UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2007
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
   
Delaware
(State or other jurisdiction of
incorporation or organization)		 41-0449260
(I.R.S. Employer
Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip(Zip Code)
Registrant’s telephone number, including area code: 1-866-249-3302
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.
Yesþ               No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
     
Large accelerated filerþ Accelerated filer¨ Non-accelerated filer¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨               Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
   
  Shares Outstanding
  April 30,October 31, 2007
Common stock, $1-2/3 par value 3,339,747,3243,354,374,522

 

 

FORM 10-Q
CROSS-REFERENCE INDEX
       
PART I 
Financial Information
    
Item 1. Financial Statements Page
  
Consolidated Statement of Income
  2834 
  
Consolidated Balance Sheet
  2935 
  
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income
  3036 
  
Consolidated Statement of Cash Flows
  3137 
  
Notes to Financial Statements
  3238 

  

Item 2.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)    
  
Summary Financial Data
  2 
  
Overview
  3 
  
Critical Accounting Policies
  68 
  
Earnings Performance
  78 
  
Balance Sheet Analysis
  1317 
  
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  1418 
  
Risk Management
  1418 
  
Capital Management
  2330 

  
Item 3. Quantitative and Qualitative Disclosures About Market Risk  1722 

  
Item 4. 
Controls and Procedures
  2733 

  
PART II 
Other Information
    
Item 1A. 
Risk Factors
  2531 

  
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
  6675 

  
Item 6. 
Exhibits
  6675 

  
Signature  6675 

  
Exhibit Index  6776 
EXHIBIT 12
EXHIBIT 31.(A)
EXHIBIT 31.(B)
EXHIBIT 32.(A)
EXHIBIT 32.(B)

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PART I — FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
                                                    
   
 % Change  % Change     
 Quarter ended Mar. 31, 2007 from  Quarter ended Sept. 30, 2007 from Nine months ended   
 Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Sept. 30, June 30, Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, % 
($ in millions, except per share amounts) 2007 2006 2006 2006 2006  2007 2007 2006 2007 2006 2007 2006 Change 
 

 
For the Quarter
 

For the Period

 
Net income $2,244 $2,181 $2,018  3%  11% $2,283 $2,279 $2,194  —%  4% $6,806 $6,301  8%
Diluted earnings per common share 0.66 0.64 0.60 3 10  0.68 0.67 0.64 1 6 2.01 1.85 9 

 
Profitability ratios (annualized):  
Net income to average total assets (ROA)  1.89%  1.79%  1.72% 6 10   1.67%  1.82%  1.76%  (8)  (5)  1.79%  1.73% 3 
Net income to average stockholders’ equity (ROE) 19.65 18.99 19.89 3  (1) 19.12 19.55 20.00  (2)  (4) 19.44 19.89  (2)

 
Efficiency ratio (1) 58.5 57.5 59.3 2  (1) 55.8 57.9 56.9  (4)  (2) 57.4 58.3  (2)

 
Total revenue $9,441 $9,413 $8,555 — 10  $9,853 $9,891 $8,934 — 10 $29,185 $26,278 11 

 
Dividends declared per common share 0.28 0.28 0.26 — 8 

 

Dividends declared per common share (2)

 0.31 0.28 — 11 — 0.87 0.80 9 
Dividends paid per common share 0.31 0.28 0.28 11 11 0.87 0.80 9 
Average common shares outstanding 3,376.0 3,379.4 3,358.3 — 1  3,339.6 3,351.2 3,371.9 —  (1) 3,355.5 3,364.6 — 
Diluted average common shares outstanding 3,416.1 3,424.0 3,395.7 — 1  3,374.0 3,389.3 3,416.0 —  (1) 3,392.9 3,405.5 — 

 
Average loans $321,429 $312,166 $311,132 3 3  $350,683 $331,970 $303,980 6 15 $334,801 $305,141 10 
Average assets 482,105 482,585 475,195 — 1  541,533 502,686 494,679 8 9 508,992 487,182 4 
Average core deposits (2) 290,586 283,790 257,466 2 13 
Average retail core deposits (3) 223,729 220,025 213,876 2 5 

 
Average core deposits (3) 306,135 300,535 269,725 2 13 299,142 263,818 13 
Average retail core deposits (4) 228,633 228,006 214,294 — 7 226,799 214,358 6 
Net interest margin  4.95%  4.93%  4.85% — 2   4.55%  4.89%  4.79%  (7)  (5)  4.79%  4.80% — 

 
At Quarter End
 

At Period End

 
Securities available for sale $45,443 $42,629 $51,195 7  (11) $57,440 $72,179 $52,635  (20) 9 $57,440 $52,635 9 
Loans 325,487 319,116 306,676 2 6  362,922 342,800 307,491 6 18 362,922 307,491 18 
Allowance for loan losses 3,772 3,764 3,845 —  (2) 3,829 3,820 3,799 — 1 3,829 3,799 1 
Goodwill 11,275 11,275 11,050 — 2  12,018 11,983 11,192 — 7 12,018 11,192 7 
Assets 485,901 481,996 492,428 1  (1) 548,727 539,865 483,441 2 14 548,727 483,441 14 
Core deposits (2) 296,469 288,068 263,136 3 13 
Core deposits (3) 303,853 300,602 270,818 1 12 303,853 270,818 12 
Stockholders’ equity 46,135 45,876 41,961 1 10  47,738 47,301 44,862 1 6 47,738 44,862 6 
Tier 1 capital (4) 36,476 36,808 32,758  (1) 11 
Total capital (4) 50,733 51,427 45,331  (1) 12 

 
Tier 1 capital (5) 38,279 38,387 35,551 — 8 38,279 35,551 8 
Total capital (5) 51,797 52,517 50,197  (1) 3 51,797 50,197 3 
Capital ratios:  
Stockholders’ equity to assets  9.49%  9.52%  8.52% — 11   8.70%  8.76%  9.28%  (1)  (6)  8.70%  9.28%  (6)
Risk-based capital (4) 
Risk-based capital (5) 
Tier 1 capital 8.70 8.95 8.30  (3) 5  8.21 8.57 8.74  (4)  (6) 8.21 8.74  (6)
Total capital 12.10 12.50 11.49  (3) 5  11.11 11.72 12.34  (5)  (10) 11.11 12.34  (10)
Tier 1 leverage (4) 7.83 7.89 7.13  (1) 10 

 
Tier 1 leverage (5) 7.29 7.90 7.41  (8)  (2) 7.29 7.41  (2)
Book value per common share $13.77 $13.58 $12.50 1 10  $14.36 $14.07 $13.30 2 8 $14.36 $13.30 8 

 
Team members (active, full-time equivalent) 159,600 158,000 152,000 1 5  158,800 158,700 156,400 — 2 158,800 156,400 2 

 
Common Stock Price
  
High $36.64 $36.99 $32.76  (1) 12  $37.99 $36.49 $36.89 4 3 $37.99 $36.89 3 
Low�� 33.01 34.90 30.31  (5) 9  32.66 33.93 33.36  (4)  (2) 32.66 30.31 8 
Period end 34.43 35.56 31.94  (3) 8  35.62 35.17 36.18 1  (2) 35.62 36.18  (2)
 
(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2)On April 25, 2006, the Company’s Board of Directors declared the second quarter 2006 cash dividend payable June 1, 2006. On June 27, 2006, the Board declared a two-for-one split in the form of a 100% stock dividend on the Company’s common stock and, at the same time, the third quarter 2006 cash dividend payable September 1, 2006.
(3) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). During 2006, certain customer accounts (largely Wholesale Banking) were converted to deposit balances in the form of Eurodollar sweep accounts from off-balance sheet money market funds and repurchase agreements. Included in averageAverage core deposits wereincluded converted balancesEurodollar sweep accounts of $9,888 million, $8,888$9,888 million and $1,234$3,343 million for the quarters ended March 31,September 30, 2007, December 31, 2006,June 30, 2007, and March 31,September 30, 2006, respectively. Average core deposits increased 10%11% from first quarter 2006 and 9% (annualized) from fourththird quarter 2006 not including these converted balances.
(3)(4) Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(4)(5) See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements for additional information.

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This Report onForm 10-Q for the quarter ended March 31,September 30, 2007, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which may 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 due to several factors. Some of these factors are described in the Financial Review and in the Financial Statements and related Notes. For a discussion of other factors, refer to the “Risk Factors” section in this Report and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report onForm 10-K for the year ended December 31, 2006 (2006Form 10-K)10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website atwww.sec.gov.
OVERVIEW
Wells Fargo & Company is a $486$549 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,September 30, 2007. When we refer to “the Company,” “we,” “our” orand “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company.
In firstthird quarter 2007, we achieved record diluted earnings per share of $0.66,$0.68, up 10%6% from a year ago, and record net income of $2.24$2.28 billion, up 11%4% from a year ago. Our first quarter 2007solid results reflected the balance across our broadly diverse business segments, continued improvement in operating margins, and a modest decline in net credit losses from fourth quarter 2006 levels. In terms of business performance, growth was oncewere again well balanced between consumer and commercial with most of our 80 plus businesses producingdriven by double-digit earnings or revenue growth in the quarter. In terms of operating margins, net interest margin improved to 4.95%(10%), up 10 basis points from a year ago; return on assets, which includes credit costs, improved to 1.89%, up 17 basis points from a year ago;positive operating leverage was positive with revenue(revenue growth of 10% exceeding 9%2 percentage points above expense growth;growth), double-digit growth in both loans and return on equity remained strong at 19.65%, among the best in the industry. Earnings growthcore deposits, and operating margins were solid and improved in first quarter 2007, despite an increase in nonperforming assets and credit charge-offs from a year ago, reflecting inthat remained at the top of the large part our ongoing discipline in managing our businesses and balance sheet for industry-leading risk-adjusted returns.bank peer group.
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 5.35.5 products with us. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our core products grew thisin third quarter compared with2007 from a year ago, with average loans up 3%15%, average core deposits up 13%, loans serviced for others up 12% and assets managed and administeredunder management or administration up 26%29%.

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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 risk-adjustedwhat we believe are sound credit policies for underwriting, while continuously monitoring and reviewing the performance of our loan portfolio. We maintain a well-diversified loan portfolio, measured by industry, geography and product type. We manage the interest rate and market risks inherent in our assetassets and liability balancesliabilities 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

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businesses, consistent execution of our business model and the management of our business risks.
Our financial results included the following:
Net income for firstthird quarter 2007 increased 11%4% to $2.24$2.28 billion from $2.02$2.19 billion for firstthird quarter 2006. Diluted earnings per share for firstthird quarter 2007 increased 10%6% to $0.66,$0.68 from $0.60$0.64 for firstthird quarter 2006. Return on average assets (ROA) was 1.89%1.67% and return on average stockholders’ equity (ROE) was 19.65%19.12% for third quarter 2007, and 1.76% and 20.00%, respectively, for third quarter 2006.
Net income for the first quarter 2007.nine months of 2007 was $6.81 billion, or $2.01 per share, up 8% from $6.30 billion, or $1.85 per share, for the first nine months of 2006. ROA was 1.79% and ROE was 19.44% for the first nine months of 2007, and 1.73% and 19.89%, respectively, for the first nine months of 2006.
Net interest income on a taxable-equivalent basis increased 3%5% to $5.04$5.32 billion for firstthird quarter 2007 from $4.89$5.08 billion for firstthird quarter 2006, drivenprimarily due to loan growth, offset by a 1% increase in average earning assetshigher rates on deposits and a 10 basis point increase in the net interest margin. Thedebt. Our net interest margin was 4.95% for first4.55% in third quarter 2007, compared with 4.85%down from 4.79% a year ago, largely due to an increase in the quarterly average of securities available for firstsale and an increase in interest-bearing core deposits relative to noninterest-bearing deposits.
Noninterest income for third quarter 2007 increased $686 million, or 18%, from third quarter 2006. The completion of the sales of adjustable rate mortgages (ARMs) and lower-yielding investment securities last year reduced the earning assetdouble-digit, year-over-year growth rate year over year, but helped increase the net interest margin. Net interest margin continued to benefit from growth in core deposits.
Noninterest income increased 20% to $4.43 billion for first quarter 2007, from $3.69 billion for first quarter 2006. Growth in fee income wasreflected very strong reflecting our ongoing success in cross-selling products and services to both consumer and commercial relationships. Deposit service fees rose 10% reflecting solid growth in deposit balances and accounts;service fees (up 18%); trust and investment fees rose 10% reflecting(up 17% driven by new business growth and market appreciation); card fees (up 21% driven by business activity and continued increases in equity/bond marketsdebit/credit card penetration rates); and other fees (up 11% driven by real estate brokerage fees). Mortgage banking noninterest income increased $339 million in third quarter 2007 from a year ago with the growth and successvalue of the mortgage servicing business more than offsetting a 12% decline in building new wealth management relationships; debit andmortgage originations from a year ago.
During third quarter 2007, noninterest income was affected by widening credit card fees rose 22% reflecting deeper customer penetrationspreads, increases in market volatility, changes in interest rates and increased activity; insurance fees rose 10% reflecting higher revenue; and mortgage banking fee income was higher due to increased originations and a 41% increase in gross servicing income, including the $140 billion servicing portfolio acquired last year. In line with our asset/liability management process, we sold $4 billion of our lowest-yielding bonds in first quarter 2007 at a gain of $29 million.other credit/housing market conditions, including:
•($490) millionReduction in net mortgage loan origination/sales activities gains reflecting a write-down of the mortgage warehouse/pipeline due to the illiquidity in the non-agency mortgage secondary market, a write-down of mortgage loans held or repurchased during the quarter and an increase in the repurchase reserve for projected early payment defaults.
•$562 millionIncrease in mortgage servicing income reflecting a $638 million reduction in the value of mortgage servicing rights (MSRs) due to the decline in mortgage rates during the quarter, offset by a $1.2 billion gain on the financial instruments hedging the MSRs.
•($20) millionWrite-down on commercial loans held for sale, recorded in other noninterest income.

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Revenue, the sum of net interest income and noninterest income, grew $886$919 million, or 10%, to $9.44$9.85 billion in firstthird quarter 2007 from $8.56$8.93 billion in firstthird quarter 2006. Community Banking and Wholesale BankingRevenue of $29.2 billion for the first nine months of 2007 was up 11% from the same period of 2006. Achieving double-digit revenue growth was 12% and 15%, respectively, reflectingduring the strength and balancechallenging environment in third quarter 2007 once again reflected the value of our diversified business model.model and our success in earning more of our customers’ business. Businesses with double-digit, or nearthat generated double-digit, year-over-year revenue growth included commercial banking, asset-based lending, asset management, international/trade finance, capital markets, real estate brokerage, insurance, international, small business direct,lending, wealth management, credit card, global remittance services, home equity lending, personal credit management, corporate trust and home mortgage. Year-over-year revenue growth was driven by growth in net interest income and particularly strong increases in fee income across products and services, reflecting continued growth in cross-sell. Given the deterioration in the nonprime mortgage market during first quarter 2007, we took a number of actions that reduced revenue by approximately $90 million

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(pre tax), including reducing the carrying value of all nonprime loans in our mortgage warehouse and providing for additional estimated early payment default losses on securitized mortgages. In addition, given the decline in mortgage rates during the quarter, revenue was reduced by $34 million (pre tax) reflecting the decline in the value of mortgage servicing rights (MSRs) net of hedging.
Noninterest expense was $5.53$5.50 billion for firstthird quarter 2007, up $452$420 million, or 9%8%, from first quarter 2006.$5.08 billion for the same period of 2006, 2 percentage points below revenue growth, resulting in positive operating leverage. The increase was primarily driven by continued investment in our businesses, both additional sales personnel and new stores. During firstefficiency ratio improved to 55.8% for third quarter 2007 from 56.9% a year ago and 57.9% in second quarter 2007. Third quarter 2007 expenses included $26 million for merger and integration costs, and severance and other costs in the residential real estate businesses. While we opened 18 regionalactively manage our expenses for positive operating leverage and have reduced expenses at Wells Fargo Home Mortgage, we continued to invest for future growth. We added 20 banking stores added 57 newwebATM® machines and converted 151 ATMs39 Placer Sierra Bancshares stores in Central California toEnvelope-FreeSMwebATMmachines to better serve our customers. Expenses in firstthird quarter 2007, included $50 million of stock option expense, $29 million of seasonal FICA expenses and $16 million of integration costs.as well as added 342 platform bankers.
Net charge-offs for firstthird quarter 2007 were $715$892 million (0.90%(1.01% of average total loans outstanding, annualized), up from $720 million (0.87%) in second quarter 2007 and $663 million (0.86%) in third quarter 2006. For the first nine months of 2007, net charge-offs were $2.33 billion (0.93%), compared with $726 million (0.92%$1.53 billion (0.67%) during fourth quarter 2006 and $433 million (0.56%) during, for the first quarter 2006, which was positively impacted by historically low personal bankruptcies afternine months of 2006. Almost half of the fourth quarter 2005 bankruptcy spike caused by the then impending changeincrease in the bankruptcy law. Auto relatednet credit losses for firstfrom second quarter 2007 while still at historically elevated levels, declined from third and fourth quarter 2006 due to our intensive management efforts, in both collections and underwriting, along with seasonality. Losses remained at predicted levels in our consumer unsecured and small business portfolios, and we continued to experience historically low losses in our commercial portfolios. Home equity losses have increased due to current real estate market conditions, including stress in certain regional markets, along with underperformance in home equity loans acquired from correspondents. We have tightened our underwriting standards and focused additional collections resources on targeted portfolio segments. During 2007, we expect higher but manageable losseswas concentrated in the home equity portfolio.portfolio, where losses accelerated given the steeper than anticipated decline in home prices. The remainder of the increased credit losses was concentrated in the auto portfolio (seasonally higher in the second half of the year) and in unsecured consumer credit (largely due to portfolio growth, with loss rates remaining relatively stable). Our first mortgage portfolio continued to perform well, with annualized losses of 0.11% — only $16 million on the entire portfolio of $63.9 billion (average) for third quarter 2007 — down from 0.18% in third quarter 2006. The $24 billion debt consolidation portfolio at Wells Fargo Financial continued to grow and perform as expected, and better than industry levels. First mortgage delinquency rates also remained below industry levels. In addition, commercial and commercial real estate loan losses remained modest and within portfolio expectations.
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $3.96$4.02 billion or 1.22%(1.11% of total loans,loans) at March 31,September 30, 2007, compared with $3.96 billion or 1.24%,(1.24%) at December 31, 2006, and $4.03$3.98 billion or 1.31%,(1.29%) at March 31,September 30, 2006.
Total nonaccrual loans were $1.75$2.09 billion or 0.54%(0.58% of total loans,loans) at March 31,September 30, 2007, compared with $1.67 billion or 0.52%,(0.52%) at December 31, 2006, and $1.39$1.49 billion or 0.45%,(0.48%) at March 31,September 30, 2006. Total nonperforming assets (NPAs) were $2.67$3.18 billion or 0.82%(0.88% of total loans,loans) at March 31,September 30, 2007, compared with $2.42 billion or 0.76%,(0.76%) at December 31, 2006, and $1.85$2.10 billion or 0.60%,(0.68%) at March 31,September 30, 2006. Foreclosed assets were $909 million$1.09 billion at March 31,September 30, 2007, compared with $745 million at December 31, 2006, and $455$608 million at March 31,September 30, 2006. Foreclosed assets, a component of total NPAs, included $381$487 million, $322

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$322 million and $227$266 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loans at March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively, consistent with regulatory reporting requirements. The foreclosed real estate securing GNMA loans of $381$487 million represented 1213 basis points of the ratio of nonperforming assets to loans at March 31,September 30, 2007. Both principal and interest for GNMA loans secured by the foreclosed real estate are fully collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. Commercial nonperforming assets continued at historically low levels, and our loan impairment

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analysis indicated only modest loss potential. We are constantly monitoring residential mortgage and auto nonperforming levels and have active programs to determine the best strategy to hold and workout or sell these assets.
The Company and each of its subsidiary banks continued to remain well-capitalized. During first quarter 2007 we repurchased $1.6 billion of our common stock.“well capitalized” under applicable regulatory capital adequacy guidelines. The ratio of stockholders’ equity to total assets was 9.49%8.70% at March 31,September 30, 2007, 9.52% at December 31, 2006, and 8.52%9.28% at March 31,September 30, 2006. Our total risk-based capital (RBC) ratio at March 31,September 30, 2007, was 12.10%11.11% and our Tier 1 RBC ratio was 8.70%8.21%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at March 31,September 30, 2006, were 11.49%12.34% and 8.30%8.74%, respectively. Our Tier 1 leverage ratios were 7.83%7.29% and 7.13%7.41% at March 31,September 30, 2007 and 2006, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
Current Accounting Developments
On January 1, 2007, we adopted the following new accounting pronouncements:
 • FIN 48 — Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109;
 • FSP 13-2 — FASB Staff Position 13-2,Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction;
 • FAS 155 — Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments,an amendment of FASB Statements No. 133 and 140;
 • FAS 157,Fair Value Measurements; and
 • FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.
The adoption of FIN 48, FAS 155, FAS 157 and FAS 159 did not have any effect on our financial statements at the date of adoption. For additional information, see Note 11 (Income Taxes) and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements.
Upon adoption of FSP 13-2, we recorded a cumulative effect of change in accounting principle to reduce the beginning balance of 2007 retained earnings by $71 million after tax ($115 million pre tax). This amount will be recognized back into income over the remaining terms of the affected leases.
On July 1, 2007, we adopted Emerging Issues Task Force (EITF) Topic D-109,Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133(Topic D-109), which provides clarifying guidance as to whether certain hybrid financial instruments are more akin to debt or equity, for purposes of evaluating whether the embedded derivative financial instrument requires separate accounting

6

under FAS 133. In accordance with the transition provisions of Topic D-109, we transferred $1.2 billion of securities, consisting of investments in preferred stock callable by the issuer, from trading assets to securities available for sale. Because the securities were carried at fair value, the adoption of Topic D-109 did not have any effect on our total stockholders’ equity.
On April 30, 2007, the FASB issued Staff Position FIN 39-1,Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 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 are currently evaluating the impact, if any, that FSP FIN 39-1 may have on our consolidated financial statements.
On June 11, 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 07-1,Clarification of the Scope of the Audit and Accounting Guide “Investment Companies” and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies(SOP 07-1). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting GuideInvestment Companies(the Guide). For those entities that are determined to be investment companies, SOP 07-1 also addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. As originally issued, SOP 07-1 was effective for the year beginning January 1, 2008; however, on October 17, 2007, the FASB voted to indefinitely defer the effective date.
On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7, 2006, meeting with respect to Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements(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 Issue No. 06-10,Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements(EITF 06-10). These consensuses require that for endorsement split-dollar life insurance arrangements and collateral assignment 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 January 1, 2008, with early adoption permitted. We expect that the adoption of EITF 06-4 and EITF 06-10 will reduce beginning retained earnings for 2008 by approximately $20 million (after tax), primarily related to the acquisition of Greater Bay Bancorp.
On November 5, 2007, SEC Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings(SAB 109), was issued. SAB 109 provides the staff’s views on the accounting for written loan commitments recorded at fair value under 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,

7

Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 states that the expected net future cash flows related to the associated servicing of the 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 are applicable to written loan commitments issued or modified beginning on January 1, 2008. We are currently evaluating the impact, if any, that SAB 109 may have on our consolidated financial statements.
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 residential MSRsmortgage servicing rights (MSRs) and pension accounting. Management has reviewed and approved these critical

6

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 2006 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 table on page 810 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 3%5% to $5.04$5.32 billion in firstthird quarter 2007 from $4.89$5.08 billion in firstthird quarter 2006, primarily drivendue to loan growth, offset by a 1% growth in average earning assetshigher rates on deposits and a 10 basis point increase in the net interest margin.debt. The net interest margin was 4.95%4.55% in firstthird quarter 2007, updown from 4.85%4.79% in firstthird quarter 2006.2006, largely due to an increase in the quarterly average of securities available for sale and an increase in interest-bearing core deposits relative to noninterest-bearing deposits. During the quarter, we sold $27 billion of our lowest-yielding mortgage-backed securities that were largely hedging the MSRs asset against a decline in interest rates. The completionsecurities were replaced with off-balance sheet economic hedges to more efficiently manage the market risk in the MSRs portfolio. Since most of these securities were sold on a forward basis, they remained on the balance sheet for most of the sales of ARMs and lower-yielding investment securities last year reduced the earning asset growth rate year over year, but also helped boostquarter, while only modestly adding to net interest margin. Theincome, and resulted in a decline in the net interest margin continuedduring the quarter. In total, gains on the sale of all mortgage-backed securities in the quarter were $160 million, largely offset by the associated $147 million loss on the forward sales contracts executed to lock in the sale of the securities. The sale of the mortgage-backed securities also provided additional

8

capacity to acquire more attractively-yielding assets. About $17 billion of new securities and loans were purchased later in third quarter 2007 at yields well above the yields on the mortgage-backed securities that were sold, which will benefit from growthnet interest margin in core deposits.fourth quarter 2007.
Average earning assets increased $43.1 billion, or 10%, to $410.8$465.3 billion in firstthird quarter 2007 from $407.5$422.2 billion in firstthird quarter 2006. Average loans increased $46.7 billion, or 15%, to $321.4$350.7 billion in firstthird quarter 2007 from $311.1$304.0 billion in first quarter 2006. Excluding real estate 1-4 family first mortgages, the loan category affected by the sales of ARMs last year, total average loans grew by $30.2 billion, or 13%, from firstthird quarter 2006. Average mortgages held for sale decreased $6.8 billion to $32.3$35.6 billion in firstthird quarter 2007 from $39.5$42.4 billion in firstthird quarter 2006. Average debt securities available for sale increased $2.7 billion to $44.7$68.4 billion in firstthird quarter 2007 from $43.5$65.7 billion in firstthird quarter 2006.
Average coreCore deposits are an important contributor to growth in net interest income and the net interest margin. This low-cost source of funding rose to $290.6 billion for first quarter 200713% on average from $257.5 billion a year ago and funded 90%87% and 83%89% of average loans at March 31,for third quarter 2007 and 2006, respectively. Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Core deposits now include thoseSome of these foreign deposits that were previously swept into non-deposit products.products in 2006. Including only the growth in these funds from the date of conversion to deposits, average core deposits grew 10%11% year over year. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, for firstthird quarter 2007, grew $9.9$14.3 billion, or 5%7%, from a year ago. Average mortgage escrow deposits were $20.6$22.4 billion for firstthird quarter 2007, up $5.1$3.0 billion from a year ago. Average savings certificates of depositsdeposit increased to $38.5$41.1 billion in firstthird quarter 2007 from $28.7$33.9 billion in firstthird quarter 2006 and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $234.3$243.3 billion in firstthird quarter 2007 from $225.3$226.5 billion in firstthird quarter 2006. Total average interest-bearing deposits increased to $221.0were $247.7 billion in firstthird quarter 2007, up $17.3 billion from $215.9$230.4 billion in firstthird quarter 2006.

79

AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)(1) (2)
                                                
   
 Quarter ended March 31, Quarter ended September 30,
 2007 2006  2007 2006 
 Interest Interest  Interest Interest 
 Average Yields/ income/ Average Yields/ income/  Average Yields/ income/ Average Yields/ income/ 
(in millions) balance rates expense balance rates expense  balance rates expense balance rates expense 

   
EARNING ASSETS
  
Federal funds sold, securities purchased under resale agreements and other short-term investments $5,867  5.15% $75 $5,192  4.21% $54  $4,219  5.01% $53 $4,247  5.00% $53 
Trading assets 4,305 5.53 59 6,099 4.61 69  4,043 3.69 37 3,880 5.19 51 
Debt securities available for sale (3):  
Securities of U.S. Treasury and federal agencies 753 4.31 8 866 4.30 9  871 4.27 10 912 4.42 10 
Securities of U.S. states and political subdivisions 3,532 7.39 63 3,106 8.13 60  5,021 7.31 90 3,240 7.99 63 
Mortgage-backed securities:  
Federal agencies 30,640 6.19 467 27,718 5.92 406  52,681 6.03 794 47,009 6.09 716 
Private collateralized mortgage obligations 3,993 6.33 62 6,562 6.46 104  4,026 6.22 62 7,696 6.78 129 
                  
Total mortgage-backed securities 34,633 6.21 529 34,280 6.02 510  56,707 6.05 856 54,705 6.19 845 
Other debt securities (4) 5,778 7.44 106 5,280 7.86 104  5,822 7.67 114 6,865 6.80 116 
                  
Total debt securities available for sale (4) 44,696 6.43 706 43,532 6.36 683  68,421 6.26 1,070 65,722 6.31 1,034 
Mortgages held for sale (5) 32,343 6.55 530 39,523 6.16 609 
Loans held for sale 794 7.82 15 651 6.93 11 
Mortgages held for sale (3) 35,552 6.59 586 42,369 6.63 702 
Loans held for sale (3) 960 7.79 19 622 7.73 12 
Loans:  
Commercial and commercial real estate:  
Commercial 71,063 8.30 1,455 62,769 7.71 1,195  79,713 8.24 1,655 66,216 8.36 1,395 
Other real estate mortgage 30,590 7.41 560 28,686 7.01 497  32,641 7.42 610 29,851 7.47 562 
Real estate construction 15,892 8.01 314 13,850 7.59 259  16,914 7.94 338 15,073 8.13 309 
Lease financing 5,503 5.74 79 5,436 5.80 79  6,026 5.78 87 5,385 5.65 76 
                  
Total commercial and commercial real estate 123,048 7.93 2,408 110,741 7.42 2,030  135,294 7.90 2,690 116,525 7.98 2,342 
Consumer:  
Real estate 1-4 family first mortgage 54,444 7.33 995 74,383 6.82 1,259  63,929 7.26 1,162 50,138 7.54 951 
Real estate 1-4 family junior lien mortgage 69,079 8.17 1,393 59,972 7.65 1,131  73,476 8.19 1,515 65,991 8.14 1,353 
Credit card 14,557 13.55 493 11,765 13.23 389  16,261 13.68 557 12,810 13.45 431 
Other revolving credit and installment 53,539 9.75 1,287 48,329 9.39 1,120  54,165 9.79 1,336 51,988 9.75 1,278 
                  
Total consumer 191,619 8.78 4,168 194,449 8.10 3,899  207,831 8.75 4,570 180,927 8.81 4,013 
Foreign 6,762 11.54 192 5,942 12.57 185  7,558 11.62 221 6,528 12.42 204 
                  
Total loans (5) 321,429 8.51 6,768 311,132 7.95 6,114  350,683 8.48 7,481 303,980 8.57 6,559 
Other 1,327 5.12 16 1,389 4.62 16  1,396 5.01 20 1,348 5.12 18 
                  
Total earning assets $410,761 8.04 8,169 $407,518 7.50 7,556  $465,274 7.92 9,266 $422,168 7.95 8,429 
                  

 
FUNDING SOURCES
  
Deposits:  
Interest-bearing checking $4,615 3.25 37 $4,069 2.23 22  $5,160 3.20 42 $4,370 3.24 36 
Market rate and other savings 140,934 2.77 963 134,228 2.08 687  149,194 2.89 1,085 132,906 2.55 854 
Savings certificates 38,514 4.43 421 28,718 3.45 245  41,080 4.38 454 33,909 4.03 344 
Other time deposits 9,312 5.13 118 33,726 4.48 373  10,948 5.10 140 36,920 5.27 491 
Deposits in foreign offices 27,647 4.67 318 15,152 4.16 155  41,326 4.77 497 22,303 4.84 272 
                  
Total interest-bearing deposits 221,022 3.41 1,857 215,893 2.78 1,482  247,708 3.55 2,218 230,408 3.44 1,997 
Short-term borrowings 11,498 4.78 136 26,180 4.17 270  36,415 5.06 464 21,539 4.99 271 
Long-term debt 89,027 5.15 1,138 81,686 4.49 910  94,686 5.33 1,267 84,112 5.13 1,084 
                  
Total interest-bearing liabilities 321,547 3.94 3,131 323,759 3.33 2,662  378,809 4.14 3,949 336,059 3.96 3,352 
Portion of noninterest-bearing funding sources 89,214 — — 83,759 — —  86,465 — — 86,109 — — 
                  
Total funding sources $410,761 3.09 3,131 $407,518 2.65 2,662  $465,274 3.37 3,949 $422,168 3.16 3,352 
                  
Net interest margin and net interest income on a taxable-equivalent basis (6)
  4.95% $5,038  4.85% $4,894   4.55% $5,317  4.79% $5,077 
                  

 
NONINTEREST-EARNING ASSETS
  
Cash and due from banks $11,862 $12,897  $11,579 $12,159 
Goodwill 11,274 10,963  12,008 11,156 
Other 48,208 43,817  52,672 49,196 
          
Total noninterest-earning assets $71,344 $67,677  $76,259 $72,511 
     

      
NONINTEREST-BEARING FUNDING SOURCES
  
Deposits $88,769 $86,997  $88,991 $89,245 
Other liabilities 25,474 23,320  26,351 25,839 
Stockholders’ equity 46,315 41,119  47,382 43,536 
Noninterest-bearing funding sources used to fund earning assets  (89,214)  (83,759)   (86,465)  (86,109) 
          
Net noninterest-bearing funding sources $71,344 $67,677  $76,259 $72,511 
          

 
TOTAL ASSETS
 $482,105 $475,195  $541,533 $494,679 
          
(1) Our average prime rate was 8.25%8.18% and 7.43%8.25% for the quarters ended March 31,September 30, 2007 and 2006, respectively, and 8.23% and 7.86% for the nine months ended September 30, 2007 and 2006, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.36%5.44% and 4.76%5.43% for the same quarters ended September 30, 2007 and 2006, respectively, and 5.39% and 5.14% for the nine months ended September 30, 2007 and 2006, respectively.
(2) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3) Yields are based on amortized cost balances computed on a settlement date basis.
(4) Includes certain preferred securities.
(5) Nonaccrual loans and related income are included in their respective loan categories.
(6) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.

810

                         
  
  Nine months ended September 30,
  2007  2006 
          Interest          Interest 
  Average  Yields/  income/  Average  Yields/  income/ 
  balance  rates  expense  balance  rates  expense 
  

 

                        
 
 
 		 $4,972   5.09% $189  $4,761   4.58% $163 
   4,306   4.70   151   5,298   4.91   195 
                         
 
 		  821   4.29   27   905   4.38   30 
 
 		  4,318   7.36   232   3,120   8.11   183 
                         
   39,656   6.08   1,794   38,366   5.99   1,723 
   3,945   6.32   185   7,149   6.65   352 
                     
   43,601   6.10   1,979   45,515   6.10   2,075 
   5,564   7.57   316   6,136   7.06   324 
                     
 
 		  54,304   6.32   2,554   55,676   6.28   2,612 
   34,664   6.52   1,694   44,533   6.34   2,119 
   873   7.78   51   619   7.33   34 
                         
                         
   74,934   8.28   4,641   64,816   8.07   3,914 
   31,663   7.44   1,762   29,162   7.26   1,585 
   16,404   7.97   978   14,485   7.89   854 
   5,698   5.82   249   5,416   5.74   233 
                     
 
 		  128,699   7.92   7,630   113,879   7.73   6,586 
                         
   58,920   7.31   3,228   59,758   7.20   3,221 
   70,998   8.19   4,348   62,923   7.91   3,723 
   15,262   13.89   1,590   12,178   13.29   1,213 
   53,725   9.77   3,926   50,152   9.57   3,592 
                     
   198,905   8.79   13,092   185,011   8.49   11,749 
   7,197   11.72   631   6,251   12.53   587 
                     
   334,801   8.52   21,353   305,141   8.29   18,922 
   1,351   5.11   54   1,366   4.90   50 
                     
  $435,271   8.00   26,046  $417,394   7.72   24,095 
                     
 
 		                        
                         
  $4,991   3.23   121  $4,243   2.77   88 
   145,135   2.83   3,070   133,767   2.31   2,307 
   39,784   4.40   1,308   30,997   3.75   868 
   8,284   5.06   313   36,324   4.94   1,343 
   33,988   4.73   1,204   19,477   4.58   667 
                     
   232,182   3.46   6,016   224,808   3.14   5,273 
   23,084   5.01   865   24,168   4.59   830 
   91,569   5.22   3,579   83,437   4.81   3,004 
                     
   346,835   4.03   10,460   332,413   3.66   9,107 
   88,436   —   —   84,981   —   — 
                     
  $435,271   3.21   10,460  $417,394   2.92   9,107 
                     
 
 		      4.79% $15,586       4.80% $14,988 
                     
                         
  $11,698          $12,495         
   11,575           11,066         
   50,448           46,227         
                       
  $73,721          $69,788         
                       
 
 
 		                        
  $89,673          $88,395         
   25,664           24,007         
   46,820           42,367         
 
 		  (88,436)          (84,981)        
                       
 
 		 $73,721          $69,788         
                       
 
 		 $508,992          $487,182         
                       
  

11

NONINTEREST INCOME
                                    
   
 Quarter    Quarter Nine months   
 ended March 31, %  ended Sept. 30, % ended Sept. 30, % 
(in millions) 2007 2006 Change  2007 2006 Change 2007 2006 Change 
 

 
Service charges on deposit accounts $685 $623  10% $837 $707  18% $2,262 $1,995  13%

 
Trust and investment fees:  
Trust, investment and IRA fees 537 491 9  573 508 13 1,720 1,508 14 
Commissions and all other fees 194 172 13  204 156 31 627 494 27 
              
Total trust and investment fees 731 663 10  777 664 17 2,347 2,002 17 

 
Card fees 470 384 22  561 464 21 1,548 1,266 22 

 
Other fees:  
Cash network fees 45 44 2  51 48 6 146 140 4 
Charges and fees on loans 238 242  (2) 246 244 1 737 735 — 
All other 228 202 13 
All other fees 269 217 24 832 632 32 
              
Total other fees 511 488 5  566 509 11 1,715 1,507 14 

 
Mortgage banking:  
Servicing income, net 216 81 167  797 188 324 968 579 67 
Net gains on mortgage loan origination/sales activities 495 273 81 
Net gains (losses) on mortgage loan origination/ sales activities  (61) 179 — 1,069 811 32 
All other 79 61 30  87 117  (26) 265 244 9 
              
Total mortgage banking 790 415 90  823 484 70 2,302 1,634 41 

 
Operating leases 192 201  (4) 171 192  (11) 550 593  (7)
Insurance 399 364 10  329 313 5 1,160 1,041 11 
Trading assets 265 134 98 
Net gains (losses) from trading activities  (43) 106 — 482 331 46 
Net gains (losses) on debt securities available for sale 31  (35) —  160 121 32 149  (70) -- 
Net gains from equity investments 97 190  (49) 173 159 9 512 482 6 
All other 260 258 1  219 168 30 672 596 13 
              

 
Total $4,431 $3,685 20  $4,573 $3,887 18 $13,699 $11,377 20 
              
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,September 30, 2007, these assets totaled $1.02$1.12 trillion, up 26%29% from $808$868 billion at March 31,September 30, 2006. Generally, trust,Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets that are managed, administered,under management or both.administration. The increase in these fees in firstthird quarter 2007 from a year ago was due to continued growth across all trust and investment management businesses.
We also receive commissions and other fees for providing services to full-service and discount brokerage customers. At March 31,September 30, 2007 and 2006, brokerage balances totaled $120were $132 billion and $103$110 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. A significant portion of the increase in fees in third quarter 2007 from a year ago was due to an increase in securities issuance and investment banking activity.

12

Card fees increased 22%21% from firstthird quarter 2006, due to growth in distribution of debit and credit cards to our customers and increased usage. Purchase volume on these cards was up 19%20% from a year ago and average balances were up 20%27%.
Other fees increased 11% from third quarter 2006, largely due to commercial real estate brokerage fees.
Mortgage banking noninterest income was $790increased to $823 million in firstthird quarter 2007 compared with $415from $484 million in the same period of 2006.2006 with the growth and value of the mortgage servicing business more than offsetting a decline of 12% in mortgage originations from a year ago. Servicing fees, included in net servicing income, increased to $1.05 billion$970 million in firstthird quarter 2007 from $747$947 million in firstthird quarter 2006, due to growth in loans serviced for others. Our portfolio of loans serviced for others was $1.31$1.38 trillion

9

at March 31,September 30, 2007, up 41%12% from $931 billion$1.24 trillion at March 31,September 30, 2006. 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 firstthird quarter 2007 included a $34$562 million net MSRs valuation lossgain that was recorded to earnings ($11638 million fair value loss and a $23$1,200 million economic hedging loss)gain) and for firstthird quarter 2006 included a $184$86 million net MSRs valuation loss ($5221,147 million fair value gain less $706loss and a $1,061 million economic hedging loss)gain). The favorable performance of the economic hedge relative to the decline in value of the MSRs in third quarter 2007 was primarily due to wider agency versus non-agency mortgage spreads, wider mortgage-backed securities versus treasury/LIBOR-based spreads, and the market estimate of prepayment speeds due to slower housing turnover.
Net gainslosses on mortgage loan origination/sales activities were $495$61 million in firstthird quarter 2007, up from $273compared with net gains of $179 million in firstthird quarter 2006. Current period gains were reduced by $490 million, reflecting a $378 million write-down of the mortgage warehouse/ pipeline due to the illiquidity in the non-agency mortgage secondary market, and $112 million predominantly for a write-down of mortgage loans held or repurchased during the quarter, as well as an increase in the repurchase reserve for projected early payment defaults. Residential real estate originations totaled $68 billion in firstthird quarter 2007 up from $66compared with $77 billion in firstthird quarter 2006. Under FAS 159 we elected in first quarter 2007 to account for new prime mortgages held for sale (MHFS) at fair value. These loans are initially measured at fair value, with subsequent changes in fair value recognized as a component of net gains on mortgage loan origination/sales activities. Prior to the adoption of FAS 159, these fair value gains would have been deferred until the sale of these loans. Included in the $495 million of net gains on mortgage loan origination/sales activities in first quarter 2007 was $229 million of gains from the initial measurement and subsequent changes to fair value of the prime MHFS that we elected to carry at fair value under FAS 159, which included $151 million related to loans that were originated and sold during first quarter 2007. (For additional detail, see “Asset/Liability and Market Risk Management — Mortgage Banking Interest Rate and Market Risk,” and Notes 1 (Significant Accounting Policies), 15 (Mortgage Banking Activities) and 16 (Fair Values of Assets and Liabilities) to Financial Statements.)
In first quarter 2007, we recognized $103 million of origination fees in mortgage loan originations/sales activities that would have previously been deferred and recognized at the time of sale. In first quarter 2007, we recognized $92 million in origination costs in noninterest expense that would have previously been deferred and recognized as a reduction of net gains on mortgage loan origination/sales activities at the time of sale. Separately included in net gains on mortgage loan origination/sales activities was a lower-of-cost-or-market write-down of $66 million for the remaining MHFS portfolio, primarily nonprime loans, which, as a consequence of our adoption of FAS 159, were valued separately from the prime MHFS. Prior to the adoption of FAS 159, these MHFS would have been valued together and the write-down would not have been required. The 1-4 family first mortgage unclosed pipeline was $57$45 billion at March 31,September 30, 2007, $48 billion at December 31, 2006, and $59$55 billion at March 31,September 30, 2006.
Income from trading assets increased to $265activities was a loss of $43 million and gain of $482 million in the third quarter and first quarternine months of 2007, from $134respectively, compared with gains of $106 million and $331 million in first quarter 2006, due to higher capital markets income.the same periods of 2006. Net gains (losses) on debt securities available for sale were $31$160 million and $149 million in the third quarter and first quarternine months of 2007, compared with net losses of $35$121 million and $(70) million in firstthe same periods of 2006. Third quarter 2006.2007 included a net gain of $13 million on the sale of mortgage-backed securities, consisting of the $160 million realized gain on debt securities, offset by a $147 million realized loss on the related forward

13

sales contracts, included in trading activities. Net gains from equity investments were $97$173 million and $512 million in the third quarter and first quarternine months of 2007, compared with $190respectively, and $159 million and $482 million in first quarterthe same periods of 2006.
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. 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 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.

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On October 3, 2007, Visa Inc. (Visa) announced that it had completed restructuring transactions in preparation for its initial public offering planned for 2008. We have an ownership interest in the restructured Visa and, subject to definitive SEC accounting guidance, may be required to recognize expense and income related to the restructuring transactions, the planned initial public offering, and our obligations under related loss and judgment sharing agreements with Visa in connection with certain litigation. The SEC guidance will determine the amount and timing of any expense or income recognition.

NONINTEREST EXPENSE
                                    
   
 Quarter    Quarter Nine months   
 ended March 31, %  ended Sept. 30, % ended Sept. 30, % 
(in millions) 2007 2006 Change  2007 2006 Change 2007 2006 Change 
   

Salaries

 $1,867 $1,672  12% $1,933 $1,769  9% $5,707 $5,195  10%
Incentive compensation 742 668 11  802 710 13 2,444 2,092 17 
Employee benefits 665 589 13  518 458 13 1,764 1,534 15 
Equipment 337 335 1  295 294 — 924 913 1 
Net occupancy 365 336 9  398 357 11 1,132 1,038 9 
Operating leases 153 161  (5) 136 155  (12) 437 473  (8)
Outside professional services 192 193  (1) 222 240  (8) 649 669  (3)
Contract services 118 132  (11) 103 143  (28) 334 414  (19)
Travel and entertainment 109 130  (16) 113 132  (14) 340 401  (15)
Advertising and promotion 91 106  (14) 108 123  (12) 312 354  (12)
Outside data processing 111 104 7  123 111 11 355 324 10 
Postage 87 81 7  88 75 17 260 235 11 
Telecommunications 81 70 16  79 70 13 241 213 13 
Insurance 128 76 68  81 43 88 357 218 64 
Stationery and supplies 53 51 4  54 57  (5) 159 163  (2)
Operating losses 87 62 40  55 33 67 199 140 42 
Security 43 43 —  42 43  (2) 129 130  (1)
Core deposit intangibles 26 29  (10) 28 28 — 81 85  (5)
All other 271 236 15  323 240 35 930 740 26 
              

Total

 $5,526 $5,074 9  $5,501 $5,081 8 $16,754 $15,331 9 
              
 
Noninterest expense for third quarter 2007 increased 9%8% from the prior year, mostly due to continued investmenthigher personnel costs, reflecting a 2% increase in ourteam members (full-time equivalents, largely sales and service professionals), normal merit increases, and higher sales commissions in the wealth management and real estate brokerage businesses, both of which had strong revenue growth from a year ago. Third quarter expenses included $26 million for merger and integration

14

costs, and severance and other costs in the residential real estate businesses. In the last 12 months, we opened 104 retail132 banking stores, including 1820 stores and conversions of 39 Placer Sierra Bancshares stores this quarter, and added 7,6002,400 full-time equivalent (FTE) team members. Expenses in first quarter 2007 also included $50 million of stock option expense $29of $24 million and $107 million in the third quarter and first nine months of seasonal FICA expenses2007, respectively, and $16$28 million and $108 million in the same periods of acquisition-related integration costs.2006. In addition, expenses included $109 million and $321 million in the third quarter and first quarternine months of 2007, included $92 millionrespectively, in origination costs that, prior to the adoption of FAS 159, would have been deferred and recognized as a reduction of net gains on mortgage loan origination/sales activities at the time of sale, prior to the adoption of FAS 159.sale.
INCOME TAX EXPENSE
On January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48). Implementation of FIN 48 did not result in a cumulative effect adjustment to retained earnings. At January 1, 2007, the total amount of unrecognized tax benefits was $3.1 billion, of which $1.7 billion related to tax benefits that, if recognized, would impact the annual effective tax rate. DuringOur effective income tax rate was 34.01% for third quarter 2007, up from 32.28% for third quarter 2006. For the quarter, $119 millionfirst nine months of net2007, our effective tax benefits were recorded,rate was 32.64%, down from 33.45% for the first nine months of 2006, primarily reflecting the resolution of certain outstanding federal income tax matters.matters in first quarter 2007. (See Note 11 (Income Taxes) to Financial Statements.) Our effective income tax rate was 29.87% for first quarter 2007, down from 33.80% for first quarter 2006. We expect that FIN 48 will cause more volatility in our effective tax rate from quarter to quarter as we are now required to recognize tax positions in our financial statements based on the probability that such positions will effectively be sustained by taxing authorities, and to reassess those positions each quarter based on our evaluation of new information.

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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 13 (Operating Segments) to Financial Statements. To reflect a change in the allocation of income taxes for management reporting adopted in second quarter 2007, results for prior periods have been revised.
Community Banking’snet income increased 27%8% to $1.53$1.61 billion in firstthird quarter 2007 from $1.21$1.49 billion in firstthird quarter 2006, due in part to strong fee revenue growth in retail banking and Wells Fargo Home Mortgage net income.mortgage, as well as positive operating leverage. Net interest income decreased 1%increased 15% to $3.22$4.71 billion in the first nine months of 2007 from $4.08 billion in the first nine months of 2006. Revenue was $6.48 billion in third quarter 2007, up 12% from $3.26$5.78 billion in firstthird quarter 2006, due to a decline in earning assets that resulted from the sales of ARMs at the end of first quarter 2006. The decline related to ARM sales was partially offset by an improvement in net interest margin of 21 basis points to 5.03% in first quarter 2007, despite pressures from the flat-to-inverted yield curve. Average loans were $180.8$197.4 billion in firstthird quarter 2007, down 5%up 14% from $190.4a year ago. Core deposits averaged $250.6 billion in firstthird quarter 2006.2007, up 8% over the prior year. Noninterest income in firstthird quarter 2007 increased $704$618 million, or 33%25%, from $2.14$2.49 billion in firstthird quarter 2006. The growth was2006, largely due primarily to higher fee incomerevenue related to brokerage, deposit service charges, cards, investments and mortgage and consumer loans, cards, brokerage and deposits.banking. Noninterest income for the first nine months of 2007 increased $1.96 billion from the same period of 2006. Noninterest expense increased $253$227 million or 7%, primarilyand $662 million in the third quarter and first nine months of 2007, respectively, from the same periods in 2006, due to growth in personnel expenses.expense. The provision for credit losses increased $117$210 million, or 62%, primarilypredominantly due to higher losses in credit card andthe home equity lending. Income tax expense for first quarter 2007 decreased from a year ago due to a benefit from the resolution during the quarter of certain outstanding federal income tax matters for the periods prior to 2002.and unsecured consumer credit portfolios.

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Wholesale Banking’snet income increased 13%6% to $598$543 million in firstthird quarter 2007 from $528$510 million in third quarter 2006. Net income increased 11% to $1.69 billion in the first quarternine months of 2007 from $1.53 billion in the first nine months of 2006. Revenue was $2.05$2.00 billion in firstthird quarter 2007, up 15%12% from $1.78 billion in firstthird quarter 2006, due todriven by strong loan and deposit growth and higher fee income. Net interest income increased 14% to $854 million in third quarter 2007 from $751 million in third quarter 2006. Average loans increased 21% from third quarter 2006, with double-digit increases across nearly all wholesale lending businesses. The increase in first quarter 2007 increased 15%average loans included the impact of the acquisition of CIT Construction ($2.6 billion). Average core deposits were $55.5 billion, up 52% from a year ago. Average core deposits grew 64% from first quarter 2006,ago, all in interest-bearing balances, reflecting a mixcombination of organic growth from new and theexisting customers and conversions, completed in 2006, of customer sweep accounts from off-balance sheet money market funds into Wells Fargo deposits. Noninterest income increased $169 million in firstfor third quarter 2007 increased by $116 million from a year ago$1.03 billion the same period in 2006, due to higher trust and investment income, insurance revenue, commercial real estate brokerage fees, trust and investment income (reflecting a 14% increase in assets under management), foreign exchange and insurance revenue, partially offset by a lower level of capital markets activity.activity, which included the $20 million write-down on commercial loans held for sale. Noninterest income was $3.75 billion for the first nine months of 2007 and $3.21 billion for the same period of 2006. Noninterest expense increased $14516% to $1.15 billion in third quarter 2007 from $999 million in third quarter 2006, mainly fromdue to higher personnel-related costs, including additional team member additionsmembers and higher incentive payments, alongexpenses, and expenses associated with higher expenses from acquisitions, expenses related to higher sales volumes and investmentsacquisitions completed in new offices, businessesthe latter part of 2006. Noninterest expense was $3.56 billion in the first nine months of 2007 and systems.$3.01 billion in the same period of 2006.
Wells Fargo Financial’snet income decreased 29% to $114$135 million in firstthird quarter 2007 from $280$191 million in firstthird quarter 2006. Third quarter 2006 due toresults included a $50 million reversal of the $127 million gain realized on the sale of our consumer lending business in Puerto Rico in first quarter 2006, as well as the higher provisionallowance for credit losses recordedthat had been previously established for Hurricane Katrina in third quarter 2005. For the first quarter 2007. Total revenue declined 4% in firstnine months of 2007, net income was $403 million, compared with $694 million for the same period a year ago. Third quarter 2007 to $1.32revenue of $1.4 billion was virtually flat compared with $1.38 billion in firstthird quarter 2006. Net interest income increased $71$55 million, or 8%5%, to $1.01$1.06 billion in firstthird quarter 2007 from $934 million$1.00 billion in firstthird quarter 2006, due to continued growth in the real estate and auto loan portfolios.average loans. Average real estate secured receivables increased 20%24% to $23.6$26.1 billion and average auto finance receivables rose 23%5% to $27.6 billion.$27.8 billion from third quarter 2006. Noninterest expense increased $546% to $728 million or 8%, in firstthird quarter 2007 from $695$690 million in firstthird quarter 2006, drivenprimarily due to the additional collection capacity added in 2006 in auto, along with higher collection and repossession costs and mortgage insurance premiums. Noninterest expense was $2.27 billion in the first nine months of 2007 and $2.06 billion in the same period of 2006. The provision for credit losses was $427 million for third quarter 2007 up from $377 million for third quarter 2006, which included the $50 million reversal of the allowance for Hurricane Katrina. Net credit losses for third quarter 2007 were flat compared with a year ago, with the $45 million increase in net losses for the credit card portfolio offset by normal annual increasesa $32 million reduction in personnel costs, as well as staffing level increasescredit losses in collectionsthe auto portfolio and declines in other investments in business processes.consumer portfolios.

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BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Our securities available for saleavailable-for-sale portfolio consists of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and yield enhancement. Accordingly, this portfolio primarily includesconsists of very liquid, high-quality federal agency and municipal debt securities. At March 31,September 30, 2007, we held $44.7$54.9 billion of debt securities available for sale, compared with $41.8 billion at December 31, 2006, with net unrealized gains of $774$459 million and $722 million for the same periods, respectively. We also held $765 million$2.49 billion of marketable equity securities available for sale at March 31,September 30, 2007, and $796 million at December 31, 2006, with net unrealized gains of $174$122 million and $204 million for the same periods, respectively. The increase in marketable equity securities was primarily due to our adoption of Topic D-109 effective July 1, 2007, which resulted in the transfer of approximately $1.2 billion of securities, consisting of investments in preferred stock callable by the issuer, from trading assets to securities available for sale.
The weighted-average expected maturity of debt securities available for sale was 5.37.2 years at March 31,September 30, 2007. Since 78%76% 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 saleavailable-for-sale portfolio isare shown below.
MORTGAGE-BACKED SECURITIES
                        
 
 Fair Net unrealized Remaining  Fair Net unrealized Remaining 
(in billions) value gain (loss) maturity  value gain (loss) maturity 
 

At March 31, 2007

 $34.8 $0.6 4.3 yrs. 

At March 31, 2007, assuming a 200 basis point:

 

At September 30, 2007

 $42.0 $0.4 4.5 yrs.

At September 30, 2007, assuming a 200 basis point:

 
Increase in interest rates 32.0  (2.2) 7.0 yrs.  38.5  (3.1) 7.5 yrs.
Decrease in interest rates 35.4 1.2 1.1 yrs.  43.2 1.6 1.2 yrs.
 
See Note 4 (Securities Available for Sale) to Financial Statements 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 78 and a comparative schedule of average loan balances is included in the table on page 8;10; quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.
Total loans at March 31,September 30, 2007, were $325.5$362.9 billion, up 6%$55.4 billion, or 18%, from $306.7$307.5 billion at March 31,September 30, 2006. Real estate 1-4 family first mortgageConsumer loans decreased $10.1increased $32.4 billion to $56.0$215.8 billion at March 31,September 30, 2007, from $66.1$183.4 billion at March 31, 2006, due to the sales of lower-yielding ARMs last year. This decrease offset an increase of $8.4 billion in real estate 1-4 family junior lien mortgages to $69.5 billion from $61.1 billion for the same periods.a year ago. Commercial and commercial real estate loans increased $12.9$21.7 billion or 11%,to $139.2 billion at September 30, 2007, from first quarter 2006.$117.6 billion a year ago. Mortgages held for sale decreased to $32.3$29.7 billion at March 31,September 30, 2007, from $43.5$39.9 billion a year ago.

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DEPOSITS
                        
   
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 
   

Noninterest-bearing

 $89,067 $89,119 $88,701  $82,365 $89,119 $86,849 
Interest-bearing checking 3,652 3,540 3,459  4,376 3,540 3,279 
Market rate and other savings 146,911 140,283 136,605  153,116 140,283 135,837 
Savings certificates 38,753 37,282 29,377  41,863 37,282 34,828 
Foreign deposits (1) 18,086 17,844 4,994  22,133 17,844 10,025 
              
Core deposits 296,469 288,068 263,136  303,853 288,068 270,818 
Other time deposits 4,503 13,819 33,317  2,448 13,819 32,185 
Other foreign deposits 10,185 8,356 11,852  28,655 8,356 11,316 
              
Total deposits $311,157 $310,243 $308,305  $334,956 $310,243 $314,319 
              
 
(1) During 2006, certain customer accounts (largely Wholesale Banking) were converted to deposit balances in the form of Eurodollar sweep accounts from off-balance sheet money market funds and repurchase agreements. We include Eurodollar sweep balances in total core deposits.
Average core deposits increased $33.1$36.4 billion, or 13%, to $290.6$306.1 billion in firstthird quarter 2007 from firstthird quarter 2006, primarilypredominantly due to growth in market rate and other savings, and savings certificates, along with growth in foreign deposits. Included in average core deposits were converted Eurodollar sweep balances of $9,888 million, $8,888 million and $1,234$3,343 million for the quarterquarters ended March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively. Average core deposits increased 10%11% from first quarter 2006 and 9% (annualized) from fourththird quarter 2006 not including the converted foreign balances.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
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. 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 2006 Form 10-K and Note 18 (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, 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 agencies review and perform detailed tests of our credit underwriting, loan administration and allowance processes.

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Nonaccrual Loans and Other Assets
The table below shows the comparative data for nonaccrual loans and other assets. We generally place loans on nonaccrual status when:
 • the full and timely collection of interest or principal becomes uncertain;
 
• they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages and auto loans) past due for interest or principal (unless both well-secured and in the process of collection); or
 • part of the principal balance has been charged off.
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2006 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER ASSETS
                        
   
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 
   

Nonaccrual loans:

  
Commercial and commercial real estate:  
Commercial $350 $331 $256  $399 $331 $256 
Other real estate mortgage 114 105 163  133 105 116 
Real estate construction 82 78 21  188 78 90 
Lease financing 31 29 31  38 29 27 
              
Total commercial and commercial real estate 577 543 471  758 543 489 
Consumer:  
Real estate 1-4 family first mortgage (1) 701 688 508  886 688 595 
Real estate 1-4 family junior lien mortgage 233 212 190  238 212 200 
Other revolving credit and installment 195 180 188  160 180 167 
              
Total consumer 1,129 1,080 886  1,284 1,080 962 
Foreign 46 43 37  46 43 38 
              
Total nonaccrual loans (2) 1,752 1,666 1,394  2,088 1,666 1,489 
As a percentage of total loans  0.54%  0.52%  0.45%  0.58%  0.52%  0.48%

Foreclosed assets:

  
GNMA loans (3) 381 322 227  487 322 266 
Other 528 423 228  603 423 342 
Real estate and other nonaccrual investments (4) 5 5 —  5 5 3 
              
Total nonaccrual loans and other assets $2,666 $2,416 $1,849  $3,183 $2,416 $2,100 
              

As a percentage of total loans

  0.82%  0.76%  0.60%  0.88%  0.76%  0.68%
              
 
(1) Includes nonaccrual mortgages held for sale.
(2) Includes impaired loans of $251$394 million, $230 million and $137$192 million at March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2006 Form 10-K for further information on impaired loans.
(3) Consistent with regulatory reporting requirements, foreclosed real estate securing GNMA loans is classified as nonperforming. These assetsBoth principal and interest for GNMA loans secured by the foreclosed real estate are fully collectible because the corresponding GNMA loans are insured by the FHA or guaranteed by the Department of Veterans Affairs.
(4) Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans.
A significant portion of the $1.1 billion increase in nonperforming assets from a year ago was in the residential real estate portfolios, with the balance from the auto and the commercial and commercial real estate portfolios. Commercial nonperforming assets increased $269 million in third quarter 2007 from a year ago. A significant portion of the commercial increase occurred this quarter, as one large, residential real estate developer was moved to nonperforming status.

19

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

15

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 or more past due and still accruing was $4,812$5,526 million, $5,073 million and $3,412$3,664 million at March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively. At March 31, 2007, December 31, 2006, and March 31, 2006, theThe total included $3,683$4,263 million, $3,913 million and $2,680$2,689 million for the same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools 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 ADVANCES)
                        
   
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 
   

Commercial and commercial real estate:

  
Commercial $29 $15 $17  $14 $15 $20 
Other real estate mortgage 4 3 4  22 3 8 
Real estate construction 5 3 13  10 3 4 
              
Total commercial and commercial real estate 38 21 34  46 21 32 
Consumer:  
Real estate 1-4 family first mortgage (1) 159 154 92  225 154 123 
Real estate 1-4 family junior lien mortgage 64 63 47  127 63 50 
Credit card 272 262 158  303 262 213 
Other revolving credit and installment 560 616 364  520 616 516 
              
Total consumer 1,055 1,095 661  1,175 1,095 902 
Foreign 36 44 37  42 44 41 
              
Total $1,129 $1,160 $732  $1,263 $1,160 $975 
              
   
(1) Includes mortgages held for sale 90 days or more past due and still accruing.
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 nonaccrual loans will change at different points in time based on credit performance, loan mix and collateral values. 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.

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Net credit losses and loss rates in the home equity portfolio increased over the prior quarter and prior year. Third quarter 2007 net credit losses in real estate 1-4 family junior liens were $153 million (0.83% of average loans, annualized), a $62 million increase from $91 million (0.51%) for second quarter 2007 and a $126 million increase from $27 million (0.17%) for third quarter 2006. The majority of the home equity portfolio segments, those sourced through our retail stores or through cross-sell from Wells Fargo Home Mortgage, performed satisfactorily during the quarter. Due to the continued soft national real estate market conditions we reduced maximum allowable combined loan-to-value advance rates for all sales channels during third quarter 2007. In addition, a segment of the portfolio, correspondent home equity loans purchased from third party originators, has demonstrated an unacceptable level of credit losses. The loans generated by our correspondent channel represented about 7% of the home equity portfolio at quarter end, but generated about 25% of the losses in the quarter. As this adverse trend emerged, we tightened credit standards earlier in 2007 and completely eliminated this channel during the third quarter. Given current real estate market conditions, credit losses in the home equity portfolio are likely to increase in fourth quarter 2007 and remain at elevated levels into 2008. Our real estate 1-4 family first mortgage portfolio continued to perform well, with net credit losses of $16 million (0.11% of average loans, annualized) for third quarter 2007, down from $19 million (0.13%) for second quarter 2007 and $22 million (0.18%) for third quarter 2006.
Because of our responsible lending and risk management practices, we have not faced many of the issues others have in the mortgage industry. We do not originate any negative amortizing mortgages, including option adjustable-rate mortgages (ARMs). We have minimal ARM reset risk across our owned loan portfolios. While our disciplined underwriting standards have resulted in first mortgage delinquencies below industry levels, we continued to tighten our underwriting standards in third quarter 2007. Wells Fargo Home Mortgage closed its nonprime wholesale channel early in third quarter, after closing its nonprime correspondent channel in second quarter 2007. Rates were increased for non-conforming mortgage loans during third quarter reflecting the reduced liquidity in the capital markets. In addition, even though we did not hold any nonprime no-documentation mortgages or nonprime low-documentation mortgages at September 30, 2007, in fourth quarter 2007, we began to portfolio small amounts of these mortgages in response to 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 does not use brokers or correspondents in its business. We endeavor to ensure that there is a tangible benefit to the borrower before we make a loan. The recent guidance issued by the federal financial regulatory agencies in June 2007,Statement on Subprime Mortgage Lending,which addresses issues relating to certain ARM products, will not have a significant impact on Wells Fargo Financial’s operations, since many of those guidelines have long been part of our normal business practices. Additionally, we have been proactive in mitigating the credit risk in this portfolio by obtaining private mortgage insurance on a significant portion of our higher loan-to-value loans.
Higher credit losses in non-real estate consumer loans (credit card and other revolving credit and installment) were primarily due to typical second half seasonal increases in the indirect auto portfolio, with net auto losses for third quarter 2007 up $57 million from prior quarter. Year over year, net auto losses for third quarter 2007 were down $32 million. Net losses in all other

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consumer portfolios, including credit cards, increased only $32 million during the third quarter primarily due to slightly higher levels of bankruptcies and delinquency rates.
Credit performance in the commercial and commercial real estate portfolio remained strong, with credit losses of $125 million (0.37% of average loans, annualized) compared with $107 million (0.33%) in second quarter 2007 and $73 million (0.25%) in third quarter 2006. As is typical each quarter, the vast majority of these charge-offs came from the small business loan portfolio (loans under $100,000), which continued to perform as expected. Because of our Wholesale Banking business model, focused primarily on middle-market customers and regional commercial real estate, we do not actively participate in certain higher-risk activities. Wholesale Banking did not create any structured investment vehicles (SIVs) to hold off-balance sheet assets and has negligible exposure to SIVs, hedge funds, collateralized debt obligations (CDDs) and asset-backed commercial paper. Leveraged-buyout-related outstandings are diversified by business and borrower and total less than 2% of total Wells Fargo loans. Our residential real estate development portfolio of less than $6 billion, or 2% of total loans, continued to perform in a satisfactory manner.
We consider the allowance for credit losses of $3.96$4.02 billion adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31,September 30, 2007. Given that the majority of our loan portfolio is consumer loans, for which losses tend to emerge within a relatively short, predictable timeframe, and that a significant portion of the allowance for credit losses relatesis related to estimated credit losses associated with consumer loans, management believes that the provision for credit losses for consumer loans, absent any significant credit event, severe decrease in collateral values, significant acceleration of losses or significant change in payment behavior, will closely track the level of related net charge-offs. The process for determining the adequacy of the

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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 2006 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 2006 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.

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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:
 • assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, earnings will initially decline);
 • assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates);
 • short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may affect new loan yields and funding costs differently); or
•the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available for sale portfolio may prepay significantly earlier than anticipated — which could reduce portfolio income).
the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available-for-sale portfolio may prepay significantly earlier than anticipated — which could reduce portfolio income).
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the value of MSRs, the value of the pension liability and other sources ofitems 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,September 30, 2007, our most recent simulation indicated estimated earnings at

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risk is 1.8%of approximately 6% of our most likely earnings plan over the next 12 months under a scenario in which the federal funds rate rises 175225 basis points to 7.00% and the Constant Maturity Treasury bond yield rises 250220 basis points to 7.25%,6.70% over the same 12-month 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. 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 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 values of these derivatives as of March 31,September 30, 2007, and December 31, 2006, are presented in Note 20 (Derivatives) to Financial Statements. We use derivatives for asset/liability management in three ways:
 • to convert a major portion of our long-term fixed-rate debt, which we issue to finance the Company, from fixed-rate payments to floating-rate payments by entering into receive-fixed swaps;
 • to convert the cash flows from selected asset and/or liability instruments/portfolios from fixed-rate payments to floating-rate payments or vice versa; and
 • to hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest rate swaps, swaptions, futures, forwards and options.

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Mortgage Banking Interest Rate and Market Risk
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 virtually 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 origination. 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 portfolio a portion of the securities issued at the time we securitize mortgages held for sale.
WhileThird quarter 2007 was a challenging quarter for the financial services industry with the downturn in the national housing market, deterioration in the capital markets, widening credit spreads and increases in market volatility, in addition to changes in interest rates discussed in the following sections. Notwithstanding the sharp downturn in the housing sector, the widening of nonconforming credit spreads and the lack of liquidity risks have historically been relatively low forin the nonconforming secondary markets, our mortgage banking activities, interestrevenue grew, reflecting the complementary origination and servicing strengths of the business. The secondary market for agency-conforming mortgages functioned well for most of the quarter. However, with secondary market spreads widening, gain-on-sale margins declined. The mortgage warehouse and pipeline, which predominantly consists of prime mortgage loans, was written down by $378 million in third quarter 2007 to reflect the unusual widening in spreads between nonconforming and conforming agency market spreads. Many of these assets were then securitized and a large portion retained as securities in our available-for-sale portfolio at attractive yields. None of the newly added securities are collateralized by subprime mortgage loans. In addition to the write-down associated with the mortgage warehouse and pipeline, we further reduced mortgage origination gains by $112 million predominantly to reflect a write-down of mortgage loans held or repurchased during the quarter, as well as an increase to the repurchase reserve for projected early payment defaults.
The widening of mortgage spreads, due to illiquidity and market estimates of prepayments, that drove a decrease in the mortgage warehouse, positively impacted the MSRs valuation. While servicing income was reduced by $638 million, due to the impact of a more than 30 basis point decline in 30-year mortgage rates on the value of our MSRs during the quarter, the free-standing derivatives used as economic hedges of our MSRs increased by $1.2 billion. During the quarter, we also positioned our free-standing derivatives used as economic hedges to hold proportionately more non-mortgage-backed securities instruments, such as Treasury futures and options, swaps and options on swaps, which benefited our net results. We also sold $27 billion of our lowest-yielding mortgage-backed securities, which were largely used as on-balance sheet hedges of our MSRs, to provide further capacity to acquire higher yielding assets, and added $17 billion of securities and loans later in the quarter.
Interest rate and market risk can be substantial.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 mortgages held for sale (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 MSRs and MHFS, and the value of derivative loan commitments extended to mortgage applicants.

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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

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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, which we adopted January 1, 2007, 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 currently exist to reliably support fair value pricing models used for these loans. We also elected to remeasuremeasure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe that the election for MHFS and other interests held (which are now hedged with free-standing derivatives (economic hedges) along with our MSRs) willhelps 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, which we adopted January 1, 2006, we have 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.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 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 to not 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 a rising rate period, when the MSRs may not be fully hedged with free-standing derivatives, the change in the fair value of the MSRs that can be recaptured into income will typically — although not always — exceed the losses on any free-standing derivatives hedging the MSRs. In firstthird quarter 2007, the decrease in the fair value of our MSRs and the lossesgains on free-standing derivatives used to hedge the MSRs totaled $34 million.exceeded the decrease in the fair value of MSRs by $562 million, primarily due to wider agency versus non-agency mortgage spreads, wider mortgage-backed securities versus treasury/LIBOR-based spreads, and the market estimate of prepayment speeds due to slower housing turnover.

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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:
MSRs valuation changes associated with interest rate changes are recorded in earnings immediately within the accounting period in which those interest rate changes occur, whereas the impact of those same changes in interest rates on origination and servicing fees occur with a lag and over time. Thus, the mortgage business could be protected from adverse changes in interest rates over a period of time on a cumulative basis but still display large variations in income from one accounting period to the next.

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display large variations in income from one accounting period to the next.
 • The degree to which the “natural business hedge” offsets changes in MSRs valuations is imperfect, varies at different points in the interest rate cycle, and depends not just on the direction of interest rates but on the pattern of quarterly interest rate changes.
 • Origination volumes, the valuation of MSRs and hedging results and associated costs are also impacted by many factors. Such factors include the mix of new business between ARMs and fixed-rated mortgages, the relationship between short-term and long-term interest rates, the degree of volatility in interest rates, the relationship between mortgage interest rates and other interest rate markets, and other interest rate factors. Many of these factors are hard to predict and we may not be able to directly or perfectly hedge their effect.
 • While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs.
The total carrying value of our residential and commercial MSRs was $18.2$18.7 billion at March 31,September 30, 2007, and $18.0 billion at December 31, 2006. The weighted-average note rate on the owned servicing portfolio was 5.93%5.98% at March 31,September 30, 2007, and 5.92% at December 31, 2006. Our total MSRs were 1.39%1.35% of mortgage loans serviced for others at March 31,September 30, 2007, compared with 1.41% at December 31, 2006.
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. We record no value for the loan commitment at inception. Subsequent to inception, we recognize the fair value of the derivative loan commitment based on estimated changes in the fair value of the underlying loan that would result from the exercise of that commitment and on 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 thatthe underlying loan 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 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 Treasury futures, forwards

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and options, Eurodollar futures, and forwardTreasury futures, forwards and options contracts as economic hedges against the potential decreases in the values of the loans that could result from the exercise of the loan commitments.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.

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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, 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,September 30, 2007, and December 31, 2006, are included in Note 20 (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. 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 days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout firstthird quarter 2007 was $12$35 million, with a lower bound of $10 million and an upper bound of $14$93 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). The Board reviewsBoard’s policy is to review business developments, key risks and historical returns for the private equity investmentsinvestment 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 $1.75$1.98 billion at March 31,September 30, 2007, and $1.67 billion at December 31, 2006.
We also have marketable equity securities in the available for saleavailable-for-sale investment 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

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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

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securities was $765 million$2.49 billion and cost was $591 million$2.37 billion at March 31,September 30, 2007, and $796 million and $592 million, respectively, at December 31, 2006. The increase in marketable equity securities was primarily due to our adoption of Topic D-109 effective July 1, 2007, which resulted in the transfer of approximately $1.2 billion of securities, consisting of investments in preferred stock callable by the issuer, from trading assets to securities available for sale.
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 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 saleavailable-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). In third quarter 2007, net interest income was reduced by approximately $15 million due to temporarily elevated short-term LIBOR-based funding costs at the peak of the dislocation in the capital markets in August 2007.
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

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base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix and level and quality of earnings. In September 2003, Moody’s Investors Service ratedrates Wells Fargo Bank, N.A. as “Aaa,” its highest investment grade, and ratedrates the Company’s senior debt as “Aa1.” In July 2005, Dominion Bond Rating Service raised the Company’s senior debt rating to “AA” from “AA(low).” In February 2007, Standard & Poor’s Ratings Services raised Wells Fargo Bank, N.A.’s credit rating to “AAA” from “AA+,” and raised the Company’s senior debt rating to “AA+” from “AA.” Wells Fargo Bank, N.A. is now the only U.S. bank to have the highest possible credit rating from both Moody’s and S&P.
Parent. Under SEC rules, effective December 1, 2005, 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

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equity, in the last three years. However, the Parent’s ability to issue debt and other securities under a registration statement filed with the SEC under these new rules is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $25 billion in outstanding short-term debt and $95 billion in outstanding long-term debt, subject to a total outstanding debt limit of $110 billion. 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. During the first quarternine months of 2007, the Parent issued a total of $9.2$15.4 billion of registered senior notes, including $1.5 billion (denominated in pounds sterling) sold primarily in the United Kingdom. In October 2007, the Parent issued an additional $3.0 billion of registered senior notes. The Parent also issued $1.0 billion in junior subordinated debt in connection with the issuance of trust preferred securities by a statutory business trust formed by the Parent. Also, during the first nine months of 2007, the Parent issued $413 million in private placements (denominated in Australian dollars) under the Parent’s Australian debt issuance program. We used the proceeds from securities issued in the first quarternine months of 2007 for general corporate purposes and expect that the proceeds in the future will also be used for general corporate purposes. 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 $20$50 billion in outstanding short-term debt and $40$50 billion in outstanding long-term debt. In March 2003, Wells Fargo Bank, N.A. established a $50 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $20 billion in outstanding short-term senior notes and $30 billion in long-term senior notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. During the first nine months of 2007, Wells Fargo Bank, N.A. did not issue any debtissued $16.8 billion in first quarter 2007.short-term senior notes.
Wells Fargo Financial. In January 2006, Wells Fargo Financial Canada Corporation (WFFCC), a wholly-owned Canadian subsidiary of Wells Fargo Financial, Inc. (WFFI), qualified for distribution with the Canadian provincial securities exchanges in Canada $7.0CAD$7.0 billion (Canadian) of issuance authority. WFFI did not issue any debt in the first quarternine months of 2007. During the first nine months of 2007, WFFCC issued CAD$1.4 billion in senior notes. At March 31,September 30, 2007, the remaining issuance capacity for WFFCC was $5.4 billion (Canadian).CAD$4.0 billion.

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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-marketabove market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when suchthe costs of doing so 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 Securities Exchange Act of 1934 (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

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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 2006, the Board authorized the repurchase of up to 50 million additional shares of our outstanding common stock. In March 2007, the Board authorized the repurchase of up to 75 million additional shares of our outstanding common stock.stock, and in August 2007, the repurchase of up to 50 million additional shares. During the first quarternine months of 2007, we repurchased approximately 47137 million shares of our common stock. We issued approximately 18 million shares of common stock in June 2007 in connection with the acquisition of Placer Sierra Bancshares. At March 31,September 30, 2007, the total remaining common stock repurchase authority was approximately 9049 million shares. (For additional information regarding third quarter 2007 share repurchases and repurchase authorizations, see Part II Item 2 of this Report.)
In July 2007, the Board authorized a quarterly common stock dividend of 31 cents per share, an increase of 3 cents per share, or 11%, from the prior quarter. On October 1, 2007, we completed the acquisition of Greater Bay Bancorp with the issuance of approximately 40 million shares of our common stock.
Our potential sources of capital include retained earnings and issuances of common and preferred stock. In the first quarternine months of 2007, retained earnings increased $1.2$3.5 billion, predominantly resulting from net income of $2.2$6.8 billion, less dividends of $0.9$2.9 billion. In the first quarternine months of 2007, we issued $576 million$1.9 billion 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.

30

At March 31,September 30, 2007, 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.

24

RISK FACTORS
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. This Report contains forward-looking statements that:
 • we expectthe amount recorded as a cumulative effect of change in 2007 higher but manageable credit losses in our home equity loan portfolio;
accounting principle upon adoption of FSP 13-2 will be recognized back into income over the remaining terms of the affected leases;
 • our loan impairment analysiswe expect that the adoption of GNMA loans indicated only modest loss potential;EITF 06-4 and EITF 06-10 will reduce beginning retained earnings for 2008 by approximately $20 million (after tax);
 •loans and securities purchased in third quarter 2007 will benefit net interest margin in fourth quarter 2007;
•we may be required to recognize expense and income, the amount and timing of which will be determined by definitive SEC accounting guidance, related to the Visa restructuring transactions, Visa’s initial public offering, and our obligations under related loss and judgement sharing agreements with Visa in connection with certain litigation;
 • we expect FIN 48 will cause more volatility in our effective tax rate from quarter to quarter;
•it is reasonably possible that the total unrecognized tax benefit as of January 1, 2007, could decrease by an estimated $380 million by December 31, 2007, as a result of expiration of statutes of limitations and potential settlements with federal and state taxing authorities and that this benefit could be substantially offset by new tax matters arising during the same period;
 • we expect 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;
 • credit losses in our home equity portfolio are likely to increase in fourth quarter 2007 and remain at elevated levels into 2008;
•the recent guidance issued by federal financial regulatory agencies for nonprime mortgage lending will not have a significant impact on Wells Fargo Financial’s operations;
•our auto loan portfolio typically experiences higher credit losses in the second half of the year;
•we expectbelieve the provision for credit losses for consumer loans, absent a significant credit event, tosevere decrease in collateral values, significant acceleration of losses or significant change in payment behavior, will closely follow the level of related net charge-offs;
 • we believe the election to measure new prime mortgages held for sale and other interests held at fair value will reduce certain timing differences and better match changes in the value of these interests with changes in the value of derivatives used to hedge these interests;
 
• we expect changes in the fair value of derivative financial instruments used to hedgeas economic hedges of derivative loan commitments will fully or partially offset changes in the fair value of such commitments;
commitments to the extent changes in value are due to interest rate changes;
 • we expect to use the proceeds of securities issued in the future for general corporate purposes;
•we expect to complete one pending business combination transaction in second quarter 2007;

31

 • we do not expect to be required to make a minimum contribution in 2007 forto the Cash Balance Plan;
Plan in 2007;
 • we expect to recover our affordable housing investments over time through realization of federal low-income housing tax credits;
 • we do not expect the amount of any additional consideration that may be payable in connection with previous acquisitions to be material; and
 
• we expect $20$34 million of net deferred net gains on derivatives in other comprehensive income at March 31,September 30, 2007, will be reclassified as earnings in the next 12 months.
This Report also includes various statements about the estimated impact on our earnings from simulated changes in interest rates.

25

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:
 • lower or negative revenue growth because of our inability to sell more products to our existing customers;
 
• decreased demand for our products and services because of an economic slowdown;
 • reduced fee income from our brokerage and asset management businesses because of a fall in stock market prices;
 • lower net interest margin, decreased mortgage loan originations and reductions in the value of our MSRs because of changes in interest rates;rates or hedging activities;
 •reduced liquidity and value of certain asset classes, such as mortgage loans, due to volatility and risk aversion in the secondary markets;
 • reduced earnings due to higher credit losses generally and specifically because:
 °o losses in our consumer auto loan portfolio remain at or above historic levels notwithstanding our collections and underwriting efforts; and/or
 
°o losses in our residential real estate loan portfolio (including home equity) are greater than expected due to declining home values, increasing interest rates, increasing unemployment or other economic factors;
 • reduced earnings because of changes in the value of our venture capital investments;
 
• changes in our accounting policies or in accounting standards;
 • reduced earnings from not realizing the expected benefits of acquisitions or from unexpected difficulties integrating acquisitions;
 
• federal and state regulations;
regulations, including those relating to nonprime and student lending activities;
 • reputational damage from negative publicity;
 • fines, penalties and other negative consequences from regulatory violations, even inadvertent or unintentional violations;
 • the loss of checking and saving account deposits to alternative investments such as the stock market and higher-yielding fixed income investments; and
 •the inability to obtain private mortgage insurance on our loans at reasonable or economical rates; and
 • fiscal and monetary policies of the Federal Reserve Board.
Refer to our 2006 Form 10-K, including “Risk Factors,” for information about these factors. Refer also to this Report, including the discussion under “Risk Management” in the Financial

32

Review section, for additional risk factors and other information that may supplement or modify the discussion of risk factors in our 2006 Form 10-K.

26

CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31,September 30, 2007, 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,September 30, 2007.
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 U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
 • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company;
 
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
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 firstthird quarter 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

2733

WELLS FARGO & COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME
                        
   
 Quarter ended March 31, Quarter ended Sept. 30, Nine months ended Sept. 30,
(in millions, except per share amounts) 2007 2006  2007 2006 2007 2006 
 

INTEREST INCOME

  
Trading assets $53 $69  $37 $45 $137 $179 
Securities available for sale 686 663  1,032 1,014 2,470 2,552 
Mortgages held for sale 530 609  586 702 1,694 2,119 
Loans held for sale 15 11  19 12 51 34 
Loans 6,764 6,110  7,477 6,555 21,341 18,910 
Other interest income 91 70  72 71 242 214 
              
Total interest income 8,139 7,532  9,223 8,399 25,935 24,008 
              

INTEREST EXPENSE

  
Deposits 1,857 1,482  2,218 1,997 6,016 5,273 
Short-term borrowings 136 270  464 271 865 830 
Long-term debt 1,136 910  1,261 1,084 3,568 3,004 
              
Total interest expense 3,129 2,662  3,943 3,352 10,449 9,107 
              

NET INTEREST INCOME

 5,010 4,870  5,280 5,047 15,486 14,901 
Provision for credit losses 715 433  892 613 2,327 1,478 
              
Net interest income after provision for credit losses 4,295 4,437  4,388 4,434 13,159 13,423 
              

NONINTEREST INCOME

  
Service charges on deposit accounts 685 623  837 707 2,262 1,995 
Trust and investment fees 731 663  777 664 2,347 2,002 
Card fees 470 384  561 464 1,548 1,266 
Other fees 511 488  566 509 1,715 1,507 
Mortgage banking 790 415  823 484 2,302 1,634 
Operating leases 192 201  171 192 550 593 
Insurance 399 364  329 313 1,160 1,041 
Net gains (losses) on debt securities available for sale 31  (35) 160 121 149  (70)
Net gains from equity investments 97 190  173 159 512 482 
Other 525 392  176 274 1,154 927 
              
Total noninterest income 4,431 3,685  4,573 3,887 13,699 11,377 
              

NONINTEREST EXPENSE

  
Salaries 1,867 1,672  1,933 1,769 5,707 5,195 
Incentive compensation 742 668  802 710 2,444 2,092 
Employee benefits 665 589  518 458 1,764 1,534 
Equipment 337 335  295 294 924 913 
Net occupancy 365 336  398 357 1,132 1,038 
Operating leases 153 161  136 155 437 473 
Other 1,397 1,313  1,419 1,338 4,346 4,086 
              
Total noninterest expense 5,526 5,074  5,501 5,081 16,754 15,331 
              

INCOME BEFORE INCOME TAX EXPENSE

 3,200 3,048  3,460 3,240 10,104 9,469 
Income tax expense 956 1,030  1,177 1,046 3,298 3,168 
              

NET INCOME

 $2,244 $2,018  $2,283 $2,194 $6,806 $6,301 
              

EARNINGS PER COMMON SHARE

 $0.66 $0.60  $0.69 $0.65 $2.03 $1.87 

DILUTED EARNINGS PER COMMON SHARE

 $0.66 $0.60  $0.68 $0.64 $2.01 $1.85 

DIVIDENDS DECLARED PER COMMON SHARE

 $0.28 $0.26  $0.31 $— $0.87 $0.80 
     
Average common shares outstanding 3,376.0 3,358.3  3,339.6 3,371.9 3,355.5 3,364.6 
Diluted average common shares outstanding 3,416.1 3,395.7  3,374.0 3,416.0 3,392.9 3,405.5 
 
The accompanying notes are an integral part of these statements.

2834

WELLS FARGO & COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
                        
   
 March 31, December 31, March 31, September 30,  December 31, September 30,
(in millions, except shares) 2007 2006 2006  2007 2006 2006 
 

ASSETS

  
Cash and due from banks $12,485 $15,028 $13,224  $12,200 $15,028 $12,591 
Federal funds sold, securities purchased under resale agreements and other short-term investments 4,668 6,078 4,954  4,546 6,078 4,079 
Trading assets 6,525 5,607 9,930  7,298 5,607 5,300 
Securities available for sale 45,443 42,629 51,195  57,440 42,629 52,635 
Mortgages held for sale (includes $25,692 million carried at fair value at March 31, 2007) 32,286 33,097 43,521 
Mortgages held for sale (includes $26,714 carried at fair value at September 30, 2007) 29,699 33,097 39,913 
Loans held for sale 829 721 629  1,011 721 617 

Loans

 325,487 319,116 306,676  362,922 319,116 307,491 
Allowance for loan losses  (3,772)  (3,764)  (3,845)  (3,829)  (3,764)  (3,799)
              
Net loans 321,715 315,352 302,831  359,093 315,352 303,692 
              

Mortgage servicing rights:

  
Measured at fair value (residential MSRs) 17,779 17,591 13,800  18,223 17,591 17,712 
Amortized 400 377 142  460 377 328 
Premises and equipment, net 4,864 4,698 4,493  5,002 4,698 4,645 
Goodwill 11,275 11,275 11,050  12,018 11,275 11,192 
Other assets 27,632 29,543 36,659  41,737 29,543 30,737 
              

Total assets

 $485,901 $481,996 $492,428  $548,727 $481,996 $483,441 
              

LIABILITIES

  
Noninterest-bearing deposits $89,067 $89,119 $88,701  $82,365 $89,119 $86,849 
Interest-bearing deposits 222,090 221,124 219,604  252,591 221,124 227,470 
              
Total deposits 311,157 310,243 308,305  334,956 310,243 314,319 
Short-term borrowings 13,181 12,829 21,350  41,729 12,829 13,800 
Accrued expenses and other liabilities 25,101 25,903 36,312  28,712 25,903 26,369 
Long-term debt 90,327 87,145 84,500  95,592 87,145 84,091 
              

Total liabilities

 439,766 436,120 450,467  500,989 436,120 438,579 
              

STOCKHOLDERS’ EQUITY

  
Preferred stock 740 384 634  545 384 465 
Common stock — $1-2/3 par value, authorized 6,000,000,000 shares; issued 3,472,762,050 shares 5,788 5,788 5,788  5,788 5,788 5,788 
Additional paid-in capital 7,875 7,739 7,479  8,089 7,739 7,667 
Retained earnings 36,439 35,277 31,750  38,817 35,277 34,080 
Cumulative other comprehensive income 289 302 576  291 302 633 
Treasury stock — 122,242,186 shares, 95,612,189 shares and 115,124,934 shares  (4,204)  (3,203)  (3,587)
Treasury stock — 147,535,970 shares, 95,612,189 shares and 100,057,636 shares  (5,209)  (3,203)  (3,273)
Unearned ESOP shares  (792)  (411)  (679)  (583)  (411)  (498)
              

Total stockholders’ equity

 46,135 45,876 41,961  47,738 45,876 44,862 
              

Total liabilities and stockholders’ equity

 $485,901 $481,996 $492,428  $548,727 $481,996 $483,441 
              
 
The accompanying notes are an integral part of these statements.

2935

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
                                                      
   
 Cumulative      Cumulative     
 Additional other Unearned Total  Additional other Unearned Total 
 Number of Preferred Common paid-in Retained comprehensive Treasury ESOP stockholders'  Number of Preferred Common paid-in Retained comprehensive Treasury ESOP stockholders’ 
(in millions, except shares) common shares stock stock capital earnings income stock shares equity  common shares stock stock capital earnings income stock shares equity 
 

BALANCE DECEMBER 31, 2005

 3,355,166,064 $325 $5,788 $7,040 $30,580 $665 $(3,390) $(348) $40,660  3,355,166,064 $325 $5,788 $7,040 $30,580 $665 $(3,390) $(348) $40,660 
                                      
Cumulative effect from adoption of FAS 156 101 101  101 101 
          
BALANCE JANUARY 1, 2006 3,355,166,064 325 5,788 7,040 30,681 665  (3,390)  (348) 40,761  3,355,166,064 325 5,788 7,040 30,681 665  (3,390)  (348) 40,761 
                                      
Comprehensive income
Net income		 2,018 2,018 
Comprehensive income: 
Net income 6,301 6,301 
Other comprehensive income, net of tax:  
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $53 million of net gains included in net income  (205)  (205)
Net unrealized gains on derivatives and hedging activities, net of reclassification of $30 million of net gains on cash flow hedges included in net income 119 119 
Translation adjustments 4 4 
Minimum pension liability adjustment  (3)  (3)  (3)  (3)
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $87 million of net gains included in net income  (6)  (6)
Net unrealized losses on derivatives and hedging activities, net of reclassification of $71 million of net gains on cash flow hedges included in net income  (27)  (27)
      
Total comprehensive income 1,929  6,269 
Common stock issued 19,798,358  (16)  (75) 576 485  56,859,649  (48)  (207) 1,674 1,419 
Common stock repurchased  (20,613,612)  (646)  (646)  (47,488,608)  (1,566)  (1,566)
Preferred stock (414,000) issued to ESOP 414 29  (443) —  414 29  (443) — 
Preferred stock released to ESOP  (7) 112 105   (19) 293 274 
Preferred stock (105,037) converted to common shares 3,286,306  (105) 9 96 — 
Preferred stock (274,457) converted to common shares 8,167,309  (274) 31 243 — 
Common stock dividends  (874)  (874)  (2,695)  (2,695)
Tax benefit upon exercise of stock options 52 52  179 179 
Stock option compensation expense 52 52  108 108 
Net change in deferred compensation and related plans 12  (12) —  39  (23) 16 
Reclassification of share-based plans 308  (211) 97  308  (211) 97 
                                      
Net change 2,471,052 309 — 439 1,069  (89)  (197)  (331) 1,200  17,538,350 140 — 627 3,399  (32) 117  (150) 4,101 
                                      
BALANCE MARCH 31, 2006 3,357,637,116 $634 $5,788 $7,479 $31,750 $576 $(3,587) $(679) $41,961 

BALANCE SEPTEMBER 30, 2006

 3,372,704,414 $465 $5,788 $7,667 $34,080 $633 $(3,273) $(498) $44,862 
                                      

BALANCE DECEMBER 31, 2006

 3,377,149,861 $384 $5,788 $7,739 $35,277 $302 $(3,203) $(411) $45,876  3,377,149,861 $384 $5,788 $7,739 $35,277 $302 $(3,203) $(411) $45,876 
                                      
Cumulative effect of adoption of FSP 13-2
  (71)  (71)
Cumulative effect of adoption of FSP13-2
  (71)  (71)
          
BALANCE JANUARY 1, 2007
 3,377,149,861 384 5,788 7,739 35,206 302  (3,203)  (411) 45,805  3,377,149,861 384 5,788 7,739 35,206 302  (3,203)  (411) 45,805 
                                      
Comprehensive income
Net income
 2,244 2,244 
Comprehensive income:
 
Net income
 6,806 6,806 
Other comprehensive income, net of tax:
  
Translation adjustments
 1 1  24 24 
Net unrealized gains on securities available for sale and other interests held, net of reclassification of $32 million of net gains included in net income
 18 18 
Net unrealized losses on derivatives and hedging activities, net of reclassification of $39 million of net gains on cash flow hedges included in net income
  (38)  (38)
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $133 million of net gains included in net income
  (226)  (226)
Net unrealized gains on derivatives and hedging activities, net of reclassification of $61 million of net gains on cash flow hedges included in net income
 174 174 
Defined benefit pension plans:
  
Amortization of actuarial loss and prior service cost included in net income
 6 6  17 17 
      
Total comprehensive income
 2,231  6,795 
Common stock issued
 16,732,843  (17)  (63) 528 448  58,568,656  (99)  (276) 1,906 1,531 
Common stock issued for acquisitions
 17,705,418 68 581 649 
Common stock repurchased
  (47,068,819)  (1,631)  (1,631)  (137,404,390)  (4,765)  (4,765)
Preferred stock (484,000) issued to ESOP
 484 34  (518) --  484 34  (518) — 
Preferred stock released to ESOP
  (9) 137 128   (23) 346 323 
Preferred stock (127,646) converted to common shares
 3,705,979  (128) 8 120 -- 
Preferred stock (323,069) converted to common shares
 9,206,535  (323) 20 303 — 
Common stock dividends
  (948)  (948)  (2,919)  (2,919)
Tax benefit upon exercise of stock options
 51 51  199 199 
Stock option compensation expense
 50 50  107 107 
Net change in deferred compensation and related plans
 19  (18) 1  44  (31) 13 
                                      
Net change
  (26,629,997) 356 — 136 1,233  (13)  (1,001)  (381) 330   (51,923,781) 161 — 350 3,611  (11)  (2,006)  (172) 1,933 
                                      

BALANCE MARCH 31, 2007

 3,350,519,864 $740 $5,788 $7,875 $36,439 $289 $(4,204) $(792) $46,135 

BALANCE SEPTEMBER 30, 2007

 3,325,226,080 $545 $5,788 $8,089 $38,817 $291 $(5,209) $(583) $47,738 
                                      
 
The accompanying notes are an integral part of these statements.

3036

WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                
   
 Quarter ended March 31, Nine months ended September 30,
(in millions) 2007 2006  2007 2006 
 

Cash flows from operating activities:

  
Net income $2,244 $2,018  $6,806 $6,301 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for credit losses 715 433  2,327 1,478 
Changes in fair value of MSRs (residential) and MHFS carried at fair value 570  (45) 474 1,736 
Depreciation and amortization 382 540  1,141 2,250 
Other net gains  (513)  (503)  (1,337)  (1,128)
Preferred shares released to ESOP 128 105  323 274 
Stock option compensation expense 50 52  107 108 
Excess tax benefits related to stock option payments  (46)  (52)  (185)  (179)
Originations of MHFS  (54,688)  (51,280)  (176,135)  (180,739)
Proceeds from sales of and principal collected on mortgages originated for sale 55,290 53,683  175,746 179,039 
Net change in:  
Trading assets  (936) 975   (2,959) 5,582 
Loans originated for sale  (108)  (17)  (285)  (5)
Deferred income taxes 184 206  632 877 
Accrued interest receivable  (11)  (17)  (446)  (265)
Accrued interest payable  (179) 43   (59) 358 
Other assets, net 3,262  (2,753)  (5,516) 2,949 
Other accrued expenses and liabilities, net  (673) 13,269  3,059 3,136 
          

Net cash provided by operating activities

 5,671 16,657  3,693 21,772 
          

Cash flows from investing activities:

  
Net change in:  
Federal funds sold, securities purchased under resale agreements and other short-term investments 1,410 370  1,539 1,282 
Securities available for sale:  
Sales proceeds 4,545 16,964  37,297 43,896 
Prepayments and maturities 2,244 1,644  6,868 5,757 
Purchases  (9,513)  (28,397)  (54,192)  (61,347)
Loans:  
Increase in banking subsidiaries’ loan originations, net of collections  (7,367)  (8,841)  (34,020)  (26,503)
Proceeds from sales (including participations) of loans by banking subsidiaries 983 9,244  2,611 35,637 
Purchases (including participations) of loans by banking subsidiaries  (1,068)  (1,562)  (7,543)  (4,136)
Principal collected on nonbank entities’ loans 5,574 5,909  16,461 18,130 
Loans originated by nonbank entities  (5,943)  (6,908)  (19,190)  (19,956)
Net cash paid for acquisitions —  (266)  (2,862)  (526)
Proceeds from sales of foreclosed assets 291 140  1,014 376 
Other changes in MSRs  (1,026)  (723)  (1,717)  (5,127)
Other, net  (620)  (1,495)  (5,662)  (3,287)
          

Net cash used by investing activities

  (10,490)  (13,921)  (59,396)  (15,804)
          

Cash flows from financing activities:

  
Net change in:  
Deposits 914  (6,216) 22,954  (376)
Short-term borrowings 352  (2,542) 28,760  (10,139)
Long-term debt:  
Proceeds from issuance 9,536 8,499  22,569 14,987 
Repayment  (6,356)  (3,646)  (14,846)  (10,632)
Common stock:  
Proceeds from issuance 448 485  1,531 1,419 
Repurchased  (1,631)  (646)  (4,765)  (1,566)
Cash dividends paid  (948)  (874)  (2,919)  (2,695)
Excess tax benefits related to stock option payments 46 52  185 179 
Other, net  (85)  (21)  (594) 49 
          

Net cash provided (used) by financing activities

 2,276  (4,909) 52,875  (8,774)
          

Net change in cash and due from banks

  (2,543)  (2,173)  (2,828)  (2,806)

Cash and due from banks at beginning of quarter

 15,028 15,397 

Cash and due from banks at beginning of period

 15,028 15,397 
          

Cash and due from banks at end of quarter

 $12,485 $13,224 

Cash and due from banks at end of period

 $12,200 $12,591 
          

Supplemental disclosures of cash flow information:

  
Cash paid during the quarter for: 
Cash paid during the period for: 
Interest $3,308 $2,619  $10,508 $8,749 
Income taxes 106 90  2,613 1,423 
Noncash investing and financing activities:  
Net transfers from loans to MHFS $— $14,546 
Transfers from trading assets to securities available for sale $1,268 $— 
Transfers from loans to MHFS — 32,381 
Transfers from MHFS to loans 1,522 — 
Transfers from loans to foreclosed assets 1,087 493  1,978 1,243 
 
The accompanying notes are an integral part of these statements.

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NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company is a diversified financial services company. We provide 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. When we refer to “the Company,” “we,”Company”, “we”, “our” orand “us” in this Form 10-Q, we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period.
The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K).
On January 1, 2007, we adopted the following new accounting pronouncements:
 • FIN 48 — Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109;
 
• FSP 13-2 — FASB Staff Position 13-2,Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction;
 
• FAS 155 — Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments,an amendment of FASB Statements No. 133 and 140;
 
• FAS 157,Fair Value Measurements; and
 • FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.
The adoption of FIN 48, FAS 155, FAS 157 and FAS 159 did not have any effect on our financial statements at the date of adoption. For additional information, see Note 11 (Income Taxes) and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements.
FSP 13-2 relates to the accounting for leveraged lease transactions for which there have been cash flow estimate changes based on when income tax benefits are recognized. Certain of our leveraged lease transactions have been challenged by the Internal Revenue Service (IRS). We have paid the IRS the contested income tax associated with these transactions. However, we are continuing to vigorously defend our initial filing position as to the timing of the tax benefits associated with these transactions. Upon adoption of FSP 13-2, we recorded a cumulative effect

3238

of change in accounting principle to reduce the beginning balance of 2007 retained earnings by $71 million after tax ($115 million pre tax). Since this adjustment changes only the timing of income tax cash flows and not the total net income for these leases, this amount will be recognized back into income over the remaining terms of the affected leases.
On July 1, 2007, we adopted Emerging Issues Task Force (EITF) Topic D-109,Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133(Topic D-109), which provides clarifying guidance as to whether certain hybrid financial instruments are more akin to debt or equity, for purposes of evaluating whether the embedded derivative financial instrument requires separate accounting under FAS 133. In accordance with the transition provisions of Topic D-109, we transferred $1.2 billion of securities, consisting of investments in preferred stock callable by the issuer, from trading assets to securities available for sale. Because the securities were carried at fair value, the adoption of Topic D-109 did not have any effect on our total stockholders’ equity.
Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2006 Form 10-K. There have been no significant changes to these policies, except as discussed below for mortgages held for sale and income taxes, based on these new pronouncements.
MORTGAGES HELD FOR SALE
Mortgages held for sale (MHFS) include commercial and residential mortgages originated for sale and securitization in the secondary market, which is our principal market, or for sale as whole loans. Effective January 1, 2007, upon adoption of FAS 159, we elected to measure MHFS at fair value prospectively for new prime residential MHFS originations. (See Note 16.) These loans are initially recorded and carried at fair value, with changes in the fair value of these loans recognized in mortgage banking noninterest income. Loan origination fees are recorded when earned, and related direct loan origination costs and fees are recognized when incurred.
In addition, other MHFS (predominantly nonprime loans)loans and commercial mortgages) are carried at the lower of cost or market value. For these MHFS, direct loan origination costs and fees are deferred at origination of the loans and recognized in mortgage banking noninterest income upon sale of the loan. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income.
INCOME TAXES
We file a consolidatedare subject to U.S. federal income tax returnas well as income tax in numerous state and in certain states, combined state tax returns.foreign jurisdictions.
We account for income taxes in accordance with FAS 109,Accounting for Income Taxes, as interpreted by FIN 48, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. We determine deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws.laws in the period in which they occur. Deferred income tax expense results from changes in deferred

39

tax assets and liabilities between periods. Deferred tax assets are recognized subject to management judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Foreign taxes paid are generally applied as credits to reduce federal income taxes payable. Interest and penalties are recognized as a component of income tax expense.

33

2. BUSINESS COMBINATIONS
We regularly explore opportunities to acquire financial services companies and businesses. Generally, we do not make a public announcement about an acquisition opportunity until a definitive agreement has been signed.
At March 31,Transactions completed in the first nine months of 2007 were:
         
  
(in millions) Date  Assets 
  

Placer Sierra Bancshares, Sacramento, California

 June 1  $2,644 
Certain assets of The CIT Group/Equipment Financing, Inc., Tempe, Arizona June 29   2,888 
Other (1)      36 
        
      $5,568 
        
  
(1)Consists of the acquisition of an insurance brokerage business.
Effective October 1, 2007, we had one pending business combinationacquired Greater Bay Bancorp, a bank holding company with total$7.4 billion in assets based in East Palo Alto, California, with the issuance of approximately $2.6 billion. We expect to complete this transaction in second quarter 2007.40 million shares of our common stock.
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
3.FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
                        
   
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 
 

Federal funds sold and securities purchased under resale agreements

 $3,730 $5,024 $3,445  $3,436 $5,024 $2,768 
Interest-earning deposits 361 413 904  499 413 629 
Other short-term investments 577 641 605  611 641 682 
              
Total $4,668 $6,078 $4,954  $4,546 $6,078 $4,079 
              
 

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4. SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major categories of securities available for sale carried at fair value. There were no securities classified as held to maturity as of the periods presented.
                        
                         
 Mar. 31, 2007 Dec. 31, 2006 Mar. 31, 2006   
 Estimated Estimated Estimated  Sept. 30, 2007 Dec. 31, 2006 Sept. 30, 2006 
 fair fair fair  Fair Fair Fair 
(in millions) Cost value Cost value Cost value  Cost value Cost value Cost value 
 

Securities of U.S. Treasury and federal agencies

 $827 $822 $774 $768 $931 $919  $859 $860 $774 $768 $892 $886 
Securities of U.S. states and political subdivisions 3,528 3,665 3,387 3,530 2,923 3,040  5,698 5,786 3,387 3,530 3,241 3,388 
Mortgage-backed securities:  
Federal agencies 30,336 30,874 26,981 27,463 34,268 34,312  29,470 29,902 26,981 27,463 35,549 36,045 
Private collateralized mortgage obligations (1) 3,865 3,921 3,989 4,046 5,628 5,730  12,083 12,086 3,989 4,046 4,842 4,912 
                          
Total mortgage-backed securities 34,201 34,795 30,970 31,509 39,896 40,042  41,553 41,988 30,970 31,509 40,391 40,957 
Other 5,348 5,396 5,980 6,026 6,301 6,319  6,377 6,312 5,980 6,026 6,549 6,575 
                          
Total debt securities 43,904 44,678 41,111 41,833 50,051 50,320  54,487 54,946 41,111 41,833 51,073 51,806 
Marketable equity securities 591 765 592 796 556 875  2,372 2,494 592 796 597 829 
             
             

Total

 $44,495 $45,443 $41,703 $42,629 $50,607 $51,195  $56,859 $57,440 $41,703 $42,629 $51,670 $52,635 
                          
 
(1) Substantially all of the private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages.
The following table provides the components of the estimated net unrealized gains on securities available for sale. The estimated net unrealized gains and losses on securities available for sale are reported on an after-tax basis as a component of cumulative other comprehensive income.
             
  
  Mar. 31, Dec. 31, Mar. 31,
(in millions) 2007  2006  2006 
 

Estimated gross unrealized gains

 $996  $987  $792 
Estimated gross unrealized losses  (48)  (61)  (204)
          
Estimated net unrealized gains $948  $926  $588 
          
 
             
  
  Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007  2006  2006 
  

Gross unrealized gains

 $857  $987  $1,050 
Gross unrealized losses  (276)  (61)  (85)
          
Net unrealized gains $581  $926  $965 
          
  
The following table shows the net realized gains on the sales of securities from the securities available for saleavailable-for-sale portfolio, including marketable equity securities.
                
          
  Quarter Nine months 
 Quarter ended March 31, ended Sept. 30, ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
 

Gross realized gains

 $59 $171  $212 $143 $292 $390 
Gross realized losses (1)  (7)  (85)  (23)  (15)  (77)  (273)
              
Net realized gains $52 $86  $189 $128 $215 $117 
              
 
(1) Includes other-than-temporary impairment of $3 million and $7 million for the third quarter and first nine months of 2007, respectively, and $4 million and $17 million for the third quarter and first quarter 2007. No other-than-temporary impairment was recorded for first quarter 2006.nine months of 2006, respectively.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of the major categories of loans outstanding is shown in the following table. Outstanding loan balances reflect unearned income, net deferred loan fees, and unamortized discount and premium totaling $3,169$3,562 million, $3,113 million and $3,561$3,050 million, at March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively.
                        
 
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 

Commercial and commercial real estate:

  
Commercial $72,268 $70,404 $63,836  $82,598 $70,404 $66,797 
Other real estate mortgage 31,542 30,112 28,754  33,227 30,112 29,914 
Real estate construction 15,869 15,935 14,308  17,301 15,935 15,397 
Lease financing 5,494 5,614 5,402  6,089 5,614 5,443 
              
Total commercial and commercial real estate 125,173 122,065 112,300  139,215 122,065 117,551 
Consumer:  
Real estate 1-4 family first mortgage 55,982 53,228 66,106  66,877 53,228 49,765 
Real estate 1-4 family junior lien mortgage 69,489 68,926 61,115  74,632 68,926 67,185 
Credit card 14,594 14,697 11,618  17,129 14,697 13,343 
Other revolving credit and installment 53,445 53,534 49,295  57,180 53,534 53,080 
              
Total consumer 193,510 190,385 188,134  215,818 190,385 183,373 
Foreign 6,804 6,666 6,242  7,889 6,666 6,567 
              

Total loans

 $325,487 $319,116 $306,676  $362,922 $319,116 $307,491 
              
The recorded investment in impaired loans and the methodology used to measure impairment was:
                        
 
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 

Impairment measurement based on:

  
Collateral value method $163 $122 $111  $267 $122 $121 
Discounted cash flow method 88 108 26  127 108 71 
              
Total (1) $251 $230 $137  $394 $230 $192 
              
(1) Includes $133$221 million, $146 million and $49$61 million of impaired loans with a related allowance of $21$24 million, $29 million and $11$8 million at March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, respectively.
The average recorded investment in impaired loans was $251$308 million and $168 million for firstthird quarter 2007 and $1602006, respectively, and $273 million and $159 million for the first quarter 2006.nine months of 2007 and 2006, respectively.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
                
          
  Quarter Nine months 
 Quarter ended March 31, ended Sept. 30, ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
 

Balance, beginning of period

 $3,964 $4,057  $4,007 $4,035 $3,964 $4,057 

Provision for credit losses

 715 433  892 613 2,327 1,478 

Loan charge-offs:

  
Commercial and commercial real estate:  
Commercial  (126)  (79)  (155)  (103)  (408)  (275)
Other real estate mortgage  (1)  (1) —  (1)  (2)  (3)
Real estate construction  (3)  (1)  (5)  (1)
Lease financing  (7)  (9)  (8)  (6)  (24)  (22)
              
Total commercial and commercial real estate  (134)  (89)  (166)  (111)  (439)  (301)
Consumer:  
Real estate 1-4 family first mortgage  (24)  (29)  (22)  (30)  (71)  (81)
Real estate 1-4 family junior lien mortgage  (83)  (34)  (167)  (36)  (357)  (98)
Credit card  (183)  (105)  (205)  (133)  (579)  (351)
Other revolving credit and installment  (474)  (322)  (473)  (501)  (1,381)  (1,172)
              
Total consumer  (764)  (490)  (867)  (700)  (2,388)  (1,702)
Foreign  (62)  (74)  (69)  (74)  (195)  (222)
              
Total loan charge-offs  (960)  (653)  (1,102)  (885)  (3,022)  (2,225)
              

Loan recoveries:

  
Commercial and commercial real estate:  
Commercial 24 27  35 26 84 84 
Other real estate mortgage 2 1  2 8 7 14 
Real estate construction 1 1  1 — 2 2 
Lease financing 5 6  3 4 12 16 
              
Total commercial and commercial real estate 32 35  41 38 105 116 
Consumer:  
Real estate 1-4 family first mortgage 6 3  6 8 18 20 
Real estate 1-4 family junior lien mortgage 9 8  14 9 39 27 
Credit card 31 24  29 23 90 72 
Other revolving credit and installment 149 129  105 124 393 401 
              
Total consumer 195 164  154 164 540 520 
Foreign 18 21  15 20 50 61 
              
Total loan recoveries 245 220  210 222 695 697 
              
Net loan charge-offs  (715)  (433)  (892)  (663)  (2,327)  (1,528)
              

Other

 1  (32)

Allowances related to business combinations/other

 11  (7) 54  (29)
              

Balance, end of period

 $3,965 $4,025  $4,018 $3,978 $4,018 $3,978 
              

Components:

  
Allowance for loan losses $3,772 $3,845  $3,829 $3,799 $3,829 $3,799 
Reserve for unfunded credit commitments 193 180  189 179 189 179 
              
Allowance for credit losses $3,965 $4,025  $4,018 $3,978 $4,018 $3,978 
              

Net loan charge-offs (annualized) as a percentage of average total loans

  0.90%  0.56%  1.01%  0.86%  0.93%  0.67%

Allowance for loan losses as a percentage of total loans

  1.16%  1.25%  1.06%  1.24%  1.06%  1.24%
Allowance for credit losses as a percentage of total loans 1.22 1.31  1.11 1.29 1.11 1.29 
 

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6. OTHER ASSETS
The components of other assets were:
                        
   
 Mar. 31, Dec. 31, Mar. 31, Sept. 30, Dec. 31, Sept. 30,
(in millions) 2007 2006 2006  2007 2006 2006 
 

Nonmarketable equity investments:

  
Private equity investments $1,750 $1,671 $1,603  $1,982 $1,671 $1,654 
Federal bank stock 1,325 1,326 1,370  1,637 1,326 1,338 
All other 2,199 2,240 2,054  2,672 2,240 2,084 
              
Total nonmarketable equity investments (1) 5,274 5,237 5,027  6,291 5,237 5,076 

Operating lease assets

 3,084 3,091 3,391  2,526 3,091 3,120 
Accounts receivable 4,781 7,522 14,066  16,750 7,522 7,048 
Interest receivable 2,581 2,570 2,296  3,016 2,570 2,544 
Core deposit intangibles 356 383 462  362 383 410 
Foreclosed assets:  
GNMA loans (2) 381 322 227  487 322 266 
Other 528 423 228  603 423 342 
Due from customers on acceptances 61 103 91  83 103 140 
Other 10,586 9,892 10,871  11,619 9,892 11,791 
              
Total other assets $27,632 $29,543 $36,659  $41,737 $29,543 $30,737 
              
 
(1) At March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, $4.5$5.4 billion, $4.5 billion and $4.4 billion, respectively, of nonmarketable equity investments, including all federal bank stock, were accounted for at cost.
 
(2) Consistent with regulatory reporting requirements, foreclosed assets includeincluded foreclosed real estate securing Government National Mortgage Association (GNMA) loans. These assetsBoth principal and interest for GNMA loans secured by the foreclosed real estate are fully collectible because the corresponding GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
Income related to nonmarketable equity investments was:
                
          
  Quarter Nine months 
 Quarter ended March 31, ended Sept. 30, ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
 

Net gains from private equity investments

 $76 $69  $144 $152 $446 $295 
Net losses from all other nonmarketable equity investments  (13)  (3)
Net gains (losses) from all other nonmarketable equity investments  (7) 8  (24)  (11)
              
Net gains from nonmarketable equity investments $63 $66  $137 $160 $422 $284 
              
 

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7. INTANGIBLE ASSETS
The gross carrying amount of intangible assets and accumulated amortization was:
                                
   
 March 31, September 30,
 2007 2006  2007 2006 
 Gross Accumulated Gross Accumulated  Gross Accumulated Gross Accumulated 
(in millions) carrying amount amortization carrying amount amortization  carrying amount amortization carrying amount amortization 
 

Amortized intangible assets:

  
MSRs (commercial) (1) $496 $96 $194 $52  $592 $132 $396 $68 
Core deposit intangibles 2,374 2,018 2,370 1,908  2,434 2,072 2,374 1,964 
Credit card and other intangibles 583 388 568 325  656 410 576 370 
                  
Total intangible assets $3,453 $2,502 $3,132 $2,285  $3,682 $2,614 $3,346 $2,402 
                  

MSRs (fair value) (1)

 $17,779 $13,800  $18,223 $17,712 
Trademark 14 14  14 14 
 
(1) See Note 15 for additional information on MSRs.
The current year and estimated future amortization expense for intangible assets as of March 31,September 30, 2007, follows:
                        
   
 Core      Core     
 deposit      deposit     
(in millions) intangibles Other(1) Total  intangibles Other  (1) Total 
 

Three months ended March 31, 2007 (actual)

 $26 $32 $58 

Nine months ended September 30, 2007 (actual)

 $81 $79 $160 
              

Estimate for year ended December 31,

  
2007 $102 $105 $207  $108 $112 $220 
2008 94 86 180  104 115 219 
2009 86 78 164  95 102 197 
2010 77 73 150  84 92 176 
2011 19 63 82  25 81 106 
2012 2 56 58  7 71 78 
 
(1) Includes amortized commercial MSRs and credit card and other intangibles.
We based ourthe projections of amortization expense shown above on existing asset balances at March 31,September 30, 2007. Future amortization expense may vary based on additional core deposit or other intangibles acquired through business combinations.

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8. GOODWILL
The changes in the carrying amount of goodwill as allocated to our operating segments for goodwill impairment analysis were:
                                
   
 Community Wholesale Wells Fargo Consolidated  Community Wholesale Wells Fargo Consolidated 
(in millions) Banking Banking Financial Company  Banking Banking Financial Company 
 

December 31, 2005

 $7,374 $3,047 $366 $10,787  $7,374 $3,047 $366 $10,787 

Goodwill from business combinations

 11 252 — 263  30 373 — 403 
Foreign currency translation adjustments — — 2 2 
Realignment of businesses (primarily insurance)  (19) 19 — —   (19) 19 — — 
                  
March 31, 2006 $7,366 $3,318 $366 $11,050 
September 30, 2006 $7,385 $3,439 $368 $11,192 
                  

December 31, 2006 and March 31, 2007

 $7,385 $3,524 $366 $11,275 

December 31, 2006

 $7,385 $3,524 $366 $11,275 
Goodwill from business combinations
 473 262 — 735 
Foreign currency translation adjustments
 — — 8 8 
         
September 30, 2007
 $7,858 $3,786 $374 $12,018 
                  
 
For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating segments. For management reporting we do not allocate all of the goodwill to the individual operating segments; some is allocated at the enterprise level. See Note 13 for further information on management reporting. The balances of goodwill for management reporting were:
                     
  
  Community  Wholesale  Wells Fargo      Consolidated 
(in millions) Banking  Banking  Financial  Enterprise  Company 
 

March 31, 2006

 $3,519  $1,368  $366  $5,797  $11,050 

March 31, 2007

 $3,538  $1,574  $366  $5,797  $11,275 
 
                     
  
  Community  Wholesale  Wells Fargo      Consolidated 
(in millions) Banking  Banking  Financial  Enterprise  Company 
  

September 30, 2006

 $3,538  $1,489  $368  $5,797  $11,192 

September 30, 2007

  4,011   1,836   374   5,797   12,018 
  

4046

9. PREFERRED STOCK
We are authorized to issue 20 million shares of preferred stock and 4 million shares of preference stock, both without par value. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. We have not issued any preference shares under this authorization.
                                                                
   
 Shares issued and outstanding Carrying amount (in millions) Adjustable  Shares issued and outstanding Carrying amount (in millions) Adjustable 
 Mar. 31, Dec. 31, Mar. 31, Mar. 31, Dec. 31, Mar. 31, dividends rate  Sept. 30, Dec. 31, Sept. 30, Sept. 30, Dec. 31, Sept. 30, dividends rate 
 2007 2006 2006 2007 2006 2006 Minimum Maximum  2007 2006 2006 2007 2006 2006 Minimum Maximum 

ESOP Preferred Stock (1):

  

2007

 363,754 — — $364 $— $—  10.75%  11.75% 181,016 — — $181 $— $—  10.75%  11.75%
2006 108,121 115,521 315,963 108 116 316 10.75 11.75  104,966 115,521 162,493 105 116 162 10.75 11.75 
2005 84,284 84,284 95,184 84 84 95 9.75 10.75  81,134 84,284 89,984 81 84 90 9.75 10.75 
2004 65,180 65,180 74,880 65 65 75 8.50 9.50  62,960 65,180 71,280 63 65 71 8.50 9.50 
2003 44,843 44,843 52,643 45 45 53 8.50 9.50  43,143 44,843 49,843 43 45 50 8.50 9.50 
2002 32,874 32,874 39,754 33 33 40 10.50 11.50  31,679 32,874 37,774 32 33 38 10.50 11.50 
2001 22,303 22,303 28,263 22 22 28 10.50 11.50  21,593 22,303 27,003 21 22 27 10.50 11.50 
2000 14,142 14,142 19,282 14 14 19 11.50 12.50  13,744 14,142 18,542 14 14 19 11.50 12.50 
1999 4,094 4,094 6,368 4 4 6 10.30 11.30  3,961 4,094 6,094 4 4 6 10.30 11.30 
1998 563 563 1,953 1 1 2 10.75 11.75  539 563 1,863 1 1 2 10.75 11.75 
1997 — — 136 — — — 9.50 10.50  — — 130 — — — 9.50 10.50 
                          

Total ESOP Preferred Stock

 740,158 383,804 634,426 $740 $384 $634  544,735 383,804 465,006 $545 $384 $465 
                            

Unearned ESOP shares (2)

 $(792) $(411) $(679)  $(583) $(411) $(498) 
              
 
(1) Liquidation preference $1,000. At March 31,September 30, 2007, December 31, 2006, and March 31,September 30, 2006, additional paid-in capital included $52$38 million, $27 million and $45$33 million, respectively, related to preferred stock.
(2) In accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6,Employers’ Accounting for Employee Stock Ownership Plans, we recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released.

4147

10. EMPLOYEE BENEFITS
We sponsor noncontributory qualified defined benefit retirement plans including the Cash Balance Plan. The Cash Balance Plan is an active plan that covers eligible employees (except employees of certain subsidiaries).
We are not planning to make, nor do notwe expect that we will be required to make, a minimum contribution in 2007 for the Cash Balance Plan. The maximum we can contribute in 2007 forto the Cash Balance Plan depends on several factors, including the finalization of participant data. Our decision on how much to contribute, if any, depends on other factors, including the actual investment performance of plan assets. Given these uncertainties, we cannot at this time reliably estimate the maximum deductible contribution or the amount that we will contribute in 2007, tobecause the Cash Balance Plan.Plan is well funded.
The net periodic benefit cost for first quarter 2007 and 2006 was:
                        
 
 Quarter ended March 31,                        
 2007 2006   
 Pension benefits Pension benefits    Pension benefits Pension benefits 
 Non- Other Non- Other  Non- Other Non- Other 
(in millions) Qualified qualified benefits Qualified qualified benefits  Qualified qualified benefits Qualified qualified benefits 

Quarter ended September 30,

 2007
 2006
    

Service cost

 $70 $4 $4 $62 $4 $4  $71 $4 $4 $62 $4 $4 
Interest cost 61 4 10 56 4 10  60 4 10 56 4 10 
Expected return on plan assets  (113) —  (9)  (105) —  (8)  (112) —  (9)  (105) —  (8)
Amortization of net actuarial loss (1) 8 3 1 14 2 2  8 4 1 14 2 1 
Amortization of prior service cost — —  (1) — —  (1) —  (1)  (1) — —  (1)
                          
Net periodic benefit cost $26 $11 $5 $27 $10 $7  $27 $11 $5 $27 $10 $6 
                          

Nine months ended September 30,

 

Service cost

 $211 $12 $12 $186 $12 $12 
Interest cost 182 12 30 168 12 30 
Expected return on plan assets  (337) —  (27)  (315) —  (24)
Amortization of net actuarial loss (1) 24 10 4 42 6 4 
Amortization of prior service cost —  (2)  (3) — —  (3)
Special termination benefits — — — 2 — — 
Curtailment gain — — — — —  (9)
             
Net periodic benefit cost $80 $32 $16 $83 $30 $10 
             
 
(1) Net actuarial loss is generally amortized over five years.

4248

11. INCOME TAXES
On January 1, 2007, we adopted FIN 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. Implementation of FIN 48 did not result in a cumulative effect adjustment to retained earnings at the date of adoption. At January 1, 2007, the total amount of unrecognized tax benefits was $3.1 billion, of which $1.7 billion was related to tax benefits that, if recognized, would impact the annual effective tax rate. We recognize both interest and penalties as a component of income tax expense. The liability for unrecognized tax benefits included $262 million of interest and no penalties. It is reasonably possible that the total unrecognized tax benefit as of January 1, 2007, could decrease by an estimated $380 million by December 31, 2007, as a result of expiration of statutes of limitations and potential settlements with federal and state taxing authorities. It is also reasonably possible that this benefit could be substantially offset by new matters arising during the same period. The Company files a consolidatedWe are subject to U.S. federal income tax return and the Company and its subsidiaries fileas well as income tax returns in variousnumerous state and foreign jurisdictions. With few exceptions, we are not subject to federal orincome tax examinations for taxable years prior to 2005, foreign income tax examinations for taxable years prior to 2003, or state and local income tax examinations prior to 2002.
We expect that the adoption of FIN 48 will result in increased volatility in our quarterly and annual effective income tax rate because FIN 48 requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the period in which it occurs. The effective tax rate inIn first quarter 2007 income tax expense was impactedreduced by a $119 million net reduction to income tax expense. The net decrease, including refund interest, was primarily due to the resolution during the quarter of certain outstanding federal income tax matters for periods prior to 2002. Income tax expense was increased in second and third quarter 2007 by $4 million and $10 million, respectively, due to various discrete events.

4349

12. EARNINGS PER COMMON SHARE
The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations.
                
          
  Quarter Nine months 
 Quarter ended March 31, ended September 30, ended September 30,
(in millions, except per share amounts) 2007 2006  2007 2006 2007 2006 
 

Net income (numerator)

 $2,244 $2,018  $2,283 $2,194 $6,806 $6,301 
              

EARNINGS PER COMMON SHARE

  
Average common shares outstanding (denominator) 3,376.0 3,358.3  3,339.6 3,371.9 3,355.5 3,364.6 
              

Per share

 $0.66 $0.60  $0.69 $0.65 $2.03 $1.87 
              

DILUTED EARNINGS PER COMMON SHARE

  
Average common shares outstanding 3,376.0 3,358.3  3,339.6 3,371.9 3,355.5 3,364.6 
Add: Stock options 40.0 37.3  34.3 44.0 37.3 40.8 
Restricted share rights 0.1 0.1  0.1 0.1 0.1 0.1 
              
Diluted average common shares outstanding (denominator) 3,416.1 3,395.7  3,374.0 3,416.0 3,392.9 3,405.5 
              

Per share

 $0.66 $0.60  $0.68 $0.64 $2.01 $1.85 
              
 
At March 31,September 30, 2007 and 2006, options to purchase 6.18.9 million and 39.24.4 million shares, respectively, were outstanding but not included in the calculation of diluted earnings per common share because the exercise price was higher than the market price, and therefore they were antidilutive.

4450

13. OPERATING SEGMENTS
We have three lines of business for management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial. The results for these lines of business are based on our management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and, unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. We define our operating segments by product type and customer segments. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change. To reflect a change in the allocation of income taxes for management reporting adopted in second quarter 2007, results for prior periods have been revised.
The Community Banking Groupoffers a complete line of diversified financial products and services to consumers and small businesses with annual sales generally up to $20 million in which the owner generally is the financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, securities brokerage through affiliates and venture capital financing. These products and services include theWells Fargo Advantage FundsSM, a family of mutual funds, as well as personal trust and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation (recreational vehicle and marine) loans, education loans, origination and purchase of residential mortgage loans and servicing of mortgage loans and credit cards. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, venture capital financing, cash management, payroll services, retirement plans, Health Savings Accounts and credit and debit cardmerchant payment processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs), time deposits and debit cards.
Community Banking serves customers through a wide range of channels, which include traditional banking stores, in-store banking centers, business centers and ATMs. Also,Phone BankSM centers and the National Business Banking Center provide 24-hour telephone service. Online banking services include single sign-on to online banking, bill pay and brokerage, as well as online banking for small business.
The Wholesale Banking Groupserves businesses across the United States with annual sales generally in excess of $10 million. Wholesale Banking provides a complete line of commercial, corporate and real estate banking products and services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high-yield debt, international trade facilities, foreign exchange services, treasury management, investment management, institutional fixed income and equity sales, interest rate, commodity and equity risk management, online/electronic products such as theCommercial Electronic Office® (CEO®) portal, insurance and investment banking services. Wholesale Banking manages and administers institutional investments, employee benefit trusts and mutual funds, including theWells Fargo Advantage Funds. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade Bank, which provides trade financing, letters of credit and

51

collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made

45

products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit, permanent loans for securitization, commercial real estate loan servicing and real estate and mortgage brokerage services.
Wells Fargo Financialincludes consumer finance and auto finance operations. Consumer finance operations make direct consumer and real estate loans to individuals and purchase sales finance contracts from retail merchants from offices throughout the United States, and in Canada and the Pacific Rim. Automobile finance operations specialize in purchasing sales finance contracts directly from automobile dealers and making loans secured by automobiles in the United States, Canada and Puerto Rico. Wells Fargo Financial also provides credit cards and lease and other commercial financing.
The Consolidated Companytotal of average assets includes unallocated goodwill balances held at the enterprise level.

52

                                                                
 
(income/expense in millions, Community Wholesale Wells Fargo Consolidated  Community Wholesale Wells Fargo Consolidated 
average balances in billions) Banking Banking Financial Company  Banking Banking Financial Company 
Quarter ended March 31, 2007 2006 2007 2006 2007 2006 2007 2006 
Quarter ended September 30,
 2007 2006 2007 2006 2007 2006 2007 2006 

Net interest income (1)

 $3,367 $3,292 $854 $751 $1,059 $1,004 $5,280 $5,047 
Provision for credit losses 446 236 19 — 427 377 892 613 
Noninterest income 3,110 2,492 1,149 1,033 314 362 4,573 3,887 
Noninterest expense 3,619 3,392 1,154 999 728 690 5,501 5,081 
                 
Income before income tax expense 2,412 2,156 830 785 218 299 3,460 3,240 
Income tax expense 807 663 287 275 83 108 1,177 1,046 
                 
Net income $1,605 $1,493 $543 $510 $135 $191 $2,283 $2,194 
                 

Average loans

 $197.4 $172.5 $87.5 $72.3 $65.8 $59.2 $350.7 $304.0 
Average assets (2) 348.2 326.7 115.8 97.5 71.7 64.7 541.5 494.7 
Average core deposits 250.6 233.1 55.5 36.5 — 0.1 306.1 269.7 

Nine months ended September 30,

 

Net interest income (1)

 $3,224 $3,256 $781 $680 $1,005 $934 $5,010 $4,870  $9,890 $9,869 $2,449 $2,137 $3,147 $2,895 $15,486 $14,901 
Provision (reversal of provision) for credit losses 306 189 13  (2) 396 246 715 433  1,105 612 33  (9) 1,189 875 2,327 1,478 
Noninterest income 2,847 2,143 1,265 1,096 319 446 4,431 3,685  8,988 7,033 3,750 3,214 961 1,130 13,699 11,377 
Noninterest expense 3,640 3,387 1,137 992 749 695 5,526 5,074  10,926 10,264 3,560 3,009 2,268 2,058 16,754 15,331 
                                  
Income before income tax expense 2,125 1,823 896 786 179 439 3,200 3,048  6,847 6,026 2,606 2,351  651 1,092 10,104 9,469 
Income tax expense 593 613 298 258 65 159 956 1,030  2,137 1,946 913 824 248 398 3,298 3,168 
                                  
Net income $1,532 $1,210 $598 $528 $114 $280 $2,244 $2,018  $4,710 $4,080 $1,693 $1,527 $403 $694 $6,806 $6,301 
                                  

Average loans

 $180.8 $190.4 $77.9 $67.6 $62.7 $53.1 $321.4 $311.1  $188.2 $178.8 $82.4 $70.1 $64.2 $56.2 $334.8 $305.1 
Average assets (2) 307.0 314.8 101.0 95.9 68.3 58.7 482.1 475.2  325.1 322.9 108.1 96.9 70.0 61.6 509.0 487.2 
Average core deposits 243.9 229.0 46.7 28.4 — 0.1 290.6 257.5  248.5 231.4 50.6 32.3 — 0.1 299.1 263.8 
 
(1) Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment. In general, Community Banking has excess liabilities and receives interest credits for the funding it provides to other segments.
(2) The Consolidated Company balance includes unallocated goodwill held at the enterprise level of $5.8 billion for both first quarter 2007 and 2006.all periods presented.

4653

14. VARIABLE INTEREST ENTITIES
We are a variable interest holder in certain special-purpose entities that are consolidated because we absorb a majority of each entity’s expected losses, receive a majority of each entity’s expected returns or both. We do not hold a majority voting interest in these entities. Our consolidated variable interest entities, substantially all of which were formed to invest in securities and to securitize real estate investment trust securities, had approximately $3.7$4.5 billion and $3.4 billion in total assets at March 31,September 30, 2007, and December 31, 2006, respectively. The primary activities of these entities consist of acquiring and disposing of, and investing and reinvesting in securities, and issuing beneficial interests secured by those securities to investors. The creditors of a majority of these consolidated entities have no recourse against us.
We also hold variable interests greater than 20% but less than 50% in certain special-purpose entities formed to provide affordable housing and to securitize corporate debt that had approximately $3.7$4.3 billion and $2.9 billion in total assets at March 31,September 30, 2007, and December 31, 2006, respectively. We are not required to consolidate these entities. Our maximum exposure to loss as a result of our involvement with these unconsolidated variable interest entities was approximately $1.2$1.7 billion and $980 million at March 31,September 30, 2007, and December 31, 2006, respectively, largelyprimarily representing investments in entities formed to invest in affordable housing. However, we expect to recover our investment over time, primarily through realization of federal low-income housing tax credits.

4754

15. MORTGAGE BANKING ACTIVITIES
Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations and servicing.
Effective January 1, 2006, upon adoption of FAS 156, we remeasured our residential mortgage servicing rights (MSRs) at fair value and recognized a pre-tax adjustment of $158 million to residential MSRs and recorded a corresponding cumulative effect adjustment of $101 million (after tax) to increase the 2006 beginning balance of retained earnings in stockholders’ equity.
The changes in residential MSRs measured using the fair value method were:
                        
   
 Quarter ended March 31, Quarter ended Sept. 30, Nine months ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
   

Fair value, beginning of quarter

 $17,591 $12,547 

Fair value, beginning of period

 $18,733 $15,650 $17,591 $12,547 
Purchases 159 219  188 2,907 489 3,637 
Servicing from securitizations or asset transfers 828 989  951 965 2,808 3,264 
Sales  (292) —  (1,714) — 
         
Net additions 847 3,872 1,583 6,901 

Changes in fair value:

  
Due to change in valuation model inputs or assumptions (1)  (11) 522 
Due to changes in valuation model inputs or assumptions (1)  (638)  (1,147) 1,364  (75)
Other changes in fair value (2)  (788)  (477)  (719)  (663)  (2,315)  (1,661)
              

Fair value, end of quarter

 $17,779 $13,800 
Total changes in fair value  (1,357)  (1,810)  (951)  (1,736)
         

Fair value, end of period

 $18,223 $17,712 $18,223 $17,712 
              
 
(1) Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.
The changes in amortized MSRs were:
                        
   
 Quarter ended March 31, Quarter ended Sept. 30, Nine months ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
   

Balance, beginning of quarter

 $377 $122 

Balance, beginning of period

 $418 $175 $377 $122 
Purchases (1) 29 25  46 161 101 225 
Servicing from securitizations or asset transfers (1) 10 —  12 2 33 2 
Amortization  (16)  (5)  (16)  (10)  (51)  (21)
              
Balance, end of quarter (2) $400 $142 
Balance, end of period (2) $460 $328 $460 $328 
              

Fair value of amortized MSRs:

  
Beginning of quarter $457 $146 
End of quarter 484 205 
Beginning of period $561 $252 $457 $146 
End of period 602 440 602 440 
   
(1) Based on March 31,September 30, 2007, assumptions, the weighted-average amortization period for MSRs added during the third quarter and first nine months of 2007 was approximately 11.7 years.10.2 years and 10.7 years, respectively.
(2) There was no valuation allowance recorded for the periods presented.

4855

The components of our managed servicing portfolio were:
                
   
 March 31, September 30,
(in billions) 2007 2006  2007 2006 
   

Loans serviced for others (1)

 $1,309 $931  $1,380 $1,235 
Owned loans serviced (2) 88 110  97 90 
          
Total owned servicing 1,397 1,041  1,477 1,325 
Sub-servicing 26 25  22 20 
          
Total managed servicing portfolio $1,423 $1,066  $1,499 $1,345 
          
Ratio of MSRs to related loans serviced for others  1.39%  1.50%  1.35%  1.46%
   
(1) Consists of 1-4 family first mortgage and commercial mortgage loans.
(2) Consists of mortgages held for sale and 1-4 family first mortgage loans.
The components of mortgage banking noninterest income were:
                        
   
 Quarter ended March 31, Quarter ended Sept. 30, Nine months ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
   

Servicing income, net:

  
Servicing fees (1) $1,054 $747  $970 $947 $3,031 $2,514 
Changes in fair value of residential MSRs:  
Due to changes in valuation model inputs or assumptions (2)  (11) 522   (638)  (1,147) 1,364  (75)
Other changes in fair value (3)  (788)  (477)  (719)  (663)  (2,315)  (1,661)
         
Total changes in fair value of residential MSRs  (1,357)  (1,810)  (951)  (1,736)
Amortization  (16)  (5)  (16)  (10)  (51)  (21)
Net derivative losses from economic hedges (4)  (23)  (706)
Net derivative gains (losses) from economic hedges (4) 1,200 1,061  (1,061)  (178)
              
Total servicing income, net 216 81  797 188 968 579 
Net gains on mortgage loan origination/sales activities 495 273 

Net gains (losses) on mortgage loan origination/sales activities

  (61) 179 1,069 811 
All other 79 61  87 117 265 244 
              
Total mortgage banking noninterest income $790 $415  $823 $484 $2,302 $1,634 
              

Market-related valuation changes to MSRs, net of hedge results (2) + (4)

 $(34) $(184) $562 $(86) $303 $(253)
              
   
(1) Includes contractually specified servicing fees, late charges and other ancillary revenues.
(2) Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.
(3) Represents changes due to collection/realization of expected cash flows over time.
(4) Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 20 — Free-Standing Derivatives for additional discussion and detail.

4956

16. FAIR VALUES OF ASSETS AND LIABILITIES
Effective January 1, 2007, upon adoption of FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,we elected to measure mortgages held for sale (MHFS) at fair value prospectively for new prime residential MHFS originations for which an active secondary market and readily available market prices currently exist to reliably support fair value pricing models used for these loans. We also elected to remeasure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe the election for 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. There was no transition adjustment required upon adoption of FAS 159 for MHFS because we continued to account for MHFS originated prior to 2007 at the lower of cost or market value. At December 31, 2006, the book value of other interests held was equal to fair value and, therefore, a transition adjustment was not required. Upon adoption of FAS 159, we were also required to adopt FAS 157,Fair Value Measurements.
In accordance with FAS 157, we group our financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
 • Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury other U.S. government and federal agency securities and federal agency mortgage-backed securities, thatwhich are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
 
 • Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. For example, substantially all of our MHFS are valued based on what securitization markets are currently offering for mortgage loans with similar characteristics. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
 
 • Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

5057

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
                 
  
  March 31, 2007 
(in millions) Total  Level 1  Level 2  Level 3 
  

Trading assets

 $6,525  $1,572  $4,599  $354 
Securities available for sale  45,443   32,412   10,223   2,808 
Mortgages held for sale  25,692   —   25,692   — 
Mortgage servicing rights (residential)  17,779   —   —   17,779 
Other assets  538   470   58   10 
             
Total $95,977  $34,454  $40,572  $20,951 
             

Other liabilities (1)

 $(3,056) $(1,285) $(1,460) $(311)
             
  
(1)Derivatives represent a major portion of this category.
                 
  
  September 30, 2007 
(in millions) Total  Level 1  Level 2  Level 3 
  

Trading assets

 $7,298  $1,403  $5,385  $510 
Securities available for sale  57,440   32,734   20,969   3,737 
Mortgages held for sale  26,714   —   26,636   78 
Mortgage servicing rights (residential)  18,223   —   —   18,223 
Other assets  1,060   791   249   20 
             
Total $110,735  $34,928  $53,239  $22,568 
             

Other liabilities

 $(3,079) $(1,936) $(822) $(321)
             
  
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
                    
                         
 Quarter ended March 31, 2007   
 Trading Mortgage Other  Trading Mortgage Net Other 
 assets Securities servicing Net derivative liabilities  assets Securities Mortgages servicing derivative liabilities 
 (excluding available rights assets and (excluding  (excluding available held for rights assets and (excluding 
(in millions) derivatives) for sale (residential) liabilities derivatives)  derivatives) for sale sale (residential) liabilities derivatives) 
   

Quarter ended September 30, 2007

 

Balance, beginning of quarter

 $360 $3,447 $17,591 $(68) $(282) $466 $2,014 $— $18,733 $(79) $(277)

Total net gains (losses) included in net income

  (41) —  (799) 17  (6)

Total net gains (losses) for the quarter included in:

 
Net income  (52) —  (1)  (1,357) 124  (19)
Other comprehensive income —  (8) — — — — 
Purchases, sales, issuances and settlements, net 34  (639) 987 — 39  96 1,731 16 847  (71) 21 
Net transfers into/out of Level 3 — —  63(3) — — — 
                        
Balance, end of quarter $353 $2,808 $17,779 $(51) $(249) $510 $3,737 $78 $18,223 $(26) $(275)
                        

Net losses included in net income relating to assets held at March 31, 2007 (1)

 $(25)(2) $— $(10)(3) $(43)(2) $(6)(3)

Net unrealized losses included in net income for the quarter relating to assets and liabilities held at September 30, 2007 (1)

 $(37)(2) $— $(1)(4) $(603)(4)(5) $(17)(4) $(20)(4)
             

Nine months ended September 30, 2007

 
Balance, beginning of period $360 $3,447 $— $17,591 $(68) $(282)

Total net losses for the period included in:

 
Net income  (31) —  (1)  (951)  (259)  (47)
Other comprehensive income —  (8) — — — — 
Purchases, sales, issuances and settlements, net 181 298 16 1,583 297 54 
Net transfers into/out of Level 3 — —  63(3) — 4 — 
             
Balance, end of period $510 $3,737 $78 $18,223 $(26) $(275)
             

Net unrealized gains (losses) included in net income for the period relating to assets and liabilities held at September 30, 2007 (1)

 $15(2) $— $(1)(4) $1,341(4)(5) $(22)(4) $(48)(4)
                        
   
(1) Represents only net lossesgains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
(2) Included in other noninterest income in the income statement.
(3) Represents loans previously classified as Level 2 that became unsaleable during third quarter 2007; therefore the fair value measurement was derived from discounted cash flow models using unobservable inputs and assumptions.
(4)Included in mortgage banking in the income statement.
(5)Represents total unrealized losses of $638 million, net of losses of $35 million related to sales, for third quarter 2007, and total unrealized gains of $1,364 million, net of gains of $23 million related to sales, for the first nine months of 2007.

5158

Also, we may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in the first quarternine months of 2007 that were still held in the balance sheet at quarter end,September 30, 2007, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at quarter end.September 30, 2007.
                                        
 
 Quarter ended  Nine months ended 
 March 31, 2007  September 30, 2007 
 Carrying value at March 31, 2007 Total  Carrying value at September 30, 2007 Total 
(in millions) Total Level 1 Level 2 Level 3 losses  Total Level 1 Level 2 Level 3 losses 
 

Mortgages held for sale

 $5,023 $— $5,023 $— $(66) $2,984 $— $2,984 $— $(131)
Loans held for sale 668 — 668 —  (20)
Loans (1) 592 — 592 —  (575) 602 — 583 19  (2,134)
Private equity investments 3 — — 3  (5) 37 — — 37  (31)
Foreclosed assets (2) 225 — 225 —  (89) 362 — 362 —  (142)
Operating lease assets 46 — 46 —  (2)
      
 $(735) $(2,460)
      
 
(1) Represents carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral. The carrying value of loans fully charged-off, the majority of which are auto loans and unsecured lines and loans, is zero.
(2) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.
Fair Value Option
The following table reflects the differences between the fair value carrying amount of mortgages held for sale measured at fair value under FAS 159 and the aggregate unpaid principal amount we are contractually entitled to receive at maturity.
            
             
 March 31, 2007 
 Excess of fair  September 30, 2007 
 value carrying  Fair value 
 Aggregate amount over  Aggregate carrying amount 
 Fair value unpaid (under) unpaid  Fair value unpaid less aggregate 
(in millions) carrying amount principal principal  carrying amount principal unpaid principal 
 

Mortgages held for sale reported at fair value:

  
Total loans $25,692 $25,417 $275(1) $26,714 $26,403 $311(1)
Nonaccrual loans 30 35  (5) 21 29  (8)
Loans 90 days or more past due and still accruing 5 5 —  11 11 — 
 
(1) The excess ofdifference between fair value carrying amount overand aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on the related loan commitment prior to funding, and premiums on acquired loans.

5259

The assets accounted for under FAS 159 are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The changes in fair values related to initial measurement and subsequent changes in fair value that are included in current period earnings for these assets measured at fair value are shown, by income statement line item, below.
                
        
  September 30, 2007 
 Quarter ended March 31, 2007  Quarter ended Nine months ended 
 Other  Mortgages Other Mortgages Other 
 Mortgages interests  held interests held interests 
(in millions) held for sale held  for sale held for sale held 
 

Changes in fair value included in net income:

  
Mortgage banking noninterest income:  
Net gains on mortgage loan origination/sales activities $229 $— 
Net gains on mortgage loan origination/sales activities (1) $355 $— $477 $— 
Other noninterest income —  (41) —  (52) —  (32)
 
(1)Includes changes in fair value of servicing associated with mortgage loans held for sale.
Interest income on mortgages held for sale measured at fair value is calculated based on the note rate of the loan and is recorded in interest income in the income statement.

5360

17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Following are the condensed consolidating financial statements of the Parent and Wells Fargo Financial Inc. and its wholly-owned subsidiaries (WFFI). The Wells Fargo Financial business segment for management reporting (see Note 13) consists of WFFI and other affiliated consumer finance entities managed by WFFI that are included within other consolidating subsidiaries in the following tables.
Condensed Consolidating Statement of Income
                                        
   
 Quarter ended March 31, 2007  Quarter ended September 30, 2007 
 Other    Other   
 consolidating Consolidated  consolidating Consolidated 
(in millions) Parent WFFI subsidiaries Eliminations Company  Parent WFFI subsidiaries Eliminations Company 
 

Dividends from subsidiaries:

  
Bank $1,558 $— $— $(1,558) $—  $418 $— $— $(418) $— 
Nonbank 4 — —  (4) —  18 — —  (18) — 
Interest income from loans — 1,354 5,421  (11) 6,764  — 1,431 6,058  (12) 7,477 
Interest income from subsidiaries 852 — —  (852) —  1,002 — —  (1,002) — 
Other interest income 34 26 1,317  (2) 1,375  38 29 1,681  (2) 1,746 
                      
Total interest income 2,448 1,380 6,738  (2,427) 8,139  1,476 1,460 7,739  (1,452) 9,223 
                      

Deposits

 — — 2,060  (203) 1,857  — — 2,397  (179) 2,218 
Short-term borrowings 59 110 218  (251) 136  152 120 531  (339) 464 
Long-term debt 897 453 197  (411) 1,136  1,007 491 261  (498) 1,261 
                      
Total interest expense 956 563 2,475  (865) 3,129  1,159 611 3,189  (1,016) 3,943 
                      

NET INTEREST INCOME

 1,492 817 4,263  (1,562) 5,010  317 849 4,550  (436) 5,280 
Provision for credit losses — 282 433 — 715  — 250 642 — 892 
                      
Net interest income after provision for credit losses 1,492 535 3,830  (1,562) 4,295  317 599 3,908  (436) 4,388 
                      

NONINTEREST INCOME

  
Fee income — nonaffiliates — 80 2,317 — 2,397  — 105 2,636 — 2,741 
Other 31 77 1,938  (12) 2,034   (7) 31 2,917  (1,109) 1,832 
                      
Total noninterest income 31 157 4,255  (12) 4,431   (7) 136 5,553  (1,109) 4,573 
                      

NONINTEREST EXPENSE

  
Salaries and benefits 4 307 2,963 — 3,274   (9) 293 2,969 — 3,253 
Other 20 312 1,932  (12) 2,252  19 263 3,075  (1,109) 2,248 
                      
Total noninterest expense 24 619 4,895  (12) 5,526  10 556 6,044  (1,109) 5,501 
                      

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES

 1,499 73 3,190  (1,562) 3,200  300 179 3,417  (436) 3,460 
Income tax expense (benefit)  (11) 34 933 — 956   (98) 55 1,220 — 1,177 
Equity in undistributed income of subsidiaries 734 — —  (734) —  1,885 — —  (1,885) — 
                      

NET INCOME

 $2,244 $39 $2,257 $(2,296) $2,244  $2,283 $124 $2,197 $(2,321) $2,283 
                      
 

5461

Condensed Consolidating Statement of Income
                                        
   
 Quarter ended March 31, 2006  Quarter ended September 30, 2006 
 Other    Other   
 consolidating Consolidated  consolidating Consolidated 
(in millions) Parent WFFI subsidiaries Eliminations Company  Parent WFFI subsidiaries Eliminations Company 
 

Dividends from subsidiaries:

  
Bank $595 $— $— $(595) $—  $637 $— $— $(637) $— 
Nonbank 5 — —  (5) —  45 — —  (45) — 
Interest income from loans — 1,290 4,829  (9) 6,110  — 1,336 5,231  (12) 6,555 
Interest income from subsidiaries 754 — —  (754) —  862 — —  (862) — 
Other interest income 28 23 1,371 — 1,422  27 26 1,794  (3) 1,844 
                      
Total interest income 1,382 1,313 6,200  (1,363) 7,532  1,571 1,362 7,025  (1,559) 8,399 
                      

Deposits

 — — 1,482 — 1,482  — — 1,997 — 1,997 
Short-term borrowings 109 94 272  (205) 270  139 96 288  (252) 271 
Long-term debt 706 408 147  (351) 910  834 457 180  (387) 1,084 
                      
Total interest expense 815 502 1,901  (556) 2,662  973 553 2,465  (639) 3,352 
                      

NET INTEREST INCOME

 567 811 4,299  (807) 4,870  598 809 4,560  (920) 5,047 
Provision for credit losses — 272 161 — 433  — 362 251 — 613 
                      
Net interest income after provision for credit losses 567 539 4,138  (807) 4,437  598 447 4,309  (920) 4,434 
                      

NONINTEREST INCOME

  
Fee income — nonaffiliates — 64 2,094 — 2,158  — 76 2,268 — 2,344 
Other  (23) 66 1,499  (15) 1,527  85 48 1,417  (7) 1,543 
                      
Total noninterest income  (23) 130 3,593  (15) 3,685  85 124 3,685  (7) 3,887 
                      

NONINTEREST EXPENSE

  
Salaries and benefits 33 285 2,611 — 2,929  5 280 2,652 — 2,937 
Other  (2) 211 2,158  (222) 2,145  13 217 2,159  (245) 2,144 
                      
Total noninterest expense 31 496 4,769  (222) 5,074  18 497 4,811  (245) 5,081 
                      

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES

 513 173 2,962  (600) 3,048  665 74 3,183  (682) 3,240 
Income tax expense (benefit)  (34) 64 1,000 — 1,030   (54) 27 1,073 — 1,046 
Equity in undistributed income of subsidiaries 1,471 — —  (1,471) —  1,475 — —  (1,475) — 
                      

NET INCOME

 $2,018 $109 $1,962 $(2,071) $2,018  $2,194 $47 $2,110 $(2,157) $2,194 
                      
 

5562

Condensed Consolidating Statement of Income
                     
  
  Nine months ended September 30, 2007 
          Other        
          consolidating      Consolidated 
(in millions) Parent  WFFI  subsidiaries  Eliminations  Company 
  

Dividends from subsidiaries:

                    
Bank $3,684  $—  $—  $(3,684) $— 
Nonbank  22   —   —   (22)  — 
Interest income from loans  —   4,226   17,149   (34)  21,341 
Interest income from subsidiaries  2,723   —   —   (2,723)  — 
Other interest income  105   81   4,413   (5)  4,594 
                
Total interest income  6,534   4,307   21,562   (6,468)  25,935 
                

Deposits

  —   —   6,488   (472)  6,016 
Short-term borrowings  291   346   1,183   (955)  865 
Long-term debt  2,826   1,405   672   (1,335)  3,568 
                
Total interest expense  3,117   1,751   8,343   (2,762)  10,449 
                

NET INTEREST INCOME

  3,417   2,556   13,219   (3,706)  15,486 
Provision for credit losses  —   448   1,879   —   2,327 
                
Net interest income after provision for credit losses  3,417   2,108   11,340   (3,706)  13,159 
                

NONINTEREST INCOME

                    
Fee income — nonaffiliates  —   276   7,596   —   7,872 
Other  120   108   6,732   (1,133)  5,827 
                
Total noninterest income  120   384   14,328   (1,133)  13,699 
                

NONINTEREST EXPENSE

                    
Salaries and benefits  49   918   8,948   —   9,915 
Other  77   828   7,067   (1,133)  6,839 
                
Total noninterest expense  126   1,746   16,015   (1,133)  16,754 
                

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES

  3,411   746   9,653   (3,706)  10,104 
Income tax expense (benefit)  (141)  267   3,172   —   3,298 
Equity in undistributed income of subsidiaries  3,254   —   —   (3,254)  — 
                

NET INCOME

 $6,806  $479  $6,481  $(6,960) $6,806 
                
  

63

Condensed Consolidating Statement of Income
                     
  
  Nine months ended September 30, 2006 
          Other        
          consolidating      Consolidated 
(in millions) Parent  WFFI  subsidiaries  Eliminations  Company 
  

Dividends from subsidiaries:

                    
Bank $1,472  $—  $—  $(1,472) $— 
Nonbank  218   —   —   (218)  — 
Interest income from loans  —   3,933   15,007   (30)  18,910 
Interest income from subsidiaries  2,430   —   —   (2,430)  — 
Other interest income  79   76   4,946   (3)  5,098 
                
Total interest income  4,199   4,009   19,953   (4,153)  24,008 
                

Deposits

  —   —   5,273   —   5,273 
Short-term borrowings  349   274   888   (681)  830 
Long-term debt  2,333   1,310   473   (1,112)  3,004 
                
Total interest expense  2,682   1,584   6,634   (1,793)  9,107 
                

NET INTEREST INCOME

  1,517   2,425   13,319   (2,360)  14,901 
Provision for credit losses  —   689   789   —   1,478 
                
Net interest income after provision for credit losses  1,517   1,736   12,530   (2,360)  13,423 
                

NONINTEREST INCOME

                    
Fee income — nonaffiliates  —   206   6,564   —   6,770 
Other  58   171   4,413   (35)  4,607 
                
Total noninterest income  58   377   10,977   (35)  11,377 
                

NONINTEREST EXPENSE

                    
Salaries and benefits  57   817   7,947   —   8,821 
Other  (4)  653   6,566   (705)  6,510 
                
Total noninterest expense  53   1,470   14,513   (705)  15,331 
                

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES

  1,522   643   8,994   (1,690)  9,469 
Income tax expense (benefit)  (114)  228   3,054   —   3,168 
Equity in undistributed income of subsidiaries  4,665   —   —   (4,665)  — 
                

NET INCOME

 $6,301  $415  $5,940  $(6,355) $6,301 
                
  

64

Condensed Consolidating Balance Sheet
                                        
   
 March 31, 2007  September 30, 2007 
 Other    Other   
 consolidating Consolidated  consolidating Consolidated 
(in millions) Parent WFFI subsidiaries Eliminations Company  Parent WFFI subsidiaries Eliminations Company 
 

ASSETS

  
Cash and cash equivalents due from:  
Subsidiary banks $15,900 $308 $— $(16,208) $—  $8,358 $194 $— $(8,552) $— 
Nonaffiliates 79 116 16,958 — 17,153  — 284 16,462 — 16,746 
Securities available for sale 866 1,821 42,762  (6) 45,443  2,531 2,076 52,839  (6) 57,440 
Mortgages and loans held for sale — — 33,115 — 33,115  — — 30,710 — 30,710 

Loans

 — 47,473 278,372  (358) 325,487  — 50,405 320,896  (8,379) 362,922 
Loans to subsidiaries:  
Bank 3,400 — —  (3,400) —  11,400 — —  (11,400) — 
Nonbank 48,565 543 —  (49,108) —  51,253 — —  (51,253) — 
Allowance for loan losses —  (1,204)  (2,568) —  (3,772) —  (846)  (2,983) —  (3,829)
                      
Net loans 51,965 46,812 275,804  (52,866) 321,715  62,653 49,559 317,913  (71,032) 359,093 
                      
Investments in subsidiaries:  
Bank 43,591 — —  (43,591) —  47,165 — —  (47,165) — 
Nonbank 4,847 — —  (4,847) —  5,775 — —  (5,775) — 
Other assets 6,926 1,694 61,497  (1,642) 68,475  7,108 1,724 79,149  (3,243) 84,738 
                      

Total assets

 $124,174 $50,751 $430,136 $(119,160) $485,901  $133,590 $53,837 $497,073 $(135,773) $548,727 
                      
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
Deposits $— $— $327,365 $(16,208) $311,157  $— $— $343,508 $(8,552) $334,956 
Short-term borrowings 20 8,314 18,725  (13,878) 13,181  33 8,660 58,185  (25,149) 41,729 
Accrued expenses and other liabilities 3,993 1,507 21,634  (2,033) 25,101  5,035 1,470 25,472  (3,265) 28,712 
Long-term debt 68,591 37,940 17,115  (33,319) 90,327  72,025 40,424 20,406  (37,263) 95,592 
Indebtedness to subsidiaries 5,435 — —  (5,435) —  8,759 — —  (8,759) — 
                      
Total liabilities 78,039 47,761 384,839  (70,873) 439,766  85,852 50,554 447,571  (82,988) 500,989 
Stockholders’ equity 46,135 2,990 45,297  (48,287) 46,135  47,738 3,283 49,502  (52,785) 47,738 
                      

Total liabilities and stockholders’ equity

 $124,174 $50,751 $430,136 $(119,160) $485,901  $133,590 $53,837 $497,073 $(135,773) $548,727 
                      
 

5665

Condensed Consolidating Balance Sheet
                                        
   
 March 31, 2006  September 30, 2006 
 Other    Other   
 consolidating Consolidated  consolidating Consolidated 
(in millions) Parent WFFI subsidiaries Eliminations Company  Parent WFFI subsidiaries Eliminations Company 
 

ASSETS

  
Cash and cash equivalents due from:  
Subsidiary banks $15,366 $196 $14 $(15,576) $—  $11,879 $232 $— $(12,111) $— 
Nonaffiliates 75 273 17,830 — 18,178  77 195 16,398 — 16,670 
Securities available for sale 847 1,768 48,586  (6) 51,195  986 1,798 49,857  (6) 52,635 
Mortgages and loans held for sale — 25 44,125 — 44,150  — 29 40,501 — 40,530 

Loans

 1 46,026 261,535  (886) 306,676  — 47,174 261,213  (896) 307,491 
Loans to subsidiaries:  
Bank 3,400 — —  (3,400) —  3,400 — —  (3,400) — 
Nonbank 45,118 330 —  (45,448) —  46,369 63 —  (46,432) — 
Allowance for loan losses —  (1,326)  (2,519) —  (3,845) —  (1,147)  (2,652) —  (3,799)
                      
Net loans 48,519 45,030 259,016  (49,734) 302,831  49,769 46,090 258,561  (50,728) 303,692 
                      
Investments in subsidiaries:  
Bank 38,451 — —  (38,451) —  41,335 — —  (41,335) — 
Nonbank 4,595 — —  (4,595) —  5,168 — —  (5,168) — 
Other assets 7,100 1,290 68,908  (1,224) 76,074  5,817 1,456 64,148  (1,507) 69,914 
                      

Total assets

 $114,953 $48,582 $438,479 $(109,586) $492,428  $115,031 $49,800 $429,465 $(110,855) $483,441 
                      

LIABILITIES AND STOCKHOLDERS’ EQUITY

  
Deposits $— $— $323,880 $(15,575) $308,305  $— $— $326,430 $(12,111) $314,319 
Short-term borrowings 68 7,476 25,717  (11,911) 21,350  18 7,909 19,072  (13,199) 13,800 
Accrued expenses and other liabilities 3,310 1,158 33,836  (1,992) 36,312  3,359 1,018 24,038  (2,046) 26,369 
Long-term debt 65,230 37,343 14,707  (32,780) 84,500  61,817 37,944 16,447  (32,117) 84,091 
Indebtedness to subsidiaries 4,384 — —  (4,384) —  4,975 — —  (4,975) — 
                      
Total liabilities 72,992 45,977 398,140  (66,642) 450,467  70,169 46,871 385,987  (64,448) 438,579 
Stockholders’ equity 41,961 2,605 40,339  (42,944) 41,961  44,862 2,929 43,478  (46,407) 44,862 
                      

Total liabilities and stockholders’ equity

 $114,953 $48,582 $438,479 $(109,586) $492,428  $115,031 $49,800 $429,465 $(110,855) $483,441 
                      
 

5766

Condensed Consolidating Statement of Cash Flows
                                
   
 Quarter ended March 31, 2007  Nine months ended September 30, 2007 
 Other    Other   
 consolidating    consolidating   
 subsidiaries/ Consolidated  subsidiaries/ Consolidated 
(in millions) Parent WFFI eliminations Company  Parent WFFI eliminations Company 
 

Cash flows from operating activities:

  
Net cash provided by operating activities $754 $511 $4,406 $5,671 
Net cash provided (used) by operating activities $2,970 $1,133 $(410) $3,693 
                  

Cash flows from investing activities:

  
Securities available for sale:  
Sales proceeds 115 107 4,323 4,545  1,836 400 35,061 37,297 
Prepayments and maturities — 77 2,167 2,244  — 266 6,602 6,868 
Purchases  (52)  (276)  (9,185)  (9,513)  (2,800)  (998)  (50,394)  (54,192)
Loans:  
Increase in banking subsidiaries’ loan originations, net of collections —  (414)  (6,953)  (7,367) —  (1,849)  (32,171)  (34,020)
Proceeds from sales (including participations) of loans by banking subsidiaries — — 983 983  — — 2,611 2,611 
Purchases (including participations) of loans by banking subsidiaries — —  (1,068)  (1,068) — —  (7,543)  (7,543)
Principal collected on nonbank entities’ loans — 4,570 1,004 5,574  — 14,512 1,949 16,461 
Loans originated by nonbank entities —  (4,734)  (1,209)  (5,943) —  (15,960)  (3,230)  (19,190)
Net repayments from (advances to) nonbank entities  (518) — 518 — 
Net repayments from (advances to) subsidiaries  (9,143) — 9,143 — 
Capital notes and term loans made to subsidiaries  (1,933) — 1,933 —   (8,608) — 8,608 — 
Principal collected on notes/loans made to subsidiaries 1,900 —  (1,900) —  6,512 —  (6,512) — 
Net decrease (increase) in investment in subsidiaries  (71) — 71 —   (1,138) — 1,138 — 
Net cash paid for acquisitions — —  (2,862)  (2,862)
Other, net —  (11) 66 55  —  (706)  (4,120)  (4,826)
                  
Net cash used by investing activities  (559)  (681)  (9,250)  (10,490)  (13,341)  (4,335)  (41,720)  (59,396)
                  

Cash flows from financing activities:

  
Net change in:  
Deposits — — 914 914  — — 22,954 22,954 
Short-term borrowings 446 606  (700) 352  2,924 2,112 23,724 28,760 
Long-term debt:  
Proceeds from issuance 9,235 1,500  (1,199) 9,536  18,254 9,435  (5,120) 22,569 
Repayment  (6,019)  (2,049) 1,712  (6,356)  (10,688)  (8,347) 4,189  (14,846)
Common stock:  
Proceeds from issuance 448 — — 448  1,531 — — 1,531 
Repurchased  (1,631) — —  (1,631)  (4,765) — —  (4,765)
Cash dividends paid  (948) — —  (948)  (2,919) — —  (2,919)
Excess tax benefits related to stock option payments 46 — — 46  185 — — 185 
Other, net  (2) 67  (150)  (85)  (2) 10  (602)  (594)
                  
Net cash provided by financing activities 1,575 124 577 2,276  4,520 3,210 45,145 52,875 
                  

Net change in cash and due from banks

 1,770  (46)  (4,267)  (2,543)  (5,851) 8 3,015  (2,828)

Cash and due from banks at beginning of quarter

 14,209 470 349 15,028 

Cash and due from banks at beginning of period

 14,209 470 349 15,028 
                  

Cash and due from banks at end of quarter

 $15,979 $424 $(3,918) $12,485 

Cash and due from banks at end of period

 $8,358 $478 $3,364 $12,200 
                  
 

5867

Condensed Consolidating Statement of Cash Flows
                                
   
 Quarter ended March 31, 2006  Nine months ended September 30, 2006 
 Other    Other   
 consolidating    consolidating   
 subsidiaries/ Consolidated  subsidiaries/ Consolidated 
(in millions) Parent WFFI eliminations Company  Parent WFFI eliminations Company 
 

Cash flows from operating activities:

  
Net cash provided (used) by operating activities $(134) $263 $16,528 $16,657 
Net cash provided by operating activities $2,235 $714 $18,823 $21,772 
                  

Cash flows from investing activities:

  
Securities available for sale:  
Sales proceeds 50 140 16,774 16,964  188 443 43,265 43,896 
Prepayments and maturities 1 43 1,600 1,644  4 172 5,581 5,757 
Purchases  (5)  (201)  (28,191)  (28,397)  (265)  (646)  (60,436)  (61,347)
Loans:  
Increase in banking subsidiaries’ loan originations, net of collections —  (309)  (8,532)  (8,841) —  (1,448)  (25,055)  (26,503)
Proceeds from sales (including participations) of loans by banking subsidiaries — 50 9,194 9,244  — 50 35,587 35,637 
Purchases (including participations) of loans by banking subsidiaries —  (202)  (1,360)  (1,562) —  (202)  (3,934)  (4,136)
Principal collected on nonbank entities’ loans — 4,994 915 5,909  — 15,092 3,038 18,130 
Loans originated by nonbank entities —  (6,165)  (743)  (6,908) —  (16,638)  (3,318)  (19,956)
Net repayments from (advances to) nonbank entities 1,593 —  (1,593) — 
Net repayments from (advances to) subsidiaries  (54) — 54 — 
Capital notes and term loans made to subsidiaries  (2,905) — 2,905 —   (4,705) — 4,705 — 
Principal collected on notes/loans made to subsidiaries 829 —  (829) —  3,025 —  (3,025) — 
Net decrease (increase) in investment in subsidiaries  (2) — 2 —   (192) — 192 — 
Net cash paid for acquisitions — —  (266)  (266) — —  (526)  (526)
Other, net — 624  (2,332)  (1,708) — 814  (7,570)  (6,756)
                  
Net cash used by investing activities  (439)  (1,026)  (12,456)  (13,921)  (1,999)  (2,363)  (11,442)  (15,804)
                  

Cash flows from financing activities:

  
Net change in:  
Deposits — —  (6,216)  (6,216) — —  (376)  (376)
Short-term borrowings 396  (1,529)  (1,409)  (2,542) 875  (1,097)  (9,917)  (10,139)
Long-term debt:  
Proceeds from issuance 7,328 3,580  (2,409) 8,499  9,640 5,255 92 14,987 
Repayment  (1,521)  (1,296)  (829)  (3,646)  (6,926)  (2,576)  (1,130)  (10,632)
Common stock:  
Proceeds from issuance 485 — — 485  1,419 — — 1,419 
Repurchased  (646) — —  (646)  (1,566) — —  (1,566)
Cash dividends paid  (874) — —  (874)  (2,695) — —  (2,695)
Excess tax benefits related to stock option payments 52 — — 52  179 — — 179 
Other, net — 3  (24)  (21) — 20 29 49 
                  
Net cash provided (used) by financing activities 5,220 758  (10,887)  (4,909) 926 1,602  (11,302)  (8,774)
                  

Net change in cash and due from banks

 4,647  (5)  (6,815)  (2,173) 1,162  (47)  (3,921)  (2,806)

Cash and due from banks at beginning of quarter

 10,794 474 4,129 15,397 

Cash and due from banks at beginning of period

 10,794 474 4,129 15,397 
                  

Cash and due from banks at end of quarter

 $15,441 $469 $(2,686) $13,224 

Cash and due from banks at end of period

 $11,956 $427 $208 $12,591 
                  
 

5968

18. GUARANTEES
We provideThe significant guarantees that we provide to third parties includinginclude standby letters of credit, various indemnification agreements, guarantees accounted for as derivatives, additionalcontingent consideration related to business combinations and contingent performance guarantees.
We issue standby letters of credit, which include performance and financial guarantees, for customers in connection with contracts between the customers and third parties. Standby letters of credit assure that the third parties will receive specified funds if customers fail to meet their contractual obligations. We are obligated to make payment if a customer defaults. Standby letters of credit were $12.1$13.1 billion at March 31,September 30, 2007, and $12.0 billion at December 31, 2006, including financial guarantees of $6.3$6.4 billion and $7.2 billion, respectively, that we had issued or purchased participations in. Standby letters of credit are net of participations sold to other institutions of $1.4$1.2 billion at March 31,September 30, 2007, and $2.8 billion at December 31, 2006. We consider the credit risk in standby letters of credit in determining the allowance for credit losses. Deferred fees for these standby letters of credit were not significant to our financial statements. We also had commitments for commercial and similar letters of credit of $926 million$1.0 billion at March 31,September 30, 2007, and $801 million at December 31, 2006.
We enter into indemnification agreements in the ordinary course of business under which we agree to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with us. These relationships or transactions include those arising from service as a director or officer of the Company, underwriting agreements relating to our securities, securities lending, acquisition agreements, and various other business transactions or arrangements. Because the extent of our obligations under these agreements depends entirely upon the occurrence of future events, our potential future liability under these agreements is not fully determinable.
We write options, floors and caps. Periodic settlements occur on floors and caps based on market conditions. The fair value of the written options liability in our balance sheet was $740$929 million at March 31,September 30, 2007, and $556 million at December 31, 2006. The aggregate fair value of the written floors and caps liability was $88$124 million at September 30, 2007, and $86 million respectively.at December 31, 2006. Our ultimate obligation under written options, floors and caps is based on future market conditions and is only quantifiable at settlement. The notional value related to written options was $47.1$45.6 billion at March 31,September 30, 2007, and $47.3 billion at December 31, 2006, and the aggregate notional value related to written floors and caps was $11.7$12.9 billion and $11.9 billion, respectively.respectively, for the same periods. We offset substantially all options written to customers with purchased options.
We also enter into credit default swaps under which we buy loss protection from or sell loss protection to a counterparty in the event of default of a reference obligation. The carrying amountfair value of the contracts sold was a liability of $9$12 million at March 31,September 30, 2007, and $2 million at December 31, 2006. The maximum amount we would be required to pay under the swaps in which we sold protection, assuming all reference obligations default at a total loss, without recoveries, was $698$850 million and $599 million based on notional value at March 31,September 30, 2007, and December 31, 2006, respectively. We purchased credit default swaps of comparable notional amounts to mitigate the exposure of the written credit default swaps at March 31,September 30, 2007, and December 31, 2006. These purchased credit default swaps had terms (i.e., used the same

69

reference obligation and maturity) that would offset our exposure from the written default swap contracts in which we are providing protection to a counterparty.

60

In connection with certain brokerage, asset management, insurance agency and other acquisitions we have made, the terms of the acquisition agreements provide for deferred payments or additional consideration based on certain performance targets. At March 31,September 30, 2007, and December 31, 2006, the amount of additional consideration we expected to pay was not significant to our financial statements.
We have entered into various contingent performance guarantees through credit risk participation arrangements with remaining terms up to 22 years. We will be required to make payments under these guarantees if a customer defaults on its obligation to perform under certain credit agreements with third parties. The extent of our obligations under these guarantees depends entirely on future events and was contractually limited to an aggregate liability of approximately $100$65 million at March 31,September 30, 2007, and $125 million at December 31, 2006.

6170

19. REGULATORY AND AGENCY CAPITAL REQUIREMENTS
The Company and each of its subsidiary banks are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency, respectively.
We do not consolidate our wholly-owned trusts (the Trusts) formed solely to issue trust preferred securities. The amount of trust preferred securities issued by the Trusts that was includable in Tier 1 capital in accordance with FRB risk-based capital guidelines was $3.5$4.5 billion at March 31,September 30, 2007. The junior subordinated debentures held by the Trusts were included in the Company’s long-term debt.
                                                        
 
 To be well capitalized  To be well capitalized 
 under the FDICIA  under the FDICIA 
 For capital prompt corrective  For capital prompt corrective 
 Actual adequacy purposes action provisions  Actual adequacy purposes action provisions 
(in billions) Amount Ratio Amount Ratio Amount Ratio  Amount Ratio Amount Ratio Amount Ratio 
 

As of March 31, 2007:

 

As of September 30, 2007:

         
Total capital (to risk-weighted assets)          
Wells Fargo & Company $50.7  12.10% ³ $33.5 ³8.00%  $51.8  11.11% > $37.3 >  8.00%     
Wells Fargo Bank, N.A. 40.0 11.78 ³27.2 ³8.00 ³$34.0 ³10.00% 41.5 11.06 > 30.1 > 8.00 > $37.6 >  10.00%

Tier 1 capital (to risk-weighted assets)

          
Wells Fargo & Company $36.5  8.70% ³$16.8 ³4.00%  $38.3  8.21% > $18.7 >  4.00%     
Wells Fargo Bank, N.A. 28.9 8.50 ³13.6 ³4.00 ³$20.4 ³6.00% 29.3 7.80 > 15.0 > 4.00 > $22.5 >  6.00%

Tier 1 capital (to average assets)

          
(Leverage ratio)          
Wells Fargo & Company $36.5  7.83% ³$18.6 ³4.00%(1)  $38.3  7.29% > $21.0 >  4.00%(1)     
Wells Fargo Bank, N.A. 28.9 7.51 ³15.4 ³4.00(1) ³$19.2 ³5.00% 29.3 6.96 > 16.8 >  4.00(1) > $21.1 >  5.00%
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations.
As an approved seller/servicer, Wells Fargo Bank, N.A., through its mortgage banking division, is required to maintain minimum levels of shareholders’ equity, as specified by various agencies, including the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation and Federal National Mortgage Association. At March 31,September 30, 2007, Wells Fargo Bank, N.A. met these requirements.

6271

20. DERIVATIVES
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate long-term debt and certificates of deposit to floating rates to hedge our exposure to interest rate risk. We also enter into cross-currency swaps and cross-currency interest rate swaps to hedge our exposure to foreign currency risk and interest rate risk associated with the issuance of non-U.S. dollar denominated debt. The ineffective portion of these fair value hedges is recorded as part of other noninterest income in the income statement. In addition, we use derivatives, such as Treasury and LIBOR futures and swaptions, to hedge changes in fair value due to changes in interest rates of our commercial real estate mortgage loans held for sale. The ineffective portion of these fair value hedges is recorded as part of mortgage banking noninterest income in the income statement. For fair value hedges of long-term debt, certificates of deposit, foreign currency and commercial real estate loans held for sale, all parts of each derivative’s gain or loss due to the hedged risk are included in the assessment of hedge effectiveness.
We enter into equity collars to lock in share prices between specified levels for certain equity securities. As permitted, we include the intrinsic value only (excluding time value) when assessing hedge effectiveness. The net derivative gain or loss related to the equity collars is recorded in other noninterest income in the income statement.
At March 31,September 30, 2007, all designated fair value hedges continued to qualify as fair value hedges.
Cash Flow Hedges
We hedge floating-rate senior debt against future interest rate increases by using interest rate swaps to convert floating-rate senior debt to fixed rates and by using interest rate caps and floors to limit variability of rates. We also use interest rate swaps and floors to hedge the variability of interest rate changes associated with certain floating-rate commercial loans. With the issuance of FAS 159, derivatives used to hedge the forecasted sales of certain MHFS such as Treasury futures, forwards and options, Eurodollar futures, and forward contracts, are accounted for as economic hedges. Previously, we accounted for these derivatives as cash flow hedges under FAS 133. Gains and losses on derivatives that are reclassified from cumulative other comprehensive income to current period earnings, are included in the line item in which the hedged item’s effect in earnings is recorded. All parts of gain or loss on these derivatives are included in the assessment of hedge effectiveness. As of March 31,September 30, 2007, all designated cash flow hedges continued to qualify as cash flow hedges.
We expect that $20$34 million of net deferred net gains on derivatives in other comprehensive income at March 31,September 30, 2007, will be reclassified as earnings during the next twelve months, compared with $112$24 million of net deferred net gainslosses at March 31,September 30, 2006. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 10seven years for hedges of both floating-rate senior debt.debt and floating-rate commercial loans.

6372

The following table provides net derivative gains and losses related to fair value and cash flow hedges resulting from the change in value of the derivatives excluded from the assessment of hedge effectiveness and the change in value of the ineffective portion of the derivatives.
                        
   
 Quarter ended March 31, Quarter ended Sept. 30, Nine months ended Sept. 30,
(in millions) 2007 2006  2007 2006 2007 2006 
   

Net gains (losses) from fair value hedges from:

  
Change in value of derivatives excluded from the assessment of hedge effectiveness $2 $(10) $1 $— $8 $(8)
Ineffective portion of change in value of derivatives 3 4  12 3 13 14 

Net gains from ineffective portion of change in the value of cash flow hedges

 25 16 

Net gains (losses) from ineffective portion of change in the value of cash flow hedges

 —  (7) 25 48 
   
Free-Standing Derivatives
We use free-standing derivatives (economic hedges), in addition to debt securities available for sale, to hedge the risk of changes in the fair value of residential MSRs, new prime residential MHFS, and derivative loan commitments and other interests held, with the resulting gain or loss reflected in income.
The derivatives used to hedge residential MSRs include swaps, swaptions, forwards, Eurodollar and Treasury futures, and options Eurodollar futures and options, and forward contracts. Net derivative lossesgains (losses) of $23$1,200 million and $(1,061) million for the third quarter and first quarternine months of 2007, respectively, and $706$1,061 million and $(178) million for the third quarter and first quarternine months of 2006, respectively, from economic hedges related to our mortgage servicing activities are included in the income statement in “Mortgage banking.” The aggregate fair value of these derivatives used as economic hedges was a net asset of $360$596 million at March 31,September 30, 2007, and $157 million at December 31, 2006. Changes in fair value of debt securities available for sale (unrealized gains and losses) are not included in servicing income, but are reported in cumulative other comprehensive income (net of tax) or, upon sale, are reported in net gains (losses) on debt securities available for sale.
Interest rate lock commitments for residential mortgage loans that we intend to sell are considered free-standing derivatives. Our interest rate exposure on these derivative loan commitments, as well as new prime residential MHFS carried at fair value under FAS 159, is hedged with free-standing derivatives (economic hedges), such as Treasury futures, forwards and options, Eurodollar futures, and forwardTreasury futures, forwards and options contracts. The commitments and free-standing derivatives are carried at fair value with changes in fair value included in the income statement in “Mortgage banking.” We record a zero fair value for a derivative loan commitment at inception. 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 which(referred to as a fall-out factor). The value of the underlying loan is affected primarily by changes in interest rates and the passage of time (referred totime. However, changes in investor demand, such as a fall-out factor).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. The aggregate fair value of derivative loan commitments in the balance sheet at March 31,September 30, 2007, and December 31, 2006, was a net

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liability of $48$26 million and $65 million, respectively, and is included in the caption “Interest rate contracts” under Customer Accommodation, Trading and Other Free-Standing Derivatives in the following table. Net derivative lossesgains (losses) on interest rate lock commitments of $73$124 million and $(259) million for the third quarter and first quarternine months of 2007, respectively, and net derivative gains (losses) from economic hedges related to derivative loan commitments and MHFS of $(598) million and $303 million, respectively, for the same periods, are included in the income statement in “Mortgage

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banking.” The aggregate fair value of these derivatives used as economic hedges was a net assetliability of $31$119 million at March 31,September 30, 2007.
We also enter into various derivatives primarily to provide derivative products to customers. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. We also enter into free-standing derivatives for risk management that do not otherwise qualify for hedge accounting. They are carried at fair value with changes in fair value recorded as part of other noninterest income in the income statement. Additionally, free-standing derivatives include embedded derivatives that are required to be separately accounted for from their host contracts.
Derivative Financial Instruments –— Summary Information
The total credit risk amount and estimated net fair value for derivatives at March 31,September 30, 2007, and December 31, 2006, were:
                                
   
 March 31, 2007 December 31, 2006  September 30, 2007 December 31, 2006 
 Credit Estimated Credit Estimated  Credit Estimated Credit Estimated 
 risk net fair risk net fair  risk net fair risk net fair 
(in millions) amount(2) value amount (2) value  amount  (2) value amount  (2) value 

   
ASSET/LIABILITY MANAGEMENT HEDGES
  
Qualifying hedge contracts accounted for under FAS 133
  
Interest rate contracts $262 $(120) $621 $199  $442 $75 $621 $199 
Equity contracts —  (7) —  (15) —  (2) —  (15)
Foreign exchange contracts 692 652 548 539  1,493 1,468 548 539 
Free-standing derivatives (economic hedges)
  
Interest rate contracts (1) 863 371 715 183  1,349 448 715 183 
Foreign exchange contracts 93 90 136 87  213 202 136 87 

 
CUSTOMER ACCOMMODATION, TRADING AND OTHER FREE-STANDING DERIVATIVES
  
Interest rate contracts 1,360 212 1,454 214  2,056 547 1,454 214 
Commodity contracts 335 28 362 22  405 39 362 22 
Equity contracts 451  (1) 300  (13) 618 54 300  (13)
Foreign exchange contracts 286  (6) 306 19  723 40 306 19 
Credit contracts 164 144 30 3  59 40 30 3 
   
(1) Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS, interest rate lock commitments and other interests held.
(2) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by all counterparties.

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PART II –— OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows Company repurchases of its common stock for each calendar month in the quarter ended March 31,September 30, 2007.
                        
 
 Maximum number of  Weighted- Maximum number of 
 Total number shares that may yet  Total number average shares that may yet 
Calendar of shares Weighted-average be repurchased under  of shares price paid be repurchased under 
month repurchased (1) price paid per share the authorizations  repurchased(1) per share the authorizations 

 
January 4,420,613  $35.90 57,418,093 

 
February 6,832,830 35.52 50,585,263 

 
March 35,815,376 34.33 89,769,887 

July

 26,699,066 $34.42 32,849,175 

August

 30,304,701 34.39 52,544,474 

September

 3,110,158 36.74 49,434,316 
      
Total 47,068,819  60,113,925 
      
 
(1) All shares were repurchased under threetwo authorizations covering up to 50 million, 5075 million and 7550 million shares of common stock approved by the Board of Directors and publicly announced by the Company on November 15, 2005, June 27, 2006,March 21, 2007, and March 21,August 6, 2007, respectively. Unless modified or revoked by the Board, these authorizations do not expire.
Item 6. Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
Dated: May 7,November 6, 2007 WELLS FARGO & COMPANY
     
  By: /s/ RICHARD D. LEVY
     
    Richard D. Levy
    Executive Vice President and Controller
    (Principal Accounting Officer)

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EXHIBIT INDEX
     
Exhibit    
Number Description Location
     
3(a) Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 28, 2006.
     
3(b) Certificate of Designations for the Company’s 2007 ESOP Cumulative Convertible Preferred Stock. Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 19, 2007.
     
3(c) Certificate Eliminating the Certificate of Designations for the Company’s 1997 ESOP Cumulative Convertible Preferred Stock. Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 19, 2007.
     
3(d) By-Laws. Incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed December 4, 2006.
     
4(a) See Exhibits 3(a) through 3(d).  
     
4(b) The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.  
     
10(a)Amendment to Long-Term Incentive Compensation Plan, effective January 1, 2007.Filed herewith.
10(b)Action of Human Resources Committee Specifying “Fair Market Value” for February 27, 2007, Option Grants Under the Long-Term Incentive Compensation Plan.Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10(c)Amendment to Long-Term Incentive Compensation Plan, effective February 28, 2007.Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10(d)Action of Governance and Nominating Committee Increasing Amount of Formula Stock and Option Awards Under Directors Stock Compensation and Deferral Plan, effective January 1, 2007.Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10(e)Amendment to Directors Stock Compensation and Deferral Plan, effective February 27, 2007.Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
10(f)Amendment to Deferred Compensation Plan, effective January 1, 2007.Filed herewith.
10(g)Amendment to PartnerShares Stock Option Plan, effective January 1, 2007.Filed herewith.
12 Computation of Ratios of Earnings to Fixed Charges: Filed herewith.
               
    Quarter ended March 31,
        2007  2006 
   
               
  Including interest on deposits      2.01   2.12 
               
  Excluding interest on deposits      3.41   3.47 
               
   
                 
  
  Quarter ended  Nine months ended 
  September 30, September 30,
  2007  2006  2007  2006 
  

Including interest on deposits

  1.87   1.95   1.95   2.02 

Excluding interest on deposits

  2.94   3.30   3.20   3.37 
  

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Exhibit    
Number Description Location
31(a) Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
     
31(b) Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
     
32(a) Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350. Furnished herewith.
     
32(b) Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350. Furnished herewith.

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