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FRESH OUT OF COLLEGE 31 YEARS AGO, John Stumpf landed a job as a repo man in Minneapolis. He would show up at the bank at 10:00 a.m. and work the phones until 5:00 p.m. trying to track down borrowers whose auto loans were past due. Then, after a short break for dinner, he would change into casual clothes and head out to hunt down and seize cars, often long past midnight.

"When you collect bad loans," says Stumpf, "you sure learn a lot about making good ones."

That streetwise education has served Stumpf, 54, well. Perhaps nothing could have prepared him better for the challenges he faces today as CEO of Wells Fargo & Co. In late June, when he succeeded retail banking legend Richard Kovacevich, things were looking rosy enough. The bank was finishing a record second quarter that would produce $2.28 billion in net income, 9 percent better than a year earlier, on $9.9 billion in revenue, up 13 percent. The performance capped a sterling two-decade run of 17 percent compound annual growth in profit that coincided with Kovacevich's tenure -- first as vice chairman and, since 1993, as CEO of Norwest Corp., which bought San Francisco­based Wells in 1998 and took its name.

Stumpf had barely taken over when the nation's already wounded mortgage markets descended into the chaos that has cost three financial services CEOs -- Peter Wuffli of UBS, Stanley O'Neal of Merrill Lynch & Co. and Charles Prince of Citi -- their jobs and led to tens of billions of dollars of write-offs. An entire industry, it seems, must relearn lessons about making good loans and bad loans. Not Wells, though. It's bigger than any of these institutions in the mortgage business and more dependent on it. But it has come through the crisis relatively unscathed -- so far.

In the dismal third quarter just ended, as one bank after another tallied up its write-offs -- or losses -- Wells held steady. Net income, in fact, rose to a record $2.283 billion, up 4 percent on the preceding year's quarter, while revenues, at $9.85 billion, climbed 10 percent. Per-share earnings, at 68 cents, fell 2 cents short of the analyst consensus estimate.

It's a remarkable achievement. Wells Fargo, after all, is a dominant force in a market in near shambles. The fifth-biggest U.S. bank by assets, with $549 billion, Wells draws nearly one fifth of its income from mortgage and home equity: In 2006 it ranked second in originations in the U.S. and first in loans serviced, according to newsletter "Inside Mortgage Finance." In early November, brimming with confidence, Wells announced a plan to buy back up to 75 million shares, worth $2.3 billion at current prices. By contrast, consider the travails of Wells's nearest competitor, Countrywide Financial Corp. -- No. 1 in originations and No. 2 in servicing. It posted a loss of $1.2 billion in the third quarter, is laying off 12,000 employees and in August turned to Bank of America Corp. for an emergency $2 billion capital infusion.

Wells is sporting its share of bruises, to be sure. Like other banks it took a hit in subprime mortgages and had to boost its credit-loss provisions by 46 percent, to $892 million, in the third quarter. Analysts were surprised by a sharp rise in losses in Wells's big home-equity portfolio. And there could be more mortgage-related damage to come. But all in all, considering the carnage in the financial world, Stumpf and Kovacevich, who plans to remain as chairman through 2008, have had plenty of reason to smile.

Can Wells continue to perform as well -- especially when it appears the mortgage crisis is deepening? Announcements by Merrill Lynch that it was writing down $8.4 billion in loans, $7.9 billion of them subprime, and by Citi that it would write off an additional $8 billion to $11 billion in bad loans have spooked the markets.

So far, analysts are keeping faith with the West Coast bank. "With the continued market deterioration, there could be greater write-downs," notes Joe Morford, an analyst at RBC Capital Markets in San Francisco, who retains an outperform on the shares. "But relative to other banks and brokers, there will probably be fewer write-downs at Wells Fargo."

Investors can thank the idiosyncratic business model and corporate culture of Wells, which likes to do things its own ornery way. It won't give earnings guidance to Wall Street and does not break down business-unit performance details as much as the market might like. But investors (the biggest is Warren Buffett's Berkshire Hathaway, with 6.5 percent) have been won over by its steady long-term performance, rock solid capital base -- it is the only triple-A-rated bank in the country -- and its approach. Wells combines widespread diversification across 84 separate business lines with a gung ho sales spirit and a no-nonsense approach to credit.

"We think the way to eliminate volatility from earnings is to have a breadth of businesses," says Kovacevich, adding that Wells's businesses "operate in different geographies, against different competitors, under different conditions, at different stages of maturity, and the culture is what holds it all together."

Kovacevich's emphasis on the soft side of management is anything but lip service. It is spelled out in a 36-page "Vision and Values" handbook known internally as "the bible" that all employees are asked to read and keep for reference. Wells's style can feel hokey -- its 5,900 retail branches are called "stores" and its customers are known as "guests" -- but it works. In community banking, where Wells serves 11 million households, the average customer uses 5.5 Wells products; 22 percent of its customers use more than eight. No other bank approaches those cross-selling figures.

Wells also got it right online, treating the Internet as a co-equal convenience for customers, who are free to choose branches and telephone contacts too. Today, 9.5 million, or 64 percent, of Wells checking account customers are active online users. No major bank worldwide has done better at bringing its customers online.

The sensitivity to cultural values also meant that when Kovacevich chose to step down early, in June, he had a handpicked successor in place, unlike such firms as Merrill and Citi that are hastily conducting searches for new CEOs. And his pick knows the ropes. As Kovacevich notes: "John Stumpf has lived and breathed that culture for more than two decades."

During Kovacevich's reign, Wells, and its predecessor, Norwest, have eschewed financial industry trends to focus almost single-mindedly on building the premier consumer banking franchise. Commercial lending and real estate contribute less than 10 percent of profits. Wary of clashing cultures, Wells has avoided the investment banking business and has virtually no footprint overseas: Just $7.9 billion of the bank's $362.9 billion total loan portfolio is foreign. It has thus forgone many of the great growth opportunities chased down by rivals -- particularly in such areas as China; but it has also steered clear of the periodic crises that have dinged the finance industry, from the Russian collapse of 1998 to the popping of the tech stock bubble in 2000.

"They've done a good job of zigging when the rest of the industry zags," says John McDonald, banking analyst with Banc of America Securities in New York.

In mortgages Wells has been doing more zagging. The bank's third-quarter net credit losses, $892 billion, rose $172 million, or 24 percent, from the second quarter; half of the increase came from its $83 billion home equity loan portfolio. Declines in mortgage servicing assets and mortgage production cost Wells $1 billion in revenue. That was offset by an equivalent gain from "hedging against a decline in the valuation of their servicing," says McDonald. He believes that Wells will have to bolster its reserves from 1.11 percent of loans, down from 1.17 percent in the second quarter. He recently lowered his 2008 earnings estimates on 13 of 17 large banks; he shaved Wells to $2.90 per share, from $2.95.

Yet McDonald remains a fan, and Wells maintains a high level of investor confidence. At a recent stock price of about $33, Wells was trading at 11.4 times projected 2008 earnings. That compares with Bank of America's 8.8, Citi's 8.1, JPMorgan Chase & Co.'s 9.7 and Wachovia Corp.'s 9.4. Among regional banks, SunTrust Banks and U.S. Bancorp equaled Wells's 11.4, PNC Financial Services Group weighed in at 11.9, and others were below 11.

Wells made its share of subprime loans, but it avoided the more reckless lending practices -- negative amortization loans and option adjustable rate mortgages, for instance. Nor did it rely on conduits or assemble the structured investment vehicles (SIVs) that have caused havoc for others. In the past 18 months, the bank grew increasingly cautious. It sold off some $60 billion in loans with troubling risk profiles, according to Victoria Wagner, a credit analyst with Standard & Poor's. It also halted purchases of riskier loans from brokers where it hadn't done the underwriting and moved away from adjustable-rate offerings.

"They stuck to a certain underwriting discipline during the boom times and limited their risks by being very careful about what loans were left in the portfolio," Wagner says

Wells might even profit from the market mess. With its steady profitability, watertight balance sheet and appetite for deals, it's positioned to be an acquirer or merger partner of choice. Kovacevich built the bank through 250 acquisitions. The biggest by far was Norwest's $34 billion acquisition in 1998 of Wells Fargo, which became vulnerable after system integration problems plagued its $11.6 billion purchase of First Interstate Bancorp. two years earlier.

Kovacevich's name has even been floated as a potential CEO for Citi, where he was once a senior executive. Why not a merger? Citi would benefit immensely from Wells's 23-state retail banking franchise. It's doubtful, for cultural reasons, that Wells would consider such a combination. But Jacqueline Reeves, a longtime industry follower and managing director of Bell Rock Capital, a Paoli, Pennsylvania, firm that manages more than $200 million in investor assets, thinks Wells should be "one of the beneficiaries of all this turmoil."

Figuring this out will be Stumpf's first great challange as successor to Kovacevich. It won't be easy. "We're replacing a guy with big shoes, but we think we've got the guy who can fill them," says Robert Joss, a Wells director since 1999 and dean of Stanford University's Graduate School of Business. "A big part of the challenge is to establish his identity as John Stumpf, as opposed to the guy who took over for Dick."

That identity will have to be forged in the midst of one of the banking industry's worst crises in memory.

DICK KOVACEVICH, BY ANY ESTIMATION, is "a tough act to follow," says Thomas Brown, a veteran banking analyst and follower of Wells who runs New York hedge fund Second Curve Capital. Kovacevich cut his business teeth running the Kenner Toys division of General Mills, became a top retail banking executive at Citi and at Wells created one of the banking industry's vaunted sales cultures, rewarding employees for working together in teams and selling multiple products to customers.

"A core value of the company is collaboration," explains Anat Bird, a former head of retail banking for Wells's northern California region. She recalls that on her first day working for Kovacevich in 1998, "He pulled me into his office and said, 'Winning is important here. But helping the whole team win is much more important.'"

Even in cutting deals, the bank applied its value system. Many of those deals were overseen by Stumpf, who says, "The key thing is winning the hearts and minds of employees." For example, when Kovacevich acquired Wells, he insisted on calling it a merger of equals, avoided talk of layoffs and gave his counterpart at Wells, Paul Hazen, the title of chairman until early 2001.

The second of 11 children, Stumpf learned all about teamwork growing up on a dairy farm outside of Pierz, Minnesota, a town of 1,300 residents about 100 miles north of Minneapolis. "Whether we were picking eggs or baling hay, it was always as part of a team," he says. Family members remember the affable and self-deprecating Stumpf as an orderly youngster who cleaned his plate at mealtimes, kept clothes stacked neatly in his bureau and was fastidious about his appearance. "His disposition, mannerisms and habits were all perfection," says his mother. She recalls that as a high-schooler, "the first thing he'd do when he got in his car was look in the rearview mirror to check his hair."

Stumpf worked for a year in a local bakery before enrolling at St. Cloud State University, just down the road. He earned a bachelor's degree in finance and his keep playing bass guitar at night for a rock-and-roll band called Mason-Dixon Line, which played songs from the 1950s, '60s and '70s. "It was the best job I ever had," he says. "I got paid for having fun."

As a college senior, Stumpf got his introduction to banking working as an intern at a small bank in St. Paul. He was attracted by the sense that "no matter what business you were in, there was always a bank in the middle." Upon graduation in 1976, he joined First Bank System (now U.S. Bancorp) in Minneapolis, and after his stint as a repo man, earned a promotion and was soon reviewing and approving credits. At night he earned an MBA in finance from the University of Minnesota.

In 1982 he jumped to crosstown rival Northwestern National Bank, as Norwest was then known. He spent a year as a branch officer before moving to the Minneapolis headquarters to do commercial loan workouts -- an area he ran until 1987, when he was made chief credit officer and head of the auto finance business.

Kovacevich arrived from Citi in 1986, and as he got down to work on the sales culture, Stumpf was rising, in part because of his credit sense. In 1991, two years after he was posted to Norwest Bank Arizona as chairman and CEO, Norwest acquired United Banks of Colorado in Denver, which had been weakened by bad real estate loans. Stumpf was assigned to use his workout skills to clean up that mess and his people skills to impart Kovacevich's culture. Stumpf had come to Kovacevich's attention when he was heading the commercial loan workout group in Minneapolis, and that's what got him the Colorado job. "It was our first major acquisition," Kovacevich recalls. "We wanted John to start running something, and there was a lot of workout to do in Colorado, so it was a good match."

Nursing that bank back to health was "challenging," Stumpf says, adding that the overriding lesson from that experience was that getting people committed and engaged was more important than setting rules. "When you trust people and invest in them as human beings, the results are usually bigger than you would imagine."

Stumpf showed a knack for managing growth. From 1994 to 1998 he was regional president of Norwest Bank Texas, where he oversaw the purchases of 30 community banks with a total of $13 billion in assets. "We'd announce a deal in the morning, and I'd spend the rest of the week going out and meeting each team member -- having coffee and doughnuts with them before work, or pizza and Cokes after work, talking about our values and culture, winning their hearts and minds," he says. Today, Wells is the Lone Star State's third-largest commercial bank in deposits, with $28 billion. When Norwest acquired Wells Fargo, Stumpf was put in charge of the combined retail operations in the Southwest, and by 2000 he was heading the Western Banking Group, covering ten states other than California. He became head of all community banking in July 2002, three years before becoming Kovacevich's No. 2 as COO.

Running a bank as spread out as Wells is a challenge. Kovacevich describes the job as that of a "CEO of CEOs," making sure that the right people are in the right jobs, orchestrating a culture that gets everyone pulling in the same direction and encouraging effective interactions between business units to boost sales. "I don't run this thing," Kovacevich quipped last year. "I kiss babies, cut ribbons and talk to reporters and analysts."

But he also prodded and led the cheering, obsessively focused on the key performance metric of the cross-sell ratio. Wells's rationale is simple: The more products customers have with the bank, the more profits they generate. The trick is in the execution. Wells effectively uses the cross-sell number as a benchmark and rallying point, and it's one way it holds team members, as employees are called, accountable in the way they serve their guests.

A target ratio of eight products per customer is but one of the long-term corporate performance goals that are underscored as team initiatives, along with double-digit earnings and revenue growth every year, and return on equity of at least 20 percent. (It was 19.12 percent in the third quarter.) Branches are ranked on core product sales and profits per day, cross-selling success and closed referrals. Wells commissions surveys from the Gallup Organization to regularly measure "employment engagement," calculating what executives call the happy-to-grumpy ratio in the workforce. "There's a very strong correlation between engaged employees and results," Kovacevich says.

Brad Strothkamp, a senior analyst with Forrester Research in San Francisco who worked for Wells's online banking operation between 1997 and 2004, says the secret of Wells's success lies in product coordination, which provides better financial deals for customers who use multiple products and services. One example is a portfolio management account, which, rather than basing discounts simply on account balances, factors in the total relationship -- including balances on home equity, credit card and mortgage loans -- to figure any discount.

Though it sounds simple, Strothkamp says that in practice it's exceedingly difficult for banks to build the systems and structures required to overcome the turf mentalities of individual product silos that typically have their own profit-and-loss statements. "It's not the camaraderie and culture that make Wells a highly profitable bank, it's the tools and products," Strothkamp says. "To get that greater wallet share, you have to put some real money back into the customer's pocket. Wells does that, and most other banks don't."

It will take good fundamentals to get through the mortgage crunch. S&P analyst Wagner says Wells is better positioned than most banks to weather the storm, and as of now its triple-A rating isn't in jeopardy. Loan-loss provisions and charge-offs will likely rise as mortgage origination volumes fall, but the company bears little credit risk after having securitized and sold off the diciest loans to investors. Wells gains a hedge as a servicer of $1.4 trillion in mortgage loans. It provides administration, collection and other functions that yield an annuitylike fee-income stream, and it's first in the collection line if loans go bad. "They're among the very best at mitigating and managing risk to avoid earnings volatility," says Wagner.

Wells's underwriting discipline helps. Banc of America's McDonald says that Wells was smart to sell off adjustable-rate mortgage holdings in late 2006 and early 2007 and that management has been "good stewards of the balance sheet." In the third quarter 57 percent of new originations in the subprime area were fixed-rate loans.

Wells senior executive vice president for home and consumer finance Mark Oman says the only significant subset of sketchy loan quality on the company's books is a $24 billion portfolio of nonprime mortgages issued for debt-consolidation purposes. These are all loans that the company underwrote itself to existing customers. According to CFO Howard Atkins, these loans in the third quarter -- with an average size of $127,000, an average FICO credit score of 642 (less than 620 is generally considered subprime) and an average loan-to-value ratio of 77 percent -- generated annualized losses of less than 20 basis points. About 46 percent of that portfolio is fixed-rate loans. The remainder are ARMs, whose rates begin to rise after three years, which could be tricky to manage, though Atkins says that borrowers' abilities to pay reset rates were factored in during underwriting.

Wagner says a bigger threat lies in Wells's home equity portfolio; most of that exposure follows from existing Wells first mortgages. The third-quarter loss in this area, $157 million, was 0.77 percent of annualized average loans, up from $68 million, or 0.44 percent, in the second quarter. "Clearly, profits from mortgage banking will be lower," Wagner says. "But Wells is so diversified and conservative, it shouldn't be bad."

The bank also boasts a tier-1 capital ratio of 8.21 percent of assets as of the end of the third quarter. That's down from 8.74 a year earlier, but analyst McDonald says the decline is not a concern. It's still high within Wells's peer group -- Bank of America is at 8.22, Wachovia Corp. 7.2 -- and "the bank's capital and liquidity metrics are still stronger than most."

OBSERVERS THINK THAT STUMPF might look to an acquisition outside the mortgage area, making his mark through geographical expansion. Wells has a history of opportunistic, fill-in acquisitions such as last month's purchase of the $7.4 billion-in-assets, 41-branch Greater Bay Bancorp of East Palo Alto, California. Kovacevich repeatedly dismissed talk of deals east of the Mississippi, arguing it would dilute a franchise that has stayed focused on the western -- and faster-growing -- half of the U.S. Shortly after he was named president in 2005, Stumpf raised some eyebrows when he called the Southeast a "very attractive" market, but today he is Kovacevich-esque on the subject.

"The Southeast has good demographics," he says, adding that he "learned over time the value of being No. 1, 2 or 3 in a market, because the density of distribution vis-à-vis competitors matters a lot." It would therefore take a large deal to make an impact in virgin territory, he says, "and I view a large deal as highly, highly unlikely."

That could change. Stumpf doesn't rule out national expansion, but says it won't happen by setting out to "become a national bank." Rather, he says, "If you do things better than the competition, then you get the opportunity to extend it in a national way through a good acquisition opportunity or, over time, through organic growth."

Meantime, other challenges loom. For all its efforts to present a friendly face to consumers, Wells has been a laggard in the University of Michigan's American customer satisfaction index, falling below average banking industry scores. Stumpf says that's a downside of cross-selling success: "When you have six or seven products with a customer, there are more opportunities to make a mistake." Since 2004, Wells has surveyed 50,000 customers a month to identify shortcomings and encourage improvements among the branches. Last year it launched the "One Wells Fargo" initiative to shorten service times, simplify product menus and empower call-center representatives to fix problems the first time a customer calls.

Such technical fixes, Stumpf says, are key to being competitive. "The big innovations in this industry won't be new products or services," he says. "They'll be behind-the-curtains engineering that make our systems and processes more elegant." The latest ACSI report, in February, proclaimed that "Wells Fargo no longer is playing catch-up with the rest of the industry." On the scale of customer satisfaction, it registered a 5-point increase, to 72, over the prior year, the biggest jump in the industry.

Stumpf also has investor complaints to answer. Wells is among the shrinking minority of companies that offer only a prerecorded quarterly earnings call, with no question-and-answer session. The financial reports break the operation down into only three segments -- community banking, wholesale banking and the Wells Fargo Financial consumer finance business. Most retail, small business and mortgage results are lumped together in community banking, with subprime lending under Wells Fargo Financial. BofA Securities' McDonald grouses about a "lack of visibility" of future mortgage revenues, though he views the entire mortgage sector as opaque in this regard.

R. Scott Siefers, an analyst with Sandler O'Neill & Partners in New York, adds, "All you really get is anecdotal commentary but no real hard data." Kovacevich's team and track record have banked some trust with analysts and portfolio managers, but they would "appreciate the opportunity to question management about the numbers in a public setting," Siefers says.

Staying on his predecessor's message, Stumpf argues that the various businesses are too tightly linked to warrant a reporting overhaul. "Mortgage is part of the consumer business," he says, "and we don't look at consumers like a beef cow at the butcher, where there's steak here and loin there. The business can't be managed in a way that bifurcates consumers into pieces."

In his continued, albeit diminished, advisory role, Kovacevich can help Stumpf through market stresses and shore up his credibility with investors. "My job isn't to be hands-on and make decisions," says Kovacevich. "But I still know everything that's going on here. And then sometimes we call a time-out and get everyone together to talk about things."

Wells has successfully navigated or evaded oil-patch, overseas and technology market downturns, and if it can do the same this time around, then Stumpf won't have to dust off his old repo skills after all.

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