Wells Fargo - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-2979

WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)

420 Montgomery Street, San Francisco, California 94104
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 1-800-292-9932

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   þ     No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   þ     No  o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

FORM 10-Q
CROSS-REFERENCE INDEX

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PART I – FINANCIAL INFORMATION

FINANCIAL REVIEW

SUMMARY FINANCIAL DATA

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This Report on Form 10-Q for the quarter ended March 31, 2005, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ significantly from our forecasts and expectations. Please refer to “Factors that May Affect Future Results” in this Report for a discussion of some factors that may cause results to differ.

OVERVIEW

Wells Fargo & Company is a $436 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, 2005. When we refer to “the Company,” “we,” “our” and “us” in this report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the Parent, we mean Wells Fargo & Company.

In first quarter 2005, we achieved record diluted earnings per share of $1.08, up 5% from a year ago, and record net income of $1.86 billion, up 5% from a year ago. First quarter 2005 results included pre-tax charges or losses of $410 million for several actions designed to further strengthen our balance sheet. First, in a step toward bringing our mortgage, home equity and consumer finance businesses onto common systems and conforming credit charge-off practices with the more stringent standards of the Federal Financial Institutions Examination Council (FFIEC), Wells Fargo Financial recognized $163 million in credit losses in its portfolios. Second, we incurred $117 million in expenses upon adjusting the estimated lives of certain depreciable assets. Finally, we realized $130 million of losses related to the sale of $18 billion of our lowest-yielding adjustable rate mortgages (ARMs) and auto loans. During the past 12 months, there have been market opportunities to improve asset yields and margins by selling our lowest-yielding loans. The note rates at which we are now beginning to replace these ARMs through new originations are 80-90 basis points higher than the note rates on the ARMs sold during the past 12 months. The yield on the first mortgage portfolio was 6.0%, compared with 5.3% a year ago and 5.7% in fourth quarter 2004.

Our corporate vision is to satisfy all the financial needs of our customers, 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 we provide to our customers and to focus on providing each customer with all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitates growth in strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us. We estimate that our average banking household now has 4.6 products with us, which we believe is among the highest, if not the highest, in our industry. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our core products grew this quarter compared with a year ago, with average loans up 12% and average core deposits up 9%.

We believe it is important to maintain a well-controlled environment as we continue to grow our businesses. We manage our credit risk by maintaining prudent credit policies for underwriting

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and effective procedures for monitoring and review. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. Our stockholder value has increased over time due to customer satisfaction, strong financial results, investment in our businesses and the prudent way we attempt to manage our business risks.

Our financial results included the following:

Net income for first quarter 2005 was $1.86 billion, up 5%, compared with $1.77 billion for first quarter 2004. Diluted earnings per share for first quarter 2005 were $1.08, up 5%, compared with $1.03 for first quarter 2004. Return on average assets (ROA) was 1.75% and return on average common equity (ROE) was 19.60% for first quarter 2005.

Net interest income on a taxable-equivalent basis increased 10% to $4.48 billion for first quarter 2005 on 12% earning asset growth, compared with $4.07 billion for first quarter 2004. The net interest margin was 4.87% for first quarter 2005, compared with 4.94% for first quarter 2004.

Noninterest income increased 17% to $3.64 billion for first quarter 2005, compared with $3.10 billion for first quarter 2004. The increase was driven by growth across our businesses, with particular strength in trust and investment fees, credit and debit card fees, consumer loan fees and mortgage banking. Substantially all of the increase in trust and investment fees was due to the acquisition of assets under management from Strong Financial Corporation (Strong Financial), which closed December 31, 2004. Mortgage banking noninterest income reflected the benefit of a larger servicing portfolio, which resulted in higher servicing fees compared with first quarter 2004, and higher interest rates, which resulted in a mortgage servicing rights (MSRs) impairment recovery.

Revenue, the sum of net interest income and noninterest income, grew $942 million, or 13%, to $8.09 billion in first quarter 2005 from $7.15 billion in first quarter 2004. Revenue growth was broad based, with particularly strong double-digit growth in regional banking, institutional investments, debit cards, small business lending, corporate trust, consumer credit, consumer finance, home mortgage and corporate banking.

Noninterest expense was $4.69 billion for first quarter 2005, up $663 million, or 16%, from first quarter 2004. The increase was primarily due to a $332 million increase in salary and benefit expense from additional employees and higher occupancy and equipment costs, which included a $117 million expense taken during first quarter 2005 to adjust the estimated lives for certain depreciable assets, primarily building improvements.

Total first quarter net charge-offs were $585 million (.83% of average loans outstanding, annualized), including $163 million (.23%) related to the timing of credit loss recognition at Wells Fargo Financial upon adoption of FFIEC guidelines, compared with $465 million (.66%) in fourth quarter 2004 and $404 million (.63%) in first quarter 2004. Unlike our banks, Wells Fargo Financial is not subject to the FFIEC guidelines, but we believe these are sound business practices that will also provide consistent loss recognition across all Wells Fargo business units. The FFIEC’s Uniform Retail Credit Classification and Account Management Policy includes requirements for the classification and treatment of retail credit in financial institutions, such as the timeframes when delinquent retail loans and lines of credit should be written off.

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The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $3.95 billion, or 1.36% of total loans, at March 31, 2005, $3.95 billion, or 1.37%, at December 31, 2004, and $3.89 billion, or 1.47%, at March 31, 2004.

At March 31, 2005, total nonaccrual loans were $1.20 billion, or .41% of total loans, compared with $1.36 billion, or .47%, at December 31, 2004, and $1.39 billion, or .52%, at March 31, 2004. Total nonperforming assets (NPAs) were $1.41 billion, or .48% of total loans, at March 31, 2005, compared with $1.57 billion, or .55%, at December 31, 2004, and $1.61 billion, or .61%, at March 31, 2004. The $167 million decline in NPAs from December 31, 2004, primarily reflected lower consumer NPAs due to the impact of the higher charge-offs at Wells Fargo Financial to conform its credit write-off practices with FFIEC standards and the continued decline in commercial NPAs due to overall economic improvements. Foreclosed assets were $207 million at March 31, 2005, compared with $212 million at December 31, 2004, and $222 million at March 31, 2004.

The ratio of stockholders’ equity to total assets was 8.83% at March 31, 2005, 8.85% at December 31, 2004, and 8.92% at March 31, 2004. Our total risk-based capital (RBC) ratio at March 31, 2005, was 12.37% and our Tier 1 RBC ratio was 8.40%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at March 31, 2004, were 12.18% and 8.48%, respectively. Our Tier 1 leverage ratios were 7.17% and 7.13% at March 31, 2005 and 2004, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.

Recent Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), which replaces FAS 123, Accounting for Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Securities and Exchange Commission (SEC) registrants originally would have been required to adopt FAS 123R’s provisions at the beginning of their first interim period after June 15, 2005. On April 14, 2005, the SEC announced that registrants could delay adoption of FAS 123R’s provisions until the beginning of their next fiscal year. We currently expect to adopt FAS 123R on January 1, 2006, as required, using the “modified prospective” transition method. The scope of FAS 123R includes a wide range of stock-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. FAS 123R will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost must be recognized in the income statement over the vesting period of the award. Under the “modified prospective” transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with FAS 123R. In addition, expense must be recognized in the statement of income for unvested awards that were granted prior to the date of adoption. The expense will be based on the fair value determined at the grant date. We currently estimate that the adoption of FAS 123R will reduce earnings by approximately $.06 per share in 2006 and we will continue to evaluate the impact of adoption on our financial statements.

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CRITICAL ACCOUNTING POLICIES

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. Three 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 mortgage servicing rights and pension accounting. 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 Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K).

EARNINGS PERFORMANCE

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 in the following table on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% marginal tax rate.

Net interest income on a taxable-equivalent basis increased 10% to $4.48 billion in first quarter 2005 from $4.07 billion in first quarter 2004, primarily driven by a 12% increase in earning assets. These results include the impact from balance sheet repositioning actions over the past twelve months in which we sold lower-yielding assets to further strengthen our balance sheet and better position the Company for rising interest rates.

The net interest margin decreased to 4.87% in first quarter 2005 from 4.94% in first quarter 2004. The decrease was primarily due to higher market funding costs following Federal Reserve actions to raise interest rates. This impact was moderated by the benefits of the balance sheet repositioning actions referenced above, improved loan yields and strong core deposit growth.

Individual components of net interest income and the net interest margin are presented in the following table.

Average earning assets increased $40.5 billion to $372.5 billion in first quarter 2005 from $332.0 billion in first quarter 2004 due to an increase in average loans and mortgages held for sale. Loans averaged $287.3 billion in first quarter 2005, compared with $256.4 billion in first quarter 2004. The increase was largely due to growth in home equity and commercial products.

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

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Average mortgages held for sale increased to $31.6 billion from $25.0 billion in first quarter 2004 due to a redesignation of our lowest-yielding mortgages from the held for investment portfolio. Debt securities available for sale averaged $32.0 billion during first quarter 2005 and $31.5 billion in first quarter 2004.

Average core deposits are an important contributor to growth in net interest income and the net interest margin. This low-cost source of funding rose 9% from a year ago. Average core deposits were $231.8 billion and $213.1 billion in first quarter 2005 and 2004, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and mortgage escrow deposits, for first quarter 2005, grew $16.4 billion, or 9%, from a year ago. Average mortgage escrow deposits were $13.6 billion for first quarter 2005, up $1.4 billion from a year ago. While savings certificates of deposits remained flat at $19.5 billion in first quarter 2005 from first quarter 2004, noninterest-bearing checking accounts and other core deposit categories increased on average from $193.6 billion in first quarter 2004 to $212.3 billion in first quarter 2005, reflecting growth in both commercial and consumer accounts. Total average interest-bearing deposits increased to $189.1 billion in first quarter 2005 from $169.7 billion in first quarter 2004.

NONINTEREST INCOME

We earn trust, investment and IRA fees from managing and administering assets, which include mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At March 31, 2005, these assets totaled $698 billion, up 15% from $608 billion at March 31, 2004. This increase included $24 billion in mutual fund assets and $5 billion in institutional investment

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accounts acquired from Strong Financial at December 31, 2004. Upon the merger of the Wells Fargo Funds® and certain Strong Financial funds in April 2005, we renamed our mutual fund family the Wells Fargo Advantage Funds^SM. Generally, trust and investment fees are based on the market value of the assets that are managed, administered, or both. Substantially all of the increase from 2004 was due to the acquisition of assets from the Strong Financial transaction.

Additionally, we receive commissions and other fees for providing services to retail and discount brokerage customers. At March 31, 2005 and 2004, brokerage balances were $85 billion and $77 billion, respectively. Generally, these fees are based on the number of transactions executed at the customer’s direction.

Card fees increased 16% from first quarter 2004 predominantly due to increases in credit card accounts and credit and debit card transaction volume.

Mortgage banking noninterest income was $814 million in first quarter 2005, compared with $315 million in the same period of 2004. The increase reflected the impact on net servicing fees of a larger servicing portfolio and an increase in the value of MSRs due to a decrease in prepayments as a result of the increase in market rates.

Net servicing fees were $456 million in first quarter 2005, compared with $166 million in first quarter 2004. Servicing fees are presented net of amortization and impairment of MSRs, and gains and losses from hedge ineffectiveness, which are all influenced by both the level and direction of mortgage interest rates. The increase in net servicing fees reflected higher gross servicing fees resulting from growth in the servicing portfolio and a reduction of $41 million in MSRs amortization due to an increase in average market interest rates. In addition, to reflect the higher value of our MSRs resulting from an increase in market interest rates, we reversed $271 million of the valuation allowance in first quarter 2005, compared with an impairment provision of $400 million in first quarter 2004. Net derivative gains were $85 million and $538 million in first quarter 2005 and 2004, respectively.

Net gains on mortgage loan origination/sales activities were $293 million in first quarter 2005, compared with $98 million in first quarter 2004.

Net losses on debt securities were $4 million in first quarter 2005, compared with net gains of $33 million in first quarter 2004. Net gains from equity investments were $71 million in first quarter 2005 and $95 million in first quarter 2004.

We routinely review our investment portfolios and recognize impairment write-downs based primarily on issuer-specific factors and results, and our intent to hold such securities. 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 impairment based on all of the information available at the time of the assessment, but new information or economic developments in the future could result in recognition of additional impairment.

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NONINTEREST EXPENSE

The 16% increase in noninterest expense was due primarily to a $332 million increase in salary and benefit expense from an additional 7,100 full-time equivalent (FTE) employees, largely sales people, across our businesses. Higher occupancy and equipment costs reflected a $117 million expense incurred during first quarter 2005 to adjust the estimated lives for certain depreciable assets, primarily building improvements.

The Strong Financial transaction added about $74 million of noninterest expense for first quarter 2005, including $8 million of integration costs. We expect to incur additional integration costs in 2005 related to the April 2005 merger of Wells Fargo Funds and certain Strong Financial funds.

See “Recent Accounting Standards” for information with respect to the accounting for share-based awards, such as stock option grants and the required date of adoption. Upon adoption, we will be required to include the cost of such grants in our statement of income over the vesting period of the award.

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OPERATING SEGMENT RESULTS

Our lines of business for management reporting consist of Community Banking, Wholesale Banking and Wells Fargo Financial.

Community Banking’s net income increased 19% to $1.40 billion in first quarter 2005 from $1.18 billion in first quarter 2004. Net interest income increased 10% to $3.12 billion in first quarter 2005 from $2.84 billion in first quarter 2004, primarily due to growth in consumer loans and deposits, and mortgages held for sale. Average loans were $192.6 billion in first quarter 2005, up 7% from $180.3 billion in first quarter 2004. Retail core deposits, which exclude Wholesale Banking core deposits and mortgage escrow deposits, averaged $206.2 billion in first quarter 2005, up 10% over the prior year. Noninterest income in first quarter 2005 increased $532 million, or 25%, compared with first quarter 2004, predominantly due to increased mortgage banking revenue and higher card fees, loan fees and other income. Noninterest expense was $3.51 billion in first quarter 2005, up $513 million from first quarter 2004, due to an increase in the number of team members and a $117 million expense incurred in first quarter 2005 to adjust the estimated lives of certain depreciable assets.

Wholesale Banking’s net income decreased 5% to $425 million in first quarter 2005 from $448 million in first quarter 2004. Revenue was $1,410 million, up 1% from $1,390 million in first quarter 2004. First quarter 2004 included strong revenue in both asset-based lending and capital markets-related businesses. Average loans increased 18% and average core deposits grew 4% from first quarter 2004. The provision for credit losses decreased to $4 million in first quarter 2005 from $23 million in first quarter 2004, due to lower net charge-offs. Noninterest income increased $17 million to $845 million in first quarter 2005, compared with first quarter 2004. Noninterest expense increased to $745 million in first quarter 2005 from $669 million in first quarter 2004, primarily due to the first full quarter with Strong Financial and related integration expenses.

Wells Fargo Financial’s net income decreased 80% to $27 million in first quarter 2005 from $136 million in first quarter 2004. The first quarter 2005 results reflected $163 million in credit losses being recognized to conform Wells Fargo Financial’s charge-off timing estimates with FFIEC guidelines. Total revenue rose 15% in first quarter 2005, reaching $861 million, compared with $746 million in first quarter 2004. Net interest income increased $125 million, or 19%, to $769 million in first quarter 2005 from $644 million in first quarter 2004, due to growth in average loans. Average real estate secured receivables increased 57% to $14.6 billion and average auto finance receivables rose 42% to $10.4 billion. The provision for credit losses increased by $211 million from first quarter 2004 to first quarter 2005. Noninterest expense increased $74 million, or 20%, in first quarter 2005 from first quarter 2004, reflecting business expansion and additional team members.

For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 12 (Operating Segments) to Financial Statements.

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BALANCE SHEET ANALYSIS

A comparison between March 31, 2005, December 31, 2004, and March 31, 2004, balance sheets is presented below.

SECURITIES AVAILABLE FOR SALE

Our securities available for sale portfolio includes both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and yield enhancement purposes. Accordingly, this portfolio primarily includes very liquid, high-quality federal agency debt securities. At March 31, 2005, we held $30.9 billion of debt securities available for sale, compared with $33.0 billion at December 31, 2004, with a net unrealized gain of $768 million and $1.2 billion for the same periods. In addition, we held $835 million of marketable equity securities available for sale at March 31, 2005, and $696 million at December 31, 2004, with a net unrealized gain of $162 million and $189 million for the same periods.

The weighted-average expected maturity of debt securities available for sale was 5.3 years at March 31, 2005. Since 75% of this portfolio was 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 portfolio is shown below.

MORTGAGE-BACKED SECURITIES

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

LOAN PORTFOLIO

A comparative schedule of average loan balances is included in the table on page 7; quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.

Loans averaged $287.3 billion in first quarter 2005, compared with $256.4 billion in first quarter 2004, an increase of 12%. Total loans at March 31, 2005, were $290.6 billion, compared with $264.2 billion at March 31, 2004, an increase of 10%. Average commercial and commercial real estate loans increased $10.9 billion, or 12%, from first quarter 2004. Total commercial loan growth accelerated to 15% (annualized), up $3.7 billion to $99.4 billion, on a linked-quarter basis. Mortgages held for sale increased to $38.7 billion from $26.4 billion, due to a

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redesignation of mortgages from the held for investment portfolio in first quarter 2005. Loans held for sale decreased to $1.8 billion at March 31, 2005, from $8.7 billion at year-end 2004, due to a redesignation of student loans held for sale to the held for investment portfolio. Our decision to hold these loans for investment was based on present yields and our intent and ability to hold this portfolio for the foreseeable future.

DEPOSITS

Average deposits increased $27.7 billion to $270.8 billion in first quarter 2005 from first quarter 2004, primarily due to growth in market rate and other time deposits.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

In the ordinary course of business, we engage in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. 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 2004 Form 10-K and Note 16 (Guarantees) to Financial Statements in this Report.

RISK MANAGEMENT

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, frequent and detailed risk measurement and modeling, extensive credit training programs and a continual loan audit review process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.

Nonaccrual Loans and Other Assets

The table on the following page shows the comparative data for nonaccrual loans and other assets. We generally place loans on nonaccrual status (1) when the full and timely collection of interest or principal becomes uncertain, (2) when they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal (unless both

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well-secured and in the process of collection) or (3) when part of the principal balance has been charged off. Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2004 Form 10-K describes our accounting policy for nonaccrual loans.

NONACCRUAL LOANS AND OTHER ASSETS

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. The performance of any loan can be affected by external factors, such as economic conditions, or factors particular to a borrower, such as actions of a borrower’s management.

The decrease in total nonaccrual loans and other assets from December 31, 2004, reflected a lower level of consumer nonperforming loans due to the impact of higher charge-offs at Wells Fargo Financial to conform its credit charge-off practices with FFIEC standards and the continued decline in commercial nonperforming loans due to overall economic improvements.

Loans 90 Days or More Past Due and Still Accruing

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 past due and still accruing was $2,581 million, $2,578 million and $2,293 million at March 31, 2005, December 31, 2004, and March 31, 2004, respectively. At March 31, 2005, December 31, 2004, and March 31, 2004, the total included $1,946 million, $1,820 million and $1,631 million, respectively, in advances pursuant to our servicing

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agreements to Government National Mortgage Association (GNMA) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

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

Allowance for Credit Losses

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 nonperforming loans will change at different points in time based on credit performance, loan mix and collateral values. The analysis of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is presented in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.

We consider the allowance for credit losses of $3.95 billion adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2005. 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 2004 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 conditions and ongoing internal and external examination processes. Our process for determining the adequacy of the allowance for credit losses is discussed in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2004 Form 10-K.

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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 – Community Banking (including Mortgage Banking), Wholesale Banking and Wells Fargo Financial – have individual asset/liability management committees and processes linked to the Corporate ALCO process.

INTEREST RATE RISK

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:

We assess interest rate risk by comparing our most likely earnings plan with various earnings models 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. Currently, our main risk is to substantially lower interest rates. For example, as of March 31, 2005, our simulation indicated estimated earnings at risk of about 5% of our most likely earnings plan to a scenario in which the federal funds rate dropped 150 basis points over the next twelve months from 2.50% to 1.00% and the 10 year Constant Maturity Treasury Bond yield dropped 100 basis points from 4.25% to 3.25% over the same period. 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.

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 values of these derivatives as of March 31, 2005, and December 31, 2004, are presented in Note 18 (Derivatives) to Financial Statements. We use derivatives for asset/liability management in three ways:

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MORTGAGE BANKING INTEREST RATE RISK

We originate, fund and service mortgage loans, which subjects us to a number of risks, including credit, liquidity and interest rate risks. We manage credit and liquidity risk by selling or securitizing most of the mortgage loans we originate. Changes in interest rates, however, may have a significant effect on mortgage banking income in any quarter and over time. Interest rates impact both the value of the mortgage servicing rights (MSRs), which is adjusted to the lower of cost or fair value, and the future earnings of the mortgage business, which are driven by origination volume and the duration of our servicing. We manage both risks by hedging the impact of interest rates on the value of the MSRs using derivatives, combined with the “natural hedge” provided by the origination and servicing components of the mortgage business; however, we do not hedge 100% of these two risks.

We hedge a significant portion of the value of our MSRs against a change in interest rates with derivatives. The principal source of risk in this hedging process is the risk that changes in the value of the hedging contracts may not match changes in the value of the hedged portion of our MSRs for any given change in long-term interest rates.

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

For a given decline in interest rates, a portion of the potential reduction in the value of our MSRs is offset by estimated increases in origination and servicing fees over time from new mortgage activity or refinancing associated with that decline in interest rates. With much lower long-term interest rates, the decline in the value of our MSRs and the effect on net income would be immediate whereas the additional origination and servicing fee income accrues over time. Under generally accepted accounting principles (GAAP), impairment of our MSRs, due to a decrease in long-term rates or other reasons, is charged immediately to earnings through an increase to the valuation allowance.

In scenarios of sustained increases in long-term interest rates, origination fees may decline as refinancing activity slows. In such higher interest rate scenarios, the duration of the servicing portfolio may lengthen. In such circumstances, we may reduce periodic amortization of MSRs, and may recover some or all of the previously established valuation allowance.

Our MSRs totaled $9.0 billion, net of a valuation allowance of $1.3 billion, at March 31, 2005, and $7.9 billion, net of a valuation allowance of $1.6 billion, at December 31, 2004. The weighted-average note rate on the owned servicing portfolio was 5.75% at both March 31, 2005,

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and December 31, 2004. Our MSRs were 1.24% of mortgage loans serviced for others at March 31, 2005, compared with 1.15% at December 31, 2004.

MARKET RISK – TRADING ACTIVITIES

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, loans, foreign exchange transactions, commodity transactions and derivatives – transacted with customers or used to hedge capital market transactions with customers – are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The notional or contractual amount, credit risk amount and estimated net fair value of all customer accommodation derivatives at March 31, 2005, and December 31, 2004, are included in Note 18 (Derivatives) to Financial Statements. 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 is the value-at-risk (VAR) metrics complemented with factor analysis and stress testing. Value-at-risk measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VAR at 99% confidence interval based on actual changes in rates and prices over the past 250 days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout first quarter 2005 was $20 million, with a lower bound of $16 million and an upper bound of $24 million.

MARKET RISK – EQUITY MARKETS

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 reviews business developments, key risks and historical returns for the private equity investments 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. At March 31, 2005, private equity investments totaled $1,458 million, compared with $1,449 million at December 31, 2004.

We also have marketable equity securities in the available for sale investment portfolio, including securities distributed from 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, in addition, other-than-temporary impairment may be periodically recorded. 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

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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, to a lesser degree, our investment horizon in relationship to an anticipated near-term recovery in the stock price, if any. At March 31, 2005, the fair value of marketable equity securities was $835 million and cost was $673 million, compared with $696 million and $507 million, respectively, at December 31, 2004.

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

LIQUIDITY AND FUNDING

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 liquidity management guidelines for both the consolidated balance sheet as well as for the Parent specifically 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 and securities purchased under resale agreements. 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. The remaining assets were funded by long-term debt, deposits in foreign offices, short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities.

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-based secured funding. In September 2003, Moody’s Investors Service raised Wells Fargo Bank, N.A.’s rating to “Aaa,” its highest investment grade, from “Aa1” and raised the Company’s senior debt rating to “Aa1” from “Aa2.” In October 2003, Standard & Poor’s Ratings Service raised the counterparty ratings on the Company to “AA-minus/A-1-plus” from “A-plus/A-1” and the revised outlook for the Company to stable from positive. 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.

Parent. In April 2004, the Parent filed a registration statement with the Securities and Exchange Commission (SEC) for issuance of $20 billion in senior and subordinated notes, preferred stock and other securities. During first quarter 2005, the Parent issued a total of $5.8 billion of senior notes. At March 31, 2005, the Parent’s remaining issuance capacity under its effective

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registration statement was $6.1 billion. We used the proceeds from securities issued in first quarter 2005 for general corporate purposes and expect that the proceeds in the future will also be used for general corporate purposes. In April 2005, the Parent issued $1 billion in senior notes. The Parent also issues commercial paper and has a $1 billion back-up credit facility.

Wells Fargo Bank, N.A. In March 2003, Wells Fargo Bank, N.A. established a $50 billion bank note program under which it may issue up to $20 billion in short-term senior notes outstanding at any time and up to a total of $30 billion in long-term senior and subordinated notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. During first quarter 2005, Wells Fargo Bank, N.A. issued $1.6 billion in senior long-term notes. At March 31, 2005, the remaining issuance authority under the long-term portion was $7.4 billion. In addition, outside of the bank note program, Wells Fargo Bank, N.A. issued $1.5 billion in subordinated debt during first quarter 2005.

Wells Fargo Financial. In November 2003, Wells Fargo Financial Canada Corporation (WFFCC), a wholly owned Canadian subsidiary of Wells Fargo Financial, Inc. (WFFI), qualified for distribution with the provincial securities exchanges in Canada $1.5 billion (Canadian) of issuance authority. In December 2004, WFFCC amended its existing shelf registration by adding $2.5 billion (Canadian) of issuance authority. During first quarter 2005, WFFCC issued $300 million (Canadian) in senior notes. At March 31, 2005, the remaining issuance capacity for WFFCC was $2.6 billion (Canadian).

CAPITAL MANAGEMENT

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. Growth in average earning assets from first quarter 2004 was 12% and ROE was 19.60% for first quarter 2005 and 20.31% for first quarter 2004.

From time to time our Board of Directors authorizes the Company to repurchase shares of its common stock. Although we announce when our 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. In November 2003, the SEC amended Rule 10b-18 to impose 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 the Company’s 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

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of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.

In April 2004, the Board of Directors authorized the repurchase of up to 25 million shares of our outstanding common stock. In January 2005, the Board authorized the repurchase of up to 25 million additional shares of common stock. During first quarter 2005, we repurchased approximately 10 million shares of our common stock. At March 31, 2005, the total remaining common stock repurchase authority under the 2004 and 2005 authorizations was approximately 28 million shares. (For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 on page 58.)

Our potential sources of capital include retained earnings, and issuances of common and preferred stock and subordinated debt. In first quarter 2005, retained earnings increased $1.0 billion, predominantly as a result of net income of $1.86 billion less dividends of $815 million. For first quarter 2005, stock repurchases represented 34% of net income and the combination of stock repurchases and dividends represented 77% of net income. In first quarter 2005, we issued $450 million of common stock under various employee benefit and director plans and under our dividend reinvestment program.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Forward-looking statements include:

In this report, for example, we make forward-looking statements discussing our expectations about:

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Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we might not update them to reflect changes that occur after the date they are made.

There are a number of factors – many beyond our control – that could cause results to differ significantly from our expectations. Some of these factors are described below. Other factors, such as credit, market, operational, liquidity, interest rate and other risks, are described elsewhere in this report (see, for example, “Balance Sheet Analysis”). Factors relating to the regulation and supervision are described in our 2004 Form 10-K. Any factor described in this report or in our 2004 Form 10-K could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There are also other factors that we have not described in this report or in our 2004 Form 10-K that could cause results to differ from our expectations.

Industry Factors

As a financial services company, our earnings are significantly affected by general business and economic conditions.

Our business and earnings are affected by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which we operate. For example, an economic downturn, an increase in unemployment, or other events that affect household and/or corporate incomes could decrease the demand for loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans.

Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, could affect business and economic conditions in the U.S. and abroad. The terrorist attacks in 2001, for example, caused an immediate decrease in air travel, which affected the airline industry, lodging, gaming and tourism.

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

The fiscal and monetary policies of the federal government and its agencies significantly affect our earnings.

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

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The financial services industry is highly competitive.

We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. Banks, securities firms and insurance companies now can merge by creating a “financial holding company,” which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the United States, further increasing competition in the U.S. market. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

We are heavily regulated by federal and state agencies.

The Parent, our subsidiary banks and many of our nonbank subsidiaries are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of nonbanks to offer competing financial services and products. Also, if we do not comply with laws, regulations or policies, we could receive regulatory sanctions and damage to our reputation. For more information, refer to the “Regulation and Supervision” section and to Notes 3 (Cash, Loan and Dividend Restrictions) and 26 (Regulatory and Agency Capital Requirements) to Financial Statements in our 2004 Form 10-K.

Future legislation could change our competitive position.

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

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

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit, we may assume that a customer’s audited

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financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on the audit report covering those financial statements. Our financial condition and results of operations could be negatively affected by relying on financial statements that do not comply with GAAP or that are materially misleading.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes now allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.

Company Factors

Maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services.

Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not be successful in introducing new products and services, achieving market acceptance of our products and services, or developing and maintaining loyal customers.

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

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

The Parent relies on dividends from its subsidiaries for most of its revenue.

The Parent is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the Parent’s common and preferred stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank and certain of our nonbank subsidiaries may pay to the Parent. Also, the Parent’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. For more information, refer to “Regulation and

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Supervision – Dividend Restrictions” and “ – Holding Company Structure” in our 2004 Form 10-K.

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

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2004 Form 10-K describes our significant accounting policies.

Three accounting policies are critical to presenting our financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions. These critical accounting policies relate to: (1) the allowance for credit losses, (2) the valuation of mortgage servicing rights, and (3) pension accounting. Because of the uncertainty of estimates about these matters, we cannot provide any assurance that we will not:

For more information, see “Critical Accounting Policies” in our 2004 Form 10-K and refer in this report to “Balance Sheet Analysis” and “Asset/Liability and Market Risk Management.”

Changes in accounting standards could materially impact our financial statements.

From time to time the Financial Accounting Standards Board (FASB) and SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.

We have businesses other than banking.

We are a diversified financial services company. In addition to banking, we provide insurance, investments, mortgages and consumer finance. Although we believe our diversity helps lessen the effect when downturns affect any one segment of our industry, it also means our earnings could be subject to different risks and uncertainties. We discuss some examples below.

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

Mortgage Banking. The effect of interest rates on our mortgage business can be large and complex. Changes in interest rates can affect loan origination fees and loan servicing fees, which account for a significant portion of mortgage-related revenues. A decline in mortgage rates generally increases the demand for mortgage loans as borrowers refinance, but also generally leads to accelerated payoffs in our mortgage servicing portfolio. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and a decline in payoffs in our servicing portfolio. We use dynamic, sophisticated models to assess the effect of interest rates on mortgage fees, amortization of mortgage servicing rights, and the value of mortgage servicing rights. The estimates of net income and fair value produced by these models, however, depend on assumptions of future loan demand, prepayment speeds and other factors that may overstate or understate actual experience. We use derivatives to hedge the value of our servicing portfolio but they do not cover the full value of the portfolio. We cannot assure that the hedges will offset significant decreases in the value of the portfolio. For more information, see “Critical Accounting Policies – Valuation of Mortgage Servicing Rights” in our 2004 Form 10-K and “Asset /Liability and Market Risk Management” in this report.

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

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

We have an active acquisition program.

We regularly explore opportunities to acquire financial institutions and other financial services providers. We cannot predict the number, size or timing of acquisitions. We typically do not comment publicly on a possible acquisition or business combination until we have signed a definitive agreement.

We must generally receive federal regulatory approval before we can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition,

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financial condition, and future prospects including current and projected capital ratios and levels, the competence, experience, and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the Community Reinvestment Act, and the effectiveness of the acquiring institution in combating money laundering activities. In addition, we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We might be required to sell banks or branches as a condition to receiving regulatory approval.

Difficulty in integrating an acquired company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of our business or the business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.

Legislative Risk

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

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

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

Our stock price can be volatile.

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

General market fluctuations, industry factors and general economic and political conditions and events, such as terrorist attacks, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, also could cause our stock price to decrease regardless of our operating results.

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CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31, 2005, 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 the chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005.

Internal Control Over Financial Reporting

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 generally accepted accounting principles 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 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of these statements.

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