								60
Common stockholders’ equity		34,980									30,548
Noninterest-bearing funding sources used to fund earning assets		(72,278	)								(63,664	)

Net noninterest-bearing funding sources	$	54,570								$	58,330

TOTAL ASSETS	$	386,614								$	355,108

$12.5 billion for first quarter 2004, down $4.9 billion from a year ago. Excluding mortgage escrow deposits, total average core deposits grew $21 billion, or 12%, from a year ago. While savings certificates of deposit declined on average to $19.5 billion in first quarter 2004 from $22.0 billion in first quarter 2003, noninterest-bearing checking accounts and other core deposit categories increased on average from $174.8 billion in first quarter 2003 to $193.7 billion in first quarter 2004 reflecting growth in both commercial and consumer accounts. Total average interest-bearing deposits increased to $169.7 billion in first quarter 2004 from $152.1 billion in first quarter 2003.


Delaware		41-0449260
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


PART I	Financial Information
	Consolidated Statement of Income	27
	Consolidated Balance Sheet	28
	Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income	29
	Consolidated Statement of Cash Flows	30
	Notes to Financial Statements	31
	Summary Financial Data	1
	Overview	2
	Critical Accounting Policies	4
	Earnings Performance	5
	Net Interest Income	5
	Noninterest Income	7
	Noninterest Expense	9
	Operating Segment Results	9
	Balance Sheet Analysis	10
	Securities Available for Sale (table on page 33)	10
	Loan Portfolio (table on page 34)	11
	Deposits	11
	Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	12
	Asset/Liability and Market Risk Management	14
	Capital Management	19
	Factors that May Affect Future Results	20

Item 4.	Controls and Procedures	26

PART II	Other Information
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	57

Item 6.	Exhibits and Reports on Form 8-K	57

Signature		60

Exhibit 3(o)

Exhibit 31(a)

Exhibit 31(b)

Exhibit 32(a)

Exhibit 32(b)

Exhibit 99(a)

Exhibit 99(b)

EXHIBIT 3(O)
EXHIBIT 31(A)
EXHIBIT 31(B)
EXHIBIT 32(A)
EXHIBIT 32(B)
EXHIBIT 99(A)
EXHIBIT 99(B)

Table of Contents

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		Shares Outstanding April 30, 2004
Common stock, $1-2/3 par value		1,687,551,934

(1)		The efficiency ratio is defined as noninterest expense divided by the total revenue (net interest income and noninterest income).
(2)		Core deposits consist of noninterest-bearing deposits, interest-bearing checking, savings certificates and market rate and other savings.
(3)		See Note 17 (Regulatory and Agency Capital Requirements) to Financial Statements for additional information.

(1)		Our average prime rate was 4.00% and 4.25% for the quarters ended March 31, 2004 and 2003, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.12% and 1.33% for the same quarters, 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 primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for both quarters presented.



	Quarter
	ended March 31				,	%
(in millions)	2004		2003			Change

Service charges on deposit accounts	$	615	$	553			11	%
T