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Wells Fargo Corporation 2009

Donald L. Crooks Wagner College Robert S. Goodman Wagner College John Burbridge Elon University1 WFC
The year of 2009 witnessed continued deterioration in the housing and credit markets, high unemployment rates, and tight credit. Many banks are stuggling and many have recently failed, including Colonial National and Guaranty Financial Group. Like many banks today, Guaranty had more than $3 billion of securities backed by adjustable-rate mortgages. Delinquency rates on their holdings soared as high as 40 percent before federal officials seized the bank in August 2009. Many homeowners today cannot make mortgage payments. The value of houses has dropped below the amount borrowed, causing great problems for all. This is the environment that Wells Fargo Bank and its competitors in the financial services industries face as they look to the future.

Wells Fargo is a storied name in American Old West folklore going back to the days of the stagecoach. Wells Fargo is the result of over 200 mergers including, most recently, Wachovia. The vast majority of these acquisitions, except for Wachovia, involved financial institutions in the far western part of the United States. An important acquisition came in 1998 when San Franciscobased Wells Fargo acquired Norwest Corporation in a stock swap that valued Wells Fargo at $34 billion. The result was a San Franciscobased bank with branches in 21 states in the West and Midwest, $191 billion in combined assets, and almost 6,000 service outlets worldwide. Because Norwest was the countrys largest mortgage underwriter, the new bank became a major force in that market. It also had a presence in Canada, the Caribbean, Latin America, and other countries. By the end of 2008, Wells Fargo had built a very creditable reputation and was widely recognized as an industry leader. The following statistics based on industry sources and government statistics clearly show its size and strength: 41st in revenue among all U.S. companies as ranked by Fortune 17th most profitable company in the United States 33rd largest employer in the United States 18th most respected company in the world as ranked by Barrons Aaa credit-rated by Moodys




Wells Fargo Organizational Chart

President & CEO John Stumpf

Chairman Dick Kovacevich

CFO Howard Atkins

Office of Transition Pat Callahan

Wealth Management, Brokerage & Retirement Services David Carroll

Wholesale Banking Dave Hoyt

Chief Risk and Credit Officer Mike Loughlin

Chief Auditor Kevin McCabe

Technology and Operations Avid Modjtabai

Home and Consumer Finance Mark Oman

Card Services and Consumer Lending Kevin Rhein

General Counsel Jim Strother

Community Banking Carrie Tolstedt Source: www.wellsfargo.com.

The only Standard & Poors AAA bank in the United States. Among the top 50 companies as ranked by Diversity, Inc. Retail Banker of the Year according to U.S. Banker Number-one commercial real estate lender [number of transactions] 18th among the worlds most valuable brands according to the Financial Times

Internal Issues
Vision and Ethics
Our product: SERVICE. Our Value-added: FINANCIAL ADVICE. Our competitive advantage: OUR PEOPLE.

Wells Fargo provides banking, insurance, investments, mortgage, and consumer finance services for more than 25 million customers through over 6,000 stores, the Internet, and other distribution channels across North America and elsewhere internationally. The companys statement says, Were headquartered in San Francisco, but we are decentralized so every local Wells Fargo store is a headquarters for satisfying all our customers financial needs and helping them succeed financially. Wells Fargo strives to be the number-one financial services provider in each of their markets. As can be seen below, it has made great strides in that direction in the United States: Number-one small business lender Number-one agricultural lender Number-two debit card issuer Number-two prime home-equity lender Number-three mutual fund provider among U.S. banks




Wells Fargo/Wachovia U.S. Locations

Wells Fargo retail banking stores3,296 Wachovia retail banking stores3,314 Total combined retail banking stores6,610 Source: Wells Fargo 4Q2008 financial results presentation.

Wells Fargos chairman and CEO, Richard M. Kovacevich, discusses the banks vision at length. He says, This is not a task. This is a journey. Every journey has a destination. To get to that destination, you need a vision. Ours is an ambitious one. Kovacevich further states, We are a big company. We will continue to grownot to become bigger but as a result of getting better. . . . Regardless of how big we are and how much territory we cover our team shares certain values that hold us together wherever we are and whatever we do. Wells Fargo puts considerable emphasis on its culture and image as seen by the following values: Known by Our Own Team Members. Well be known as a company that believes in people as a competitive advantage, a great place to work, an employer of choice, a company that really cares about people, knows the value that a diverse work force can bring, that encourages innovation: new and better ways of serving customers. Known by Our Customers. We want to be known by our customers as a financial partner, for outstanding service and sound financial advice, satisfying all of their financial needs and helping them to succeed financially. Our customers, external and internal, are our friends. Theyre the center of everything we do. Known by Our Communities. Well be regarded as the premier financial services company in each of our markets. Well promote the economic advancement of everyone in our communities including those not yet able to be economically selfsufficient, who have yet to share fully in the prosperity of our extraordinary country. Well be known as an active community leader in economic development, in services that promote economic self-sufficiency, education, social services and the arts.



Known by Our Shareholders. Well be known as a great investment. Well have financial results, not only among the very best in the financial services industry, but among the entire Fortune 500. Today, were the only bank in the United States with a Moodys credit rating of Aaa [the highest possible rating]. Wells Fargo also believes that competing effectively and ethically are both at the forefront of its long-term objectives. Wells Fargo expects all of its team members (employees) to adhere to the highest possible standard of ethics and business conduct with customers, team members, stockholders, and the communities that it serves while complying with all applicable laws, rules, and regulations that govern its business. Its aim is to promote an atmosphere in which ethical behavior is well recognized as a priority and practiced throughout the organization. The following statement by Richard Kovacevich, the chairman and CEO, summarizes this emphasis: Integrity is not a commodity. Its the most rare and precious of personal attributes. It is the core of a personsand a companysreputation.

Recent Performance
Wells Fargo has been a leading innovator in the use of the Internet and is in the forefront of using e-commerce in the financial industry. Wells Fargo has been fortunate to sidestep most of the subprime market mess and the accompanying derivative credit meltdown. Senior management has shown keen acumen in not pursuing the easy path and has moved forward to capture more and more of the mortgage and banking business in its geographic area. Wells Fargo has a vision (noted earlier), and its strategies complement that vision. At the end of 2008, Wells Fargo was in an enviable position as the largest financial institution headquartered in the western United States. It has an unbroken record of paying increasing dividends since 1995, when it paid $0.0525 per share. In 2008, the dividend had increased to $0.34 per share. A strong balance sheet and the ability to steer through the pitfalls that plagued many of its larger competitors have allowed Wells Fargo a stronger force in the banking industry in 2009. This is an important moment in its history as it considers its future. The following information provides additional information concerning the present:

The Wachovia Acquisition

In the fall of 2008, Wells Fargo considered acquiring Wachovia Bank. Wachovia, headquartered in Charlotte, North Carolina, had been a rising East Coast bank growing by leaps and bounds over the previous decade. Since Wachovias merger with First Union Bank a few years before, Wachovia seemed to be very well positioned to take the next step in order to compete with the likes of Bank of America, Citigroup, Merrill Lynch, and even Morgan Stanley. However, all was not well with Wachovia, which had its own subprime mortgage problems. It was also overcommitted in credit default swaps, the same issue that brought down Bear Stearns, Merrill Lynch, and Lehman Brothers. Wells Fargo agreed to acquire all of Wachovias almost 2.2 billion shares of stock for $7 per share. It also announced it would issue $20 billion in new shares to pay for the transaction. Wells Fargo was purchasing an extensive banking system, especially strong in the East but saddled with a large portfolio of subprime mortgages. So although there would be continued downward pressure on housing prices, the value of Wachovia could drop. Wells Fargo management could only make an educated guess of potential loss. Wells Fargo and Wachovia saw this outwardly as a tremendous marriage of convenience presenting opportunities for one and survival for the other. Robert Steele, CEO of Wachovia, stated that the deal would enable Wachovia to remain intact and preserve the value of the integrated company without government support. Wells Fargo CEO Richard Kovacevich was quick to add that the agreement provides superior value compared to the previous [Citigroup] offer to acquire only the banking operations of the company and because Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the worlds




Wells Fargos Income Statements (all numbers in thousands)

31-Dec-08 31-Dec-07 31-Dec-06


Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income from Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect of Accounting Changes Other Items Net Income Preferred Stock and Other Adjustments Net Income Applicable To Common Shares
Source: www.wellsfargo.com.

$52,389,000 4,521,000 47,868,000 22,661,000 16,716,000 8,491,000 8,491,000 5,234,000 3,257,000 602,000 2,655,000 2,655,000 (286,000) $ 2,369,000

$53,593,000 $47,998,000 8,152,000 7,174,000 45,441,000 40,824,000 22,824,000 4,939,000 17,678,000 17,678,000 6,051,000 11,627,000 3,570,000 8,057,000 8,057,000 20,742,000 2,223,000 17,859,000 17,859,000 5,114,000 12,745,000 4,263,000 8,482,000 8,482,000

$ 8,057,000 $ 8,482,000


Wells Fargos Balance Sheets (all numbers in thousands)

31-Dec-08 31-Dec-07 31-Dec-06


Assets Current Assets Cash and Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long Term Asset Charges Total Assets

23,763,000 49,433,000 28,854,000 1,110,195,000 13,520,000 22,627,000 15,515,000 45,732,000 $1,309,639,000

$ 22,484,000 2,754,000 13,890,000 502,358,000 5,771,000 13,106,000 435,000 14,644,000 $575,442,000

$ 20,635,000 6,078,000 10,195,000 415,326,000 8,212,000 11,275,000 383,000 9,892,000 $481,996,000





Wells Fargos Balance Sheets (all numbers in thousands)continued

31-Dec-08 31-Dec-07 31-Dec-06


Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities Stockholders Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholders Equity Total StockholdersEquity Total Liabilities and SE
Source: www.wellsfargo.com.

53,921,000 108,074,000 781,402,000 267,158,000 $1,210,555,000

30,706,000 53,255,000 344,460,000 99,393,000 $527,814,000

25,903,000 12,829,000 310,243,000 87,145,000 $436,120,000

31,332,000 450,000 384,000 7,273,000 5,788,000 5,788,000 36,543,000 38,970,000 35,277,000 (4,666,000) (6,035,000) (3,203,000) 36,026,000 8,212,000 7,739,000 (7,424,000) 243,000 (109,000) 99,084,000 47,628,000 45,876,000 $1,309,639,000 $575,442,000 $481,996,000


Wells FargoBusiness Segment Results

(Income/Expense in $ millions, average balances in $ billions) 2009 Q1 FY Q4 2008 Q3 Q2 Q1

COMMUNITY BANKING Net interest income Provision for credit losses Noninterest income Noninterest expense Income (loss) before income tax exp. (benefit) Income tax expense (benefit) Net income (loss) b/ non-controlling interests Less net income from non-controlling interests Net income (loss)

8,497 4,004 5,456 7,158 2,791 890 1,901 62 1,839

20,542 13,622 12,424 16,507 2,837 659 2,178 32 2,146

5,296 6,789 2,096 4,320 (3,717) (1,606) (2,111) (11) (2,100)

5,293 2,202 3,209 3,982 2,318 764 1,554 14 1,540

5,235 2,766 3,637 4,300 1,806 604 1,202 18 1,184

4,718 1,865 3,482 3,905 2,430 897 1,533 11 1,522 continued




Wells FargoBusiness Segment Resultscontinued

(Income/Expense in $ millions, average balances in $ billions) 2009 Q1 FY Q4 2008 Q3 Q2 Q1

Average loans Average assets Average core deposits WHOLESALE BANKING Net interest income Provision for credit losses Noninterest income Noninterest expense Income before income tax expense Income tax expense Net income (loss) b/ non-controlling interests Less net income from non-controlling interests Net income Average loans Average assets Average core deposits WEALTH, BROKERAGE & RETIREMENT SERVICES Net interest income Provision for credit losses Noninterest income Noninterest expense Income before income tax expense Income tax expense Net income (loss) b/ non-controlling interests Less net income from non-controlling interests Net income Average loans Average assets Average core deposits OTHER Net interest income Provision for credit losses Noninterest income Noninterest expense Income before income tax expense Income tax expense (benefit) Net income (loss) b/ non-controlling interests

552.8 801.3 538.0

n/a n/a n/a

288.9 466.0 260.6

287.1 452.3 252.8

283.2 439.9 251.1

282.7 431.8 246.6

2,367 545 2,540 2,531 1,831 647 1,184 4 1,180 271.9 400.4 138.5

4,516 1,115 3,685 5,282 1,804 416 1,388 11 1,377 n/a n/a n/a

1,400 414 515 1,251 250 31 219 4 215 124.2 163.2 81

1,065 294 631 1,329 73 (30) 103 103 116.3 158.1 64.4

1,025 246 1,388 1,358 809 235 574 (2) 576 107.7 151.4 64.8

1,026 161 1,151 1,344 672 180 492 9 483 100.8 140.0 68.2

737 25 1,902 2,219 395 158 237 (22) 259 46.7 104.0 102.6

827 302 1,839 1,992 372 141 231 231 n/a n/a n/a

251 293 417 512 (137) (52) (85) (85) 16.5 20.0 25.6

223 3 458 498 180 68 112 112 15.9 19.1 23.5

199 4 481 497 179 68 111 111 14.8 17.8 22.5

154 2 483 485 150 57 93 93 13.7 16.7 21.0

(225) (16) (257) (90) (376) (143) (233)

(742) 940 (1,214) (1,183) (1,713) (614) (1,099)

(223) 948 (275) (273) (1,173) (409) (764)

(200) (4) (302) (308) (190) (72) (118)

(181) (4) (324) (310) (191) (73) (118)

(138) (313) (292) (159) (60) (99) continued




Wells FargoBusiness Segment Resultscontinued

(Income/Expense in $ millions, average balances in $ billions) 2009 Q1 FY Q4 2008 Q3 Q2 Q1

Less net income from non-controlling interests Net income (loss) Average loans Average assets Average core deposits
Source: www.wellsfargo.com.

(233) (15.8) (16.0) (25.2)

(1,099) n/a n/a n/a

(764) (15.7) (16.0) (22.2)

(118) (15.1) (15.3) (20.6)

(118) (14.2) (14.4) (20.0)

(99) (13.3) (13.5) (18.5)

great financial services companies. On the surface, the fourth and fifth largest banks in assets appear extremely similar. Both were oversized super-regionals that had never seemed to have national aspirations. Both emphasized consumer banking over lending to big institutional clients. Both were built on a platform of strong sales culture and attention to detail in operations. The resultant combined company had total deposits of $787 billion and assets of $1.42 trillion, more than doubling Wells Fargos totals on both counts. The bank will operate more than 10,000 locations and currently employs 280,000 people, although there will be anticipated downsizing because of duplication of labor and functions. On December 31, 2008, the deal was completed, creating according to Wells Fargos press release The Most Extensive Financial Services Company, Coast-to-Coast in Community Banking. The new entity was traded on the New York Stock Exchange under the symbol WFC; the Wachovia symbol WB was retired.

The Future
The first half of 2009 was not kind to the banking industry or Wells Fargo. Moodys Investor Service reduced Wells Fargos debt rating two levels during January, citing a significantly weakened capital position and the likelihood that Wachovia assets would hurt earnings. The shares lost half their value in January, falling to the lowest level since 1997. On March 6, 2009, Wells Fargo cut its dividend 85 percent to a nickel per share in a move to attempt to solidify its balance sheet. As we enter the second half of 2009, the question facing Wells Fargo management is how to move this large national bank with an international presence forward. The banking industry has undergone an amazing transition in the past six months. Investment EXHIBIT 6 Selected Banks Key Financial Data 20062008 ($ billions)
Wells Fargo 2008 2007 2006 2008 Citi 2007 2006 2008 Bank of America 2007 2006

Revenue Net Income P/E (%) RoA (%) RoE (%)

42.2 2.8 14.6 0.44 4.79

39.4 8 12.7 1.55 17.12

35.7 8.4 14.3 1.73 19.52

52.8 (27.7) (1.28) (28.8)

81.7 3.6 40.8 0.17 2.9

81.6 21.5 13.1 1.28 18.8

72.8 3.6 10.7 0.22 1.80

68.1 14.9 12.5 0.94 11.08

73.8 21.1 11.6 1.44 16.27

Source: Companies 20072008 Annual Reports, except for P/E ratio where the source is Morningstar.




Wells Fargo versus Rivals

Weels Fargo Bank of America Citigroup US Bancorp Industry Average

Market Cap Employees Qtrly Rev Growth Revenue Oper Margins Net Income EPS

130.52B 269,900 106.20% 42.84B 21.64% 3.58B 0.912

151.06B 283,000 33.10% 62.09B 15.44% 3.47B 0.597

25.89B 279,000 68.00% 34.69B -57.85% -23.79B -3.651

42.60B 57,904 -14.40% 10.15B 26.57% 1.46B 0.820

19.63B 42.31K 11.70% 7.98B 23.69% n/a 0.91

Source: Company Form 10k Reports and www.france.yahoo.com.

banks have all but disappeared. The large national banks have become bigger while community banks still exist to satisfy local communities. All of the larger banks worldwide are attempting to grow globally. The lack of regulation today has blurred the products and services banks offer. Given the lingering economic recession and changes in the banking industry, how should Wells Fargo Bank proceed from a strategic and operational standpoint during the next few years? This is the question facing the Wells Fargo board and its chairman and CEO. In July 2009, Wells Fargo announced that the firm is significantly expanding its securities business that it largely inherited from Wachovia. Prior to the December 31, 2008, Wachovia acquisition, Wells Fargo basically did no securities business. The new business at Wells Fargo is to be called Wells Fargo Secuities and will begin offering merger advice, stock and bond underwriting, loan syndications, and fixed-income trading. Wells Fargo today has approximately 6,700 bank branches in some 40 states. It also has more than 4,000 mortgage and consumer finance offices nationwide and is one of the largest residential mortgage lenders in the United States. How should Wells Fargo position itself in the future? Should it strengthen its retail presence, grow internationally, or move into the void created by the disappearance of investment banks? This case provides the opportunity to analyze the future of the financial services industry and develop a plan to position Wells Fargo to better compete in this industry over the next several years.

1. The authors would like to thank Alex Profis, Dr. Donald Crookss graduate assistant at Wagner College, who helped tremendously with research for this case study.