Wells Fargo Corporation —2009Donald L. CrooksWagner College

Robert S. GoodmanWagner College

John BurbridgeElon University1

WFC

www.wellsfargo.comThe year of 2009 witnessed continued deterioration in the housing and credit markets, highunemployment rates, and tight credit. Many banks are stuggling and many have recentlyfailed, 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 officialsseized the bank in August 2009. Many homeowners today cannot make mortgage payments.The value of houses has dropped below the amount borrowed, causing great problemsfor all.

This is the environment that Wells Fargo Bank and its competitors in the financialservices industries face as they look to the future.

HistoryWells Fargo is a storied name in American Old West folklore going back to the days ofthe stagecoach. Wells Fargo is the result of over 200 mergers including, most recently,Wachovia. The vast majority of these acquisitions, except for Wachovia, involvedfinancial institutions in the far western part of the United States. An important acquisi-tion came in 1998 when San Francisco–based Wells Fargo acquired NorwestCorporation in a stock swap that valued Wells Fargo at $34 billion. The result was a SanFrancisco–based bank with branches in 21 states in the West and Midwest, $191 billionin combined assets, and almost 6,000 service outlets worldwide. Because Norwest wasthe country’s largest mortgage underwriter, the new bank became a major force in thatmarket. It also had a presence in Canada, the Caribbean, Latin America, and othercountries.

By the end of 2008, Wells Fargo had built a very creditable reputation and waswidely recognized as an industry leader. The following statistics based on industry sourcesand 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 Barron’s• “Aaa” credit-rated by Moody’s

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112 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE

• The only Standard & Poor’s “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 world’s most valuable brands according to the Financial Times

Internal Issues

Vision and Ethics

“Our product: SERVICE. Our Value-added: FINANCIAL ADVICE. Our competitiveadvantage: OUR PEOPLE.”

Wells Fargo provides banking, insurance, investments, mortgage, and consumer financeservices for more than 25 million customers through over 6,000 stores, the Internet, andother distribution channels across North America and elsewhere internationally. Thecompany’s statement says, “We’re headquartered in San Francisco, but we are decentral-ized 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 theirmarkets. 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

ChairmanDick Kovacevich

CFOHoward Atkins

Chief Risk and Credit OfficerMike Loughlin

Technology and OperationsAvid Modjtabai

Card Services andConsumer Lending

Kevin Rhein

Community BankingCarrie Tolstedt

Wealth Management, Brokerage& Retirement Services

David Carroll

Wholesale BankingDave Hoyt

Chief AuditorKevin McCabe

Home and Consumer FinanceMark Oman

General CounselJim Strother

Office of TransitionPat Callahan

President & CEOJohn Stumpf

EXHIBIT 1 Wells Fargo Organizational Chart

Source: www.wellsfargo.com.

CASE 11 • WELLS FARGO CORPORATION — 2009 113

Wells Fargo’s chairman and CEO, Richard M. Kovacevich, discusses the bank’svision at length. He says, “This is not a task. This is a journey. Every journey has a desti-nation. 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 grow—notto become bigger but as a result of getting better. . . . Regardless of how big we are andhow much territory we cover our team shares certain values that hold us together whereverwe are and whatever we do.”

Wells Fargo puts considerable emphasis on its culture and image as seen by thefollowing values:

• Known by Our Own Team Members. “We’ll be known as a company that believesin people as a competitive advantage, a great place to work, an employer ofchoice, a company that really cares about people, knows the value that a diversework force can bring, that encourages innovation: new and better ways of servingcustomers.”

• Known by Our Customers. “We want to be known by our customers as a financialpartner, for outstanding service and sound financial advice, satisfying all of theirfinancial needs and helping them to succeed financially. Our customers, externaland internal, are our friends. They’re the center of everything we do.”

• Known by Our Communities. “We’ll be regarded as the premier financial servicescompany in each of our markets. We’ll promote the economic advancement ofeveryone in our communities including those not yet able to be economically self-sufficient, who have yet to share fully in the prosperity of our extraordinary country.We’ll be known as an active community leader in economic development, in servicesthat promote economic self-sufficiency, education, social services and the arts.”

EXHIBIT 2 Wells Fargo/Wachovia U.S. Locations

Wells Fargo retail banking stores—3,296

Wachovia retail banking stores—3,314

Total combined retail banking stores—6,610

Source: Wells Fargo 4Q2008 financial results presentation.

114 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE

• Known by Our Shareholders. “We’ll be known as a great investment. We’ll havefinancial results, not only among the very best in the financial services industry, butamong the entire Fortune 500. Today, we’re the only bank in the United States with aMoody’s credit rating of “Aaa” [the highest possible rating].

Wells Fargo also believes that competing effectively and ethically are both at the forefrontof its long-term objectives. Wells Fargo expects all of its team members (employees) toadhere to the highest possible standard of ethics and business conduct with customers,team members, stockholders, and the communities that it serves while complying with allapplicable laws, rules, and regulations that govern its business. Its aim is to promote anatmosphere in which ethical behavior is well recognized as a priority and practicedthroughout the organization. The following statement by Richard Kovacevich, thechairman and CEO, summarizes this emphasis: “Integrity is not a commodity. It’s themost rare and precious of personal attributes. It is the core of a person’s—and acompany’s—reputation.”

Recent PerformanceWells Fargo has been a leading innovator in the use of the Internet and is in the forefrontof using e-commerce in the financial industry. Wells Fargo has been fortunate to sidestepmost of the subprime market mess and the accompanying derivative credit meltdown.Senior management has shown keen acumen in not pursuing the easy path and hasmoved forward to capture more and more of the mortgage and banking business in itsgeographic area. Wells Fargo has a vision (noted earlier), and its strategies complementthat vision.

At the end of 2008, Wells Fargo was in an enviable position as the largest financialinstitution headquartered in the western United States. It has an unbroken record of payingincreasing dividends since 1995, when it paid $0.0525 per share. In 2008, the dividend hadincreased to $0.34 per share. A strong balance sheet and the ability to steer through thepitfalls that plagued many of its larger competitors have allowed Wells Fargo a strongerforce in the banking industry in 2009. This is an important moment in its history as it con-siders its future. The following information provides additional information concerning thepresent:

The Wachovia AcquisitionIn the fall of 2008, Wells Fargo considered acquiring Wachovia Bank. Wachovia, head-quartered in Charlotte, North Carolina, had been a rising East Coast bank growing byleaps and bounds over the previous decade. Since Wachovia’s merger with First UnionBank a few years before, Wachovia seemed to be very well positioned to take the nextstep 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 ownsubprime mortgage problems. It was also overcommitted in credit default swaps, thesame issue that brought down Bear Stearns, Merrill Lynch, and Lehman Brothers.

Wells Fargo agreed to acquire all of Wachovia’s almost 2.2 billion shares of stockfor $7 per share. It also announced it would issue $20 billion in new shares to pay forthe transaction. Wells Fargo was purchasing an extensive banking system, especiallystrong in the East but saddled with a large portfolio of subprime mortgages. Soalthough there would be continued downward pressure on housing prices, the value ofWachovia could drop. Wells Fargo management could only make an educated guess ofpotential loss.

Wells Fargo and Wachovia saw this outwardly as a tremendous marriage of conve-nience presenting opportunities for one and survival for the other. Robert Steele, CEO ofWachovia, stated that the deal would enable Wachovia to remain intact and preserve thevalue of the integrated company without government support. Wells Fargo CEO RichardKovacevich was quick to add that “the agreement provides superior value compared to theprevious [Citigroup] offer to acquire only the banking operations of the company andbecause Wachovia shareholders will have a meaningful opportunity to participate in thegrowth and success of a combined Wachovia-Wells Fargo that will be one of the world’s

CASE 11 • WELLS FARGO CORPORATION — 2009 115

EXHIBIT 3 Wells Fargo’s Income Statements (all numbers in thousands)

PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06

Total Revenue $52,389,000 $53,593,000 $47,998,000Cost of Revenue 4,521,000 8,152,000 7,174,000Gross Profit 47,868,000 45,441,000 40,824,000

Operating ExpensesResearch Development — — —Selling General and Administrative 22,661,000 22,824,000 20,742,000Non Recurring — — —Others 16,716,000 4,939,000 2,223,000Total Operating Expenses — — —

Operating Income or Loss 8,491,000 17,678,000 17,859,000Income from Continuing OperationsTotal Other Income/Expenses Net — — —Earnings Before Interest and Taxes 8,491,000 17,678,000 17,859,000Interest Expense 5,234,000 6,051,000 5,114,000Income Before Tax 3,257,000 11,627,000 12,745,000Income Tax Expense 602,000 3,570,000 4,263,000Minority Interest — — —Net Income from Continuing Ops 2,655,000 8,057,000 8,482,000Non-recurring EventsDiscontinued Operations — — —Extraordinary Items — — —Effect of Accounting Changes — — —Other Items — — —

Net Income 2,655,000 8,057,000 8,482,000Preferred Stock and Other Adjustments (286,000) — —Net Income Applicable To Common Shares $ 2,369,000 $ 8,057,000 $ 8,482,000

Source: www.wellsfargo.com.

EXHIBIT 4 Wells Fargo’s Balance Sheets (all numbers in thousands)

PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06

AssetsCurrent Assets

Cash and Cash Equivalents $ 23,763,000 $ 22,484,000 $ 20,635,000Short Term Investments 49,433,000 2,754,000 6,078,000Net Receivables 28,854,000 13,890,000 10,195,000Inventory — — —Other Current Assets — — —

Total Current Assets — — —Long Term Investments 1,110,195,000 502,358,000 415,326,000Property Plant and Equipment 13,520,000 5,771,000 8,212,000Goodwill 22,627,000 13,106,000 11,275,000Intangible Assets 15,515,000 435,000 383,000Accumulated Amortization — — —Other Assets 45,732,000 14,644,000 9,892,000Deferred Long Term Asset Charges — — —Total Assets $1,309,639,000 $575,442,000 $481,996,000

continued

116 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE

EXHIBIT 4 Wells Fargo’s Balance Sheets (all numbers in thousands)—continued

PERIOD ENDING 31-Dec-08 31-Dec-07 31-Dec-06

LiabilitiesCurrent Liabilities

Accounts Payable 53,921,000 30,706,000 25,903,000Short/Current Long Term Debt 108,074,000 53,255,000 12,829,000Other Current Liabilities 781,402,000 344,460,000 310,243,000

Total Current Liabilities — — —Long Term Debt 267,158,000 99,393,000 87,145,000Other Liabilities — — —Deferred Long Term Liability Charges — — —Minority Interest — — —Negative Goodwill — — —Total Liabilities $1,210,555,000 $527,814,000 $436,120,000Stockholders’ EquityMisc Stocks Options Warrants — — —Redeemable Preferred Stock — — —Preferred Stock 31,332,000 450,000 384,000Common Stock 7,273,000 5,788,000 5,788,000Retained Earnings 36,543,000 38,970,000 35,277,000Treasury Stock (4,666,000) (6,035,000) (3,203,000)Capital Surplus 36,026,000 8,212,000 7,739,000Other Stockholders’ Equity (7,424,000) 243,000 (109,000)Total Stockholders’Equity 99,084,000 47,628,000 45,876,000Total Liabilities and SE $1,309,639,000 $575,442,000 $481,996,000

Source: www.wellsfargo.com.

continued

EXHIBIT 5 Wells Fargo—Business Segment Results

(Income/Expense in $ millions, average balances in $ billions)

2009 2008

Q1 FY Q4 Q3 Q2 Q1

COMMUNITY BANKINGNet interest income 8,497 20,542 5,296 5,293 5,235 4,718Provision for credit losses 4,004 13,622 6,789 2,202 2,766 1,865Noninterest income 5,456 12,424 2,096 3,209 3,637 3,482Noninterest expense 7,158 16,507 4,320 3,982 4,300 3,905Income (loss) before income tax exp. (benefit) 2,791 2,837 (3,717) 2,318 1,806 2,430Income tax expense (benefit) 890 659 (1,606) 764 604 897Net income (loss) b/ non-controlling interests 1,901 2,178 (2,111) 1,554 1,202 1,533Less net income from non-controlling interests 62 32 (11) 14 18 11Net income (loss) 1,839 2,146 (2,100) 1,540 1,184 1,522

CASE 11 • WELLS FARGO CORPORATION — 2009 117

EXHIBIT 5 Wells Fargo—Business Segment Results—continued

(Income/Expense in $ millions, average balances in $ billions)

2009 2008

Q1 FY Q4 Q3 Q2 Q1

Average loans 552.8 n/a 288.9 287.1 283.2 282.7Average assets 801.3 n/a 466.0 452.3 439.9 431.8Average core deposits 538.0 n/a 260.6 252.8 251.1 246.6

WHOLESALE BANKINGNet interest income 2,367 4,516 1,400 1,065 1,025 1,026Provision for credit losses 545 1,115 414 294 246 161Noninterest income 2,540 3,685 515 631 1,388 1,151Noninterest expense 2,531 5,282 1,251 1,329 1,358 1,344Income before income tax expense 1,831 1,804 250 73 809 672Income tax expense 647 416 31 (30) 235 180Net income (loss) b/ non-controlling interests 1,184 1,388 219 103 574 492Less net income from non-controlling interests 4 11 4 — (2) 9Net income 1,180 1,377 215 103 576 483Average loans 271.9 n/a 124.2 116.3 107.7 100.8Average assets 400.4 n/a 163.2 158.1 151.4 140.0Average core deposits 138.5 n/a 81 64.4 64.8 68.2

WEALTH, BROKERAGE & RETIREMENT SERVICESNet interest income 737 827 251 223 199 154Provision for credit losses 25 302 293 3 4 2Noninterest income 1,902 1,839 417 458 481 483Noninterest expense 2,219 1,992 512 498 497 485Income before income tax expense 395 372 (137) 180 179 150Income tax expense 158 141 (52) 68 68 57Net income (loss) b/ non-controlling interests 237 231 (85) 112 111 93Less net income from non-controlling interests (22) — — — — —Net income 259 231 (85) 112 111 93Average loans 46.7 n/a 16.5 15.9 14.8 13.7Average assets 104.0 n/a 20.0 19.1 17.8 16.7Average core deposits 102.6 n/a 25.6 23.5 22.5 21.0

OTHERNet interest income (225) (742) (223) (200) (181) (138)Provision for credit losses (16) 940 948 (4) (4) —Noninterest income (257) (1,214) (275) (302) (324) (313)Noninterest expense (90) (1,183) (273) (308) (310) (292)Income before income tax expense (376) (1,713) (1,173) (190) (191) (159)Income tax expense (benefit) (143) (614) (409) (72) (73) (60)

Net income (loss) b/ non-controlling interests (233) (1,099) (764) (118) (118) (99)

continued

118 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE

EXHIBIT 6 Selected Banks’ Key Financial Data 2006–2008 ($ billions)

Wells Fargo Citi Bank of America

2008 2007 2006 2008 2007 2006 2008 2007 2006

Revenue 42.2 39.4 35.7 52.8 81.7 81.6 72.8 68.1 73.8Net Income 2.8 8 8.4 (27.7) 3.6 21.5 3.6 14.9 21.1P/E (%) 14.6 12.7 14.3 — 40.8 13.1 10.7 12.5 11.6RoA (%) 0.44 1.55 1.73 (1.28) 0.17 1.28 0.22 0.94 1.44RoE (%) 4.79 17.12 19.52 (28.8) 2.9 18.8 1.80 11.08 16.27

Source: Companies’ 2007–2008 Annual Reports, except for P/E ratio where the source is Morningstar.

great financial services companies.” On the surface, the fourth and fifth largest banks inassets appear extremely similar. Both were oversized super-regional’s that had neverseemed to have national aspirations. Both emphasized consumer banking over lending tobig institutional clients. Both were built on a platform of strong sales culture and attentionto detail in operations.

The resultant combined company had total deposits of $787 billion and assets of$1.42 trillion, more than doubling Wells Fargo’s totals on both counts. The bank willoperate more than 10,000 locations and currently employs 280,000 people, althoughthere will be anticipated downsizing because of duplication of labor and functions.

On December 31, 2008, the deal was completed, creating according to Wells Fargo’spress release “The Most Extensive Financial Services Company, Coast-to-Coast inCommunity Banking.” The new entity was traded on the New York Stock Exchange underthe symbol WFC; the Wachovia symbol WB was retired.

The FutureThe first half of 2009 was not kind to the banking industry or Wells Fargo. Moody’sInvestor Service reduced Wells Fargo’s debt rating two levels during January, citing a“significantly weakened” capital position and the likelihood that Wachovia assets wouldhurt earnings. The shares lost half their value in January, falling to the lowest level since1997. On March 6, 2009, Wells Fargo cut its dividend 85 percent to a nickel per share ina move to attempt to solidify its balance sheet.

As we enter the second half of 2009, the question facing Wells Fargo managementis how to move this large national bank with an international presence forward. The bank-ing industry has undergone an amazing transition in the past six months. Investment

EXHIBIT 5 Wells Fargo—Business Segment Results—continued

(Income/Expense in $ millions, average balances in $ billions)

2009 2008

Q1 FY Q4 Q3 Q2 Q1

Less net income from non-controlling interests — — — — — —

Net income (loss) (233) (1,099) (764) (118) (118) (99)Average loans (15.8) n/a (15.7) (15.1) (14.2) (13.3)Average assets (16.0) n/a (16.0) (15.3) (14.4) (13.5)Average core deposits (25.2) n/a (22.2) (20.6) (20.0) (18.5)

Source: www.wellsfargo.com.

CASE 11 • WELLS FARGO CORPORATION — 2009 119

EXHIBIT 7 Wells Fargo versus Rivals

Weels Fargo Bank of America Citigroup US Bancorp Industry Average

Market Cap 130.52B 151.06B 25.89B 42.60B 19.63BEmployees 269,900 283,000 279,000 57,904 42.31KQtrly Rev Growth 106.20% 33.10% 68.00% -14.40% 11.70%Revenue 42.84B 62.09B 34.69B 10.15B 7.98BOper Margins 21.64% 15.44% -57.85% 26.57% 23.69%Net Income 3.58B 3.47B -23.79B 1.46B n/aEPS 0.912 0.597 -3.651 0.820 0.91

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

banks have all but disappeared. The large national banks have become bigger whilecommunity banks still exist to satisfy local communities. All of the larger banks world-wide are attempting to grow globally. The lack of regulation today has blurred the prod-ucts and services banks offer. Given the lingering economic recession and changes in thebanking industry, how should Wells Fargo Bank proceed from a strategic and operationalstandpoint during the next few years? This is the question facing the Wells Fargo boardand its chairman and CEO.

In July 2009, Wells Fargo announced that the firm is significantly expanding its secu-rities 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 atWells 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 alsohas more than 4,000 mortgage and consumer finance offices nationwide and is one of thelargest residential mortgage lenders in the United States.

How should Wells Fargo position itself in the future? Should it strengthen its retailpresence, grow internationally, or move into the void created by the disappearance ofinvestment banks? This case provides the opportunity to analyze the future of the financialservices industry and develop a plan to position Wells Fargo to better compete in thisindustry over the next several years.

Endnotes1. The authors would like to thank Alex Profis, Dr. Donald Crooks’s graduate assistant

at Wagner College, who helped tremendously with research for this case study.