Wells Fargo Corporation — 11 2009 Donald L. Crooks Wagner College Robert S. Goodman Wagner College John Burbridge Elon University1 WFC www.wellsfargo.com The year of 2009 witnessed continued deterioration in the housing and credit markets, high unemployment rates, and tight credit. Many banks are stuggling and many have recently failed, including Colonial National and Guaranty Financial Group. Like many banks today, Guaranty had more than $3 billion of securities backed by adjustable-rate mortgages. Delinquency rates on their holdings soared as high as 40 percent before federal officials seized the bank in August 2009. Many homeowners today cannot make mortgage payments. The value of houses has dropped below the amount borrowed, causing great problems for all. This is the environment that Wells Fargo Bank and its competitors in the financial services industries face as they look to the future. History Wells Fargo is a storied name in American Old West folklore going back to the days of the stagecoach. Wells Fargo is the result of over 200 mergers including, most recently, Wachovia. The vast majority of these acquisitions, except for Wachovia, involved financial institutions in the far western part of the United States. An important acquisi- tion came in 1998 when San Francisco–based Wells Fargo acquired Norwest Corporation in a stock swap that valued Wells Fargo at $34 billion. The result was a San Francisco–based bank with branches in 21 states in the West and Midwest, $191 billion in combined assets, and almost 6,000 service outlets worldwide. Because Norwest was the country’s largest mortgage underwriter, the new bank became a major force in that market. It also had a presence in Canada, the Caribbean, Latin America, and other countries. By the end of 2008, Wells Fargo had built a very creditable reputation and was widely recognized as an industry leader. The following statistics based on industry sources and government statistics clearly show its size and strength: • 41st in revenue among all U.S. companies as ranked by Fortune • 17th most profitable company in the United States • 33rd largest employer in the United States • 18th most respected company in the world as ranked by Barron’s • “Aaa” credit-rated by Moody’s 112 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE EXHIBIT 1 Wells Fargo Organizational Chart Chairman President & CEO Dick Kovacevich John Stumpf CFO Office of Transition Howard Atkins Pat Callahan Wealth Management, Brokerage Wholesale Banking & Retirement Services Dave Hoyt David Carroll Chief Risk and Credit Officer Chief Auditor Mike Loughlin Kevin McCabe Technology and Operations Home and Consumer Finance Avid Modjtabai Mark Oman Card Services and General Counsel Consumer Lending Jim Strother Kevin Rhein Community Banking Carrie Tolstedt Source: www.wellsfargo.com. • The only Standard & Poor’s “AAA” bank in the United States. • Among the top 50 companies as ranked by Diversity, Inc. • Retail Banker of the Year according to U.S. Banker • Number-one commercial real estate lender [number of transactions] • 18th among the world’s most valuable brands according to the Financial Times Internal Issues Vision and Ethics “Our product: SERVICE. Our Value-added: FINANCIAL ADVICE. Our competitive advantage: OUR PEOPLE.” Wells Fargo provides banking, insurance, investments, mortgage, and consumer finance services for more than 25 million customers through over 6,000 stores, the Internet, and other distribution channels across North America and elsewhere internationally. The company’s statement says, “We’re headquartered in San Francisco, but we are decentral- ized so every local Wells Fargo store is a headquarters for satisfying all our customers’ financial needs and helping them succeed financially.” Wells Fargo strives to be the number-one financial services provider in each of their markets. As can be seen below, it has made great strides in that direction in the United States: • Number-one small business lender • Number-one agricultural lender • Number-two debit card issuer • Number-two prime home-equity lender • Number-three mutual fund provider among U.S. banks CASE 11 • WELLS FARGO CORPORATION — 2009 113 EXHIBIT 2 Wells Fargo/Wachovia U.S. Locations Wells Fargo retail banking stores—3,296 Wachovia retail banking stores—3,314 Total combined retail banking stores—6,610 Source: Wells Fargo 4Q2008 financial results presentation. Wells Fargo’s chairman and CEO, Richard M. Kovacevich, discusses the bank’s vision at length. He says, “This is not a task. This is a journey. Every journey has a desti- nation. To get to that destination, you need a vision. Ours is an ambitious one.” Kovacevich further states, “We are a big company. We will continue to grow—not to become bigger but as a result of getting better.... Regardless of how big we are and how much territory we cover our team shares certain values that hold us together wherever we are and whatever we do.” Wells Fargo puts considerable emphasis on its culture and image as seen by the following values: • Known by Our Own Team Members. “We’ll be known as a company that believes in people as a competitive advantage, a great place to work, an employer of choice, a company that really cares about people, knows the value that a diverse work force can bring, that encourages innovation: new and better ways of serving customers.” • Known by Our Customers. “We want to be known by our customers as a financial partner, for outstanding service and sound financial advice, satisfying all of their financial needs and helping them to succeed financially. Our customers, external and internal, are our friends. They’re the center of everything we do.” • Known by Our Communities. “We’ll be regarded as the premier financial services company in each of our markets. We’ll promote the economic advancement of everyone in our communities including those not yet able to be economically self- sufficient, who have yet to share fully in the prosperity of our extraordinary country. We’ll be known as an active community leader in economic development, in services that promote economic self-sufficiency, education, social services and the arts.” 114 DONALD L. CROOKS, ROBERT S. GOODMAN, AND JOHN BURBRIDGE • Known by Our Shareholders. “We’ll be known as a great investment. We’ll have financial results, not only among the very best in the financial services industry, but among the entire Fortune 500. Today, we’re the only bank in the United States with a Moody’s credit rating of “Aaa” [the highest possible rating]. Wells Fargo also believes that competing effectively and ethically are both at the forefront of its long-term objectives. Wells Fargo expects all of its team members (employees) to adhere to the highest possible standard of ethics and business conduct with customers, team members, stockholders, and the communities that it serves while complying with all applicable laws, rules, and regulations that govern its business. Its aim is to promote an atmosphere in which ethical behavior is well recognized as a priority and practiced throughout the organization. The following statement by Richard Kovacevich, the chairman and CEO, summarizes this emphasis: “Integrity is not a commodity. It’s the most rare and precious of personal attributes. It is the core of a person’s—and a company’s—reputation.” Recent Performance Wells Fargo has been a leading innovator in the use of the Internet and is in the forefront of using e-commerce in the financial industry. Wells Fargo has been fortunate to sidestep most of the subprime market mess and the accompanying derivative credit meltdown. Senior management has shown keen acumen in not pursuing the easy path and has moved forward to capture more and more of the mortgage and banking business in its geographic area. Wells Fargo has a vision (noted earlier), and its strategies complement that vision. At the end of 2008, Wells Fargo was in an enviable position as the largest financial institution headquartered in the western United States. It has an unbroken record of paying increasing dividends since 1995, when it paid $0.0525 per share. In 2008, the dividend had increased to $0.34 per share. A strong balance sheet and the ability to steer through the pitfalls that plagued many of its larger competitors have allowed Wells Fargo a stronger force in the banking industry in 2009. This is an important moment in its history as it con- siders its future. The following information provides additional information concerning the present: The Wachovia Acquisition In the fall of 2008, Wells Fargo considered acquiring Wachovia Bank. Wachovia, head- quartered in Charlotte, North Carolina, had been a rising East Coast bank growing by leaps and bounds over the previous decade. Since Wachovia’s merger with First Union Bank a few years before, Wachovia seemed to be very well positioned to take the next step in order to compete with the likes of Bank of America, Citigroup, Merrill Lynch, and even Morgan Stanley. However, all was not well with Wachovia, which had its own subprime mortgage problems. It was also overcommitted in credit default swaps, the same issue that brought down Bear Stearns, Merrill Lynch, and Lehman Brothers. Wells Fargo agreed to acquire all of Wachovia’s almost 2.2 billion shares of stock for $7 per share. It also announced it would issue $20 billion in new shares to pay for the transaction. Wells Fargo was purchasing an extensive banking system, especially strong in the East but saddled with a large portfolio of subprime mortgages. So although there would be continued downward pressure on housing prices, the value of Wachovia could drop. Wells Fargo management could only make an educated guess of potential loss. Wells Fargo and Wachovia saw this outwardly as a tremendous marriage of conve- nience presenting opportunities for one and survival for the other.