e10vq
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003

OR

o 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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

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   þ   No   o

      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   þ   No   o

      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, 2003  
Common stock, $1-2/3 par value
  1,692,029,166  

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
SUMMARY FINANCIAL DATA
OVERVIEW
CRITICAL ACCOUNTING POLICIES
EARNINGS PERFORMANCE
NET INTEREST INCOME
NONINTEREST INCOME
NONINTEREST EXPENSE
INCOME TAXES
OPERATING SEGMENT RESULTS
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
LOAN PORTFOLIO
NONACCRUAL LOANS AND OTHER ASSETS
Loans 90 Days or More Past Due and Still Accruing
ALLOWANCE FOR LOAN LOSSES
OTHER ASSETS
DEPOSITS
REGULATORY AND AGENCY CAPITAL REQUIREMENTS
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Exhibit 10(a)
Exhibit 10(b)
Exhibit 10(c)
Exhibit 10(d)
Exhibit 10(e)
Exhibit 10(f)
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(a)
Exhibit 99(a)
Exhibit 99(b)


Table of Contents

FORM 10-Q
TABLE OF CONTENTS

                 
PART I     Financial Information      
Item 1.     Financial Statements   Page
       
Consolidated Statement of Income
    2  
       
Consolidated Balance Sheet
    3  
       
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income
    4  
       
Consolidated Statement of Cash Flows
    5  
       
Notes to Financial Statements
    6  
                 
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)        
       
Summary Financial Data
    31  
       
Overview
    32  
       
Critical Accounting Policies
    35  
       
Earnings Performance
    35  
       
Net Interest Income
    35  
       
Noninterest Income
    39  
       
Noninterest Expense
    41  
       
Income Taxes
    42  
       
Operating Segment Results
    42  
       
Balance Sheet Analysis
    43  
       
Securities Available for Sale
    43  
       
Loan Portfolio
    45  
       
Nonaccrual Loans and Other Assets
    46  
       
Loans 90 Days Past Due and Still Accruing
    47  
       
Allowance for Loan Losses
    48  
       
Other Assets
    49  
       
Deposits
    50  
       
Regulatory and Agency Capital Requirements
    51  
       
Off-Balance Sheet Arrangements and Contractual Obligations
    51  
       
Asset/Liability and Market Risk Management
    52  
       
Capital Management
    56  
       
Factors that May Affect Future Results
    57  
                 
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk     52  
                 
Item 4.
  Controls and Procedures        
       
Disclosure Controls and Procedures
    63  
       
Internal Control Over Financial Reporting
    63  
                 
PART II
  Other Information        
Item 6.
  Exhibits and Reports on Form 8-K     64  
                 
Signature     67  
   

1


Table of Contents

PART I — FINANCIAL INFORMATION

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME

                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions, except per share amounts)   2003     2002     2003     2002  
   
                                 
INTEREST INCOME
                               
Securities available for sale
  $ 470     $ 582     $ 1,358     $ 1,893  
Mortgages held for sale
    906       591       2,585       1,622  
Loans held for sale
    57       52       191       194  
Loans
    3,548       3,400       10,440       10,072  
Other interest income
    64       74       205       225  
 
                       
Total interest income
    5,045       4,699       14,779       14,006  
 
                       
                                 
INTEREST EXPENSE
                               
Deposits
    384       483       1,236       1,459  
Short-term borrowings
    72       124       254       429  
Long-term debt
    349       367       1,020       1,041  
Guaranteed preferred beneficial interests in Company’s subordinated debentures
    32       30       88       88  
 
                       
Total interest expense
    837       1,004       2,598       3,017  
 
                       
                                 
NET INTEREST INCOME
    4,208       3,695       12,181       10,989  
Provision for loan losses
    434       395       1,283       1,295  
 
                       
Net interest income after provision for loan losses
    3,774       3,300       10,898       9,694  
 
                       
                                 
NONINTEREST INCOME
                               
Service charges on deposit accounts
    607       560       1,747       1,612  
Trust and investment fees
    504       462       1,433       1,395  
Credit card fees
    251       242       752       666  
Other fees
    422       372       1,161       1,009  
Mortgage banking
    773       426       1,877       1,198  
Insurance
    252       234       807       766  
Net (losses) gains on debt securities available for sale
    (23 )     121       16       202  
Net gains (losses) from equity investments
    58       (152 )     (87 )     (230 )
Other
    114       80       543       406  
 
                       
Total noninterest income
    2,958       2,345       8,249       7,024  
 
                       
                                 
NONINTEREST EXPENSE
                               
Salaries
    1,185       1,110       3,481       3,292  
Incentive compensation
    621       446       1,571       1,165  
Employee benefits
    374       304       1,143       997  
Equipment
    298       232       871       697  
Net occupancy
    283       278       867       821  
Net losses on dispositions of premises and equipment
    4             10       26  
Other
    1,635       1,037       4,206       3,141  
 
                       
Total noninterest expense
    4,400       3,407       12,149       10,139  
 
                       
                                 
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
    2,332       2,238       6,998       6,579  
Income tax expense
    771       794       2,420       2,335  
 
                       
                                 
NET INCOME BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
    1,561       1,444       4,578       4,244  
Cumulative effect of change in accounting principle
                      (276 )
 
                       
                                 
NET INCOME
  $ 1,561     $ 1,444     $ 4,578     $ 3,968  
 
                       
                                 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 1,560     $ 1,443     $ 4,575     $ 3,965  
 
                       
                                 
EARNINGS PER COMMON SHARE BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
                               
Earnings per common share
  $ .93     $ .85     $ 2.73     $ 2.49  
 
                       
                                 
Diluted earnings per common share
  $ .92     $ .84     $ 2.70     $ 2.46  
 
                       
                                 
EARNINGS PER COMMON SHARE
                               
Earnings per common share
  $ .93     $ .85     $ 2.73     $ 2.33  
 
                       
                                 
Diluted earnings per common share
  $ .92     $ .84     $ 2.70     $ 2.30  
 
                       
                                 
DIVIDENDS DECLARED PER COMMON SHARE
  $ .45     $ .28     $ 1.05     $ .82  
 
                       
                                 
Average common shares outstanding
    1,677.2       1,700.7       1,678.0       1,704.7  
 
                       
                                 
Diluted average common shares outstanding
    1,693.9       1,717.8       1,692.6       1,722.6  
 
                       
   

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Table of Contents

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

                         
   
    September 30 ,   December 31 ,   September 30 ,
(in millions, except shares)   2003     2002     2002  
   
                         
ASSETS
                       
Cash and due from banks
  $ 15,423     $ 17,820     $ 15,813  
Federal funds sold and securities purchased under resale agreements
    2,692       3,174       4,047  
Securities available for sale
    30,260       27,947       32,974  
Mortgages held for sale
    55,328       51,154       42,339  
Loans held for sale
    7,310       6,665       5,522  
                         
Loans
    231,844       196,634       186,310  
Allowance for loan losses
    3,893       3,862       3,861  
 
                 
Net loans
    227,951       192,772       182,449  
 
                 
                         
Mortgage servicing rights, net
    5,765       4,489       4,415  
Premises and equipment, net
    3,517       3,688       3,664  
Goodwill
    9,849       9,753       9,744  
Other assets
    32,718       31,797       33,283  
 
                 
                         
Total assets
  $ 390,813     $ 349,259     $ 334,250  
 
                 
                         
LIABILITIES
                       
Noninterest-bearing deposits
  $ 77,175     $ 74,094     $ 69,382  
Interest-bearing deposits
    174,261       142,822       136,374  
 
                 
Total deposits
    251,436       216,916       205,756  
Short-term borrowings
    25,589       33,446       30,370  
Accrued expenses and other liabilities
    18,839       18,334       19,341  
Long-term debt
    58,992       47,320       45,824  
Guaranteed preferred beneficial interests in Company’s subordinated debentures
    3,585       2,885       2,885  
 
                 
                         
Total liabilities
    358,441       318,901       304,176  
 
                 
                         
STOCKHOLDERS’ EQUITY
                       
Preferred stock
    319       251       294  
Unearned ESOP shares
    (263 )     (190 )     (236 )
 
                 
Total preferred stock
    56       61       58  
Common stock — $1-2/3 par value, authorized 6,000,000,000 shares; issued 1,736,381,025 shares
    2,894       2,894       2,894  
Additional paid-in capital
    9,532       9,498       9,499  
Retained earnings
    22,103       19,394       18,441  
Cumulative other comprehensive income
    572       976       1,070  
Treasury stock – 59,314,051 shares, 50,474,518 shares and 37,900,563 shares
    (2,785 )     (2,465 )     (1,888 )
 
                 
                         
Total stockholders’ equity
    32,372       30,358       30,074  
 
                 
                         
Total liabilities and stockholders’ equity
  $ 390,813     $ 349,259     $ 334,250  
 
                 
   

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Table of Contents

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

                                                                         
   
                                                            Cumulative        
                    Unearned             Additional                     other     Total  
    Number of     Preferred     ESOP     Common     paid-in     Retained     Treasury     comprehensive     stockholders'  
(in millions, except shares)   shares     stock     shares     stock     capital     earnings     stock     income     equity  
   
                                                                         
BALANCE DECEMBER 31, 2001
          $ 218     $ (154 )   $ 2,894     $ 9,436     $ 16,005     $ (1,937 )   $ 752     $ 27,214  
 
                                                       
Comprehensive income:
                                                                       
Net income
                                            3,968                       3,968  
Other comprehensive income, net of tax:
                                                                       
Net unrealized gains on securities available for sale and other retained interests, net of reclassification of $72 million of net gains included in net income
                                                            514       514  
Net unrealized losses on derivatives and hedging activities, net of reclassification of $163 million of net losses on cash flow hedges included in net income
                                                            (196 )     (196 )
 
                                                                     
Total comprehensive income
                                                                    4,286  
Common stock issued
    12,884,012                               41       (130 )     570               481  
Common stock issued for acquisitions
    12,017,193                               4               531               535  
Common stock repurchased
    25,217,058                                               (1,206 )             (1,206 )
Preferred stock (238,000) issued to ESOP
            239       (256 )             17                                
Preferred stock released to ESOP
                    174               (11 )                             163  
Preferred stock (162,687) converted to common shares
    3,301,318       (163 )                     12               151                
Preferred stock dividends
                                            (3 )                     (3 )
Common stock dividends
                                            (1,399 )                     (1,399 )
Change in Rabbi trust assets and similar arrangements (classified as treasury stock)
                                                    3               3  
 
                                                       
Net change
            76       (82 )           63       2,436       49       318       2,860  
 
                                                       
                                                                         
BALANCE SEPTEMBER 30, 2002
          $ 294     $ (236 )   $ 2,894     $ 9,499     $ 18,441     $ (1,888 )   $ 1,070     $ 30,074  
 
                                                       
                                                                         
BALANCE DECEMBER 31, 2002
          $ 251     $ (190 )   $ 2,894     $ 9,498     $ 19,394     $ (2,465 )   $ 976     $ 30,358  
 
                                                       
Comprehensive income:
                                                                       
Net income
                                            4,578                       4,578  
Other comprehensive income net of tax:
                                                                       
Translation adjustments
                                                            20       20  
Net unrealized losses on securities available for sale and other retained interests net of reclassification of $22 million of net gains included in net income
                                                            (77 )     (77 )
Net unrealized losses on derivatives and hedging activities net of reclassification of $51 million of net losses on cash flow hedges included in net income
                                                            (347 )     (347 )
 
                                                                     
Total comprehensive income
                                                                    4,174  
Common stock issued
    14,383,099                               22       (102 )     667               587  
Common stock issued for acquisitions
    129,475                                               6               6  
Common stock repurchased
    27,327,815                                               (1,289 )             (1,289 )
Preferred stock (260,200) issued to ESOP
            260       (279 )             19                               --  
Preferred stock released to ESOP
                    206               (14 )                             192  
Preferred stock (191,774) converted to common shares
    3,975,708       (192 )                     7               185               --  
Preferred stock dividends
                                            (3 )                     (3 )
Common stock dividends
                                            (1,764 )                     (1,764 )
Change in Rabbi trust assets and similar arrangements (classified as treasury stock)
                                                    111               111  
 
                                                       
Net change
            68       (73 )           34       2,709       (320 )     (404 )     2,014  
 
                                                       
                                                                         
BALANCE SEPTEMBER 30, 2003
          $ 319     $ (263 )   $ 2,894     $ 9,532     $ 22,103     $ (2,785 )   $ 572     $ 32,372  
 
                                                       
   

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Table of Contents

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

                 
   
    Nine months ended September 30 ,
(in millions)   2003     2002  
   
                 
Cash flows from operating activities:
               
Net income
  $ 4,578     $ 3,968  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
               
Provision for loan losses
    1,283       1,295  
Net provision for mortgage servicing rights in excess of fair value
    974       1,522  
Depreciation and amortization
    2,975       2,510  
Net gains on securities available for sale
    (36 )     (116 )
Net gains on mortgage loan originations / sales activities
    (1,787 )     (519 )
Net gains on sales of loans
    (23 )     (15 )
Net losses on dispositions of premises and equipment
    10       26  
Net (gains) losses on dispositions of operations
    (27 )     6  
Release of preferred shares to ESOP
    192       163  
Net increase in trading assets
    (112 )     (1,598 )
Deferred income tax expense
    718       155  
Net (increase) decrease in accrued interest receivable
    (70 )     49  
Net (decrease) increase in accrued interest payable
    (12 )     36  
Originations of mortgages held for sale
    (335,507 )     (190,320 )
Proceeds from sales of mortgages held for sale
    329,484       176,988  
Principal collected on mortgages held for sale
    2,632       1,257  
Net increase in loans held for sale
    (645 )     (777 )
Other assets, net
    (1,669 )     (3,958 )
Other accrued expenses and liabilities, net
    295       2,922  
 
           
                 
Net cash provided (used) by operating activities
    3,253       (6,406 )
 
           
                 
Cash flows from investing activities:
               
Securities available for sale:
               
Proceeds from sales
    6,057       14,566  
Proceeds from prepayments and maturities
    10,225       6,496  
Purchases
    (19,117 )     (11,459 )
Net cash paid for acquisitions
    (816 )     (574 )
Increase in banking subsidiaries’ loans resulting from originations, net of collections
    (17,972 )     (8,129 )
Proceeds from sales (including participations) of loans by banking subsidiaries
    1,259       877  
Purchases (including participations) of loans by banking subsidiaries
    (13,468 )     (1,950 )
Principal collected on nonbank entities’ loans
    13,754       8,441  
Loans originated by nonbank entities
    (15,410 )     (10,610 )
Purchases of loans by nonbank entities
    (3,682 )      
Proceeds from dispositions of operations
    30       42  
Proceeds from sales of foreclosed assets
    206       339  
Net decrease (increase) in federal funds sold and securities purchased under resale agreements
    482       (1,348 )
Net increase in mortgage servicing rights
    (3,601 )     (358 )
Other, net
    (75 )     (4,272 )
 
           
                 
Net cash used by investing activities
    (42,128 )     (7,939 )
 
           
                 
Cash flows from financing activities:
               
Net increase in deposits
    34,520       13,890  
Net decrease in short-term borrowings
    (7,857 )     (8,300 )
Proceeds from issuance of long-term debt
    25,677       16,792  
Repayment of long-term debt
    (14,688 )     (7,492 )
Proceeds from issuance of guaranteed preferred beneficial interests in Company’s subordinated debentures
    700       450  
Proceeds from issuance of common stock
    544       412  
Repurchase of common stock
    (1,289 )     (1,206 )
Payment of cash dividends on preferred and common stock
    (1,767 )     (1,402 )
Other, net
    638       46  
 
           
                 
Net cash provided by financing activities
    36,478       13,190  
 
           
                 
Net change in cash and due from banks
    (2,397 )     (1,155 )
                 
Cash and due from banks at beginning of period
    17,820       16,968  
 
           
                 
Cash and due from banks at end of period
  $ 15,423     $ 15,813  
 
           
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 2,586     $ 3,053  
Income taxes
    2,429       1,881  
Noncash investing and financing activities:
               
Transfers from loans to foreclosed assets
  $ 375     $ 352  
Net transfers from mortgages held for sale to loans
    282       224  
   

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WELLS FARGO & COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Wells Fargo & Company and Subsidiaries (consolidated) (the Company) is a 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 financial institutions in all 50 states of the U.S. and in other countries. Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company.

The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP) and prevailing practices in the financial services industry. Preparing the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Certain amounts in the financial statements for prior periods have been reclassified to conform with the current financial statement presentation.

The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K (2002 Form 10-K).

Descriptions of the significant accounting policies of the Company are included in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in the Company’s 2002 Form 10-K. There have been no significant changes to these policies, except as noted below.

CONSOLIDATION

The consolidated financial statements of the Company include the accounts of the Parent, and its majority-owned subsidiaries, which are consolidated on a line-by-line basis. Significant intercompany accounts and transactions are eliminated in consolidation. Other affiliates in which there is at least 20% ownership are generally accounted for by the equity method; those in which there is less than 20% ownership are generally carried at cost, except for marketable equity securities, which are carried at fair value with changes in fair value included in other comprehensive income, and certain variable interest entities as described below. Assets that are accounted for by either the equity or cost method are included in other assets.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarifies consolidation requirements for certain entities in which the equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. These entities are referred to as variable

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interest entities (VIEs). An enterprise’s variable interest in a variable interest entity arises from either contractual, ownership, or other monetary interests in the entity, which change with the entity’s net asset value changes. Effective for VIEs formed after January 31, 2003, and effective for all existing VIEs on December 31, 2003, the Company must consolidate a VIE if it will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

Stock-based Compensation

The Company has several stock-based employee compensation plans, which are described more fully in Note 14 (Common Stock and Stock Plans) to Financial Statements in the Company’s 2002 Form 10-K. As permitted by Statement of Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation, the Company uses the intrinsic value method of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for its stock-based employee compensation plans. Pro forma net income and earnings per common share information is provided as if the Company accounted for its employee stock option plans under the fair value method of FAS 123.

                                                 
   
                    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions, except per share amounts)   2003     2002     2003     2002  
   
                                                 
Net income, as reported   $ 1,561     $ 1,444     $ 4,578     $ 3,968  
        Add:
  Stock-based employee compensation expense included in reported net income, net of tax     1       1       2       3  
        Less:
  Total stock-based employee compensation expense under the fair value method for all awards, net of tax     47       49       150       145  
               
 
                       
Net income, pro forma   $ 1,515     $ 1,396     $ 4,430     $ 3,826  
               
 
                       
                                                 
Earnings per common share                                
        As reported   $ .93     $ .85     $ 2.73     $ 2.33  
        Pro forma     .90       .82       2.64       2.24  
Diluted earnings per common share                                
        As reported   $ .92     $ .84     $ 2.70     $ 2.30  
        Pro forma     .89       .81       2.61       2.21  
   

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2. Business Combinations

The Company regularly explores opportunities to acquire financial institutions and related financial services businesses. Generally, management of the Company does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed.

Transactions completed in the nine months ended September 30, 2003 include:

                 
   
                 
(in millions)   Date     Assets  
   
                 
Certain assets of Telmark, LLC, Syracuse, New York   February 28     $ 660  
Other (1)   Various
      112  
 
             
                 
 
          $ 772  
 
             
   
 
(1)   Consists of 11 acquisitions of asset management, commercial real estate brokerage, bankruptcy administration and insurance brokerage businesses.

The Company had three pending business combinations as of September 30, 2003, with approximately $3.0 billion in total assets, including the pending acquisition of Pacific Northwest Bancorp, with approximately $2.9 billion in assets. These transactions were subsequently completed on October 31, 2003.

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3. Intangible Assets

The gross carrying amount and accumulated amortization for intangible assets are presented in the following table:

                                 
   
    September 30, 2003     September 30, 2002  
    Gross     Accumulated     Gross     Accumulated  
(in millions)   carrying amount     amortization     carrying amount     amortization  
   
                                 
Amortized intangible assets:
                               
Mortgage servicing rights, before valuation allowance (1)
  $ 14,756     $ 7,167     $ 10,342     $ 4,168  
Core deposit intangibles
    2,415       1,654       2,415       1,510  
Other
    387       273       373       249  
 
                       
Total amortized intangible assets
  $ 17,558     $ 9,094     $ 13,130     $ 5,927  
 
                       
                                 
Unamortized intangible asset (trademark)
  $ 14             $ 14          
 
                           
   
 
(1)   The valuation allowance was $1,824 million at September 30, 2003 and $1,759 million at September 30, 2002. The carrying value of mortgage servicing rights was $5,765 million at September 30, 2003 and $4,415 million at September 30, 2002. See Note 8 (Mortgage Banking Activities) for further information.

The following table shows the current period and estimated future amortization expense for amortized intangible assets:

                                 
   
    Mortgage     Core              
    servicing     deposit              
(in millions)   rights     intangibles     Other     Total  
   
                                 
Nine months ended September 30, 2003 (actual)
  $ 2,301     $ 107     $ 22     $ 2,430  
 
                       
                                 
Three months ended December 31, 2003 (estimate)
  $ 499     $ 34     $ 7     $ 540  
 
                       
                                 
Estimate for year ended December 31,
                               
2004
  $ 1,601     $ 131     $ 23     $ 1,755  
2005
    1,091       120       16       1,227  
2006
    838       108       13       959  
2007
    679       99       12       790  
2008
    549       91       11       651  
   

The projections of amortization expense shown above for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2003. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions. The projections of amortization expense shown above for core deposit intangibles are based on existing asset balances at September 30, 2003. Future amortization expense may vary based on additional core deposit intangibles acquired through business combinations.

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4. Goodwill

The following table summarizes changes in the carrying amount of goodwill as allocated to the Company’s operating segments for the purpose of goodwill impairment analysis.

                                 
   
    Community     Wholesale     Wells Fargo     Consolidated  
(in millions)   Banking     Banking     Financial     Company  
   
                                 
Balance December 31, 2001
  $ 6,139     $ 2,781     $ 607     $ 9,527  
Goodwill from business combinations
    627       18       6       651  
Transitional goodwill impairment charge
          (133 )     (271 )     (404 )
Goodwill written off related to divestitures of businesses
    (30 )                 (30 )
 
                       
                                 
Balance September 30, 2002
  $ 6,736     $ 2,666     $ 342     $ 9,744  
 
                       
Balance December 31, 2002
  $ 6,743     $ 2,667     $ 343     $ 9,753  
Goodwill from business combinations
    31       60             91  
Foreign currency translation adjustments
                5       5  
 
                       
Balance September 30, 2003
  $ 6,774     $ 2,727     $ 348     $ 9,849  
 
                       
   

Goodwill amounts allocated to the operating segments for goodwill impairment analysis differ from amounts allocated to the Company’s operating segments for management reporting discussed in Note 7 (Operating Segments). The balance of goodwill for management reporting is summarized below:

                                         
   
    Community     Wholesale     Wells Fargo             Consolidated  
(in millions)   Banking     Banking     Financial     Enterprise     Company  
 
                                         
September 30, 2002
  $ 2,889     $ 716     $ 342     $ 5,797     $ 9,744  
 
                             
                                         
September 30, 2003
  $ 2,927     $ 777     $ 348     $ 5,797     $ 9,849  
 
                             
   

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5. Preferred Stock

The Company is authorized to issue 20 million shares of preferred stock and 4 million shares of preference stock, both without par value. All preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. No preference shares have been issued under this authorization.

The table below is a summary of the Company’s preferred stock. A detailed description of the Company’s preferred stock is provided in Note 13 (Preferred Stock) to Financial Statements included in the Company’s 2002 Form 10-K.

                                                                 
   
    Shares issued and outstanding     Carrying amount (in millions)     Adjustable  
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   dividends rate  
    2003     2002     2002     2003     2002     2002     Minimum     Maximum  
                                                                 
Adjustable-Rate Cumulative, Series B (1)
    1,460,000       1,460,000       1,460,000     $ 73     $ 73     $ 73       5.50 %     10.50 %
                                                                 
2003 ESOP Cumulative Convertible (2)
    85,324                   85                   8.50       9.50  
                                                                 
2002 ESOP Cumulative Convertible (2)
    56,741       64,049       85,727       57       64       86       10.50       11.50  
                                                                 
2001 ESOP Cumulative Convertible (2)
    42,606       46,126       56,826       43       46       57       10.50       11.50  
                                                                 
2000 ESOP Cumulative Convertible (2)
    32,092       34,742       38,242       32       35       38       11.50       12.50  
                                                                 
1999 ESOP Cumulative Convertible (2)
    12,532       13,222       14,722       13       13       14       10.30       11.30  
                                                                 
1998 ESOP Cumulative Convertible (2)
    4,875       5,095       5,745       5       5       6       10.75       11.75  
                                                                 
1997 ESOP Cumulative Convertible (2)
    5,481       5,876       7,076       5       6       7       9.50       10.50  
                                                                 
1996 ESOP Cumulative Convertible (2)
    4,327       5,407       6,907       4       6       7       8.50       9.50  
                                                                 
1995 ESOP Cumulative Convertible (2)
    2,008       3,043       4,743       2       3       5       10.00       10.00  
                                                                 
ESOP Cumulative Convertible (2)
                612                   1       9.00       9.00  
                                                                 
Unearned ESOP shares (3)
                      (263 )     (190 )     (236 )            
 
                                                   
                                                                 
Total
    1,705,986       1,637,560       1,680,600     $ 56     $ 61     $ 58                  
 
                                                   
   
 
(1)   Liquidation preference $50. On October 13, 2003, the Company called all of the shares. The shares will be redeemed on November 15, 2003 at the stated liquidation price plus accrued dividends.
(2)   Liquidation preference $1,000.
(3)   In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, the Company recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released.

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6. Earnings Per Common Share

The table below shows earnings per common share, diluted earnings per common share and a reconciliation of the numerator and denominator of both earnings per common share calculations.

                                         
   
            Quarter     Nine months  
            ended September 30 ,   ended September 30 ,
(in millions, except per share amounts)   2003     2002     2003     2002  
 
                                         
Net income before effect of change in accounting principle   $ 1,561     $ 1,444     $ 4,578     $ 4,244  
Less: Preferred stock dividends     1       1       3       3  
       
 
                       
Net income applicable to common stock before effect of change in accounting principle (numerator)     1,560       1,443       4,575       4,241  
       
 
                       
Cumulative effect of change in accounting principle (numerator)                       (276 )
Net income applicable to common stock (numerator)   $ 1,560     $ 1,443     $ 4,575     $ 3,965  
       
 
                       
                                         
EARNINGS PER COMMON SHARE                                
Average common shares outstanding (denominator)     1,677.2       1,700.7       1,678.0       1,704.7  
       
 
                       
                                         
Per share before effect of change in accounting principle   $ .93     $ .85     $ 2.73     $ 2.49  
Per share effect of change in accounting principle                       (.16 )
       
 
                       
Per share   $ .93     $ .85     $ 2.73     $ 2.33  
       
 
                       
                                         
DILUTED EARNINGS PER COMMON SHARE                                
Average common shares outstanding     1,677.2       1,700.7       1,678.0       1,704.7  
Add:
  Stock options     16.3       16.8       14.2       17.6  
       
Restricted share rights
    .4       .3       .4       .3  
       
 
                       
Diluted average common shares outstanding (denominator)     1,693.9       1,717.8       1,692.6       1,722.6  
       
 
                       
                                         
Per share before effect of change in accounting principle   $ .92     $ .84     $ 2.70     $ 2.46  
Per share effect of change in accounting principle                       (.16 )
       
 
                       
Per share   $ .92     $ .84     $ 2.70     $ 2.30  
       
 
                       
   

At September 30, 2003 and 2002, options to purchase 34.7 million and 36.5 million shares, respectively, were outstanding but not included in the computation of earnings per share. The exercise price was higher than the market price, and the options were therefore antidilutive.

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7. Operating Segments

The Company has three lines of business for management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. The results for these lines of business are based on the Company’s management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and, unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to GAAP. The management accounting process measures the performance of the operating segments based on the Company’s management structure and is not necessarily comparable with similar information for other financial services companies. The Company’s operating segments are defined by product type and customer segments. Changes in management structure and/or the allocation process may result in changes in allocations, transfers and assignments. In that case, results for prior periods would be (and have been) restated for comparability.

The Community Banking Group offers a complete line of diversified financial products and services to individual consumers and small businesses with annual sales generally up to $10 million in which the owner generally is the financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, securities brokerage and insurance through affiliates and venture capital financing. These products and services include Wells Fargo Funds®, a family of mutual funds, as well as personal trust, employee benefit trust and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation (auto, recreational vehicle and marine) loans, education loans, origination and purchase of residential mortgage loans, servicing of mortgage loans and credit cards. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, venture capital financing, cash management, payroll services, retirement plans, medical savings accounts and credit and debit card processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs), time deposits and debit cards.

Community Banking provides access to customers through a wide range of channels, which encompass a network of traditional banking stores, in-store banking centers, business centers and ATMs. Additionally, PhoneBank SM centers and the National Business Banking Center provide 24-hour telephone service. Online banking services include single sign-on to online banking, bill pay and brokerage, as well as online banking for small business.

The Wholesale Banking Group serves businesses across the United States with annual sales generally in excess of $10 million. Wholesale Banking provides a complete line of commercial, corporate and real estate banking products and services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high-yield debt, international trade facilities, foreign exchange services, treasury management, investment management, institutional fixed income and equity sales, online/electronic products, insurance brokerage services, and investment banking services. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade

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Bank, which provides trade financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit, permanent loans for securitization, commercial real estate loan servicing and real estate and mortgage brokerage services.

Wells Fargo Financial includes consumer finance and auto finance operations. Consumer finance operations make direct consumer and real estate loans to individuals and purchase sales finance contracts from retail merchants from offices throughout the United States, Canada and in the Caribbean. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles in the United States and Puerto Rico. Wells Fargo Financial also provides credit cards, and lease and other commercial financing.

The Reconciliation Column consists of Corporate level equity investment activities and balances and unallocated goodwill balances held at the enterprise level.

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The following table provides the results for the Company’s three major operating segments.

                                                                                 
   
(income/expense in millions,   Community     Wholesale     Wells Fargo     Reconciliation     Consolidated  
average balances in billions)   Banking     Banking     Financial     column (3)     Company  
       
Quarter ended September 30,   2003     2002     2003     2002     2003     2002     2003     2002     2003     2002  
                                                                                 
Net interest income (1)
  $ 3,056     $ 2,664     $ 556     $ 556     $ 599     $ 477     $ (3 )   $ (2 )   $ 4,208     $ 3,695  
Provision for loan losses (2)
    221       180       54       60       159       155                   434       395  
Noninterest income
    2,146       1,744       707       512       97       95       8       (6 )     2,958       2,345  
Noninterest expense
    3,428       2,574       629       564       343       268             1       4,400       3,407  
 
                                                           
Income (loss) before income tax expense (benefit)
    1,553       1,654       580       444       194       149       5       (9 )     2,332       2,238  
Income tax expense (benefit)
    488       581       208       159       73       57       2       (3 )     771       794  
 
                                                           
Net income (loss)
  $ 1,065     $ 1,073     $ 372     $ 285     $ 121     $ 92     $ 3     $ (6 )   $ 1,561     $ 1,444  
 
                                                           
                                                                                 
Average loans
  $ 149.8     $ 117.1     $ 49.0     $ 49.1     $ 21.2     $ 15.6     $     $     $ 220.0     $ 181.8  
Average assets
    290.3       226.4       75.7       71.3       22.9       17.4       6.2       6.1       395.1       321.2  
Average core deposits
    191.8       166.1       23.8       18.2       .1       .1                   215.7       184.4  
                                                                                 
Nine months ended September 30,
                                                                               
                                                                                 
Net interest income (1)
  $ 8,849     $ 7,936     $ 1,667     $ 1,691     $ 1,672     $ 1,370     $ (7 )   $ (8 )   $ 12,181     $ 10,989  
Provision for loan losses (2)
    681       648       154       218       448       429                   1,283       1,295  
Noninterest income
    5,942       5,013       2,015       1,728       283       273       9       10       8,249       7,024  
Noninterest expense
    9,289       7,579       1,885       1,747       973       810       2       3       12,149       10,139  
 
                                                           
Income (loss) before income tax expense (benefit) and effect of change in accounting principle
    4,821       4,722       1,643       1,454       534       404             (1 )     6,998       6,579  
Income tax expense (benefit)
    1,638       1,662       580       521       202       153             (1 )     2,420       2,335  
 
                                                           
Net income before effect of change in accounting principle
    3,183       3,060       1,063       933       332       251                   4,578       4,244  
Cumulative effect of change in accounting principle
                      (98 )           (178 )                       (276 )
 
                                                           
Net income
  $ 3,183     $ 3,060     $ 1,063     $ 835     $ 332     $ 73     $     $     $ 4,578     $ 3,968  
 
                                                           
                                                                                 
Average loans
  $ 140.8     $ 113.4     $ 49.4     $ 49.5     $ 19.3     $ 14.8     $     $     $ 209.5     $ 177.7  
Average assets
    271.9       222.5       76.1       70.3       21.1       16.6       6.2       6.2       375.3       315.6  
Average core deposits
    184.1       162.5       21.8       17.9       .1       .1                   206.0       180.5  
   
 
(1)   Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes actual interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment. In general, Community Banking has excess liabilities and receives interest credits for the funding it provides the other segments.
(2)   Generally, the provision for loan losses represents actual net charge-offs for each operating segment.
(3)   The reconciling items for net interest income, noninterest income and net income are from Corporate level equity investment activities. The material item in the reconciliation column for average assets is unallocated goodwill held at the enterprise level.

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8. Mortgage Banking Activities

Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations and servicing.

The components of mortgage banking noninterest income are presented below:

                                 
   
    Quarter     Nine months  
    ended September 30 ,   ended September 30 ,
(in millions)   2003     2002     2003     2002  
   
 
                               
Origination and other closing fees
  $ 393     $ 271     $ 1,003     $ 696  
Servicing fees, net of amortization
                               
and provision for impairment (1)
    (82 )     (158 )     (1,266 )     (279 )
Net gains on mortgage loan originations/
                               
sales activities
    319       226       1,787       519  
All other
    143       87       353       262  
 
                       
Total mortgage banking
  $ 773     $ 426     $ 1,877     $ 1,198  
 
                       
   
 
(1)   Includes impairment write-downs on other retained interests of $2 million and $59 million for the quarters ended September 30, 2003 and 2002, respectively, and $79 million and $496 million for the nine months ended September 30, 2003 and 2002, respectively.

Net of valuation allowance, mortgage servicing rights (MSRs) totaled $5.8 billion (1.03% of total mortgage loans serviced for others) at September 30, 2003, compared with $4.4 billion (.89%) at September 30, 2002.

Each quarter, the Company evaluates MSRs for possible impairment based on the difference between the carrying amount and current fair value of the MSRs, in accordance with FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. If a temporary impairment exists, a valuation allowance is established for any excess of amortized cost, as adjusted for hedge accounting, over the current fair value through a charge to income. The Company has a policy of reviewing MSRs for other-than-temporary impairment each quarter and recognizes a direct write-down when the recoverability of a recorded valuation allowance is determined to be remote. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs asset and the valuation allowance, precluding subsequent reversals. See Note 1 (Summary of Significant Accounting Policies - Transfer and Servicing of Financial Assets) to Financial Statements in the Company’s 2002 Form 10-K for additional discussion of the Company’s policy for valuation of MSRs. The Company determined that a portion of the asset was not recoverable and reduced both the asset and the previously designated valuation allowance by a write-down of $492 million and $1,338 million in the quarter and nine months ended September 30, 2003, respectively, and $887 million in the quarter ended September 30, 2002.

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The following table summarizes the changes in mortgage servicing rights:

                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions)   2003     2002     2003     2002  
   
 
                               
Mortgage servicing rights:
                               
Balance, beginning of period
  $ 6,375     $ 7,865     $ 6,677     $ 7,365  
Originations (1)
    1,377       492       2,872       1,615  
Purchases (1)
    874       268       1,730       984  
Amortization
    (572 )     (534 )     (2,301 )     (1,271 )
Write-down
    (492 )     (887 )     (1,338 )     (887 )
Other (includes changes in mortgage
                               
servicing rights due to hedging)
    27       (1,030 )     (51 )     (1,632 )
 
                       
Balance, end of period
  $ 7,589     $ 6,174     $ 7,589     $ 6,174  
 
                       
 
                               
Valuation Allowance:
                               
Balance, beginning of period
  $ 2,554     $ 1,909     $ 2,188     $ 1,124  
Provision for mortgage servicing rights in excess of fair value
          737       1,212       1,522  
Reversal of provision for mortgage servicing
                               
rights in excess of fair value
    (238 )           (238 )      
Write-down of mortgage servicing rights
    (492 )     (887 )     (1,338 )     (887 )
 
                       
Balance, end of period
  $ 1,824     $ 1,759     $ 1,824     $ 1,759  
 
                       
 
                               
Mortgage servicing rights, net
  $ 5,765     $ 4,415     $ 5,765     $ 4,415  
 
                       
   
 
(1)   Based on September 30, 2003 assumptions, the weighted-average amortization period for mortgage servicing rights added during third quarter 2003 and the first nine months of 2003 was approximately 7.4 years and 5.6 years, respectively.

The following table provides the components of the Company’s managed servicing portfolio:

                 
   
    September 30 ,
(in billions)   2003     2002  
   
   
 
               
Managed Servicing Portfolio:
               
Loans serviced for others
  $ 560     $ 495  
Owned loans serviced (portfolio and held for sale)
    114       75  
 
           
Total owned servicing
    674       570  
Sub-servicing
    18       45  
 
           
Total managed servicing
  $ 692     $ 615  
 
           
   

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9. Guarantees

Significant guarantees that the Company provides to third parties include standby letters of credit, various indemnification agreements, guarantees accounted for as derivatives, contingent consideration related to certain business combinations and contingent performance guarantees.

The Company issues standby letters of credit, which include performance and financial guarantees, on behalf of customers in connection with contracts between the customers and third parties whereby the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. Standby letters of credit totaled $7.8 billion at September 30, 2003, including financial guarantees of $4.0 billion that the Company had issued or purchased participations in. A major portion of fees received from the issuance of standby letters of credit are deferred and, at September 30, 2003, were immaterial to the Company’s financial statements.

The Company enters into indemnification agreements in the ordinary course of business under which the Company agrees to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. These relationships or transactions include those arising from service as a director or officer of the Company, underwriting agreements relating to the Company’s securities, securities lending, acquisition agreements, and various other business transactions or arrangements. Because the extent of the Company’s obligations under these indemnification agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable.

The Company writes options, floors and caps. Options are exercisable based on favorable market conditions. Periodic settlements occur on floors and caps based on market conditions. At September 30, 2003, the fair value reflected in the Company’s balance sheet of the written options liability was $316 million and the written floors and caps liability was $208 million. The Company’s ultimate obligation under written options, floors and caps is based on future market conditions and is only quantifiable at settlement. Options written to customers are predominantly offset with purchased options; other written options are entered into to mitigate balance sheet risk.

The Company also enters into credit default swaps under which it buys protection from or sells protection to a counterparty in the event of default of a reference obligation. At September 30, 2003, the gross carrying amount of the contracts sold was a $15 million liability. The maximum amount the Company would be required to pay under those swaps in which it sold protection, assuming all reference obligations default at a total loss, without recoveries, was $2.52 billion. The Company has bought protection of $2.51 billion of notional exposure. Almost all of the protection purchases offset (i.e., use the same reference obligation and maturity) the contracts in which the Company is providing protection to a counterparty.

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In connection with certain brokerage, asset management and insurance agency acquisitions made by the Company, the terms of the acquisition agreement provide for deferred payments or additional consideration based on certain performance targets. At September 30, 2003, the amount of contingent consideration expected to be paid was not material to the Company’s financial statements.

The Company has entered into various contingent performance guarantees through credit risk participation arrangements with terms ranging from 1 to 30 years. The Company will be required to make payments under these guarantees if a customer defaults on its obligation to perform under certain credit agreements with third parties. Because the extent of the Company’s obligations under these contingent performance guarantees depends entirely upon future events, the Company’s potential future liability under these agreements is not determinable.

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10. Derivative Instruments and Hedging Activities

Fair Value Hedges

The Company uses derivative contracts to manage the risk associated with changes in the fair value of mortgage servicing rights and other retained interests. Derivative gains or losses caused by market conditions (volatility) and the spread between spot and forward rates priced into the derivative contracts (the passage of time) are excluded from the overall evaluation of hedge effectiveness, but are reflected in earnings. The change in value of derivatives excluded from the assessment of hedge effectiveness was a net gain of $267 million and $916 million in the third quarter and first nine months of 2003, respectively, compared with a net gain of $432 million and $910 million in the same periods of 2002. The ineffective portion of the change in value of these derivatives was a net loss of $473 million and $164 million in the third quarter and first nine months of 2003, respectively, compared with a net gain of $338 million and $934 million in the same periods of 2002. The net derivative loss of $206 million in the third quarter of 2003 was offset by a reversal of the valuation provision for impairment on mortgage servicing rights of $238 million in the third quarter of 2003. The net derivative gain of $752 million in the first nine months of 2003 was more than offset by higher valuation provision (net of reversal) for impairment on mortgage servicing rights of $974 million. The total gains on the mortgage-related derivative contracts and valuation provision for impairment are included in mortgage banking noninterest income. See Note 8 (Mortgage Banking Activities).

In fourth quarter 2002, the Company began using derivative contracts to hedge changes in fair value of certain commercial real estate mortgages and franchise loans due to changes in LIBOR interest rates. The Company originates these loans with the intent to sell them. The ineffective portion of these fair value hedges was a net loss of $6 million and $17 million for the third quarter and first nine months of 2003, respectively, recorded in mortgage banking noninterest income. All components of gain or loss on these derivative contracts are included in the assessment of hedge effectiveness.

The Company also enters into interest rate swaps to convert certain of its fixed-rate senior and subordinated debt to floating-rate debt. The ineffective portion of these fair value hedges was not material in the third quarter and first nine months of 2003 and 2002.

As of September 30, 2003, all designated fair value hedges continued to qualify as fair value hedges.

Cash Flow Hedges

The Company uses derivative contracts to hedge forecasted sales of its mortgage loans and to convert commercial floating-rate loans and certain of its floating-rate senior debt to fixed rates. The Company recognized a net gain of $131 million and $77 million in the third quarter and first nine months of 2003, respectively, which represents the total ineffectiveness of cash flow hedges, compared with a net loss of $81 million and $250 million in the same periods of 2002. All components of gain or loss on these derivative contracts are included in the assessment of hedge effectiveness. As of September 30, 2003, all designated cash flow hedges continued to qualify as cash flow hedges.

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At September 30, 2003, the Company expected that $389 million of deferred net losses on derivative instruments included in other comprehensive income will be reclassified to earnings during the next twelve months, compared with $102 million of deferred net losses at September 30, 2002. Gains and losses on derivative contracts that are reclassified from cumulative other comprehensive income to current period earnings are included in the same line item in which the hedged item’s effect in earnings is recorded. The Company is hedging its exposure to the variability of future cash flows for all forecasted transactions for a maximum of two years for hedges converting floating-rate loans to fixed, four years for hedges converting floating-rate senior debt to fixed, and one year for hedges of forecasted sales of mortgage loans.

Derivative Financial Instruments — Summary Information

The following table summarizes the credit risk amount and estimated net fair value for the Company’s derivative financial instruments.

                                 
   
    September 30, 2003     December 31, 2002  
    Credit     Estimated     Credit     Estimated  
    risk     net fair     risk     net fair  
(in millions)   amount (1)     value     amount (1)     value  
   
 
                               
ASSET/LIABILITY MANAGEMENT HEDGES
                               
Interest rate contracts
  $ 2,975     $ 1,854     $ 3,438     $ 2,631  
 
                               
CUSTOMER ACCOMMODATIONS AND TRADING
                               
Interest rate contracts
    2,932       (115 )     3,343       31  
Commodity contracts
    70             28       4  
Equity contracts
    89       (6 )     29       (20 )
Foreign exchange contracts
    381       44       271       30  
Credit contracts
    32       (16 )     52       (11 )
   
 
(1)   Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties.

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11. Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures

In February 2002, the Company formed Wells Fargo Capital VII and Wells Fargo Capital VIII (the Trusts), to issue trust preferred securities. In May 2003, Wells Fargo Capital VII issued to the public $500 million in trust preferred securities in the form of its 5.85% Capital Securities and issued to the Company $15 million of trust common securities. Wells Fargo Capital VII used the proceeds to purchase $515 million of the Company’s 5.85% junior subordinated debentures due May 2033 (the May Debentures). In July 2003, Wells Fargo Capital VIII issued to the public $200 million in trust preferred securities in the form of its 5.625% Capital Securities and issued to the Company $6 million of trust common securities. Wells Fargo Capital VIII used the proceeds to purchase $206 million of the Company’s 5.625% junior subordinated debentures due August 2033 (together with the May Debentures, the Debentures). The Debentures are the sole assets of the Trusts and are subordinate to all of the Company’s existing and future obligations for borrowed or purchased money, obligations under letters of credit and certain derivative contracts, and any guarantees by the Company of any of such obligations. Concurrent with the issuance of the Debentures and the trust preferred and common securities, the Company issued a guarantee related to the trust preferred securities for the benefit of the holders.

The Company treats the trust preferred securities as Tier 1 capital. The Debentures, the common securities issued by the Trusts, and the related income effects are eliminated within the Company’s consolidated financial statements. The Company’s obligations under the Debentures, the related indentures, the trust agreements relating to the trust securities, and the guarantee constitute a full and unconditional guarantee by the Company of the obligations of the Trusts under the trust preferred securities.

The Debentures are subject to redemption at the option of the Company, subject to prior regulatory approval, in whole or in part on or after May 2008 for Wells Fargo Capital VII and July 2008 for Wells Fargo Capital VIII, or in whole, but not in part, within 90 days after the occurrence of certain events that either would have a negative tax effect on the Trusts or the Company, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as investment companies. Upon repayment of the Debentures at their stated maturity or following their earlier redemption, the Trusts will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

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12. Condensed Consolidating Financial Statements

Following are the condensed consolidating financial statements of the Parent and Wells Fargo Financial, Inc. and its wholly-owned subsidiaries (WFFI). The Wells Fargo Financial business segment for management reporting (See Note 7 to Financial Statements) consists of WFFI and other affiliated consumer finance entities managed by WFFI but not included in WFFI reported below.

Condensed Consolidating Statement of Income

                                         
   
    Quarter ended September 30, 2003  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
 
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 1,041     $     $     $ (1,041 )   $  
Nonbank
    100                   (100 )      
Interest income from loans
          731       2,817             3,548  
Interest income from subsidiaries
    155                   (155 )      
Other interest income
    20       19       1,458             1,497  
 
                             
Total interest income
    1,316       750       4,275       (1,296 )     5,045  
 
                             
 
                                       
Short-term borrowings
    19       18       92       (57 )     72  
Long-term debt
    145       199       85       (80 )     349  
Other interest expense
                416             416  
 
                             
Total interest expense
    164       217       593       (137 )     837  
 
                             
 
                                       
NET INTEREST INCOME
    1,152       533       3,682       (1,159 )     4,208  
Provision for loan losses
          219       215             434  
 
                             
Net interest income after
                                       
provision for loan losses
    1,152       314       3,467       (1,159 )     3,774  
 
                             
 
                                       
NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          55       1,729             1,784  
Other
    35       51       1,109       (21 )     1,174  
 
                             
Total noninterest income
    35       106       2,838       (21 )     2,958  
 
                             
 
                                       
NONINTEREST EXPENSE
                                       
Salaries and benefits
    37       188       1,955             2,180  
Other
    (45 )     139       2,165       (39 )     2,220  
 
                             
Total noninterest expense
    (8 )     327       4,120       (39 )     4,400  
 
                             
 
                                       
INCOME BEFORE INCOME TAX
                                       
EXPENSE AND EQUITY
                                       
IN UNDISTRIBUTED INCOME OF
                                       
SUBSIDIARIES
    1,195       93       2,185       (1,141 )     2,332  
Income tax expense
    30       35       706             771  
Equity in undistributed income of subsidiaries
    396                   (396 )      
 
                             
 
                                       
NET INCOME
  $ 1,561     $ 58     $ 1,479     $ (1,537 )   $ 1,561  
 
                             
   

23


Table of Contents

Condensed Consolidating Statement of Income

                                         
   
    Quarter ended September 30, 2002  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
 
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 1,525     $     $     $ (1,525 )   $  
Nonbank
    144                   (144 )      
Interest income from loans
          591       2,809             3,400  
Interest income from subsidiaries
    95                   (95 )      
Other interest income
    18       20       1,261             1,299  
 
                             
Total interest income
    1,782       611       4,070       (1,764 )     4,699  
 
                             
 
                                       
Short-term borrowings
    31       26       134       (67 )     124  
Long-term debt
    113       141       123       (10 )     367  
Other interest expense
                513             513  
 
                             
Total interest expense
    144       167       770       (77 )     1,004  
 
                             
 
                                       
NET INTEREST INCOME
    1,638       444       3,300       (1,687 )     3,695  
Provision for loan losses
          152       243             395  
 
                             
Net interest income after
                                       
provision for loan losses
    1,638       292       3,057       (1,687 )     3,300  
 
                             
 
                                       
NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          54       1,582             1,636  
Other
    26       58       641       (16 )     709  
 
                             
Total noninterest income
    26       112       2,223       (16 )     2,345  
 
                             
 
                                       
NONINTEREST EXPENSE
                                       
Salaries and benefits
    37       141       1,682             1,860  
Other
    11       107       1,464       (35 )     1,547  
 
                             
Total noninterest expense
    48       248       3,146       (35 )     3,407  
 
                             
 
                                       
INCOME BEFORE INCOME TAX
                                       
(BENEFIT) EXPENSE AND EQUITY
                                       
IN UNDISTRIBUTED INCOME OF
                                       
SUBSIDIARIES
    1,616       156       2,134       (1,668 )     2,238  
Income tax (benefit) expense
    (61 )     57       798             794  
Equity in undistributed income of subsidiaries
    (233 )                 233        
 
                             
 
                                       
NET INCOME
  $ 1,444     $ 99     $ 1,336     $ (1,435 )   $ 1,444  
 
                             
   

24


Table of Contents

Condensed Consolidating Statement of Income

                                         
   
    Nine months ended September 30, 2003  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
   
Dividends from subsidiaries:
                                       
Bank
  $ 2,831     $     $     $ (2,831 )   $  
Nonbank
    820                   (820 )      
Interest income from loans
    2       2,038       8,400             10,440  
Interest income from subsidiaries
    390                   (390 )      
Other interest income
    55       57       4,227             4,339  
 
                             
Total interest income
    4,098       2,095       12,627       (4,041 )     14,779  
 
                             
Short-term borrowings
    61       62       323       (192 )     254  
Long-term debt
    406       511       255       (152 )     1,020  
Other interest expense
                1,324             1,324  
 
                             
Total interest expense
    467       573       1,902       (344 )     2,598  
 
                             
   
NET INTEREST INCOME
    3,631       1,522       10,725       (3,697 )     12,181  
Provision for loan losses
          549       734             1,283  
 
                             
Net interest income after
                                       
provision for loan losses
    3,631       973       9,991       (3,697 )     10,898  
 
                             
   
NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          155       4,938             5,093  
Other
    110       160       2,948       (62 )     3,156  
 
                             
Total noninterest income
    110       315       7,886       (62 )     8,249  
 
                             
   
NONINTEREST EXPENSE
                                       
Salaries and benefits
    104       527       5,564             6,195  
Other
    (1 )     398       5,665       (108 )     5,954  
 
                             
Total noninterest expense
    103       925       11,229       (108 )     12,149  
 
                             
   
INCOME BEFORE INCOME TAX
                                       
(BENEFIT) EXPENSE AND EQUITY
                                       
IN UNDISTRIBUTED INCOME OF
                                       
SUBSIDIARIES
    3,638       363       6,648       (3,651 )     6,998  
Income tax (benefit) expense
    (43 )     137       2,326             2,420  
Equity in undistributed income of subsidiaries
    897                   (897 )      
 
                             
   
NET INCOME
  $ 4,578     $ 226     $ 4,322     $ (4,548 )   $ 4,578  
 
                             
   

25


Table of Contents

Condensed Consolidating Statement of Income

                                         
   
    Nine months ended September 30, 2002  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
 
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 3,004     $     $     $ (3,004 )   $  
Nonbank
    190                   (190 )      
Interest income from loans
          1,688       8,384             10,072  
Interest income from subsidiaries
    264                   (264 )      
Other interest income
    61       59       3,814             3,934  
 
                             
Total interest income
    3,519       1,747       12,198       (3,458 )     14,006  
Short-term borrowings
    103       76       434       (184 )     429  
Long-term debt
    330       403       336       (28 )     1,041  
Other interest expense
                1,547             1,547  
 
                             
Total interest expense
    433       479       2,317       (212 )     3,017  
 
                             
   
NET INTEREST INCOME
    3,086       1,268       9,881       (3,246 )     10,989  
Provision for loan losses
          451       844             1,295  
 
                             
Net interest income after
                                       
provision for loan losses
    3,086       817       9,037       (3,246 )     9,694  
 
                             
   
NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          151       4,531             4,682  
Other
    135       170       2,092       (55 )     2,342  
 
                             
Total noninterest income
    135       321       6,623       (55 )     7,024  
 
                             
   
NONINTEREST EXPENSE
                                       
Salaries and benefits
    128       422       4,904             5,454  
Other
    29       324       4,438       (106 )     4,685  
 
                             
Total noninterest expense
    157       746       9,342       (106 )     10,139  
 
                             
   
INCOME BEFORE INCOME TAX
                                       
(BENEFIT) EXPENSE,
                                       
EQUITY IN UNDISTRIBUTED
                                       
INCOME OF SUBSIDIARIES
                                       
AND EFFECT OF CHANGE IN
                                       
ACCOUNTING PRINCIPLE
    3,064       392       6,318       (3,195 )     6,579  
Income tax (benefit) expense
    (161 )     144       2,352             2,335  
Equity in undistributed income of subsidiaries
    762                   (762 )      
 
                             
   
NET INCOME BEFORE
                                       
EFFECT OF CHANGE IN
                                       
ACCOUNTING PRINCIPLE
    3,987       248       3,966       (3,957 )     4,244  
Cumulative effect of change
                                       
in accounting principle
    (19 )           (257 )           (276 )
 
                             
   
NET INCOME
  $ 3,968     $ 248     $ 3,709     $ (3,957 )   $ 3,968  
 
                             
   

26


Table of Contents

Condensed Consolidating Balance Sheet

                                         
   
    September 30, 2003  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
   
ASSETS
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 4,922     $ 24     $     $ (4,946 )   $  
Nonaffiliates
    233       158       17,724             18,115  
Securities available for sale
    1,093       1,663       27,511       (7 )     30,260  
Mortgages and loans held for sale
                62,638             62,638  
   
Loans
    1       21,718       210,125             231,844  
Loans to nonbank subsidiaries
    23,856       802             (24,658 )      
Allowance for loan losses
          753       3,140             3,893  
 
                             
Net loans
    23,857       21,767       206,985       (24,658 )     227,951  
 
                             
Investments in subsidiaries:
                                       
Bank
    32,723                   (32,723 )      
Nonbank
    3,777                   (3,777 )      
Other assets
    2,831       737       48,991       (710 )     51,849  
 
                             
   
Total assets
  $ 69,436     $ 24,349     $ 363,849     $ (66,821 )   $ 390,813  
 
                             
LIABILITIES AND
                                       
STOCKHOLDERS’ EQUITY
                                       
Deposits
  $     $ 107     $ 256,288     $ (4,959 )   $ 251,436  
Short-term borrowings
    786       4,597       31,702       (11,496 )     25,589  
Accrued expenses and other liabilities
    1,399       970       20,447       (3,977 )     18,839  
Long-term debt
    30,253       16,574       20,538       (8,373 )     58,992  
Indebtedness to subsidiaries
    1,976                   (1,976 )      
Guaranteed preferred beneficial interests in
                                       
Company’s subordinated debentures
    2,650             935             3,585  
 
                             
Total liabilities
    37,064       22,248       329,910       (30,781 )     358,441  
Stockholders’ equity
    32,372       2,101       33,939       (36,040 )     32,372  
 
                             
   
Total liabilities and stockholders’ equity
  $ 69,436     $ 24,349     $ 363,849     $ (66,821 )   $ 390,813  
 
                             
   

27


Table of Contents

Condensed Consolidating Balance Sheet

                                         
   
    September 30, 2002  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   
   
ASSETS
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 3,687     $ 51     $     $ (3,738 )   $  
Nonaffiliates
    182       170       19,508             19,860  
Securities available for sale
    1,148       1,517       30,315       (6 )     32,974  
Mortgages and loans held for sale
                47,861             47,861  
   
Loans
    2       15,541       170,767             186,310  
Loans to nonbank subsidiaries
    11,252       601             (11,853 )      
Allowance for loan losses
          593       3,268             3,861  
 
                             
Net loans
    11,254       15,549       167,499       (11,853 )     182,449  
 
                             
Investments in subsidiaries:
                                       
Bank
    31,160                   (31,160 )      
Nonbank
    4,418                   (4,418 )      
Other assets
    2,487       690       48,709       (780 )     51,106  
 
                             
   
Total assets
  $ 54,336     $ 17,977     $ 313,892     $ (51,955 )   $ 334,250  
 
                             
LIABILITIES AND
                                       
STOCKHOLDERS’ EQUITY
                                       
Deposits
  $     $ 86     $ 209,415     $ (3,745 )   $ 205,756  
Short-term borrowings
    3,090       4,480       30,983       (8,183 )     30,370  
Accrued expenses and other liabilities
    1,304       725       18,595       (1,283 )     19,341  
Long-term debt
    17,382       10,350       21,121       (3,029 )     45,824  
Indebtedness to subsidiaries
    536                   (536 )      
Guaranteed preferred beneficial interests in
                                       
Company’s subordinated debentures
    1,950             935             2,885  
 
                             
Total liabilities
    24,262       15,641       281,049       (16,776 )     304,176  
Stockholders’ equity
    30,074       2,336       32,843       (35,179 )     30,074  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 54,336     $ 17,977     $ 313,892     $ (51,955 )   $ 334,250  
 
                             
 

28


Table of Contents

Condensed Consolidating Statement of Cash Flows

                                 
   
    Nine months ended September 30, 2003  
                    Other        
                    consolidating        
                    subsidiaries/     Consolidated  
(in millions)   Parent     WFFI     eliminations     Company  
   
   
Cash flows from operating activities:
                               
Net cash provided (used) by operating activities
  $ 3,866     $ 1,057     $ (1,670 )   $ 3,253  
 
                       
   
Cash flows from investing activities:
                               
Securities available for sale:
                               
Proceeds from sales
    138       309       5,610       6,057  
Proceeds from prepayments and maturities
    128       178       9,919       10,225  
Purchases
    (333 )     (612 )     (18,172 )     (19,117 )
Net cash paid for acquisitions
    (33 )     (600 )     (183 )     (816 )
Increase in banking subsidiaries’ loans
                               
resulting from originations, net of collections
                (17,972 )     (17,972 )
Proceeds from sales (including participations) of loans by banking subsidiaries
                1,259       1,259  
Purchases (including participations) of loans by
                               
banking subsidiaries
                (13,468 )     (13,468 )
Principal collected on nonbank entities’ loans
    3,683       9,622       449       13,754  
Loans originated by nonbank entities
          (14,842 )     (568 )     (15,410 )
Purchases of loans by nonbank entities
    (3,682 )                 (3,682 )
Net advances to nonbank entities
    (1,042 )           1,042        
Capital notes and term loans made to subsidiaries
    (11,225 )           11,225        
Principal collected on notes/loans made to subsidiaries
    3,583             (3,583 )      
Net decrease (increase) in investment in subsidiaries
    37             (37 )      
Other, net
          85       (3,043 )     (2,958 )
 
                       
Net cash used by investing activities
    (8,746 )     (5,860 )     (27,522 )     (42,128 )
 
                       
   
Cash flows from financing activities:
                               
Net increase in deposits
          19       34,501       34,520  
Net decrease in short-term borrowings
    (1,502 )     (1,057 )     (5,298 )     (7,857 )
Proceeds from issuance of long-term debt
    13,553       7,976       4,148       25,677  
Repayment of long-term debt
    (3,364 )     (1,648 )     (9,676 )     (14,688 )
Proceeds from issuance of guaranteed preferred beneficial
                               
interests in Company’s subordinated debentures
    700                   700  
Proceeds from issuance of common stock
    544                   544  
Repurchase of common stock
    (1,289 )                 (1,289 )
Payment of cash dividends on preferred and common stock
    (1,767 )     (600 )     600       (1,767 )
Other, net
                638       638  
 
                       
Net cash provided by financing activities
    6,875       4,690       24,913       36,478  
 
                       
 
Net change in cash and due from banks
    1,995       (113 )     (4,279 )     (2,397 )
Cash and due from banks at beginning of period
    3,160       295       14,365       17,820  
 
                       
Cash and due from banks at end of period
  $ 5,155     $ 182     $ 10,086     $ 15,423  
 
                       
   

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Condensed Consolidating Statement of Cash Flows

                                 
   
    Nine months ended September 30, 2002  
                    Other        
                    consolidating        
                    subsidiaries/     Consolidated  
(in millions)   Parent     WFFI     eliminations     Company  
   
Cash flows from operating activities:
                               
Net cash provided (used) by operating activities
  $ 3,620     $ 776     $ (10,802 )   $ (6,406 )
 
                       
   
Cash flows from investing activities:
                               
Securities available for sale:
                               
Proceeds from sales
    386       636       13,544       14,566  
Proceeds from prepayments and maturities
    96       98       6,302       6,496  
Purchases
    (131 )     (845 )     (10,483 )     (11,459 )
Net cash (paid for) acquired from acquisitions
    (577 )     (281 )     284       (574 )
Increase in banking subsidiaries’ loans
                               
resulting from originations, net of collections
                (8,129 )     (8,129 )
Proceeds from sales (including participations) of loans
                               
by banking subsidiaries
                877       877  
Purchases (including participations) of loans by
                               
banking subsidiaries
                (1,950 )     (1,950 )
Principal collected on nonbank entities’ loans
          8,035       406       8,441  
Loans originated by nonbank entities
          (10,235 )     (375 )     (10,610 )
Net advances to nonbank entities
    (844 )           844        
Principal collected on notes/loans made to subsidiaries
    231             (231 )      
Net decrease (increase) in investment in subsidiaries
    209             (209 )      
Other, net
          (14 )     (5,583 )     (5,597 )
 
                       
Net cash used by investing activities
    (630 )     (2,606 )     (4,703 )     (7,939 )
 
                       
   
Cash flows from financing activities:
                               
Net increase in deposits
          9       13,881       13,890  
Net (decrease) increase in short-term borrowings
    (3,059 )     330       (5,571 )     (8,300 )
Proceeds from issuance of long-term debt
    5,308       2,827       8,657       16,792  
Repayment of long-term debt
    (2,534 )     (1,325 )     (3,633 )     (7,492 )
Proceeds from issuance of guaranteed preferred beneficial
                               
interests in Company’s subordinated debentures
    450                   450  
Proceeds from issuance of common stock
    412                   412  
Repurchase of common stock
    (1,206 )                 (1,206 )
Payment of cash dividends on preferred and common stock
    (1,402 )     (45 )     45       (1,402 )
Other, net
                46       46  
 
                       
Net cash (used) provided by financing activities
    (2,031 )     1,796       13,425       13,190  
 
                       
   
Net change in cash and due from banks
    959       (34 )     (2,080 )     (1,155 )
Cash and due from banks at beginning of period
    2,910       255       13,803       16,968  
 
                       
Cash and due from banks at end of period
  $ 3,869     $ 221     $ 11,723     $ 15,813  
 
                       
   

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FINANCIAL REVIEW

SUMMARY FINANCIAL DATA

                                                                 
   
                                    % Change              
    Quarter ended     Sept. 30, 2003 from     Nine months ended        
    Sept. 30,     June 30,     Sept. 30,     June 30,     Sept. 30,     Sept. 30,     Sept. 30,     %  
(in millions, except per share amounts)   2003     2003     2002     2003     2002     2003     2002     Change  
   
   
For the Period
                                                               
   
Before effect of change in accounting principle (1)
                                                               
Net income
  $ 1,561     $ 1,525     $ 1,444       2 %     8 %   $ 4,578     $ 4,244       8 %
Diluted earnings per common share
    .92       .90       .84       2       10       2.70       2.46       10  
   
Profitability ratios (annualized)
                                                               
Net income to average total assets (ROA)
    1.57 %     1.63 %     1.78 %     (4 )     (12 )     1.63 %     1.80 %     (9 )
Net income applicable to common stock to
                                                               
average common stockholders’ equity (ROE)
    18.86       19.60       19.38       (4 )     (3 )     19.39       19.69       (2 )
   
After effect of change in accounting principle
                                                               
Net income
  $ 1,561     $ 1,525     $ 1,444       2       8     $ 4,578     $ 3,968       15  
Diluted earnings per common share
    .92       .90       .84       2       10       2.70       2.30       17  
   
Profitability ratios (annualized)
                                                               
ROA
    1.57 %     1.63 %     1.78 %     (4 )     (12 )     1.63 %     1.68 %     (3 )
ROE
    18.86       19.60       19.38       (4 )     (3 )     19.39       18.41       5  
   
Efficiency ratio (2)
    61.4       58.9       56.4       4       9       59.5       56.3       6  
   
Total revenue
  $ 7,166     $ 6,755     $ 6,040       6       19     $ 20,430     $ 18,013       13  
   
Dividends declared per common share
    .45       .30       .28       50       61       1.05       .82       28  
   
Average common shares outstanding
    1,677.2       1,675.7       1,700.7             (1 )     1,678.0       1,704.7       (2 )
Diluted average common shares outstanding
    1,693.9       1,690.6       1,717.8             (1 )     1,692.6       1,722.6       (2 )
   
Average loans
  $ 220,027     $ 208,912     $ 181,782       5       21     $ 209,453     $ 177,749       18  
Average assets
    395,057       375,149       321,217       5       23       375,272       315,568       19  
Average core deposits
    215,685       205,428       184,448       5       17       206,041       180,521       14  
   
Net interest margin
    5.03 %     5.12 %     5.52 %     (2 )     (9 )     5.14 %     5.62 %     (9 )
   
At Period End
                                                               
Securities available for sale
  $ 30,260     $ 24,625     $ 32,974       23       (8 )   $ 30,260     $ 32,974       (8 )
Loans
    231,844       215,392       186,310       8       24       231,844       186,310       24  
Allowance for loan losses
    3,893       3,894       3,861             1       3,893       3,861       1  
Goodwill
    9,849       9,803       9,744             1       9,849       9,744       1  
Assets
    390,813       369,645       334,250       6       17       390,813       334,250       17  
Core deposits
    209,422       210,722       190,606       (1 )     10       209,422       190,606       10  
Common stockholders’ equity
    32,316       32,223       30,016             8       32,316       30,016       8  
Stockholders’ equity
    32,372       32,275       30,074             8       32,372       30,074       8  
Tier 1 capital (3)
    24,569       23,850       21,026       3       17       24,569       21,026       17  
Total capital (3)
    35,089       34,388       30,547       2       15       35,089       30,547       15  
   
Capital ratios
                                                               
Common stockholders’ equity to assets
    8.27 %     8.72 %     8.98 %     (5 )     (8 )     8.27 %     8.98 %     (8 )
Stockholders’ equity to assets
    8.28       8.73       9.00       (5 )     (8 )     8.28       9.00       (8 )
Risk-based capital (3)
                                                               
Tier 1 capital
    8.07       7.93       7.84       2       3       8.07       7.84       3  
Total capital
    11.53       11.43       11.39       1       1       11.53       11.39       1  
Tier 1 leverage (3)
    6.44       6.59       6.83       (2)       (6)       6.44       6.83       (6)  
   
Book value per common share
  $ 19.27     $ 19.20     $ 17.67             9     $ 19.27     $ 17.67       9  
   
Staff (active, full-time equivalent)
    139,200       135,500       125,700       3       11       139,200       125,700       11  
   
Common Stock Price
                                                               
High
  $ 53.71     $ 52.80     $ 54.84       2       (2 )   $ 53.71     $ 54.84       (2 )
Low
    48.90       45.01       38.10       9       28       43.27       38.10       14  
Period end
    51.50       50.40       48.16       2       7       51.50       48.16       7  
   
 
(1)   Change in accounting principle relates to transitional goodwill impairment charge recorded in first quarter 2002 related to the adoption of FAS 142, Goodwill and Other Intangible Assets.
(2)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(3)   See the Regulatory and Agency Capital Requirements section for additional information.

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This report, including the Financial Statements and related Notes and the information in response to Items 2, 3 and 4 of Form 10-Q, contains forward-looking statements about the Company. Broadly speaking, forward-looking statements include forecasts of future financial results and condition, expectations for future operations and business, and any assumptions underlying those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual outcomes and results might differ significantly from forecasts and expectations. Please refer to “Factors that May Affect Future Results” beginning on page 57 of this report for a discussion of some of the factors that may cause results to differ.

OVERVIEW

Wells Fargo & Company is a $391 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 financial institutions in all 50 states of the U.S. and in other countries. It ranked fourth in assets and third in market capitalization among U.S. bank holding companies at September 30, 2003. In this Form 10-Q, Wells Fargo & Company and Subsidiaries (consolidated) is referred to as the Company and Wells Fargo & Company alone is referred to as the Parent.

Certain amounts in the Financial Review for prior periods have been reclassified to conform with the current financial statement presentation.

Net income for third quarter 2003 increased 8% to $1.56 billion, from $1.44 billion for third quarter 2002. Diluted earnings per common share for third quarter 2003 were $.92, up 10%, compared with $.84 for third quarter 2002. Return on average assets (ROA) was 1.57% and return of average common equity (ROE) was 18.86% for third quarter 2003, compared with 1.78% and 19.38%, respectively, for the same period of 2002.

In third quarter 2003, taking advantage of interest rates and equity markets, the Company took a number of strategic actions which will benefit future financial performance but which had the effect of reducing third quarter 2003 earnings by $171 million after-tax, or $.10 per share. These actions included repositioning the bond portfolio, retiring $1.8 billion of term debt previously issued at higher costs, contributing approximately 40% of the Company’s public stock portfolio to the Wells Fargo Foundation (a tax-efficient way of funding this expense), consolidating certain Company-owned facilities and operations to reduce future occupancy and operating costs, and renegotiating certain vendor contracts to reduce on-going equipment and software expenses. The $.10 per share reduction in earnings from these actions, which will benefit future financial performance, includes both revenue and expense impacts and is after the net tax benefits associated with the public stock donations.

Net income for the first nine months of 2003 was $4.58 billion, or $2.70 per share, compared with $4.24 billion, or $2.46 per share, before the effect of a first quarter accounting change related to FAS 142, Goodwill and Other Intangible Assets, for the first nine months of 2002. On the same basis, ROA was 1.63% in the first nine months of 2003, compared with 1.80% for the first nine months of 2002. ROE was 19.39% in the first nine months of 2003, compared with 19.69% for the first nine months of 2002.

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Net interest income on a taxable-equivalent basis was $4.23 billion for third quarter 2003 and $12.24 billion for the first nine months of 2003, compared with $3.72 billion and $11.07 billion for the same periods of 2002. The Company’s net interest margin was 5.03% and 5.14% for the third quarter and first nine months of 2003, respectively, compared with 5.52% and 5.62% for the same periods of 2002.

Noninterest income was $2.96 billion and $8.25 billion for the third quarter and first nine months of 2003, respectively, compared with $2.35 billion and $7.02 billion for the same periods of 2002. The strategic actions taken in third quarter 2003 reduced noninterest income by $100 million.

Revenue, the sum of net interest income and noninterest income, increased 19% to $7.17 billion in third quarter 2003 from $6.04 billion in third quarter 2002. Revenue increased 13% to $20.43 billion in the first nine months of 2003 from $18.01 billion in the first nine months of 2002.

Noninterest expense was $4.40 billion and $12.15 billion for the third quarter and first nine months of 2003, respectively, compared with $3.41 billion and $10.14 billion for the same periods of 2002. The strategic actions taken in third quarter 2003 accounted for $233 million, or 23%, of the growth in expenses from third quarter 2002. These strategic actions were part of the Company’s on-going efforts to improve operating efficiency and will reduce future donations expense, occupancy costs and equipment and software costs.

During third quarter 2003, net charge-offs were $434 million, or .78% of average total loans (annualized), compared with $415 million, or .91%, in third quarter 2002. The provision for loan losses was $434 million and $1,283 million in the third quarter and first nine months of 2003, respectively, compared with $395 million and $1,295 million in the same periods of 2002. The allowance for loan losses was $3.89 billion, or 1.68% of total loans, at September 30, 2003, compared with $3.86 billion, or 1.96%, at December 31, 2002 and $3.86 billion, or 2.07%, at September 30, 2002.

At September 30, 2003, total nonaccrual loans were $1.52 billion, or .65% of total loans, compared with $1.49 billion, or .76%, at December 31, 2002 and $1.55 billion, or .83%, at September 30, 2002. Foreclosed assets were $200 million at September 30, 2003, $201 million at December 31, 2002 and $186 million at September 30, 2002.

The ratio of common stockholders’ equity to total assets was 8.27% at September 30, 2003, compared with 8.67% at December 31, 2002 and 8.98% at September 30, 2002. The Company’s total risk-based capital (RBC) ratio at September 30, 2003 was 11.53% and its Tier 1 RBC ratio was 8.07%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. The Company’s RBC ratios at September 30, 2002 were 11.39% and 7.84%, respectively. The Company’s Tier 1 leverage ratios were 6.44% and 6.83% at September 30, 2003 and 2002, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.

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Recent Accounting Standards

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The recognition and measurement provisions of this Interpretation are effective for newly created variable interest entities (VIEs) formed after January 31, 2003. On October 9, 2003, the FASB issued FIN 46-6 which delayed the recognition and measurement provisions of FIN 46 for existing VIEs to the first interim or annual reporting period ending after December 15, 2003. The Company adopted the disclosure provisions of FIN 46 effective December 31, 2002. The Company adopted the recognition and measurement provisions of FIN 46 for newly formed VIEs effective February 1, 2003, which did not have a material effect on the Company’s financial statements. The Company intends to adopt the recognition and measurement provisions of FIN 46 for existing VIEs on December 31, 2003. The Company does not expect that the adoption of FIN 46 will have a material effect on the Company’s financial statements.

The Company is a majority variable interest holder in certain special purpose entities that are expected to be consolidated effective December 31, 2003, and that were formed to invest in securities and to securitize high-yield corporate debt and real estate investment trust securities. These entities had approximately $800 million in total assets at September 30, 2003. The maximum estimated exposure to loss for these entities was approximately $300 million. Also, the Company holds variable interests generally greater than 20% but less than 50% in certain special purpose entities formed to provide affordable housing and to securitize high-yield corporate debt that had approximately $1.7 billion in total assets at September 30, 2003, and a maximum estimated exposure to loss of approximately $400 million. These entities are not expected to be required to be consolidated.

Historically, issuer trusts that issued trust preferred securities have been consolidated by their parent companies and trust preferred securities have been treated as eligible for Tier 1 capital treatment by bank holding companies under Federal Reserve rules and regulations relating to minority interests in equity accounts of consolidated subsidiaries. Applying the provisions of FIN 46, the Company may no longer be permitted to consolidate the issuer trusts, beginning on December 31, 2003, in preparing its financial statements. Although the Federal Reserve has stated in its July 2, 2003 Supervisory Letter that trust preferred securities will be treated as Tier 1 capital until notice is given to the contrary, the Supervisory Letter also indicates that the Federal Reserve will review the regulatory implications of any accounting treatment changes and will provide further guidance if necessary or warranted.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (FAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide additional clarification of certain terms and investment characteristics. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of FAS 149 will have a material effect on the Company’s financial statements.

In May 2003, the FASB issued Statement No. 150 (FAS 150) Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS 150 establishes standards

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for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify these financial instruments as liabilities (or an asset in some circumstances). Many of those instruments, including mandatorily redeemable preferred securities, were previously classified as equity or as mezzanine debt. The Company adopted FAS 150 effective July 1, 2003 and the adoption of the standard did not have a material effect on the Company’s financial statements.

In May 2003, the Emerging Issues Task Force published Topic D-107, Lessor Consideration of Third-Party Residual Value Guarantees, which specifies accounting guidance for certain lease transactions with residual value guarantees. The Company anticipates reclassifying auto leases impacted by the announcements as operating leases. The Company does not expect that adoption of this guidance will have a material effect on its results of operations for any period in which such leasing activities were present (1998 through the current period). The Company plans on implementing this guidance not later than January 1, 2004.

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified three policies that it believes are critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the valuation of mortgage servicing rights and pension accounting. The Company, in consultation with the Audit and Examination Committee of the Board of Directors, has reviewed and approved these critical accounting policies, which are further described in “Financial Review - Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in the Company’s 2002 Form 10-K.

EARNINGS PERFORMANCE

NET INTEREST INCOME

Net interest income is the difference between interest income (which includes yield-related loan fees) and interest expense. Net interest income on a taxable equivalent basis increased to $4.23 billion in third quarter 2003, from $3.72 billion in third quarter 2002, an increase of 14%.

Net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets is referred to as the net interest margin, which represents the average net effective yield on earning assets. The net interest margin decreased to 5.03% in third quarter 2003 from 5.52% in third quarter 2002. While loan growth had a positive impact on net interest income, the net interest margin was impacted by the low interest rate environment primarily because the new loans were made at yields below the existing portfolio of loans.

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

                                                 
   
    Quarter ended September 30 ,
    2003     2002  
                    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
  $ 2,514       .88 %   $ 6     $ 2,641       1.72 %   $ 11  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    1,283       4.59       14       1,719       5.48       23  
Securities of U.S. states and political subdivisions
    2,442       8.92       51       2,123       8.21       41  
Mortgage-backed securities:
                                               
Federal agencies
    18,538       7.50       334       26,037       7.20       445  
Private collateralized mortgage obligations
    1,972       5.25       25       2,119       7.20       37  
 
                                       
Total mortgage-backed securities
    20,510       7.28       359       28,156       7.20       482  
Other debt securities (4)
    3,540       7.89       64       2,883       7.87       58  
 
                                       
Total debt securities available for sale (4)
    27,775       7.37       488       34,881       7.23       604  
Mortgages held for sale (3)
    69,786       5.18       906       38,384       6.15       591  
Loans held for sale (3)
    7,124       3.17       57       5,302       3.92       52  
Loans:
                                               
Commercial
    46,947       6.04       714       46,323       6.76       789  
Real estate 1-4 family first mortgage
    51,936       4.62       601       31,366       5.94       466  
Other real estate mortgage
    25,635       5.33       343       25,389       6.09       389  
Real estate construction
    7,775       4.98       98       7,843       5.74       114  
Consumer:
                                               
Real estate 1-4 family junior lien mortgage
    38,393       6.56       635       29,192       7.71       567  
Credit card
    7,683       12.11       233       6,898       12.35       213  
Other revolving credit and installment
    31,053       8.81       689       24,251       10.24       625  
 
                                       
Total consumer
    77,129       8.02       1,557       60,341       9.26       1,405  
Lease financing
    8,343       6.52       136       8,678       7.03       153  
Foreign
    2,262       18.01       102       1,842       18.79       87  
 
                                       
Total loans (5)
    220,027       6.42       3,551       181,782       7.44       3,403  
Other
    8,905       2.60       58       6,814       3.65       63  
 
                                       
Total earning assets
  $ 336,131       6.02       5,066     $ 269,804       7.01       4,724  
 
                                       
   
FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 2,592       .20       1     $ 2,464       .44       3  
Market rate and other savings
    108,969       .61       166       94,768       1.00       238  
Savings certificates
    20,429       2.43       125       23,813       3.05       183  
Other time deposits
    27,633       1.11       78       9,068       1.88       43  
Deposits in foreign offices
    5,643       1.00       14       3,949       1.62       16  
 
                                       
Total interest-bearing deposits
    165,266       .92       384       134,062       1.43       483  
Short-term borrowings
    29,572       .96       72       29,558       1.66       124  
Long-term debt
    57,960       2.40       349       43,568       3.36       367  
Guaranteed preferred beneficial interests in Company’s subordinated debentures
    3,525       3.64       32       2,885       4.17       30  
 
                                       
Total interest-bearing liabilities
    256,323       1.30       837       210,073       1.90       1,004  
Portion of noninterest-bearing funding sources
    79,808                   59,731              
 
                                       
Total funding sources
  $ 336,131       .99       837     $ 269,804       1.49       1,004  
 
                                       
Net interest margin and net interest income on a taxable-equivalent basis (6)
            5.03 %   $ 4,229               5.52 %   $ 3,720  
 
                                       
   
NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 13,642                     $ 13,128                  
Goodwill
    9,817                       9,741                  
Other
    35,467                       28,544                  
 
                                           
Total noninterest-earning assets
  $ 58,926                     $ 51,413                  
 
                                           
   
NONINTEREST-BEARING FUNDING SOURCES
                                               
Deposits
  $ 83,695                     $ 63,403                  
Other liabilities
    22,163                       18,137                  
Preferred stockholders’ equity
    50                       54                  
Common stockholders’ equity
    32,826                       29,550                  
Noninterest-bearing funding sources used to fund earning assets
    (79,808 )                     (59,731 )                
 
                                           
Net noninterest-bearing funding sources
  $ 58,926                     $ 51,413                  
 
                                           
   
TOTAL ASSETS
  $ 395,057                     $ 321,217                  
 
                                           
   
 
(1)   The average prime rate of the Company was 4.00% and 4.75% for the quarters ended September 30, 2003 and 2002, respectively, and 4.16% and 4.75% for the nine months ended September 30, 2003 and 2002, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.13% and 1.81% for the quarters ended September 30, 2003 and 2002, respectively, and 1.23% and 1.88% for the nine months ended September 30, 2003 and 2002, 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 all periods presented.

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    Nine months ended September 30 ,
    2003     2002  
                    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
  $ 4,005       1.16 %   $ 35     $ 2,615       1.72 %   $ 34  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    1,288       4.85       45       1,852       5.67       76  
Securities of U.S. states and political subdivisions
    2,183       8.92       136       2,117       8.27       125  
Mortgage-backed securities:
                                               
Federal agencies
    17,317       7.84       957       28,338       7.10       1,460  
Private collateralized mortgage obligations
    1,997       6.48       93       2,456       7.13       128  
 
                                       
Total mortgage-backed securities
    19,314       7.70       1,050       30,794       7.10       1,588  
Other debt securities (4)
    3,243       7.77       179       3,020       7.73       172  
 
                                       
Total debt securities available for sale (4)
    26,028       7.67       1,410       37,783       7.15       1,961  
Mortgages held for sale (3)
    64,609       5.33       2,585       34,036       6.34       1,622  
Loans held for sale (3)
    7,064       3.62       191       5,236       4.96       194  
Loans:
                                               
Commercial
    47,146       6.13       2,164       46,539       6.91       2,406  
Real estate 1-4 family first mortgage
    46,512       4.99       1,740       29,722       6.16       1,372  
Other real estate mortgage
    25,561       5.50       1,052       25,462       6.25       1,191  
Real estate construction
    7,888       5.16       305       7,936       5.76       342  
Consumer:
                                               
Real estate 1-4 family junior lien mortgage
    35,132       6.82       1,792       26,817       7.82       1,568  
Credit card
    7,514       12.14       684       6,696       12.32       619  
Other revolving credit and installment
    29,117       9.17       1,997       23,818       10.37       1,848  
 
                                       
Total consumer
    71,763       8.33       4,473       57,331       9.40       4,035  
Lease financing
    8,457       6.70       425       9,034       7.17       485  
Foreign
    2,126       18.10       289       1,725       19.19       248  
 
                                       
Total loans (5)
    209,453       6.66       10,448       177,749       7.57       10,079  
Other
    7,918       2.87       170       6,529       3.94       193  
 
                                       
Total earning assets
  $ 319,077       6.23       14,839     $ 263,948       7.15       14,083  
 
                                       
   
FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 2,512       .29       5     $ 2,519       .60       11  
Market rate and other savings
    104,826       .68       533       92,545       .97       672  
Savings certificates
    21,257       2.60       413       24,785       3.32       615  
Other time deposits
    25,052       1.24       233       6,672       1.95       97  
Deposits in foreign offices
    6,083       1.15       52       5,204       1.65       64  
 
                                       
Total interest-bearing deposits
    159,730       1.03       1,236       131,725       1.48       1,459  
Short-term borrowings
    30,414       1.12       254       34,324       1.67       429  
Long-term debt
    52,141       2.61       1,020       40,843       3.40       1,041  
Guaranteed preferred beneficial interests in Company’s subordinated debentures
    3,210       3.69       88       2,745       4.29       88  
 
                                       
Total interest-bearing liabilities
    245,495       1.41       2,598       209,637       1.92       3,017  
Portion of noninterest-bearing funding sources
    73,582                   54,311              
 
                                       
Total funding sources
  $ 319,077       1.09       2,598     $ 263,948       1.53       3,017  
 
                                       
Net interest margin and net interest income on a taxable-equivalent basis (6)
            5.14 %   $ 12,241               5.62 %   $ 11,066  
 
                                       
   
NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 13,551                     $ 13,696                  
Goodwill
    9,803                       9,731                  
Other
    32,841                       28,193                  
 
                                           
Total noninterest-earning assets
  $ 56,195                     $ 51,620                  
 
                                           
   
NONINTEREST-BEARING FUNDING SOURCES
                                               
Deposits
  $ 77,446                     $ 60,672                  
Other liabilities
    20,739                       16,418                  
Preferred stockholders’ equity
    52                       55                  
Common stockholders’ equity
    31,540                       28,786                  
Noninterest-bearing funding sources used to fund earning assets
    (73,582 )                     (54,311 )                
 
                                           
Net noninterest-bearing funding sources
  $ 56,195                     $ 51,620                  
 
                                           
   
TOTAL ASSETS
  $ 375,272                     $ 315,568                  
 
                                           
   

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The pace of the decline in the margin slowed in third quarter 2003 from prior quarters. While the margin stabilized somewhat toward the end of third quarter 2003 and the strategic actions taken in third quarter 2003 may help further stabilize the margin, the net interest margin may be impacted by a variety of factors, primarily the mix of assets and liabilities, some of which could benefit and some of which could adversely impact the margin.

Individual components of net interest income and the net interest margin are presented in the rate/yield table on page 36.

Earning assets increased $66.3 billion in third quarter 2003 from the same period last year due to an increase in average loans and mortgages held for sale. Loans averaged $220.0 billion in third quarter 2003 compared with $181.8 billion in third quarter 2002. Average mortgages held for sale increased to $69.8 billion in third quarter 2003 from $38.4 billion in third quarter 2002 and increased to $64.6 billion in the first nine months of 2003 from $34.0 billion in the first nine months of 2002. The increase for both periods was due to increased originations including refinancing activity. Debt securities available for sale averaged $27.8 billion in third quarter 2003 compared with $34.9 billion in third quarter 2002.

An important contributor to the growth in net interest income from third quarter 2002 was a 17% increase in core deposits, the Company’s low-cost source of funding. Average core deposits were $215.7 billion and $184.4 billion and funded 54.6% and 57.4% of the Company’s average total assets in third quarter 2003 and 2002, respectively. While savings certificates of deposit declined on average from $23.8 billion in third quarter 2002 to $20.4 billion in third quarter 2003, noninterest-bearing checking accounts and other core deposit categories increased on average from $160.6 billion in third quarter 2002 to $195.3 billion in third quarter 2003 reflecting a combination of growth in mortgage escrow deposits, resulting from higher origination volume, and growth in primary account relationships. Total average interest-bearing deposits increased to $165.3 billion in third quarter 2003 from $134.1 billion a year ago. For the same periods, total average noninterest-bearing deposits increased to $83.7 billion from $63.4 billion.

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NONINTEREST INCOME

                                                 
   
    Quarter
ended Sept. 30
,   %     Nine months
ended Sept. 30
,   %  
(in millions)   2003     2002     Change     2003     2002     Change  
   
   
Service charges on deposit accounts
  $ 607     $ 560       8 %   $ 1,747     $ 1,612       8 %
Trust and investment fees:
                                               
Trust, investment and IRA fees
    348       327       6       995       1,004       (1 )
Commissions and all other fees
    156       135       16       438       391       12  
 
                                       
Total trust and investment fees
    504       462       9       1,433       1,395       3  
   
Credit card fees
    251       242       4       752       666       13  
   
Other fees:
                                               
Cash network fees
    48       47       2       136       139       (2 )
Charges and fees on loans
    199       160       24       565       432       31  
All other
    175       165       6       460       438       5  
 
                                       
Total other fees
    422       372       13       1,161       1,009       15  
   
Mortgage banking:
                                               
Origination and other closing fees
    393       271       45       1,003       696       44  
Servicing fees, net of amortization and provision for impairment
    (82 )     (158 )     (48 )     (1,266 )     (279 )     354  
Net gains on mortgage loan origination/ sales activities
    319       226       41       1,787       519       244  
All other
    143       87       64       353       262       35  
 
                                       
Total mortgage banking
    773       426       81       1,877       1,198       57  
   
Insurance
    252       234       8       807       766       5  
Net (losses) gains on debt securities available for sale
    (23 )     121             16       202       (92 )
Net gains (losses) from equity investments
    58       (152 )           (87 )     (230 )     (62 )
Net gains on sales of loans
    19       7       171       23       15       53  
Net (losses) gains on dispositions of operations
          (9 )     (100 )     27       (6 )      
All other
    95       82       16       493       397       24  
 
                                       
   
Total
  $ 2,958     $ 2,345       26 %   $ 8,249     $ 7,024       17 %
 
                                   
   

Service charges on deposit accounts increased 8% due to growth in primary accounts and increased activity.

The Company earns trust, investment and IRA fees from managing and administering assets, which include mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At September 30, 2003 and 2002, these assets totaled approximately $544 billion and $492 billion, respectively. Generally, these fees are based on the market value of the assets that are managed, administered, or both. The increase in trust, investment and IRA fees of 6% for third quarter 2003 compared with third quarter 2002 was predominantly due to increased sales and customer relationships, the acquisition of small asset portfolios and the beneficial impact of the strong equity markets. Additionally, the Company receives commission and other fees for providing services for retail and discount brokerage customers. At September 30, 2003 and 2002, brokerage balances were approximately $75 billion and $68 billion, respectively. Generally, these fees are based on the number of transactions executed at the direction of the customer. The increase in commissions and all other fees of 16% and 12% for the third quarter and first nine months of 2003, respectively, compared with the same periods of 2002 was largely due to a higher number of brokerage transactions, the strong equity markets and increased sales of commission-driven products.

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Table of Contents

Credit card fees increased 4% and 13% for the third quarter and first nine months of 2003, respectively, due to an increase in credit card accounts and credit and debit card transaction volume. In second quarter 2003, VISA USA Inc. (VISA) reached an agreement to settle merchant litigation, which included reducing some interchange fees to retailers. Absent any effort to increase volume or reprice these transactions the settlement is expected to reduce fee income by approximately $30 million per quarter. In October 2003, the Company renewed its contract with VISA as its primary brand for debit and credit card transactions and expanded its commitment to include VISA’s Interlink network for retail transactions with merchants.

Mortgage banking noninterest income was $773 million in the third quarter and $1,877 million for the first nine months of 2003, an increase of 81% and 57%, respectively, from the same periods of 2002. Origination and other closing fees increased to $393 million and net gains on mortgage loan origination/sales activities increased to $319 million in third quarter 2003, compared with third quarter 2002. For the first nine months of 2003, origination and other closing fees increased to $1,003 million and net gains on mortgage loan origination/sales activities increased to $1,787 million. These increases were primarily due to increased mortgage origination volume and gains on loan sales. Originations for third quarter 2003 grew to $161 billion from $89 billion for the same period of 2002. Mortgages held for sale increased to $55.3 billion at September 30, 2003 from $51.2 billion at December 31, 2002 and $42.3 billion at September 30, 2002.

Net servicing fees were a loss of $82 million and $1,266 million in the third quarter and first nine months of 2003, respectively, and a loss of $158 million and $279 million in the same periods of 2002. Servicing fees are presented net of amortization and impairment of mortgage servicing rights (MSRs) and gains and losses from hedge ineffectiveness, which are all influenced by both the level and direction of mortgage interest rates. The reduction in net losses from servicing fees from $158 million in third quarter 2002 to $82 million in third quarter 2003 was due to the growth in the servicing portfolio and the net impact of changes in interest rates. The increase in net losses from servicing fees in the first nine months of 2003 compared with the same period of the prior year was primarily due to lower average interest rates, which resulted in higher MSR amortization. Gross servicing fees increased in both the third quarter and first nine months of 2003 compared with the same periods of the prior year due to the growth in the MSR portfolio resulting from originations and purchases.

The Company recognized a direct write-down of MSRs of $492 million and $1,338 million during the third quarter and first nine months of 2003, respectively, compared with $887 million for third quarter 2002. See “Financial Review - Critical Accounting Policies — Mortgage Servicing Rights Valuation” in the Company’s 2002 Form 10-K for the method used to evaluate MSRs for impairment and to determine if such impairment is other-than-temporary. Key assumptions, including the sensitivity of those assumptions, used to determine the value of MSRs are disclosed in Notes 1 and 21 (Securitizations) to Financial Statements in the Company’s 2002 Form 10-K.

Net gains (losses) from equity investments in the third quarter were $58 million and $(87) million for the first nine months of 2003, compared with $(152) million and $(230) million

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for the same periods of 2002. Of the $58 million gain in third quarter 2003, $48 million was due to the gain on the public equity securities donated to the Wells Fargo Foundation.

The Company routinely reviews its investment portfolios for impairment. Such write-downs are based primarily on issuer-specific factors and results. General economic and market conditions, including industries in which venture capital investments are made, and adverse changes impacting the availability of venture capital financing are also taken into account. While the determination of impairment is based on all of the information available at the time of the assessment, new information or economic developments in the future could lead to additional impairment.

Included in “all other” noninterest income for third quarter 2003 is a $125 million loss on the early retirement of $1.8 billion of term debt that was previously issued at higher costs, which was predominantly offset by gains on trading securities.

NONINTEREST EXPENSE

                                                 
   
    Quarter
ended Sept. 30
,   %     Nine months
ended Sept. 30
,   %  
(in millions)   2003     2002     Change     2003     2002     Change  
   
   
Salaries
  $ 1,185     $ 1,110       7 %   $ 3,481     $ 3,292       6 %
Incentive compensation
    621       446       39       1,571       1,165       35  
Employee benefits
    374       304       23       1,143       997       15  
Equipment
    298       232       28       871       697       25  
Net occupancy
    283       278       2       867       821       6  
Net losses on dispositions of premises and equipment
    4                   10       26       (62 )
Outside professional services
    122       108       13       345       309       12  
Contract services
    270       129       109       675       353       91  
Outside data processing
    105       91       15       306       262       17  
Telecommunications
    92       94       (2 )     256       263       (3 )
Travel and entertainment
    98       85       15       275       243       13  
Advertising and promotion
    98       85       15       274       229       20  
Postage
    94       65       45       265       189       40  
Stationery and supplies
    62       51       22       173       164       5  
Insurance
    48       29       66       166       141       18  
Operating losses
    29       40       (28 )     149       115       30  
Security
    41       41             125       121       3  
Core deposit intangibles
    35       38       (8 )     107       118       (9 )
All other
    541       181       199       1,090       634       72  
 
                                       
   
Total
  $ 4,400     $ 3,407       29 %   $ 12,149     $ 10,139       20 %
 
                                   
   

The increase in noninterest expense, including increases in salaries, incentive compensation and contract services, was partly due to the growth in the mortgage and home equity businesses, which accounted for approximately 50% of the increase from third quarter 2002.

In third quarter 2003 the Company took a number of strategic actions that accounted for $233 million, or 23%, of the increase in third quarter 2003 expenses, compared with third quarter 2002. These strategic actions included charges to equipment expense related to renegotiating certain vendor contracts, net occupancy expense related to consolidating certain Company-

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owned facilities and operations, and “all other” expense related to the contribution of appreciated public equity securities to the Wells Fargo Foundation.

INCOME TAXES

The effective tax rate for third quarter 2003 was 33.0%, compared with 35.5% in the third quarter 2002, bringing the 2003 year-to-date effective tax rate down to 34.6%, compared with 35.5% for the same period of 2002. This reduction for the quarter and year-to-date compared with the same periods of a year ago was primarily due to the tax benefit derived from the Company’s third quarter 2003 donations of appreciated public equity securities to the Wells Fargo Foundation.

OPERATING SEGMENT RESULTS

Community Banking’s net income was $1,065 million in third quarter 2003, compared with $1,073 million in third quarter 2002. Net income increased 4% to $3,183 million for the first nine months of 2003 from $3,060 million for the first nine months of 2002. The strategic actions taken in the third quarter reduced Community Banking’s third quarter 2003 net income by $170 million. Net income in third quarter 2003 also reflected an increase in year-over-year earnings of $108 million from residential home mortgages. Net interest income increased to $3,056 million in third quarter 2003 from $2,664 million in third quarter 2002, mostly due to growth in consumer loans, mortgages held for sale and deposits, partially offset by net interest margin compression. Average loans in Community Banking grew 28% and average core deposits grew 15% from third quarter 2002. The provision for loan losses increased by $41 million for third quarter 2003 due to growth in average loans. Noninterest income for third quarter 2003 increased by $402 million over the same period in 2002 due to increases in mortgage banking fees, consumer loan fees, deposit service charges and credit card fees partially offset by strategic actions taken in the quarter. Noninterest expense increased by $854 million in third quarter 2003 over the same period in 2002 due primarily to increased mortgage and home equity originations. The strategic actions taken during the third quarter accounted for $231 million, or 7%, of noninterest expense.

Wholesale Banking’s net income was $372 million in third quarter 2003, compared with $285 million in third quarter 2002. Net income was $1,063 million for the first nine months of 2003, compared with $933 million, before the effect of change in accounting principle, in the first nine months of 2002, an increase of 14%. The provision for loan losses decreased by $6 million to $54 million in third quarter 2003 and by $64 million to $154 million for the first nine months of 2003 due to lower net charge-offs. Noninterest income increased 38% to $707 million and 17% to $2,015 million in the third quarter and first nine months of 2003, respectively, from $512 million and $1,728 million in the same periods of 2002 primarily due to higher asset-based lending income, insurance brokerage, commercial mortgage originations, investment income and fees and commissions. Noninterest expense increased 12% to $629 million and 8% to $1,885 million in the third quarter and first nine months of 2003, respectively, from $564 million and $1,747 million in the same periods of 2002, largely due to higher personnel expense resulting from increased benefit costs and full-time employees and higher minority interest expense in partnership earnings within asset based lending.

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Wells Fargo Financial’s net income was $121 million in third quarter 2003 compared with $92 million for the same period in 2002, an increase of 32%. Net income was $332 million for the first nine months of 2003 and $251 million, before the effect of change in accounting principle, for the same period in 2002. Net interest income increased 26% to $599 million for third quarter 2003 from $477 million for third quarter 2002 due to lower funding rates combined with growth in average loans. Average loans grew 36% to $21.2 billion at September 30, 2003. Net interest income increased 22% for the first nine months of 2003 compared with the same period in 2002. The provision for loan losses increased by $4 million and $19 million in the third quarter and first nine months of 2003, respectively. Noninterest expense was $343 million and $268 million for the quarters ended September 30, 2003 and 2002, respectively, an increase of 28%, and $973 million and $810 million for the nine months ended September 30, 2003 and 2002, respectively, an increase of 20%. The increase was primarily due to increases in full-time equivalent employees and salaries and incentive compensation resulting from increases in loan volume and an acquisition.

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.

                                                 
   
    Sept. 30, 2003     Dec. 31, 2002     Sept. 30, 2002  
            Estimated             Estimated             Estimated  
            fair             fair             fair  
(in millions)   Cost     value     Cost     value     Cost     value  
   
   
Securities of U.S. Treasury and federal agencies
  $ 1,190     $ 1,244     $ 1,315     $ 1,381     $ 1,592     $ 1,665  
Securities of U.S. states and political subdivisions
    2,601       2,757       2,232       2,382       2,291       2,458  
Mortgage-backed securities:
                                               
Federal agencies
    20,006       20,892       17,766       19,090       21,958       23,380  
Private collateralized mortgage obligations (1)
    1,827       1,908       1,775       1,880       2,057       2,187  
 
                                   
Total mortgage-backed securities
    21,833       22,800       19,541       20,970       24,015       25,567  
Other
    2,837       3,004       2,608       2,658       2,786       2,805  
 
                                   
Total debt securities
    28,461       29,805       25,696       27,391       30,684       32,495  
Marketable equity securities
    333       455       598       556       578       479  
 
                                   
   
Total
  $ 28,794     $ 30,260     $ 26,294     $ 27,947     $ 31,262     $ 32,974  
 
                                   
   
 
(1)   Substantially all private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages.

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The following table provides the components of the estimated unrealized net gains on securities available for sale. The estimated unrealized net gains on securities available for sale are reported on an after-tax basis as a component of cumulative other comprehensive income.

                         
   
(in millions)   Sept. 30, 2003     Dec. 31, 2002     Sept. 30, 2002  
   
   
Estimated unrealized gross gains
  $ 1,542     $ 1,851     $ 1,974  
Estimated unrealized gross losses
    (76 )     (198 )     (262 )
 
                 
Estimated unrealized net gains
  $ 1,466     $ 1,653     $ 1,712  
 
                 
   

The following table provides the components of the total realized net gains on the sales of securities from the securities available for sale portfolio, including those related to marketable equity securities.

                                 
   
    Quarter     Nine months  
    ended Sept. 30 ,   ended Sept. 30 ,
(in millions)   2003     2002     2003     2002  
   
   
Realized gross gains
  $ 60     $ 196     $ 141     $ 478  
Realized gross losses (1)
    (33 )     (155 )     (105 )     (362 )
 
                       
Realized net gains
  $ 27     $ 41     $ 36     $ 116  
 
                       
   
 
(1)   Includes other-than-temporary impairment of nil and $50 million for the third quarter and first nine months of 2003, respectively, compared with $103 million and $156 million for the same periods of 2002.

The weighted average expected remaining maturity of the debt securities portion of the securities available for sale portfolio was 6 years at September 30, 2003. Remaining maturities will differ from contractual maturities because mortgage debt issuers have the right to prepay obligation prior to contractual maturity.

The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale portfolio is indicated below.

                         
   
    Fair     Net unrealized     Remaining  
(in billions)   value     gain (loss)     maturity  
   
   
At September 30, 2003   $ 22.8     $ 1.0     4 yrs., 7 mos.  
   
At September 30, 2003, assuming a 200 basis point:
                       
Increase in interest rates
    20.3       (1.5 )   10 yrs., 2 mos.  
Decrease in interest rates
    23.5       1.7     2 yrs., 4 mos.  
   

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LOAN PORTFOLIO

                                         
   
                            % Change  
                            Sept. 30, 2003 from  
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2003     2002     2002     2002     2002  
   
   
Commercial (1)
  $ 47,720     $ 47,292     $ 46,827       1 %     2 %
Real estate 1-4 family first mortgage
    59,680       40,976       33,773       46       77  
Other real estate mortgage (2)
    25,723       25,312       25,233       2       2  
Real estate construction
    7,777       7,804       7,887             (1 )
Consumer:
                                       
Real estate 1-4 family junior lien mortgage
    40,681       31,290       30,193       30       35  
Credit card
    7,836       7,455       7,033       5       11  
Other revolving credit and installment
    31,919       26,353       24,912       21       28  
 
                                 
Total consumer
    80,436       65,098       62,138       24       29  
Lease financing
    8,185       8,241       8,593       (1 )     (5 )
Foreign
    2,323       1,911       1,859       22       25  
 
                                 
   
Total loans (net of unearned income, including net deferred loan fees, of $4,057, $4,276 and $4,308)
  $ 231,844     $ 196,634     $ 186,310       18 %     24 %
 
                             
   
 
(1)   Includes agricultural loans (loans to finance agricultural production and other loans to farmers) of $3,750 million, $4,473 million and $3,973 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.
(2)   Includes agricultural loans that are secured by real estate of $1,083 million, $1,111 million and $1,179 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.

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NONACCRUAL LOANS AND OTHER ASSETS

The table below presents comparative data for nonaccrual loans and other assets. A loan is placed on nonaccrual status (a) upon becoming 90 days past due as to interest or principal (unless both well-secured and in the process of collection), (b) when the full timely collection of interest or principal becomes uncertain or (c) when a portion of the principal balance has been charged off. Real estate 1-4 family loans (first and junior liens) are placed on nonaccrual status within 120 days of becoming past due as to interest or principal, regardless of security. Management’s classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. The table below excludes certain loans that are 90 days or more past due and still accruing that are presented in the table on page 47.

                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2003     2002     2002  
   
   
Nonaccrual loans:
                       
Commercial (1)
  $ 713     $ 796     $ 840  
Real estate 1-4 family first mortgage
    203       214       215  
Other real estate mortgage (2)
    267       192       198  
Real estate construction
    48       93       112  
Consumer:
                       
Real estate 1-4 family junior lien mortgage
    134       65       39  
Other revolving credit and installment
    78       48       55  
 
                 
Total consumer
    212       113       94  
Lease financing
    71       79       85  
Foreign
    3       5       5  
 
                 
Total nonaccrual loans (3)
    1,517       1,492       1,549  
As a percentage of total loans
    .65 %     .76 %     .83 %
   
Foreclosed assets
    200       201       186  
Real estate investments (4)
    6       4       2  
 
                 
Total nonaccrual loans and other assets
  $ 1,723     $ 1,697     $ 1,737  
 
               
   
 
(1)   Includes commercial agricultural loans of $65 million, $48 million and $55 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.
(2)   Includes agricultural loans secured by real estate of $26 million, $30 million and $24 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.
(3)   Includes impaired loans of $681 million, $612 million and $624 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.
(4)   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 $9 million, $9 million and $11 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.

The Company generally identifies loans to be evaluated for impairment when such loans are over $1 million and on nonaccrual. However, not all nonaccrual loans are impaired. 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. See Note 1 to Financial Statements in the Company’s 2002 Form 10-K for further discussion of impaired loans.

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The table below shows the recorded investment in impaired loans and the method used to measure impairment for the periods presented:

                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2003     2002     2002  
   
   
Impairment measurement based on:
                       
Collateral value method
  $ 385     $ 309     $ 319  
Discounted cash flow method
    296       303       305  
 
                 
Total (1)
  $ 681     $ 612     $ 624  
 
                 
   
 
(1)   Includes $72 million, $201 million and $130 million of impaired loans with a related allowance of $10 million, $52 million and $18 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.

The average recorded investment in impaired loans was $696 million and $682 million during third quarter 2003 and 2002, respectively, and $676 million and $733 million during the first nine months of 2003 and 2002, respectively. Predominantly all payments received on impaired loans are recorded using the cost recovery method. 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. For payments received on impaired loans recorded using the cash basis method, total interest income recognized for the third quarter and first nine months of 2003 was $3 million and $8 million, respectively, and $5 million and $12 million during the same periods of 2002. 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.

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 still accruing. All loans in this category are (a) both well-secured and in the process of collection or (b) real estate 1-4 family first mortgage loans or consumer loans that are exempt under regulatory rules from being classified as nonaccrual. Real estate 1-4 family loans (first and junior liens) are placed on nonaccrual within 120 days of becoming past due and are excluded from the following table.

                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2003     2002     2002  
   
   
Commercial
  $ 68     $ 92     $ 91  
Real estate 1-4 family first mortgage
    66       56       52  
Other real estate mortgage
    15       7       47  
Real estate construction
    8       11       26  
Consumer:
                       
Real estate 1-4 family junior lien mortgage
    84       67       78  
Credit card
    134       131       111  
Other revolving credit and installment
    315       308       266  
 
                 
Total consumer
    533       506       455  
 
                 
Total
  $ 690     $ 672     $ 671  
 
                 
   

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ALLOWANCE FOR LOAN LOSSES

                                 
   
    Quarter     Nine months  
    ended September 30 ,   ended September 30 ,
(in millions)   2003     2002     2003     2002  
   
   
Balance, beginning of period
  $ 3,894     $ 3,883     $ 3,862     $ 3,761  
   
Allowances related to business combinations/other
    (1 )     (2 )     31       93  
   
Provision for loan losses
    434       395       1,283       1,295  
   
Loan charge-offs:
                               
Commercial
    (136 )     (159 )     (437 )     (534 )
Real estate 1-4 family first mortgage
    (8 )     (3 )     (22 )     (18 )
Other real estate mortgage
    (12 )     (2 )     (23 )     (14 )
Real estate construction
    (2 )     (9 )     (8 )     (34 )
Consumer:
                               
Real estate 1-4 family junior lien mortgage
    (19 )     (14 )     (63 )     (43 )
Credit card
    (109 )     (99 )     (337 )     (307 )
Other revolving credit and installment
    (206 )     (212 )     (602 )     (595 )
 
                       
Total consumer
    (334 )     (325 )     (1,002 )     (945 )
Lease financing
    (26 )     (21 )     (76 )     (68 )
Foreign
    (29 )     (19 )     (74 )     (63 )
 
                       
Total loan charge-offs
    (547 )     (538 )     (1,642 )     (1,676 )
 
                       
   
Loan recoveries:
                               
Commercial
    31       36       106       120  
Real estate 1-4 family first mortgage
    1       1       2       4  
Other real estate mortgage
    2       3       7       12  
Real estate construction
    2       10       11       19  
Consumer:
                               
Real estate 1-4 family junior lien mortgage
    7       4       18       12  
Credit card
    13       12       38       36  
Other revolving credit and installment
    46       49       145       158  
 
                       
Total consumer
    66       65       201       206  
Lease financing
    6       4       19       16  
Foreign
    5       4       13       11  
 
                       
Total loan recoveries
    113       123       359       388  
 
                       
Net loan charge-offs
    (434 )     (415 )     (1,283 )     (1,288 )
 
                       
   
Balance, end of period
  $ 3,893     $ 3,861     $ 3,893     $ 3,861  
 
                       
   
Net loan charge-offs (annualized) as a percentage of average total loans
    .78 %     .91 %     .82 %     .97 %
 
                       
   
Allowance as a percentage of total loans
    1.68 %     2.07 %     1.68 %     2.07 %
 
                       
   

The Company considers the allowance for loan losses of $3.89 billion adequate to cover probable losses inherent in loans, loan commitments and standby and other letters of credit at September 30, 2003. The Company’s determination of the level of the allowance for loan losses rests upon various judgments and assumptions, including (1) general economic conditions, (2) loan portfolio composition, (3) prior loan loss experience, (4) the evaluation of credit risk related to both individual borrowers and pools of homogenous loans, (5) periodic use of sensitivity analysis and expected loss simulation modeling and (6) the Company’s ongoing examination process and that of its regulators. The allowance for loan losses consists of a component for

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individual loan impairment and multiple components of collective loan impairment. The Company considers relevant observable data in the recognition and measurement of the components of collective loan impairment.

OTHER ASSETS

                         
   
    September 30 ,   December 31 ,   September 30 ,
(in millions)   2003     2002     2002  
   
   
Trading assets
  $ 10,279     $ 10,167     $ 7,906  
Accounts receivable
    3,709       5,219       5,860  
Nonmarketable equity investments:
                       
Private equity investments
    1,713       1,657       1,651  
Federal bank stock
    1,691       1,591       1,511  
All other
    1,600       1,473       1,387  
 
                 
Total nonmarketable equity investments
    5,004       4,721       4,549  
   
Government National Mortgage Association (GNMA) pool buy-outs
    2,326       2,336       2,378  
Interest receivable
    1,209       1,139       1,235  
Core deposit intangibles
    761       868       905  
Interest-earning deposits
    608       352       2,006  
Foreclosed assets
    200       201       186  
Due from customers on acceptances
    161       110       102  
Other
    8,461       6,684       8,156  
 
                 
   
Total other assets
  $ 32,718     $ 31,797     $ 33,283  
 
                 
   

Trading assets consist largely of securities, including corporate debt, U.S. government agency obligations, and the fair value of derivative instruments held for customer accommodation purposes. Interest income from trading assets was $37 million and $43 million in third quarter 2003 and 2002, respectively, and $109 million and $135 million in the first nine months of 2003 and 2002, respectively. Noninterest income from trading assets was $104 million and $10 million in third quarter 2003 and 2002, respectively, and $346 million and $212 million in the first nine months of 2003 and 2002, respectively, and is included in the “all other” category of noninterest income.

Net gains (losses) from nonmarketable equity investments were $26 million and $(103) million for the third quarter and first nine months of 2003, respectively, compared with $(68) million and $(112) million for the same periods of 2002. Net gains (losses) from nonmarketable investments included net gains (losses) from private equity investments of $8 million and $(107) million for the third quarter and first nine months of 2003, respectively, compared with $(72) million and $(144) million for the same periods of 2002.

GNMA pool buy-outs are advances made to GNMA mortgage pools that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). These advances are made to buy out delinquent loans under the Company’s servicing agreements. The Company undertakes the collection and foreclosure process for the FHA and VA. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances.

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DEPOSITS

The following table shows comparative detail of deposits.

                         
   
    September 30 ,   December 31 ,   September 30 ,
(in millions)   2003     2002     2002  
   
   
Noninterest-bearing
  $ 77,175     $ 74,094     $ 69,382  
Interest-bearing checking
    2,506       2,625       2,258  
Market rate and other savings
    109,804       99,183       95,597  
Savings certificates
    19,937       22,332       23,369  
 
                 
Core deposits
    209,422       198,234       190,606  
Other time deposits
    35,807       9,228       12,793  
Deposits in foreign offices
    6,207       9,454       2,357  
 
                 
   
Total deposits
  $ 251,436     $ 216,916     $ 205,756  
 
                 
   

The increase in other time deposits was predominantly due to an increase in certificates of deposit greater than $100,000 sold to institutional customers.

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REGULATORY AND AGENCY CAPITAL REQUIREMENTS

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, 2003:
                                                 
Total capital (to risk-weighted assets)
                                               
Wells Fargo & Company
  $ 35.1       11.53 %     >= $ 24.3   >=  8.00 %                
Wells Fargo Bank, N.A.
    20.9       11.88       >=   14.0   >=  8.00     >= $ 17.6   >=  10.00 %
Wells Fargo Bank Minnesota, N.A.
    3.6       12.91       >=     2.3   >=  8.00     >=     2.8   >=  10.00  
   
Tier 1 capital (to risk-weighted assets)
                                               
Wells Fargo & Company
  $ 24.6        8.07 %     >= $ 12.2   >= 4.00 %                
Wells Fargo Bank, N.A.
    13.3        7.60       >=     7.0   >=  4.00     >=  $ 10.5   >=  6.00 %
Wells Fargo Bank Minnesota, N.A.
    3.4       11.91       >=     1.1   >=  4.00     >=     1.7   >=  6.00  
   
Tier 1 capital (to average assets)
                                               
(Leverage ratio)
                                                 
Wells Fargo & Company
  $ 24.6        6.44 %     >=  $ 15.3   >=  4.00 %(1)                
Wells Fargo Bank, N.A.
    13.3        6.12       >=     8.7   >=  4.00     (1)   >=  $ 10.9   >=  5.00 %
Wells Fargo Bank Minnesota, N.A.
    3.4        5.62       >=     2.4   >=  4.00     (1)   >=     3.0   >=  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.

As an approved seller/servicer, one of the Company’s mortgage banking subsidiaries is required to maintain minimum levels of shareholder’s equity, as specified by various agencies, including the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation and Federal National Mortgage Association. This mortgage banking subsidiary’s equity at September 30, 2003 was below the required levels. The subsidiary received a capital infusion from Wells Fargo Bank, N.A. in October 2003 to restore its equity to the required levels.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

In the ordinary course of business, the Company engages in financial transactions, in accordance with generally accepted accounting principles (GAAP), that are not recorded on the Company’s balance sheet or may be recorded on the Company’s balance sheet in amounts that are different than the full contract or notional amount of the transaction. (See Note 1 to Financial Statements for the Company’s accounting policy relating to consolidation.) Such transactions are structured to meet the financial needs of customers, manage the Company’s credit, market or liquidity risks, diversify funding sources or optimize capital.

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Off-balance sheet arrangements include (1) securitization activities in the ordinary course of business, including mortgage loans and other financial assets (student loans, commercial mortgages and automobile receivables), (2) investment vehicles, typically in the form of certain collateralized debt obligations and (3) unconsolidated joint ventures, used to support origination activities of the Company’s mortgage banking affiliate or formed with third parties for economies of scale.

In the ordinary course of operations, the Company enters into certain contractual obligations. Such obligations include (1) the acceptance of deposits, (2) the funding of operations through debt issuances, (3) leases for premises and equipment, (4) purchase obligations and (5) certain derivative instrument contracts.

For additional information on off-balance sheet arrangements and other contractual obligations see Note 9 (Guarantees) to Financial Statements and “Financial Review — Overview — Recent Accounting Standards” in this report and “Financial Review — Off-Balance Sheet Arrangements and Other Contractual Obligations” in the Company’s 2002 Form 10-K.

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

Asset/liability management consists of the evaluation, monitoring, and management of the Company’s interest rate risk, market risk and liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO) maintains oversight of these risks. The Committee consists of senior financial and senior business executives. Each of the Company’s principal business groups - Community Banking (including Mortgage Banking) and Wholesale Banking — have individual asset/liability management committees and processes that are linked to the Corporate ALCO process.

INTEREST RATE RISK

Interest rate risk, one of the more prominent risks in terms of potential earnings impact, is an inevitable part of being a financial intermediary. For more information, see “Financial Review — Asset/Liability and Market Risk Management — Interest Rate Risk” in the Company’s 2002 Form 10-K. The principal tool used to evaluate the Company’s interest rate risk is a simulation of net income under various economic and interest rate scenarios.

The Company assesses its interest rate risk by comparing its most likely earnings to various earnings simulations performed under multiple interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. As of September 30, 2003, the Company’s simulated earnings at risk to a higher interest rate scenario were 3.7% of its estimated most likely earnings. The higher interest rate scenario assumed that the Federal Funds rate would increase to 4.75% by the end of 2004, and that the 10 year Constant Maturity Treasury (CMT) bond yield would reach a rate of 6.50%. Simulation estimates are highly dependent on and will change with the size and mix of the Company’s actual and projected balance sheet at the time each simulation is done.

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The Company uses exchange-traded and over-the-counter interest rate derivatives to hedge certain of its interest rate exposures. The credit risk amount and estimated net fair values of these derivatives as of September 30, 2003 and December 31, 2002 are indicated in Note 10 to Financial Statements. Derivatives are used for asset/liability management in three ways: (a) a major portion of the Company’s long-term fixed-rate debt is converted to floating-rate payments by entering into received-fixed swaps at issuance; (b) the cash flows from selected asset and/or liability instruments/portfolios are converted from fixed to floating payments or vice versa; and (c) the Company’s mortgage operation actively uses swaptions, futures, forwards and rate options to hedge interest rate lock commitments, mortgages held for sale and mortgage servicing rights.

MORTGAGE BANKING INTEREST RATE RISK

The Company originates, funds and services mortgage loans. These activities subject the Company to a number of risks, including credit, liquidity and interest rate risks. The Company manages credit and liquidity risk by selling or securitizing most of the loans it originates. Changes in interest rates, however, may have a potentially large impact on mortgage banking income in any calendar quarter and over time. The Company manages both the risk to net income over time from all sources as well as the risk to an immediate reduction in the fair value of its mortgage servicing rights. The Company relies on mortgage loans held on its balance sheet and derivative instruments to maintain these risks within Corporate ALCO parameters.

At September 30, 2003, the Company had mortgage servicing rights (MSRs) of $5.8 billion, net of a valuation allowance of $1.8 billion. The Company’s MSRs were valued at 1.03% of mortgage loans serviced for others at September 30, 2003, up from .92% at December 31, 2002 and .89% at September 30, 2002. The increase in MSRs was predominantly due to the growth in the servicing portfolio resulting from originations and purchases.

The value of the MSRs is influenced by prepayment speed assumptions affecting the duration of the mortgage loans to which the MSRs relate. Changes in long-term interest rates affect these prepayment speed assumptions. For example, a decrease in long-term rates would accelerate prepayment speed assumptions as borrowers refinance their existing mortgage loans and decrease the value of the MSRs. In contrast, prepayment speed assumptions would tend to slow in a rising interest rate environment and increase the value of the MSRs.

The Company mitigates mortgage banking interest rate risk in two ways. First, a significant portion of the MSRs are hedged against a change in interest rates with derivative contracts. The principal source of risk in this hedging process is the risk that changes in the value of the hedging contracts may not match changes in the value of the hedged portion of the MSRs for any given change in long-term interest rates.

Second, a portion of the potential reduction in the value of the MSRs for a given decline in interest rates is offset by estimated increases in origination and servicing fees over time from new mortgage activity or refinancing associated with that decline in interest rates. In a scenario of much lower long-term interest rates, the decline in the value of the MSRs and its impact on net income would be immediate whereas the additional fee income accrues over time. Under

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GAAP, impairment of the MSRs, due to a decrease in long-term rates or other reasons, is reflected as a charge to earnings through an increase to the valuation allowance.

In scenarios of sustained increases in long-term interest rates, origination fees may eventually decline as refinancing activity slows. In such higher interest rate scenarios the duration of the servicing portfolio may extend. In such circumstances, periodic amortization of servicing costs may be reduced, and some or all of the valuation allowance may be released.

MARKET RISK — TRADING ACTIVITIES

The Company incurs interest rate risk, foreign exchange risk, equity price risk and commodity price risk in several trading businesses managed under limits set by Corporate ALCO. The primary purpose of these businesses is to accommodate customers in the management of their market price risks. Additionally, the Company takes positions based on market expectations or to benefit from price differentials between financial instruments and markets. All securities, loans, foreign exchange transactions, commodity transactions and derivatives transacted with customers or used to hedge capital market transactions done with customers are carried at fair value. Counterparty risk limits are established and monitored by the Institutional Risk Committee. Open, “at risk” positions for all trading business are monitored by Corporate ALCO.

MARKET RISK — EQUITY MARKETS

Equity markets impact the Company in both direct and indirect ways. For more information, see “Financial Review – Asset/Liability and Market Risk Management - Market Risk — Equity Markets” in the Company’s 2002 Form 10-K. The Company makes and manages direct equity investments in start up businesses, emerging growth companies, management buy-outs, acquisitions and corporate recapitalizations. The Company also invests in non-affiliated funds that make similar private equity investments. These private equity investments are made within capital allocations approved by the Company’s management or its Board of Directors. Management reviews these investments at least quarterly and assesses them for possible other-than-temporary impairment. At September 30, 2003, private equity investments totaled $1,713 million, compared with $1,657 million at December 31, 2002.

The Company has marketable equity securities in its securities available for sale investment portfolio, including shares distributed from the Company’s venture capital activities. These securities are managed within capital risk limits approved by management. Gains and losses on these securities are recognized in net income when realized and, in addition, other-than-temporary impairment may be periodically recorded. At September 30, 2003, the fair value of marketable equity securities was $455 million and cost was $333 million, compared with $556 million and $598 million, respectively, at December 31, 2002.

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LIQUIDITY AND FUNDING

The objective of effective liquidity management is to ensure that the Company can efficiently meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments under both normal operating conditions and under unforeseen and unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. To ensure that the Parent is a source of strength for its regulated, deposit-taking subsidiary banks, the Company sets liquidity management guidelines for both the consolidated and Parent balance sheets.

In addition to the immediately liquid resources of cash and due from banks and federal funds sold and securities purchased under resale agreements, asset liquidity is provided by the debt securities in the securities available for sale portfolio. Asset liquidity is further enhanced by the Company’s ability to sell or securitize loans in secondary markets.

Core customer deposits have historically provided the Company with a sizeable source of relatively stable and low-cost funds.

The remaining funding of assets is mostly provided by long-term debt, deposits in foreign offices, short-term borrowings (federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities. Liquidity for the Company is also available through the Company’s 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 September 2003, Moody’s Investors Service raised Wells Fargo Bank, N.A.’s rating to “Aaa”, its highest investment grade, from “Aa1” and raised the Company’s senior debt rating to “Aa1” from “Aa2”. The rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, level and quality of earnings. In October 2003, Standard & Poor’s Ratings Service raised the counterparty ratings on the Company to ‘AA-minus/A-1-plus’ from ‘A-plus/A-1’ and the revised outlook for the Company to stable from positive.

Parent. The Parent has registered with the Securities and Exchange Commission (SEC) to issue a variety of securities, including senior and subordinated notes and preferred and common securities to be issued by one or more trusts that are directly or indirectly owned by the Company and consolidated in the financial statements. In March 2003, the Parent registered for issuance an additional $15.3 billion in senior and subordinated notes and preferred and common securities. During the third quarter and first nine months of 2003, the Parent issued $3.5 billion and $10.5 billion, respectively, of senior notes. Also, during third quarter 2003, Wells Fargo Capital VIII issued a total of $200 million of trust preferred securities. At September 30, 2003, the Parent’s remaining issuance capacity under effective registration statements was $11.1 billion. In October 2003, the Parent issued $1.0 billion in senior and subordinated notes. The Company used the proceeds from securities issued in the first nine months of 2003 for general corporate purposes and expects that it will use the proceeds from the future issuance of any securities for

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general corporate purposes as well. The Parent also issues commercial paper and has two back-up credit facilities amounting to $2 billion.

On April 15, 2003, the Company issued $3 billion of convertible senior debentures as a private placement. As described in Item 2 of Part II of the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2003, the convertible debentures are convertible into shares of the Company’s common stock under certain circumstances. While the Company has the ability to settle the entire amount of the conversion rights granted in this convertible debt offering in cash, common stock or a combination, the Company intends to settle the principal amount in cash and to settle the conversion spread (the excess conversion value over the principal) in either cash or stock. The Company can also redeem all or some of the convertible debt securities for cash at any time on or after May 5, 2008, at their principal amount plus accrued interest, if any.

Bank Note Program. In March 2003, Wells Fargo Bank, N.A. established a $50 billion bank note program under which it may issue up to $20 billion in short-term senior notes outstanding at any time and up to a total of $30 billion in long-term senior and subordinated notes. This program updates and supercedes the bank note program established in February 2001. Securities are issued under this program as private placements in accordance with the Office of the Comptroller of the Currency’s regulations. During the third quarter and first nine months of 2003, Wells Fargo Bank, N.A. issued $555 million and $9.2 billion, respectively, in senior long-term notes. At September 30, 2003, the remaining issuance authority under the long-term portion was $15.1 billion. In October 2003, Wells Fargo Bank, N.A. issued $105 million in senior bank notes.

Wells Fargo Financial. During third quarter 2003, Wells Fargo Financial, Inc. issued as private placements $500 million and $400 million (Canadian) in senior notes. During the first nine months of 2003, Wells Fargo Financial Canada Corporation issued $400 million (Canadian) in senior notes, leaving at September 30, 2003 a total of $550 million (Canadian) available for issuance.

CAPITAL MANAGEMENT

The Company has an active program for managing stockholder capital. The objective of effective capital management is to produce above market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when costs are perceived to be low.

The Company uses capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase its shares. During the first nine months of 2003, the Company’s consolidated assets increased by $42 billion, or 12%. During 2002, the Board of Directors authorized the repurchase of up to 50 million additional shares of the Company’s outstanding common stock. During the first nine months of 2003, the Company repurchased approximately 27 million shares of its common stock for a total of $1.3 billion. At September 30, 2003, the total remaining common stock repurchase authority was approximately 31 million shares. In July 2003, the Board of Directors approved an increase in the Company’s quarterly common stock dividend to 45 cents per share from 30 cents per share, representing a 50% increase in the quarterly dividend.

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The Company’s potential sources of capital include retained earnings, issuance of common and preferred stock and issuance of subordinated debt and trust preferred securities. In the first nine months of 2003, retained earnings increased $2.7 billion, predominantly as a result of net income of $4.6 billion less dividends of $1.8 billion. In the first nine months of 2003, the Company issued a total of $779 million in common stock for various employee stock plans, which included $192 million related to the conversion of preferred stock to common stock under the Employee Stock Ownership Plan. On October 13, 2003, the Company called all shares of its Adjustable-Rate Cumulative, Series B preferred stock. The shares will be redeemed on November 15, 2003 at the stated liquidation price plus accrued dividends.

FACTORS THAT MAY AFFECT FUTURE RESULTS

We make forward-looking statements in this report and in other reports and proxy statements we file with the SEC. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. You should consider forward-looking statements in light of the following discussion.

Broadly speaking, forward-looking statements include:

    projections of our revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;

    descriptions of plans or objectives of our management for future operations, products or services, including pending acquisitions;

    forecasts of our future economic performance; and

    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:

    the expected benefits of the strategic actions taken in third quarter 2003;

    future credit losses and nonperforming assets;

    the future value of mortgage servicing rights;

    the future value of equity securities, including those in our venture capital portfolios;

    the impact of new accounting standards;

    future short-term and long-term interest rate levels and their impact on our net interest margin, net income, liquidity and capital; and

    the impact of the VISA USA Inc. settlement on our earnings.

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.

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There are several factors—many beyond our control—that could cause results to differ significantly from our expectations. We describe some of these factors below. We describe other factors, such as credit, market, operational, liquidity, interest rate and other risks, elsewhere in this report (see, for example, “Balance Sheet Analysis”). We describe factors relating to the regulation and supervision of the Company in our 2002 Form 10-K. Any factor described in this report or in our 2002 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 2002 Form 10-K that could cause results to differ from our expectations.

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, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans.

Geopolitical conditions can also impact our earnings. Acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts including the aftermath of the war with Iraq, could impact business and economic conditions in the U.S. and abroad. The terrorist attacks in 2001, for example, caused an immediate decrease in demand for air travel, which adversely affected not only the airline industry but also other travel-related and leisure industries, such as lodging, gaming and tourism.

We discuss other business and economic conditions in more detail elsewhere in this report.

Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights. Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and hard to predict or anticipate.

The financial services industry is highly competitive.

We operate in a highly competitive industry which could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can now merge by creating a new type of financial services company called a “financial holding company,” which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and

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underwriting) and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the United States, further increasing competition in the U.S. market. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

We are heavily regulated by federal and state agencies.

The holding company, its subsidiary banks and many of its nonbank 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 nonbanks 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 and to Notes 3 (Cash, Loan and Dividend Restrictions) and 25 (Regulatory and Agency Capital Requirements) to Financial Statements in the Company’s 2002 Form 10-K.

Future legislation could change our competitive position.

Various legislation, including proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced in the Congress. This legislation may change banking statutes and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.

We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on the audit report covering those financial statements. Our financial condition and results of operations

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could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or that are materially misleading.

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. 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 introduce new products and services, achieve market acceptance of our products and services, and/or develop and maintain loyal customers.

Negative public opinion could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action. Because virtually all our businesses operate under the “Wells Fargo” brand, actual or alleged conduct by one business can result in negative public opinion about other Wells Fargo businesses. Although we take steps to minimize reputation risk in dealing with our customers and communities, as a large diversified financial services company with a relatively high industry profile, the risk will always be present in our organization.

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 nonbank 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

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creditors. For more information, refer to “Regulation and Supervision—Dividend Restrictions” and “—Holding Company Structure” in the Company’s 2002 Form 10-K.

Our accounting policies and methods are key to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so that not only do they comply with generally accepted accounting principles but also that they reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. Note 1 to Financial Statements and “Financial Review – Critical Accounting Policies” in the Company’s 2002 Form 10-K describes our significant accounting policies.

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. We discuss some examples below.

Merchant Banking. Our merchant banking activities include venture capital investments, which have a much greater risk of capital losses than our traditional banking activities. Also, it is difficult to predict the timing of any gains from these activities. Realization of gains from our venture capital investments depends on a number of factors—many beyond our control—including general economic conditions, the prospects of the companies in which we invest, when these companies go public, the size of our position relative to the public float, and whether we are subject to any resale restrictions. Factors such as a slowdown in consumer demand or a deterioration in capital spending on technology and telecommunications equipment, could result in declines in the values of our publicly-traded and private equity securities. If we determine that the declines are other-than-temporary, additional impairment charges would be recognized. Also, we will realize losses to the extent we sell securities at less than book value. For more information, see in this report “Balance Sheet Analysis—Securities Available for Sale.”

Mortgage Banking. The impact of interest rates on our mortgage banking business can be large and complex. Changes in interest rates can impact loan origination fees and loan servicing fees, which account for a significant portion of mortgage-related revenues. A decline in mortgage rates generally increases the demand for mortgage loans as borrowers refinance, but also generally leads to accelerated payoffs in our mortgage servicing portfolio. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and a decline in payoffs in our servicing portfolio. Although the Company uses dynamic and sophisticated models to assess the impact of interest rates on mortgage fees, amortization of mortgage servicing rights, and the value of mortgage servicing assets, the estimates of net income and fair value produced by these models are

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dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may overstate or understate actual subsequent experience. In addition, although the Company uses derivative instruments to hedge the value of its servicing portfolio, the hedges do not cover the full value of the portfolio and the Company can provide no assurances that the hedges will be effective to offset significant decreases in the value of the portfolio. For more information, see “Financial Review—Critical Accounting Policies—Mortgage Servicing Rights Valuation and Risk Management—Asset /Liability and Market Risk Management” in the Company’s 2002 Form 10-K.

We rely on other companies to provide key components of our business infrastructure.

Third parties provide key components of our business infrastructure such as internet connections and network access. Any disruption in internet, network access or other voice or data communication services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Technological or financial difficulties of a third party service provider could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party.

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 regulatory approval, and we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We might be required to divest banks or branches as a condition to receiving regulatory approval.

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.

Legislative Risk

Our business model is dependent on sharing information between the family of companies owned by Wells Fargo to better satisfy our customers’ needs. Laws that restrict the ability of our companies to share information about customers could negatively impact our revenue and profit.

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Our business could suffer if we fail to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense. We may not be able to hire people or to keep them.

Our stock price can be volatile.

Our stock price can fluctuate widely in response to a variety of factors including:

  actual or anticipated variations in our quarterly operating results;

  recommendations by securities analysts;

  new technology used, or services offered, by our competitors;

  significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

  failure to integrate our acquisitions or realize anticipated benefits from our acquisitions;

  operating and stock price performance of other companies that investors deem comparable to us;

  news reports relating to trends, concerns and other issues in the financial services industry;

  changes in government regulations; and

  geopolitical conditions such as acts or threats of terrorism or military conflicts.

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.

CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

As required by SEC rules, the Company’s management evaluated the effectiveness, as of September 30, 2003, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2003.

INTERNAL CONTROL OVER FINANCIAL REPORTING

No change occurred during the third quarter of 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

     
Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

    The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.

3(a)   Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K dated June 28, 1993. Certificates of Amendment of Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated July 3, 1995 (authorizing preference stock), Exhibits 3(b) and 3(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (changing the Company’s name and increasing authorized common and preferred stock, respectively) and Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (increasing authorized common stock)

(b)   Certificate of Change of Location of Registered Office and Change of Registered Agent, incorporated by reference to Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999

(c)   Certificate of Designations for the Company’s 1995 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995

(d)   Certificate Eliminating the Certificate of Designations for the Company’s Cumulative Convertible Preferred Stock, Series B, incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K dated November 1, 1995

(e)   Certificate Eliminating the Certificate of Designations for the Company’s 10.24% Cumulative Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated February 20, 1996

(f)   Certificate of Designations for the Company’s 1996 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated February 26, 1996

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3(g)   Certificate of Designations for the Company’s 1997 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated April 14, 1997

(h)   Certificate of Designations for the Company’s 1998 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated April 20, 1998

(i)   Certificate of Designations for the Company’s Adjustable Cumulative Preferred Stock, Series B, incorporated by reference to Exhibit 3(j) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998

(j)   Certificate Eliminating the Certificate of Designations for the Company’s Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K dated April 21, 1999

(k)   Certificate of Designations for the Company’s 1999 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K dated April 21, 1999

(l)   Certificate of Designations for the Company’s 2000 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3(o) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000

(m)   Certificate of Designations for the Company’s 2001 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated April 17, 2001

(n)   Certificate of Designations for the Company’s 2002 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated April 16, 2002

(o)   Certificate of Designations for the Company’s 2003 ESOP Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 15, 2003

(p)   By-Laws, incorporated by reference to Exhibit 3(m) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998

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4(a)   See Exhibits 3(a) through 3(p)

(b)   The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.

10(a)   Amendment effective January 1, 2004 to the Deferred Compensation Plan for Non-Employee Directors of the former Norwest, filed herewith

(b)   Amendment effective January 1, 2004 to the Directors’ Formula Stock Award Plan for directors of the former Norwest, filed herewith

(c)   Amendment effective January 1, 2004 to the Directors’ Stock Deferral Plan for directors of the former Norwest, filed herewith

(d)   Amendment effective January 1, 2004 to the Deferral Plan for Directors of the former Wells Fargo, filed herewith

(e)   Amendment effective January 1, 2004 to the Directors Stock Compensation and Deferral Plan, filed herewith

(f)   Deferred Compensation Plan as amended and restated effective January 1, 2004, filed herewith

31(a)   Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

(b)   Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

32(a)   Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350, furnished herewith

(b)   Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350, furnished herewith

99(a)   Computation of Ratios of Earnings to Fixed Charges, filed herewith. The ratios of earnings to fixed charges, including interest on deposits, were 3.62 and 3.14 for the quarters ended September 30, 2003 and 2002, respectively, and 3.55 and 3.09 for the nine months ended September 30, 2003 and 2002, respectively. The ratios of earnings to fixed charges, excluding interest on deposits, were 5.62 and 4.97 for the quarters ended September 30, 2003 and 2002, respectively, and 5.64 and 4.89 for the nine months ended September 30, 2003 and 2002, respectively.

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99(b)   Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends, filed herewith. The ratios of earnings to fixed charges and preferred dividends, including interest on deposits, were 3.62 and 3.13 for the quarters ended September 30, 2003 and 2002, respectively, and 3.54 and 3.08 for the nine months ended September 30, 2003 and 2002, respectively. The ratios of earnings to fixed charges and preferred dividends, excluding interest on deposits, were 5.61 and 4.95 for the quarters ended September 30, 2003 and 2002, respectively, and 5.62 and 4.88 for the nine months ended September 30, 2003 and 2002, respectively.

(b)   The Company filed the following reports on Form 8-K during the third quarter of 2003:

(1)   July 3, 2003, under Item 7, filing as exhibits documents regarding the Company’s medium-term note program, Series E, and subordinated medium-term note program Series F

(2)   July 8, 2003, under Item 7, filing as an exhibit the form of note for the Company’s Basket Linked Notes due October 9, 2008

(3)   July 15, 2003, under Item 12, regarding the Company’s financial results for the quarter ended June 30, 2003

(4)   July 30, 2003, under Item 7, filing as exhibits documents regarding the issuance by Wells Fargo Capital VIII of its 5.625% Capital Securities and the issuance by the Company of its 5.625% Junior Subordinated Debentures due August 1, 2033

(5)   August 29, 2003, under Item 7, filing as an exhibit the form of note for the Company’s Callable Notes Linked to the S&P 500 Index due August 25, 2009

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 7, 2003  WELLS FARGO & COMPANY
 
 
  By:   /s/  Richard D. Levy   
    Richard D. Levy   
    Senior Vice President and Controller
(Principal Accounting Officer) 
 
 

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