November 11, 2004

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Presentation to McCombs School of Business

• November 11, 2004

Frank W. Schageman Senior Vice President,
Regional Manager Houston Commercial
Banking
Robert A. Chereck Executive Vice President,
Division Manager Texas Commercial
Banking
Developing RELATIONSHIPS. Providing SOLUTIONS
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Agenda

• Introduction to Wells Fargo Commercial
  Banking
• Comments regarding banking and the financial
  services industry
• Case study DistribuCo, Inc.
• Q A

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First a quiz.

• Wells Fargos ticker symbol is?
• WFC
• Wells Fargos market cap. is? (within 4B)
• 103 B /- (as of 11/4/04)
• Wells Fargos debt rating?
• Aaa (only commercial bank, first since 1997)
• Amount lost in Enron debacle?
• 0

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First a quiz.

• Three banks have larger market caps than WFC, who
  are they?
• Hint pick two JPMorgan Chase/Bank One,
  Citigroup, Wachovia, Fifth Third Bank,
  BofA/Fleet, Comerica, U.S. Bank, Bank of NY.
• Citi - 239B,
• BofA/Fleet - 186B,
• JPMorganChase/Bank One - 140B

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Our Rich History

• Established in 1852 by Henry Wells and William
  Fargo
• Financed the first cross-country stagecoach line
  in 1858
• Purchased First Interstate in 1996
• Merged with Norwest Bank in 1998
• Voted Most Admired Bank by Fortune magazine
• Only Aaa rated bank
• CEO, Dick Kovacevich, American Bankers Banker of
  the Year in 2003.

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Wells Fargos 23 state territory
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Market Recognition

• Most Admired U.S. commercial bank Fortune
• Best Commercial Internet Bank Global Finance
• Among Top 100 places to work for working mothers
  Working Mother Magazine
• Second most admired bank globally - Fortune
• Best Bank for valuing customers time - Forbes
• Best bank in the U.S. - SmartMoney

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Wells Fargo Key Facts (9/30/04)

• Assets ... 422 billion
• Team Members ... 139,000
• Customer Households .. 24 million
• Stores . 5,600
• ATMs .. 6,257
• Market Capitalization . 103 billion
• Only Aaa rated bank in U.S.

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Meeting All Wells Fargos Customers Needs
SmallBusinesses(0-10MMSales)
HighNet WorthConsumers
Consumers
LargeBusinesses(500MMSales)
Middle MarketBusinesses(10-500MMSales)
BusinessBanking
PrivateClientServices
RetailBanking
U.S.CorporateBanking
CommercialBanking
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Commercial Banking Key Statistics

• Delivery model RCBOs (Regional Commercial
  Banking Offices) and LPOs (Loan Production
  Offices).
• Approximately 1,900 full-time employees.
• More than 12,000 customer relationships.
• 65 physical office locations throughout the U.S.
• High level of service through relationship
  banking approach.
• Fast, local decision making on credit requests.
• An impressive array of treasury management
  solutions tailored to the needs of each business.
  
• Commercial Electronic Office (CEO)
  Internet-based portal for Commercial clients to
  access all services

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Primary Delivery ChannelRegional Commercial
Banking Office (RCBO)
Key RVP Regional Vice President LTM Loan Team
Manager CSM Customer Service Manager RM
Relationship Manager RA Relationship
Associate BDO Business Development Officer TMSC
Treasury Management Sales Consultant
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Typical Customer ProfileWho is our Target
Market?

• Annual sales of 20 million to 1 billion
• Average Asset Quality Rating (AQR)
• Relatively low leverage
• Established long, profitable track record
• Well-managed
• Attractive risk/return

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Profitability MetricsHow do we manage our
business?

• What we measure.
• PTPP Pre-Tax Pre-Provision
• NIACC Net Income After Capital Charge
• How we measure it
• ProfitMax
• Gives decision-makers the ability to quickly
  determine the value (force-rank) any
  relationship by profitability
• Outlines PTPP and NIACC of each relationship
• Automatic feeds from source systems
• Easily accessible by line staff enabling
  real-time decisions

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Multi-product RelationshipsKey to Our Success

• Key partners include..
• Wholesale Banking
• U.S. Corporate
• Capital Markets
• Equipment Finance and Asset based Lending
• International
• Foreign Exchange
• Investments
• Institutional Trust
• Wells Capital Management
• Private Client Services
• Other Units as Appropriate
• Retail, Business Banking, etc.

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Impact of Cross-Selling
Average Pre-Tax Profit Per Customer (000)
Number of Products Per Customer
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Cross-Sell SuccessForeign Exchange
Revenue MM
Impact of Euro?
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Changing Revenue Stream
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Case Study
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Case Study

• Situation Analysis
• Background Details
• Wells Fargos Role
• Client Options
• Valuation of Target
• Loan/Credit Analysis
• Key Risk Factors
• Strengths Weaknesses
• Financial Statements Ratios
• Sources of Repayment
• Collateral Analysis
• Credit Analysis
• Result

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Situation Analysis

• Client (DistribuCo) is a 1.6 billion revenue,
  Texas-based, private distributor of wholesale
  groceries to independent grocers and convenience
  stores.
• Shareholders of its largest customer
  (RetailCo), a Texas-based grocery retailer,
  intend to sell.
• RetailCo is DistribuCos largest customer
  (represents significant amount DistribuCos
  annual revenues and cash flow).

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Situation Analysis

• Unexpected death of of one of two managing
  shareholders at DistribuCo.
• Large grocery chains (Kroger, HEB) and Wal-Mart
  impacting Texas grocery retail market.
• If you are DistribuCo, what do you do?

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Background Details

• DistribuCo started in Texas in 1920s to serve
  the independent grocer
• Largest grocery distributor in Texas and 9th
  largest in U.S.
• Low cost operator in a very low margin business
  where pennies matter
• Drivers continued success of independent
  (neighborhood) grocery stores vs. large
  chains/Wal-Mart, ability to turn inventory,
  maniacal control of costs

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Background Details

• RetailCo started in 1970s by two partners that
  opened first grocery store concepts in Latin
  America, Mexico
• Opened first store in 1973 catering to
  first-generation Latin American immigrants a
  little bit of home
• Today, RetailCo targets the fast-growing Latino
  market in Texas with 50 locations in urban centers

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Wells Fargos Role

• Asked by the Board and Management to identify and
  evaluate possible strategies
• Recommend a strategy and steps required to
  execute that strategy
• Valuation of RetailCos business
• Underwriting of acquisition financing and
  ultimate syndication of the loan to the bank
  market.

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Client Options

• Passive Strategies
• Hope that another grocery chain (that lacks its
  own captive distribution network) buys
  RetailCo
• Hope that another grocery distributor (that lacks
  local distribution infrastructure) buys RetailCo
  (sue for peace, sign distribution contract)
• Active Strategies
• Shrink business assuming RetailCo business will
  eventually be lost
• Sell
• Buy RetailCo, vertically integrate

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Valuation

• Based on
• DCF Method tested against Comparative Multiple
  Analysis and 3rd-party comparative index
• Discount rate is a f(CAPM, after-tax cost of debt
  capital) to determine capitalization-adjusted
  cost of capital

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Valuation
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Key Risk Factors

• Acquisition/Execution Risk
• Increasing Competition
• Thin Operating Margins
• Management Succession

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DistribuCo Strengths Weaknesses

• Strengths
• 82-year history
• President and owner has been with the Company 45
  years
• Largest wholesale distributor to independent
  grocery stores and c-stores in the region
• Largest wholesale distributor to independent
  grocery stores and c-stores in the region
• High volume with 1.6Bn in annual sales
• 140MM in cash (pre-acquisition)
• Only substantial debt is owed to shareholders
• 240MM in tangible net worth
• Solid and experienced management team
• Weaknesses
• Low margins
• Customer concentration
• Leverage will increase post acquisition of
  RetailCo

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RetailCo Strengths Weaknesses

• Strengths
• 30-year history
• Sound management team including its president who
  has been with the company for 30 years
• Grocery chain with the most knowledge of the
  Hispanic market in the metropolitan areas in
  which it serves
• 1.1B in sales 125MM in cash, 11MM in debt, and
  211MM in tangible net worth
• Weaknesses
• 2 3 net margin
• Competition is putting pressure on sales and
  margins
• Leverage will increase post acquisition by
  DistribuCo

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Sources of Repayment

• Cash Flow from Operations
• Liquidation of Collateral

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Financials Ratios

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Financials Ratios


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Collateral Analysis
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Credit Analysis

• History of profitable growth, free cash flow,
  liquidity and stable management teams (track
  record)
• All growth financed by earnings/equity, little
  historical use of leverage (well-capitalized)
• Combination of previously un-levered firms
  relatively simple from an accounting perspective

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Credit Analysis

• Ample ability to repay funds borrowed to purchase
  RetailCo
• Apparent strong secondary source of repayment in
  collateral values
• Impact of aggressive large grocery retail chains
  and Wal-Mart on ability of DistribuCo/RetailCo
  to generate free cash flow in the future (said
  another way WILL THE STRONG RESULTS OF THE PAST
  BE REPEATED?)

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Offering Memorandum
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Result

• July 2004 Wells Fargo mandated to evaluate
  strategic alternatives, provide valuation and
  financing for RetailCo acquisition
• August 2004 Provided 250 million loan
  commitment to back the acquisition
• September 2004 Loan syndication launched to sell
  a portion of the loan to other lenders
• Late September 2004 Loan syndication receives
  overwhelming response (raised 2x the target loan
  commitments)
• Mid-October 2004 Acquisition completed with
  financing from Wells Fargo and Loan Syndicate
  (includes 8 participating banks)

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• QA

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