Wells Fargo - 10-Q quarterly report FY

Wells Fargo & Company is a $595 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 institutions in all 50 states of the U.S. and in other countries. We ranked fifth in assets and fourth in market value of our common stock among U.S. bank holding companies at March 31, 2008. When we refer to “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company.

Our first quarter 2008 results reflected a combination of solid business growth, strong operating margins and further balance sheet strengthening. Despite a $2.0 billion pre-tax provision for credit losses – including an additional $500 million credit reserve build in the quarter – we earned $2.0 billion (after tax), or $0.60 per share. Our ability to earn through these higher net credit losses reflected the benefit of our diversified business model, as well as the attractive growth opportunities we are realizing in this challenging environment. Our first quarter 2008 results included double-digit revenue growth (up 12% year over year) and positive operating leverage. Even with higher credit costs, our return on assets (ROA) of 1.40% and return on equity (ROE) of 16.86% remained strong and at the higher end of our peers. Our net interest margin improved 7 basis points to 4.69% on a linked-quarter basis, and was one of the highest among large U.S. bank holding companies. We increased our allowance for credit losses by providing $500 million in excess of net charge-offs in first quarter 2008 to build reserves for future credit losses inherent in our loan portfolio. Our capital ratios increased from year-end 2007 notwithstanding a 16% (annualized) linked-quarter increase in earning assets, and liquidity remained strong due largely to continued core deposit growth.

Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitate growth in strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us. Our average retail banking household now has a record 5.6 products with us. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our core products grew this quarter from a year ago, with average loans up 19%, average core deposits up 9% and assets under management or administration up 11%.

We believe it is important to maintain a well-controlled environment as we continue to grow our businesses. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We have maintained strong capital levels to provide for future growth. Our stockholder value has increased over time due to customer satisfaction, strong financial results, investment in our businesses, consistent execution of our business model and the management of our business risks.

Our financial results included the following:

Net income for first quarter 2008 was $2.00 billion ($0.60 per share), compared with $2.24 billion ($0.66 per share) for first quarter 2007. ROA was 1.40% and ROE was 16.86% for first quarter 2008, compared with 1.89% and 19.68%, respectively, for first quarter 2007.

Net interest income on a taxable-equivalent basis was $5.81 billion for first quarter 2008, up 15% from $5.04 billion for first quarter 2007, primarily driven by strong growth in both loans and interest-bearing core deposits. The net interest margin increased 7 basis points to 4.69% for first quarter 2008 from fourth quarter 2007 as the benefit of lower funding costs offset the growth in earning assets. The decline in the net interest margin from 4.95% for first quarter 2007 was largely due to the 21% growth in earning assets.

Noninterest income increased 8% to $4.80 billion for first quarter 2008 from $4.43 billion for first quarter 2007. Fee income growth largely reflected continued success in satisfying the financial needs of our customers, with cross-sell reaching a record 5.6 products in Retail Banking and a record 6.2 in Wholesale Banking. Fee income growth was particularly strong year over year in insurance (up 26%), debit and credit card fees (up 19%) and deposit service charges (up 9%), with solid growth in trust and investment fees (up 4% despite a 7% decline in the S&P500^®Index). Net gains from equity investments increased $216 million from a year ago, reflecting the $334 million gain in the quarter from our ownership in Visa, which completed its initial public offering (IPO) in March 2008.

Interest rate and credit spread volatility was particularly pronounced in first quarter 2008. The more significant market-related effects included:

Revenue, the sum of net interest income and noninterest income, grew 12% to $10.56 billion in first quarter 2008 from $9.44 billion in first quarter 2007 and included the $334 million gain from the Visa IPO. Once again, many of our businesses achieved double-digit, year-over-year revenue growth, including commercial banking, asset-based lending, insurance, international, wealth management, regional banking, debit and credit cards, mortgage banking, business direct, Small Business Administration lending and business payroll services. We continued to have a good balance between loan and deposit spread revenue and fee-based revenue, reflecting record cross-sell in both our retail and wholesale businesses.

Noninterest expense was $5.46 billion for first quarter 2008, down $64 million, or 1%, from first quarter 2007 and included a $151 million reversal of Visa litigation expense related to the Visa IPO. First quarter 2008 expenses included higher salaries, sales-related insurance costs and net occupancy costs, more than offset by lower incentive compensation (reduced incentive compensation accruals), employee benefits and outside professional services costs. We continued to invest in growing our businesses, opening 11 retail banking stores and converting 18 Greater Bay Bancorp stores during the quarter. The efficiency ratio improved to 51.7% for first quarter 2008 from 58.5% a year ago.

Net charge-offs for first quarter 2008 were $1.5 billion (1.60% of average total loans outstanding, annualized), compared with $1.2 billion (1.28%) for fourth quarter 2007 and $715 million (0.90%) for first quarter 2007. Total provision expense in first quarter 2008 was $2.0 billion, including a $500 million credit reserve build, primarily for losses in the National Home Equity Group (Home Equity) and Business Direct (primarily unsecured lines of credit to small businesses) portfolios. The $813 million increase in net credit losses from first quarter 2007 included $364 million in the real estate 1-4 family junior lien category, primarily from Home Equity, and $166 million in the commercial category, primarily from Business Direct. Residential real estate values continued to decline in the quarter and the number of markets adversely impacted continued to increase. As previously disclosed, we segregated approximately $12 billion of Home Equity loans into a liquidating portfolio in fourth quarter 2007, which has decreased to $11.5 billion at March 31, 2008. The liquidating portfolio produced $163 million in net charge-offs in first quarter 2008, for an annualized quarterly loss rate of 5.58%.

Other consumer portfolios performed as expected during the quarter. Net charge-offs in the real estate 1-4 family first mortgage portfolio increased $57 million in first quarter 2008 from first quarter 2007, including an increase of $23 million in the Wells Fargo Financial debt consolidation portfolio and $21 million in the Home Mortgage portfolio, but were still at relatively low levels. The increase in mortgage loss rates was consistent with the continued declines in home prices. Despite the $123 million increase in net charge-offs from first quarter 2007, the credit card portfolio continued to perform as expected. Delinquency in our auto portfolio improved in first quarter 2008. This portfolio has received significant management attention and the changes in underwriting and collections made in 2006 and 2007 have stabilized losses.

Commercial and commercial real estate net charge-offs increased $166 million to $268 million in first quarter 2008 from $102 million in first quarter 2007. The vast majority of commercial loans (other real estate mortgage, real estate construction and lease financing) continued to perform as expected and losses remained modest. However, losses have increased in the Business Direct portfolio, with net charge-offs up $92 million from first quarter 2007. These loans have tended to perform like credit cards. Most of the increase in Business Direct losses occurred in certain metropolitan areas within California, Nevada and Florida, and appears to be concentrated in industries related to real estate or where the business owner may be experiencing difficulty with a home loan.

The provision for credit losses was $2.0 billion in first quarter 2008, $2.6 billion in fourth quarter 2007 and $715 million in first quarter 2007. The provision for first quarter 2008 included an additional $500 million in credit reserve build due to higher credit losses inherent in the loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $6.01 billion (1.56% of total loans) at March 31, 2008, compared with $5.52 billion (1.44%) at December 31, 2007, and $3.97 billion (1.22%) at March 31, 2007.

Total nonaccrual loans were $3.26 billion (0.84% of total loans) at March 31, 2008, compared with $2.68 billion (0.70%) at December 31, 2007, and $1.75 billion (0.54%) at March 31, 2007. The majority of the increase in nonaccrual loans from a year ago was in portfolios affected by the residential real estate issues, including an increase of $517 million in Wells Fargo Financial real estate, $283 million in commercial lending, primarily in loans to home builders and developers, and $182 million in Home Equity. Total nonperforming assets (NPAs) were $4.50 billion (1.16% of total loans) at March 31, 2008, compared with $3.87 billion (1.01%) at December 31, 2007, and $2.67 billion (0.82%) at March 31, 2007. As in the prior quarter, we continued to hold more foreclosed properties than we have historically. Foreclosed assets were $1,215 million at March 31, 2008, $1,184 million at December 31, 2007, and $909 million at March 31, 2007. Foreclosed assets, a component of total NPAs, included $578 million, $535 million and $381 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loans at March 31, 2008, December 31, 2007 and March 31, 2007, respectively, consistent with regulatory reporting requirements. The foreclosed real estate securing GNMA loans of $578 million represented 15 basis points of the ratio of NPAs to loans at March 31, 2008. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.

The Company and each of its subsidiary banks continued to remain well-capitalized. The ratio of stockholders’ equity to total assets was 8.09% at March 31, 2008, 8.28% at December 31, 2007, and 9.48% at March 31, 2007. Our total risk-based capital (RBC) ratio at March 31, 2008, was 11.01% and our Tier 1 RBC ratio was 7.92%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our total RBC ratio was 10.68% and 12.09% at December 31, 2007 and March 31, 2007, respectively, and our Tier 1 RBC ratio was 7.59% and 8.68% for the same periods. Our Tier 1 leverage ratio was 7.04%, 6.83% and 7.81% at March 31, 2008, December 31, 2007 and March 31, 2007, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.

On January 1, 2008, we adopted the following new accounting pronouncements:

On April 30, 2007, the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permit a reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable), against derivative instruments executed with the same counterparty under the same master netting arrangement. The provisions of this FSP are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted FSP FIN 39-1 on January 1, 2008, and it did not have a material effect on our consolidated financial statements.

On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7, 2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require that for endorsement split-dollar life insurance arrangements and collateral split-dollar life insurance arrangements where the employee is provided benefits in postretirement periods, the employer should recognize the cost of providing that insurance over the employee’s service period by accruing a liability for the benefit obligation. Additionally, for collateral assignment split-dollar life insurance arrangements, EITF 06-10 requires an employer to recognize and measure an asset based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater Bay Bancorp.

On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides the staff’s views on the accounting for written loan commitments recorded at fair value under U.S. generally accepted accounting principles (GAAP). To make the staff’s views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105, Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 states the expected net future cash flows associated with the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109, which we adopted on January 1, 2008, are applicable to written loan commitments recorded at fair value that are entered into beginning on or after January 1, 2008. The implementation of SAB 109 did not have a material impact on our first quarter 2008 results or the valuation of our loan commitments.

On December 4, 2007, the FASB issued FAS 141R, Business Combinations. This statement requires an acquirer to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, to be measured at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R should be applied prospectively to business combinations beginning with the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact that FAS 141R may have on our consolidated financial statements.

On December 4, 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. FAS 160 specifies that noncontrolling interests in a subsidiary are to be treated as a separate component of equity and, as such, increases and decreases in the parent’s ownership interest that leave control intact are accounted for as capital transactions. It changes the way the consolidated income statement is presented by requiring that an entity’s consolidated net income include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement should be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact that FAS 160 may have on our consolidated financial statements.

On February 20, 2008, the FASB issued Staff Position FAS No. 140-3, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FSP FAS 140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under FAS 140 unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. The provisions of this FSP are effective beginning on January 1, 2009, and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after this date. Early application is prohibited. We are currently evaluating the impact that FSP FAS 140-3 may have on our consolidated financial statements.

On March 19, 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance, and cash flows. The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 will not affect our consolidated financial statements.

Our significant accounting policies are fundamental to understanding our results of operations and financial condition, because some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Five of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern the allowance for credit losses, the valuation of residential mortgage servicing rights (MSRs) and financial instruments, pension accounting and income taxes. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee. These policies are described in “Financial Review – Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2007 Form 10-K.

FAIR VALUE OF FINANCIAL INSTRUMENTS

We use fair value measurements to record fair value adjustments to certain financial instruments and determine fair value disclosures. (See our 2007 Form 10-K for the complete critical accounting policy related to fair value of financial instruments.)

Approximately 23% of total assets ($136.7 billion) at March 31, 2008, and 22% of total assets ($123.8 billion) at December 31, 2007, consisted of financial instruments recorded at fair value on a recurring basis. At March 31, 2008, approximately 83% of these financial instruments used valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value. The remaining 17% of these financial instruments (4% of total assets) were measured using model-based techniques, or Level 3 measurements. Substantially all of our financial assets valued using Level 3 measurements consisted of MSRs or investments in asset-backed securities collateralized by auto leases. In first quarter 2008, $1.1 billion of mortgages held for sale were transferred into Level 3 from Level 2 due to reduced levels of market liquidity for certain residential mortgage loans. Approximately 1% of total liabilities ($6.2 billion) at March 31, 2008, and 0.5% ($2.6 billion) at December 31, 2007, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements were $408 million at March 31, 2008.

See Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional detail for first quarter 2008. See Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2007 Form 10-K for a detailed discussion of the key assumptions used to determine the fair value of our MSRs and the related sensitivity analysis.

NET INTEREST INCOME

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

Net interest income on a taxable-equivalent basis increased 15% to $5.81 billion in first quarter 2008 from $5.04 billion in first quarter 2007, primarily driven by strong growth in both loans and interest-bearing deposits. The net interest margin increased 7 basis points to 4.69% for first quarter 2008 from fourth quarter 2007 as the benefit of lower funding costs offset the growth in earning assets. The decline in the net interest margin from 4.95% for first quarter 2007 was largely due to the 21% growth in earning assets.

Average earning assets increased $86.1 billion (21%) to $496.9 billion in first quarter 2008 from $410.8 billion in first quarter 2007. Average loans increased to $383.9 billion in first quarter 2008 from $321.4 billion a year ago. Average mortgages held for sale decreased to $26.3 billion in first quarter 2008 from $32.3 billion a year ago. Average debt securities available for sale increased to $75.2 billion in first quarter 2008 from $44.7 billion a year ago.

Core deposits are an important contributor to growth in net interest income and the net interest margin, and are a low-cost source of funding. Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose 9% to $317.3 billion for first quarter 2008 from $290.6 billion for first quarter 2007 and funded 83% and 90% of average loans in first quarter 2008 and 2007, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $11.5 billion (5%) to $228.4 billion for first quarter 2008 from a year ago. Average mortgage escrow deposits were $20.4 billion for first quarter 2008, down $205 million from a year ago. Average savings certificates of deposits increased to $41.9 billion in first quarter 2008 from $38.5 billion a year ago and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $250.0 billion in first quarter 2008 from $234.3 billion a year ago. Total average interest-bearing deposits increased to $258.4 billion in first quarter 2008 from $221.0 billion a year ago.

The following table presents the individual components of net interest income and the net interest margin.

NONINTEREST INCOME

We earn trust, investment and IRA fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At March 31, 2008, these assets totaled $1.13 trillion, up 11% from $1.02 trillion at March 31, 2007. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. The 4% increase in these fees in first quarter 2008 from a year ago was due to continued growth across all trust and investment management businesses, despite a 7% decline in the S&P500 Index.

We also receive commissions and other fees for providing services to full-service and discount brokerage customers. At March 31, 2008 and 2007, brokerage balances totaled $126 billion and $120 billion, respectively. Generally, these fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, or asset-based fees, which are based on the market value of the customer’s assets.

Card fees increased 19% to $558 million in first quarter 2008 from $470 million in first quarter 2007, primarily due to an increase in the percentage of our customer base using a Wells Fargo credit card and to higher credit and debit card transaction volume. Purchase volume on these cards was up 18% from a year ago and average card balances were up 30%.

Mortgage banking noninterest income was $631 million in first quarter 2008, compared with $790 million in first quarter 2007. Servicing fees, included in net servicing income, decreased to $964 million in first quarter 2008 from $1.05 billion in first quarter 2007, reflecting sales of a

portion of our excess servicing to improve the risk profile of our servicing assets and to take advantage of market conditions for excess servicing at that time. Our portfolio of loans serviced for others was $1.43 trillion at March 31, 2008, up 9% from $1.31 trillion at March 31, 2007. Net servicing income also includes both changes in the fair value of MSRs during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for first quarter 2008 included a $94 million net MSRs valuation gain that was recorded to earnings ($1.8 billion fair value loss offset by a $1.9 billion economic hedging gain) and for first quarter 2007 included a $34 million net MSRs valuation loss ($11 million fair value loss plus a $23 million economic hedging loss). At March 31, 2008, the ratio of MSRs to related loans serviced for others was 1.08%.

Net gains on mortgage loan origination/sales activities were $267 million in first quarter 2008, down from $495 million in first quarter 2007. Gains for first quarter 2008 were partly offset by losses of $263 million, which consisted of a $108 million write-down of the mortgage warehouse/pipeline, a $107 million write-down primarily due to mortgage loans repurchased and an increase in the repurchase reserve, and a $48 million decline in the servicing value of loans held in the mortgage warehouse/pipeline. Residential real estate originations totaled $66 billion in first quarter 2008 and $68 billion in first quarter 2007. (For additional detail, see “Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate and Market Risk,” Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.)

The 1-4 family first mortgage unclosed pipeline was $61 billion at March 31, 2008, $43 billion at December 31, 2007, and $57 billion at March 31, 2007.

Insurance revenue was up 26% from first quarter 2007, primarily due to an increase in premiums in our crop insurance business.

Income from trading activities was $103 million in first quarter 2008 and $265 million in first quarter 2007, due to lower capital markets income in 2008. Net gains on debt securities were $323 million in first quarter 2008, compared with net gains of $31 million in first quarter 2007. As rates dropped significantly during first quarter 2008, we sold $13 billion of mortgage-backed securities as part of Home Mortgage’s MSRs economic risk hedging activities, ultimately replacing these securities largely with off-balance sheet hedges when rates moved back up in the quarter. Net gains from equity investments were $313 million in first quarter 2008, compared with $97 million in first quarter 2007, and reflected the $334 million gain from our ownership in Visa, which completed its IPO in March 2008.

We routinely review our investment portfolios and recognize impairment write-downs based primarily on fair market value, issuer-specific factors and results, and our intent to hold such securities to recovery. We also consider general economic and market conditions, including industries in which venture capital investments are made, and adverse changes affecting the availability of venture capital. We determine other-than-temporary impairment based on the information available at the time of the assessment, with particular focus on the severity and duration of specific security impairments, but new information or economic developments in the future could result in recognition of additional impairment.

NONINTEREST EXPENSE

Noninterest expense decreased 1% from the prior year and included a $151 million reversal of Visa litigation expense related to the Visa IPO. First quarter 2008 expenses included higher salaries, sales-related insurance costs and net occupancy costs, more than offset by lower incentive compensation (reduced incentive compensation accruals), employee benefits and outside professional services costs. In the last 12 months, we opened 80 retail banking stores, including 11 stores this quarter, converted 60 stores from acquisitions, including 18 Greater Bay Bancorp stores this quarter, and added 1,300 full-time equivalent (FTE) team members. All other noninterest expense for first quarter 2008 included higher expenses on foreclosed assets and a $39 million liability recorded for a capital support agreement for one SIV held by our AAA-rated non-government money market mutual funds.

INCOME TAX EXPENSE

Our effective income tax rate was 34.9% for first quarter 2008, up from 29.9% for first quarter 2007. The tax rate in the first quarter of 2007 was primarily impacted by the resolution of certain outstanding federal income tax matters.

OPERATING SEGMENT RESULTS

We have three lines of business for management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements in this Report. To reflect the realignment of our corporate trust business from Community Banking into Wholesale Banking in first quarter 2008, results for prior periods have been revised.

Community Banking’s net income decreased 5% to $1.43 billion in first quarter 2008 from $1.50 billion a year ago. Revenue increased 16% to $6.86 billion from $5.92 billion a year ago. Net interest income increased 15% to $3.64 billion in first quarter 2008 from $3.15 billion a year ago. The growth in earning assets was driven by loan and securities growth. Average loans were up 19% to $214.9 billion in first quarter 2008 from $180.8 billion a year ago. Average core deposits were up 5% to $248.4 billion in first quarter 2008 from $237.1 billion a year ago. Noninterest income increased 17% to $3.22 billion in first quarter 2008 from $2.77 billion a year ago, primarily due to retail banking fee revenue growth in brokerage, deposit service charges, cards, mortgage banking and investments. The provision for credit losses increased to $1.31 billion in first quarter 2008 from $306 million a year ago. The increase reflected higher losses in the Home Equity portfolio and included a $385 million credit reserve build. Although noninterest expense decreased 7% to $3.34 billion in first quarter 2008 from $3.57 billion a year ago, the business continued to make investments in technology, distribution and sales staff. Results for first quarter 2008 included the effect of the Visa IPO, consisting of the $334 million gain and the $151 million reversal of litigation expense.

Wholesale Banking’s net income decreased 25% to $475 million in first quarter 2008 from $633 million a year ago. Revenue increased 4% to a record $2.28 billion from $2.20 billion a year ago. Net interest income increased 21% to $1.03 billion for first quarter 2008 from $855 million a year ago due to higher earning asset volumes and lower funding costs partially offset by lower earning asset yields and related fees. Average loans increased 29% to $100.6 billion in first quarter 2008 from $77.9 billion a year ago. Average core deposits grew 29% to $68.9 billion, all in interest-bearing balances. The increase in provision for credit losses to $161 million in first quarter 2008 from $13 million a year ago included $61 million from higher net charge-offs and an additional $87 million credit reserve build. Noninterest income decreased 7% to $1.25 billion in first quarter 2008 from a year ago. Higher trust and investment income, deposit service charges, foreign exchange fees, financial products and insurance revenue were offset by a lower level of commercial real estate brokerage fees and capital markets activity. Noninterest income in first quarter 2008 also included $63 million of net write-downs on commercial mortgages held for sale (MHFS) due to widening credit spreads. Noninterest expense increased 17% to $1.42 billion in first quarter 2008 from $1.21 billion a year ago, due to higher personnel-related costs, including additional team members, as well as insurance commissions, expenses related to higher financial product sales and the liability recorded for a capital support agreement for one SIV.

Wells Fargo Financial’s net income decreased 13% to $97 million in first quarter 2008 from $112 million a year ago reflecting higher credit losses consistent with the general condition of the economy. Revenue was up 7% to $1.42 billion in first quarter 2008 from $1.32 billion a year ago. Net interest income increased 9% to $1.09 billion from $1.01 billion from a year ago due to growth in average loans. Average loans increased 9% to $68.4 billion in first quarter 2008 from

$62.7 billion a year ago. The provision for credit losses increased $158 million in first quarter 2008 from a year ago, primarily due to an increase in net charge-offs in the credit card portfolio and Wells Fargo Financial’s unsecured portfolios due to the current economic environment. Noninterest expense decreased $38 million (5%) in first quarter 2008 from $749 million a year ago.

SECURITIES AVAILABLE FOR SALE

Our securities available for sale consists of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio primarily includes very liquid, high-quality federal agency debt and privately issued mortgage-backed securities. At March 31, 2008, we held $78.8 billion of debt securities available for sale, with net unrealized losses of $304 million, compared with $70.2 billion at December 31, 2007, with net unrealized gains of $775 million. The debt securities consisted of agency mortgage-backed securities, which have appreciated in value since the end of 2007, as well as other high-quality securities, mostly AAA-rated, purchased over the past few quarters at attractive long-term yields in a period when credit spreads have continued to widen. We also held $3.0 billion of marketable equity securities available for sale at March 31, 2008, and $2.8 billion at December 31, 2007, with net unrealized losses of $294 million and $95 million for the same periods, respectively.

The weighted-average expected maturity of debt securities available for sale was 6.5 years at March 31, 2008. Since 78% of this portfolio is mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because borrowers may have the right to prepay obligations before the underlying mortgages mature. 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 is shown below.

MORTGAGE-BACKED SECURITIES

See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.

LOAN PORTFOLIO

A discussion of average loan balances is included in “Earnings Performance – Net Interest Income” on page 10 and a comparative schedule of average loan balances is included in the table on page 11; quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Total loans at March 31, 2008, were $386.3 billion, up $60.8 billion (19%) from $325.5 billion at March 31, 2007. Commercial and commercial real estate loans were $156.8 billion at March 31, 2008, up $31.6 billion (25%) from $125.2 billion a year ago. Consumer loans were $222.3 billion at March 31, 2008, up $28.8 billion (15%) from $193.5 billion a year ago. Mortgages held for sale were $29.7 billion at March 31, 2008, down $2.6 billion from $32.3 billion a year ago.

DEPOSITS

Average core deposits increased $26.7 billion to $317.3 billion in first quarter 2008 from first quarter 2007, predominantly due to growth in market rate and other savings, along with growth in foreign deposits.

In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different than the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, or (4) optimize capital, and are accounted for in accordance with U.S. GAAP.

Almost all of our off-balance sheet arrangements result from securitizations. As part of our normal business operations, we routinely securitize home mortgage loans and, from time to time, other financial assets, including commercial mortgages. We normally structure loan securitizations as sales, in accordance with FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement No. 125. This involves the transfer of financial assets to certain qualifying special-purpose entities

(QSPEs) that we are not required to consolidate. We also enter into certain contractual obligations. For additional information on off-balance sheet arrangements and other contractual obligations see “Financial Review – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations” in our 2007 Form 10-K and Note 11 (Guarantees) to Financial Statements in this Report.

In December 2007, the American Securitization Forum (ASF) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the ASF Framework). The ASF Framework provides guidance for servicers to streamline borrower evaluation procedures and to facilitate the use of foreclosure and loss prevention efforts in an attempt to reduce the number of U.S. subprime residential mortgage borrowers who might default because the borrowers cannot afford to pay the increased loan interest rate after their subprime adjustable rate mortgage (ARM) loan interest rate resets. The ASF Framework was developed with the participation of representatives of the mortgage securitization industry and the U.S. Government and is intended to keep borrowers in their homes while also maximizing trust proceeds to investors and requires lenders to comply with relevant tax regulations and off-balance sheet accounting standards for loan securitizations.

Specifically, the ASF Framework applies to all first lien subprime residential ARM loans that have an initial fixed rate period of 36 months or less that were originated between January 1, 2005, and July 31, 2007, that are included in securitized pools, and that have an initial interest rate reset between January 1, 2008, and July 31, 2010. The ASF Framework divides these subprime ARM loans into three segments and requires loan servicers to address the borrowers according to their assigned segment. Segment 1 includes current loans where the borrower is likely to be able to refinance into an available mortgage product. Segment 2 includes loans where the borrower is current, meets other specific criteria, and is unlikely to be able to refinance into other readily available mortgage products. Loans included in Segment 2 are eligible for a streamlined loan modification which generally includes freezing the introductory interest rate for a period of five years following the upcoming reset date. Segment 3 includes loans where the borrower is not current and does not meet the criteria for Segments 1 or 2. The total of ASF Framework segmented loans owned by QSPEs that we serviced was approximately $2 billion at March 31, 2008, less than 0.1% of our total managed servicing portfolio.

We believe our adoption of the ASF Framework does not affect the off-balance sheet accounting treatment of the QSPEs that hold these subprime ARM loans. The Office of the Chief Accountant of the SEC has issued guidance regarding the ASF Framework that these streamlined loan modifications will not impact the accounting for the QSPEs because it would be reasonable to conclude that defaults on these loans are “reasonably foreseeable” without a loan modification.

CREDIT RISK MANAGEMENT PROCESS

Our credit risk management process provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan

administration and allowance processes. In 2007, we updated our credit policies related to residential real estate lending to reflect the deteriorating economic conditions in the industry and decisions were made to exit certain underperforming indirect channels. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified.

The table below shows the comparative data for nonaccrual loans and other assets. We generally place loans on nonaccrual status when:

Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2007 Form 10-K describes our accounting policy for nonaccrual loans.

NONACCRUAL LOANS AND OTHER ASSETS

Nonperforming loans increased $1.5 billion to $3.3 billion at March 31, 2008, from $1.8 billion at March 31, 2007, with a significant portion of the increase in the real estate 1-4 family first mortgage loan portfolio (including $115 million in Home Mortgage and $507 million in Wells

Fargo Financial real estate) due to the deteriorating conditions in the residential real estate market and the national rise in mortgage default rates. Nonaccrual real estate 1-4 family loans include approximately $124 million of loans at March 31, 2008, that have been modified. Our policy requires these loans to become current and remain current for six months before they are returned to accrual status. Additionally, a portion of the increase related to loan growth. The increase in the nonaccrual commercial and commercial real estate portfolios was influenced by the deterioration of credit related to the residential real estate and construction industries. In addition, due to illiquid market conditions, we are now holding more foreclosed properties than we have historically. As a result, other foreclosed asset balances increased $109 million to $637 million at March 31, 2008, from a year ago, including an increase of $76 million from Home Equity and $17 million from Home Mortgage.

We expect that the amount of nonaccrual loans will change due to portfolio growth, portfolio seasoning, routine problem loan recognition and resolution through collections, sales or charge-offs. Additionally, we expect that the change in charge-off policy from 120 to 180 days for the Home Equity business will add to the balance of nonaccrual loans. (See “Financial Review - Allowance for Credit Losses” in this Report for additional discussion.) The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower.

Loans included in this category are 90 days or more past due as to interest or principal and still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family first mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual.

The total of loans 90 days or more past due and still accruing was $6,919 million, $6,393 million and $4,812 million at March 31, 2008, December 31, 2007, and March 31, 2007, respectively. The total included $5,288 million, $4,834 million and $3,683 million for the same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar loans whose repayments are insured by the FHA or guaranteed by the Department of Veterans Affairs. The table below reflects loans 90 days or more past due and still accruing excluding the insured/guaranteed GNMA advances.

LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)

The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. We assume that our allowance for credit losses as a percentage of charge-offs and nonaccrual loans will change at different points in time based on credit performance, loan mix and collateral values. We increased our allowance for credit losses by providing $500 million in excess of net charge-offs in first quarter 2008 to build reserves for future credit losses inherent in our loan portfolio. The detail of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Net charge-offs for first quarter 2008 were $1.5 billion (1.60% of average total loans outstanding, annualized), compared with $1.2 billion (1.28%) for fourth quarter 2007 and $715 million (0.90%) for first quarter 2007. Total provision expense in first quarter 2008 was $2.0 billion, including a $500 million credit reserve build, primarily for losses in the National

Home Equity Group (Home Equity) and Business Direct (primarily unsecured lines of credit to small businesses) portfolios. The $813 million increase in net credit losses from a year ago included $364 million in the real estate 1-4 family junior lien category, primarily from Home Equity as residential real estate values continued to decline in the quarter and the number of markets adversely impacted continued to increase. Net credit losses in the commercial category (primarily Business Direct) increased $166 million from a year ago.

Because of our responsible lending and risk management practices, we have largely avoided many of the products others in the mortgage industry have offered. We have not offered certain mortgage products such as negative amortizing mortgages or option ARMs. We have minimal ARM reset risk across our owned loan portfolios at March 31, 2008. While our disciplined underwriting standards have resulted in first mortgage delinquencies below industry levels through March 31, 2008, we continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified. In the past year, for example, we have tightened underwriting standards as we believed appropriate. Home Mortgage closed its nonprime wholesale channel early in third quarter 2007, after closing its nonprime correspondent channel in second quarter 2007. In addition, rates were increased for non-conforming mortgage loans during third quarter 2007 reflecting the reduced liquidity in the capital markets.

Credit quality in Wells Fargo Financial’s real estate-secured lending business has not experienced the level of credit degradation that many nonprime lenders have because of our disciplined underwriting practices. Wells Fargo Financial has continued its practice not to use brokers or correspondents in its U.S. debt consolidation business. We endeavor to ensure that there is a tangible benefit to the borrower before we make a loan. The guidance issued by the federal financial regulatory agencies in June 2007, Statement on Subprime Mortgage Lending, which addresses issues relating to certain ARM products, has not had a significant impact on Wells Fargo Financial’s operations, since many of those guidelines have long been part of our normal business practices.

The deterioration in segments of the Home Equity portfolio required a targeted approach to managing these assets. We segregated into a liquidating portfolio all home equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and all home equity loans acquired through correspondents. While the $11.5 billion of loans in this liquidating portfolio represented about 3% of total loans outstanding at March 31, 2008, these loans experienced a significant portion of the credit losses in our $83.6 billion Home Equity portfolio, with an annualized loss rate of 5.58% for first quarter 2008, compared with 1.56% for the remaining core portfolio. The loans in the liquidating portfolio are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. The core portfolio consists of $72.1 billion of loans in the Home Equity portfolio at March 31, 2008. The following table includes the credit attributes of these two portfolios.

HOME EQUITY PORTFOLIO

In this challenging real estate market it is necessary to have more time to work with our customers to identify ways to help resolve their financial difficulties and keep them in their homes. In order to provide this additional time to assist our customers, beginning April 1, 2008, we changed our Home Equity charge-off policy from 120 days to no more than 180 days, or earlier if warranted, consistent with Federal Financial Institutions Examination Council (FFIEC) guidelines.

Other consumer portfolios performed as expected during the quarter. Net charge-offs in the real estate 1-4 family first mortgage portfolio increased $57 million in first quarter 2008 from first quarter 2007, including an increase of $23 million in the Wells Fargo Financial debt consolidation portfolio and $21 million in the Home Mortgage portfolio, but were still at relatively low levels. The increase in mortgage loss rates was consistent with the continued declines in home prices. Despite the $123 million increase in net charge-offs from first quarter 2007, the credit card portfolio continued to perform as expected. Delinquency in our auto portfolio improved in first quarter 2008. This portfolio has received significant management attention and the changes in underwriting and collections made in 2006 and 2007 have stabilized losses.

Because of our Wholesale Banking business model, focused primarily on business customers, we do not actively participate in certain higher-risk activities. Wholesale Banking net income in first quarter 2008 was only minimally impacted by the capital markets dislocation that has resulted in significant write-downs at other financial services companies. During first quarter 2008 we

recorded a $39 million liability for a capital support agreement for one SIV held by our AAA-rated non-government money market mutual funds. We do not act as a sponsor for any SIVs. We also recorded $63 million of net write-downs on our commercial MHFS due to widening credit spreads. At the same time, the continued market volatility in first quarter 2008 created opportunities for our financial products group to expand customer sales volume and earn higher spreads. In first quarter 2008, Wholesale Banking sales and revenue from equity, commodities, interest rate and brokerage fixed-income products reached quarterly records. On the investment side of this business, we operate within disciplined credit standards and regularly monitor and manage our securities portfolios. We have not participated in the underwriting of any of the large leveraged buyouts that were “covenant lite” and we have minimal direct exposure to hedge funds. Similarly, we have not made a market in subprime securities.

Commercial and commercial real estate net charge-offs increased $166 million to $268 million in first quarter 2008 from $102 million in first quarter 2007. The vast majority of commercial loans (other real estate mortgage, real estate construction and lease financing) continued to perform as expected and losses remained modest. However, losses have increased in the Business Direct portfolio, with net charge-offs up $92 million from a year ago. These loans have tended to perform like credit cards. Most of the increase in Business Direct losses occurred in certain metropolitan areas within California, Nevada and Florida, and appears to be concentrated in industries related to real estate or where the business owner may be experiencing difficulty with a home loan.

We believe the allowance for credit losses of $6.01 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2008. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are uncertain. (See “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” in our 2007 Form 10-K.) Therefore, we cannot provide assurance that, in any particular period, we will not have sizeable credit losses in relation to the amount reserved. We may need to significantly adjust the allowance for credit losses, considering current factors at the time, including economic or market conditions and ongoing internal and external examination processes. Our process for determining the adequacy of the allowance for credit losses is discussed in “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2007 Form 10-K.

ASSET/LIABILITY AND MARKET RISK MANAGEMENT

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO) – which oversees these risks and reports periodically to the Finance Committee of the Board of Directors – consists of senior financial and business executives. Each of our principal business groups has individual asset/liability management committees and processes linked to the Corporate ALCO process.

Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:

Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.

We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many 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. For example, as of March 31, 2008, our most recent simulation indicated estimated earnings at risk of approximately 7% of our most likely earnings plan over the next 12 months using a scenario in which the federal funds rate rises 325 basis points to 5.50% and the 10-year Constant Maturity Treasury bond yield rises 180 basis points to 5.25%. Simulation estimates depend on, and will change with, the size and mix of our actual and projected balance sheet at the time of each simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter could be higher than the average earnings at risk over the 12-month simulation period, depending on the path of interest rates and on our hedging strategies for MSRs. See “Mortgage Banking Interest Rate and Market Risk” below.

We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate exposures. The credit risk amount and estimated net fair value of these derivatives as of March 31, 2008, and December 31, 2007, are presented in Note 12 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in three main ways:

We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. We reduce unwanted credit and liquidity risks by selling or securitizing predominantly all of the long-term fixed-rate mortgage loans we originate and most of the ARMs we originate. From time to time, we hold originated ARMs in our loan portfolio as an investment for our growing base of core deposits. We determine whether the loans will be held for investment or held for sale at the time of commitment. We may subsequently change our intent to hold loans for investment and sell some or all of our ARMs as part of our corporate asset/liability management. We may also acquire and add to our securities available for sale a portion of the securities issued at the time we securitize mortgages held for sale.

Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination and servicing fees, the value of our residential MSRs measured at fair value, the value of MHFS and the associated income and loss reflected in mortgage banking noninterest income, the income and expense associated with instruments (economic hedges) used to hedge changes in the fair value of residential MSRs, new prime residential MHFS, other interests held and the value of derivative loan commitments (interest rate “locks”) extended to mortgage applicants.

Interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in servicing fee income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment, and securitizing and selling the loan, interest rate changes will impact origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed and duration of the change in interest rates.

Under FAS 159 we elected to measure MHFS at fair value prospectively for new prime MHFS originations for which an active secondary market and readily available market prices generally exist to reliably support fair value pricing models used for these loans. We also elected to measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe that the election for new prime MHFS and other interests held (which are now hedged with free-standing derivatives (economic hedges) along with our MSRs) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Loan origination fees are recorded when earned, and related direct loan origination costs and fees are recognized when incurred.

Under FAS 156 we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If

the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and periodically benchmark our estimates to independent appraisals. While the valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable, changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs. Assumptions affected include prepayment speed, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements impacted by interest rates.

A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction in fair value causes a charge to income (net of any gains on free-standing derivatives (economic hedges) used to hedge MSRs). We may choose not to fully hedge all of the potential decline in the value of our MSRs resulting from a decline in interest rates because the potential increase in origination/servicing fees in that scenario provides a partial “natural business hedge.” In first quarter 2008, a $1.8 billion decrease in the fair value of our MSRs was offset by $1.9 billion of gains on the free-standing derivatives used to hedge the MSRs, resulting in an increase to net servicing income of $94 million.

Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires sophisticated modeling and constant monitoring. While we attempt to balance these various aspects of the mortgage business, there are several potential risks to earnings:

The total carrying value of our residential and commercial MSRs was $15.4 billion at March 31, 2008, and $17.2 billion at December 31, 2007. The weighted-average note rate on the owned servicing portfolio was 6.00% at March 31, 2008, and 6.01% at December 31, 2007. Our total MSRs were 1.08% of mortgage loans serviced for others at March 31, 2008, compared with 1.20% at December 31, 2007.

As part of our mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. These loan commitments are derivative loan commitments if the loans that will result from the exercise of the commitments will be held for sale. These derivative loan commitments are recognized at fair value in the balance sheet with changes in their fair values recorded as part of mortgage banking noninterest income. For interest rate lock commitments issued prior to January 1, 2008, we recorded a zero fair value for the derivative loan commitment at inception consistent with SAB 105. Effective January 1, 2008, we were required by SAB 109 to include at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of derivative loan commitments. The implementation of SAB 109 did not have a material impact on our first quarter 2008 results or the valuation of our loan commitments. Changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan commitment is affected primarily by changes in interest rates and the passage of time.

Outstanding derivative loan commitments expose us to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To minimize this risk, we utilize forwards and options, Eurodollar futures and options, and Treasury futures, forwards and option contracts as economic hedges against the potential decreases in the values of the loans. We expect that these derivative financial instruments will experience changes in fair value that will either fully or partially offset the changes in fair value of the derivative loan commitments. However, changes in investor demand, such as concerns about credit risk, can also cause changes in the spread relationships between underlying loan value and the derivative financial instruments that cannot be hedged.

From a market risk perspective, our net income is exposed to changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The primary purpose of our trading businesses is to accommodate customers in the management of their market price risks. Also, we take positions based on market expectations or to benefit from price differences between financial instruments and markets, subject to risk limits established and monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions and derivatives used in our trading businesses are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at March 31, 2008, and December 31, 2007, are included in Note 12 (Derivatives) to Financial Statements in this Report. Open, “at risk” positions for all trading business are monitored by Corporate ALCO.

The standardized approach for monitoring and reporting market risk for the trading activities consists of value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR measures the worst expected loss over a given time interval and within a given confidence

interval. We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and prices over the past 250 trading days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout first quarter 2008 was $13 million, with a lower bound of $10 million and an upper bound of $17 million.

We are directly and indirectly affected by changes in the equity markets. We make and manage direct equity investments in start-up businesses, emerging growth companies, management buy-outs, acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make similar private equity investments. These private equity investments are made within capital allocations approved by management and the Board of Directors (the Board). The Board’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews these investments at least quarterly and assesses them for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Private equity investments totaled $2.08 billion at March 31, 2008, and $2.02 billion at December 31, 2007.

We also have marketable equity securities in the securities available-for-sale portfolio, including securities relating to our venture capital activities. We manage these investments within capital risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net income when realized and other-than-temporary impairment may be periodically recorded when identified. The initial indicator of impairment for marketable equity securities is a sustained decline in market price below the amount recorded for that investment. We consider a variety of factors such as: the length of time and the extent to which the market value has been less than cost; the issuer’s financial condition, capital strength, and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the stock price, if any. The fair value of marketable equity securities was $2.97 billion and cost was $3.26 billion at March 31, 2008, and $2.78 billion and $2.88 billion, respectively, at December 31, 2007.

Changes in equity market prices may also indirectly affect our net income by affecting (1) the value of third party assets under management and, hence, fee income, (2) particular borrowers, whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.

The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under 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. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.

Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets through whole-loan sales and securitizations.

Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).

Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding by issuing registered debt, private placements and asset-backed secured funding. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings. Moody’s Investors Service rates Wells Fargo Bank, N.A. as “Aaa,” its highest investment grade, and rates the Company’s senior debt as “Aa1.” Standard & Poor’s Ratings Services rates Wells Fargo Bank, N.A. as “AAA” and the Company’s senior debt rating as “AA+.” Wells Fargo Bank, N.A. is the only U.S. bank to have the highest possible credit rating from both Moody’s and S&P.

Parent. Under SEC rules, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with a public float of common equity of at least $700 million or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. In June 2006, the Parent’s registration statement with the SEC for issuance of senior and subordinated notes, preferred stock and other securities became effective. However, the Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $30 billion in outstanding short-term debt and $105 billion in outstanding long-term debt, subject to a total outstanding debt limit of $135 billion. During first quarter 2008, the Parent issued a total of $5.5 billion of registered senior notes. The Parent also issued capital securities in the form of $1.6 billion in junior subordinated debt in connection with the issuance of trust preferred securities by a statutory business trust formed by the Parent. We used the proceeds from securities issued in first quarter 2008 for general corporate purposes and expect that the proceeds from securities issued in the future will also be used for general corporate purposes. On May 1, 2008, the Parent remarketed $2.9 billion aggregate original principal amount of its Floating Rate Convertible Senior Debentures (the Debentures) due 2033. Following the remarketing, the Debentures are no longer convertible, and the principal amount of the Debentures will accrete at a rate of 3.55175% per annum, commencing May 1, 2008. Net proceeds of the remarketing will be paid to holders of the Debentures that elected to participate in the remarketing. The Parent also issues commercial paper from time to time, subject to its short-term debt limit.

Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $50 billion in outstanding short-term debt and $50 billion in outstanding long-term debt. In December 2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. In first quarter 2008, Wells Fargo Bank, N.A. issued $9.1 billion in short-term senior notes.

Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion of medium-term notes for distribution from time to time in Canada. In first quarter 2008, WFFCC issued CAD$500 million in medium-term notes, leaving CAD$6.5 billion available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.

We have an active program for managing stockholder capital. We use capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase our shares. Our objective is to produce above-market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when such costs are perceived to be low.

From time to time the Board of Directors authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and legal considerations. These factors can change at any time, and there can be no assurance as to the number of shares we will repurchase or when we will repurchase them.

Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Exchange Act including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.

In 2007, the Board authorized the repurchase of up to 200 million additional shares of our outstanding common stock. During first quarter 2008, we repurchased approximately 11 million shares of our common stock. In first quarter 2008, we issued approximately 17 million shares of common stock (including shares issued for our ESOP plan) under various employee benefit and director plans and under our dividend reinvestment and direct stock repurchase programs. At

March 31, 2008, the total remaining common stock repurchase authority was approximately 30 million shares. (For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.)

Our potential sources of capital include retained earnings and issuances of common and preferred stock. In first quarter 2008, retained earnings increased $926 million, predominantly resulting from net income of $2.0 billion, less dividends of $1.0 billion. In first quarter 2008, we issued $451 million of common stock under various employee benefit and director plans.

At March 31, 2008, the Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. For additional information see Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

An investment in the Company has risk. In addition, in accordance with the Private Securities Litigation Reform Act of 1995, we caution you that actual results may differ from forward-looking statements about our future financial and business performance contained in this Report and other reports we file with the SEC and in other Company communications. In this Report we make forward-looking statements that we expect or believe:

This Report includes various statements about the estimated impact on our earnings from simulated changes in interest rates and on expected losses in our loan portfolio from assumed changes in loan credit quality. This Report also includes the statement that we believe the allowance for credit losses at March 31, 2008, was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments. As described below and elsewhere in this Report and in our 2007 Form 10-K, increases in loan charge-offs, changes in the allowance for credit losses or the related provision expense, or other effects of credit deterioration could have a material negative effect on net income.

Factors that could cause our financial results and condition to vary significantly from quarter to quarter or cause actual results to differ from our expectations for our future financial and business performance include:

Refer to our 2007 Form 10-K, including “Risk Factors,” for more information about these factors. Refer also to this Report, including the discussion under “Risk Management” in the Financial Review section, for additional risk factors and other information that may supplement or modify the discussion of risk factors in our 2007 Form 10-K.

As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31, 2008, 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 March 31, 2008.

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.