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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 June 30, 2007
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   41-0449260
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (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.
Yes þ            No o
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 filer þ
  Accelerated filer o   Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
 
  Shares Outstanding
 
  July 31, 2007
Common stock, $1-2/3 par value
  3,342,457,892

 


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
  Financial Information        
Item 1.
  Financial Statements   Page
 
  Consolidated Statement of Income     32  
 
  Consolidated Balance Sheet     33  
 
  Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income     34  
 
  Consolidated Statement of Cash Flows     35  
 
  Notes to Financial Statements     36  

           
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     7  
 
  Earnings Performance     8  
 
  Balance Sheet Analysis     16  
 
  Off-Balance Sheet Arrangements and Aggregate Contractual Obligations     17  
 
  Risk Management     17  
 
  Capital Management     27  

           
  Quantitative and Qualitative Disclosures About Market Risk     20  

           
  Controls and Procedures     31  

           
  Other Information        
  Risk Factors     29  

           
  Unregistered Sales of Equity Securities and Use of Proceeds     73  

           
  Submission of Matters to a Vote of Security Holders     73  

           
  Exhibits     75  

           
Signature     75  

           
Exhibit Index     76  
 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              
    Quarter ended     June 30, 2007 from     Six months ended        
    June 30 ,   Mar. 31 ,   June 30 ,   Mar. 31 ,   June 30 ,   June 30 ,   June 30 ,   %  
($ in millions, except per share amounts)   2007     2007     2006     2007     2006     2007     2006     Change  
   

For the Period

                                                               

Net income

  $ 2,279     $ 2,244     $ 2,089       2 %     9 %   $ 4,523     $ 4,107       10 %
Diluted earnings per common share
    0.67       0.66       0.61       2       10       1.33       1.21       10  

Profitability ratios (annualized):

                                                               
Net income to average total assets (ROA)
    1.82 %     1.89 %     1.71 %     (4 )     6       1.85 %     1.71 %     8  
Net income to average stockholders’ equity (ROE)
    19.55       19.65       19.76       (1 )     (1 )     19.60       19.83       (1 )

Efficiency ratio (1)

    57.9       58.5       58.9       (1 )     (2 )     58.2       59.1       (2 )

Total revenue

  $ 9,891     $ 9,441     $ 8,789       5       13     $ 19,332     $ 17,344       11  

Dividends declared per common share (2)

    0.28       0.28       0.54             (48 )     0.56       0.80       (30 )
Dividends paid per common share
    0.28       0.28       0.26             8       0.56       0.52       8  

Average common shares outstanding

    3,351.2       3,376.0       3,363.8       (1 )           3,363.5       3,360.9        
Diluted average common shares outstanding
    3,389.3       3,416.1       3,404.4       (1 )           3,402.5       3,400.1        

Average loans

  $ 331,970     $ 321,429     $ 300,388       3       11     $ 326,729     $ 305,731       7  
Average assets
    502,686       482,105       491,456       4       2       492,453       483,371       2  
Average core deposits (3)
    300,535       290,586       264,129       3       14       295,588       260,817       13  
Average retail core deposits (4)
    228,006       223,729       214,904       2       6       225,872       214,391       5  

Net interest margin

    4.89 %     4.95 %     4.76 %     (1 )     3       4.92 %     4.80 %     3  

At Period End

                                                               
Securities available for sale
  $ 72,179     $ 45,443     $ 71,420       59       1     $ 72,179     $ 71,420       1  
Loans
    342,800       325,487       300,622       5       14       342,800       300,622       14  
Allowance for loan losses
    3,820       3,772       3,851       1       (1 )     3,820       3,851       (1 )
Goodwill
    11,983       11,275       11,091       6       8       11,983       11,091       8  
Assets
    539,865       485,901       499,516       11       8       539,865       499,516       8  
Core deposits (3)
    300,602       296,469       268,350       1       12       300,602       268,350       12  
Stockholders’ equity
    47,301       46,135       41,894       3       13       47,301       41,894       13  
Tier 1 capital (5)
    38,387       36,476       33,344       5       15       38,387       33,344       15  
Total capital (5)
    52,517       50,733       47,202       4       11       52,517       47,202       11  

Capital ratios:

                                                               
Stockholders’ equity to assets
    8.76 %     9.49 %     8.39 %     (8 )     4       8.76 %     8.39 %     4  
Risk-based capital (5)
                                                               
Tier 1 capital
    8.57       8.70       8.35       (1 )     3       8.57       8.35       3  
Total capital
    11.72       12.10       11.82       (3 )     (1 )     11.72       11.82       (1 )
Tier 1 leverage (5)
    7.90       7.83       6.99       1       13       7.90       6.99       13  

Book value per common share

  $ 14.07     $ 13.77     $ 12.46       2       13     $ 14.07     $ 12.46       13  

Team members (active, full-time equivalent)

    158,700       159,600       154,300       (1 )     3       158,700       154,300       3  

Common Stock Price

                                                               
High
  $ 36.49     $ 36.64     $ 34.86             5     $ 36.64     $ 34.86       5  
Low
    33.93       33.01       31.90       3       6       33.01       30.31       9  
Period end
    35.17       34.43       33.54       2       5       35.17       33.54       5  
     
(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 average core deposits were converted balances of $9,888 million, $9,888 million and $2,771 million for the quarters ended June 30, 2007, March 31, 2007, and June 30, 2006, respectively. Average core deposits increased 11% from second quarter 2006 not including these converted balances.
(4)   Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(5)   See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements for additional information.

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This Report on Form 10-Q for the quarter ended June 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 on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website at www.sec.gov.
OVERVIEW
Wells Fargo & Company is a $540 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 June 30, 2007. When we refer to “the Company,” “we,” “our” and “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company.
In second quarter 2007, we achieved record diluted earnings per share of $0.67, up 10% from a year ago, and record net income of $2.28 billion, up 9% from a year ago. Our double-digit earnings per share growth again was driven by an ideal combination of double-digit top line growth (revenue up 13% year over year), positive operating leverage (revenue up 13% versus 11% expense growth), and relatively stable credit quality (net credit losses of 0.87% of average total loans versus the 0.91% average of the prior two quarters). Business performance was strong and well balanced across the broad diversity of our business segments, with most of our 80 plus consumer and commercial businesses producing double-digit earnings or revenue growth in second quarter 2007. We increased or maintained operating margins, with the net interest margin at 4.89% for second quarter 2007, up 13 basis points from a year ago; return on assets (ROA), which includes all credit costs, at 1.82%, up 11 basis points from a year ago; and return on equity (ROE) remaining at a strong 19.55%, among the best in our industry.
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 5.4 products with us. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our core products grew in second quarter 2007 from a year ago, with average loans up 11%, average core deposits up 14% and assets under management or administration up 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 what 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 assets and liabilities within prudent ranges, while ensuring adequate liquidity and funding. Our stockholder value has increased over time due to customer satisfaction, strong financial results, investment in our businesses, consistent execution of our business model and the management of our business risks.
Our financial results included the following:
Net income for second quarter 2007 increased 9% to $2.28 billion from $2.09 billion for second quarter 2006. Diluted earnings per share for second quarter 2007 increased 10% to $0.67 from $0.61 for second quarter 2006. ROA was 1.82% and ROE was 19.55% for second quarter 2007, and 1.71% and 19.76%, respectively, for second quarter 2006.
Net income for the first half of 2007 was $4.52 billion, or $1.33 per share, up 10% from $4.11 billion, or $1.21 per share, for the first half of 2006. ROA was 1.85% and ROE was 19.60% in the first half of 2007, and 1.71% and 19.83%, respectively, for the first half of 2006.
Net interest income on a taxable-equivalent basis increased 4% to $5.23 billion for second quarter 2007 from $5.02 billion for second quarter 2006 driven by a 2% increase in average earning assets and a 13 basis point increase in the net interest margin, including the addition late in second quarter 2007 of approximately $30 billion in debt securities at substantially higher yields than have prevailed on average over the last two years. At 4.89% in second quarter 2007, our net interest margin remained the highest among our peers. The net interest margin for second quarter 2007 declined 6 basis points from first quarter 2007, largely due to accelerated asset growth, which is likely to increase net interest income, but reduce the net interest margin, in future quarters.
Noninterest income increased 23% to $4.70 billion for second quarter 2007 from $3.81 billion for second quarter 2006. The strong double-digit growth in fee income reflected strong year-over-year growth in deposit service fees (up 11%); trust and investment fees (up 24%); debit and credit card fees (up 24%); other fees, primarily loan related, (up 25%); and insurance revenue (up 19%). Capital markets generally were strong in the quarter, including $242 million in income from our equity businesses. Bond losses of $42 million were recorded in the quarter as we sold our lowest-yielding bonds and repositioned our portfolio with higher-yielding securities after rates increased late in the quarter.
Revenue, the sum of net interest income and noninterest income, grew $1.1 billion, or 13%, to $9.89 billion in second quarter 2007 from $8.79 billion in second quarter 2006. Despite a challenging environment and selected tightening of credit standards, double-digit revenue growth again was driven by double-digit growth in consumer and business lending and deposits, as well as very strong growth in virtually all of our diverse fee-based products and services. Businesses that generated double-digit, year-over-year revenue growth included asset management, business direct, capital markets, corporate trust, credit and debit cards, global remittance services, home

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equity, insurance, international, personal credit management, real estate brokerage, wealth management and Wells Fargo Financial.
Noninterest expense was $5.73 billion for second quarter 2007, up $551 million, or 11%, from $5.18 billion for the same period of 2006. Substantially all of the expense increase related to higher personnel costs, reflecting a 3% increase in team members (full-time equivalents, largely sales and service professionals), normal merit increases, and higher sales commissions in the insurance, wealth management, and real estate brokerage businesses, all of which had very strong revenue growth year over year. Most of our non-personnel expenses were essentially flat from last year, reflecting our ongoing discipline in containing expenses that do not directly add to revenue growth. Reflecting the continued positive operating leverage, the efficiency ratio in second quarter 2007 improved to 57.9% from 58.9% a year ago and 58.5% in first quarter 2007.
Net charge-offs for second quarter 2007 were $720 million (0.87% of average total loans outstanding, annualized), compared with $432 million (0.58%) during second quarter 2006. During the first half of 2007, net charge-offs were $1.44 billion (0.89%), compared with $865 million (0.57%), for the first half of 2006. Credit performance in our first mortgage portfolios at Wells Fargo Home Mortgage and Wells Fargo Financial remained stable. We believe our prudent product strategy, along with disciplined underwriting and collections practices, and our willingness to work proactively with our customers, has allowed us to maintain stable and predictable credit performance in our first mortgage portfolios. Overall commercial loan performance, including commercial real estate, remained very strong, supported by high occupancy rates and relatively low interest rates.
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $4.01 billion, or 1.17% of total loans, at June 30, 2007, compared with $3.96 billion, or 1.24%, at December 31, 2006, and $4.04 billion, or 1.34%, at June 30, 2006.
Total nonaccrual loans were $1.73 billion, or 0.51% of total loans, at June 30, 2007, compared with $1.67 billion, or 0.52%, at December 31, 2006, and $1.40 billion, or 0.46%, at June 30, 2006. Total nonperforming assets (NPAs) were $2.72 billion, or 0.79% of total loans, at June 30, 2007, compared with $2.42 billion, or 0.76%, at December 31, 2006, and $1.92 billion, or 0.64%, at June 30, 2006. Foreclosed assets were $977 million at June 30, 2007, compared with $745 million at December 31, 2006, and $513 million at June 30, 2006. Foreclosed assets, a component of total NPAs, included $423 million, $322 million and $238 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loans at June 30, 2007, December 31, 2006, and June 30, 2006, respectively, consistent with regulatory reporting requirements. The foreclosed real estate securing GNMA loans of $423 million represented 12 basis points of the ratio of nonperforming assets to loans at June 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.
We believe our nonperforming loan portfolio has relatively low loss potential due to the high percentage of consumer real estate and auto-secured loans where we take an initial write-down, if applicable, as the loan is transferred to nonperforming status. We are constantly monitoring

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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” under applicable regulatory capital adequacy guidelines. The ratio of stockholders’ equity to total assets was 8.76% at June 30, 2007, 9.52% at December 31, 2006, and 8.39% at June 30, 2006. Our total risk-based capital (RBC) ratio at June 30, 2007, was 11.72% and our Tier 1 RBC ratio was 8.57%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at June 30, 2006, were 11.82% and 8.35%, respectively. Our Tier 1 leverage ratios were 7.90% and 6.99% at June 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 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

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whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment 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. SOP 07-1 is effective for the year beginning January 1, 2008. We do not expect that the adoption of SOP 07-1 will have a material effect 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 mortgage servicing rights (MSRs) and pension accounting. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee. These policies are described in “Financial Review — Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2006 Form 10-K.

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

EARNING ASSETS

                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 4,849       5.09 %   $ 61     $ 4,855       4.60 %   $ 56  
Trading assets
    4,572       4.83       55       5,938       5.03       75  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    839       4.28       9       935       4.43       11  
Securities of U.S. states and political subdivisions
    4,383       7.42       79       3,013       8.24       60  
Mortgage-backed securities:
                                               
Federal agencies
    35,406       6.09       533       40,160       5.97       601  
Private collateralized mortgage obligations
    3,816       6.41       61       7,176       6.70       119  
 
                                       
Total mortgage-backed securities
    39,222       6.13       594       47,336       6.07       720  
Other debt securities (4)
    5,090       7.61       96       6,246       6.70       104  
 
                                       
Total debt securities available for sale (4)
    49,534       6.36       778       57,530       6.22       895  
Mortgages held for sale (5)
    36,060       6.42       578       51,675       6.25       808  
Loans held for sale
    864       7.74       17       585       7.35       11  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    73,932       8.31       1,531       65,424       8.12       1,324  
Other real estate mortgage
    31,736       7.48       592       28,938       7.29       526  
Real estate construction
    16,393       7.97       326       14,517       7.91       286  
Lease financing
    5,559       5.95       83       5,429       5.75       78  
 
                                       
Total commercial and commercial real estate
    127,620       7.96       2,532       114,308       7.77       2,214  
Consumer:
                                               
Real estate 1-4 family first mortgage
    58,283       7.36       1,071       55,019       7.36       1,011  
Real estate 1-4 family junior lien mortgage
    70,390       8.20       1,440       62,740       7.92       1,239  
Credit card
    14,950       14.46       540       11,947       13.18       393  
Other revolving credit and installment
    53,464       9.78       1,303       50,098       9.56       1,194  
 
                                       
Total consumer
    197,087       8.85       4,354       179,804       8.55       3,837  
Foreign
    7,263       12.00       218       6,276       12.61       198  
 
                                       
Total loans (5)
    331,970       8.58       7,104       300,388       8.34       6,249  
Other
    1,329       5.23       18       1,363       4.97       16  
 
                                       
Total earning assets
  $ 429,178       8.05       8,611     $ 422,334       7.70       8,110  
 
                                       

FUNDING SOURCES

                                               
Deposits:
                                               
Interest-bearing checking
  $ 5,193       3.24       42     $ 4,288       2.80       30  
Market rate and other savings
    145,185       2.82       1,022       134,182       2.29       766  
Savings certificates
    39,729       4.38       433       30,308       3.69       279  
Other time deposits
    4,574       4.82       55       38,288       5.03       479  
Deposits in foreign offices
    32,841       4.75       389       20,898       4.59       240  
 
                                       
Total interest-bearing deposits
    227,522       3.42       1,941       227,964       3.16       1,794  
Short-term borrowings
    21,066       5.06       265       24,836       4.68       289  
Long-term debt
    90,931       5.17       1,174       84,486       4.79       1,010  
 
                                       
Total interest-bearing liabilities
    339,519       3.99       3,380       337,286       3.68       3,093  
Portion of noninterest-bearing funding sources
    89,659                   85,048              
 
                                       
Total funding sources
  $ 429,178       3.16       3,380     $ 422,334       2.94       3,093  
 
                                       
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.89 %   $ 5,231               4.76 %   $ 5,017  
 
                                       
NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 11,655                     $ 12,437                  
Goodwill
    11,435                       11,075                  
Other
    50,418                       45,610                  
 
                                           
Total noninterest-earning assets
  $ 73,508                     $ 69,122                  
 
                                           

NONINTEREST-BEARING FUNDING SOURCES

                                               
Deposits
  $ 91,256                     $ 88,917                  
Other liabilities
    25,159                       22,835                  
Stockholders’ equity
    46,752                       42,418                  
Noninterest-bearing funding sources used to fund earning assets
    (89,659 )                     (85,048 )                
 
                                           
Net noninterest-bearing funding sources
  $ 73,508                     $ 69,122                  
 
                                           

TOTAL ASSETS

  $ 502,686                     $ 491,456                  
 
                                           
   
(1)   Our average prime rate was 8.25% and 7.90% for the quarters ended June 30, 2007 and 2006, respectively, and 8.25% and 7.66% for the six months ended June 30, 2007 and 2006, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.36% and 5.21% for the quarters ended June 30, 2007 and 2006, respectively, and 5.36% and 4.99% for the six months ended June 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.

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    Six months ended June 30 ,
    2007     2006  
                    Interest                     Interest  
    Average     Yields/     income/     Average     Yields/     income/  
    balance     rates     expense     balance     rates     expense  
   
 

 

  $ 5,355       5.13 %   $ 136     $ 5,023       4.40 %   $ 110  
 
    4,439       5.17       114       6,018       4.82       144  

 

    796       4.29       17       901       4.36       20  
 

 

    3,960       7.40       142       3,059       8.18       120  

 

    33,036       6.14       1,000       33,973       5.94       1,007  
 
 
    3,904       6.37       123       6,870       6.58       223  
 
                                       
 
    36,940       6.16       1,123       40,843       6.05       1,230  
 
    5,433       7.52       202       5,766       7.23       208  
 
                                       
 
 
    47,129       6.39       1,484       50,569       6.28       1,578  
 
    34,212       6.48       1,108       45,632       6.21       1,417  
 
    829       7.78       32       618       7.13       22  
 

 

    72,505       8.30       2,986       64,104       7.92       2,519  
 
    31,166       7.45       1,152       28,813       7.15       1,023  
 
    16,144       7.99       640       14,186       7.75       545  
 
    5,531       5.84       162       5,432       5.78       157  
 
                                       
 
 
    125,346       7.94       4,940       112,535       7.60       4,244  

 

    56,374       7.34       2,066       64,648       7.06       2,270  
 
 
    69,738       8.19       2,833       61,364       7.79       2,370  
 
    14,755       14.01       1,033       11,856       13.20       782  
 
    53,501       9.76       2,590       49,218       9.48       2,314  
 
                                       
 
    194,368       8.82       8,522       187,086       8.32       7,736  
 
    7,015       11.78       410       6,110       12.59       383  
 
                                       
 
    326,729       8.55       13,872       305,731       8.14       12,363  
 
    1,327       5.17       34       1,376       4.80       32  
 
                                       
 
  $ 420,020       8.05       16,780     $ 414,967       7.59       15,666  

 

                                       

 

  $ 4,905       3.24       79     $ 4,179       2.52       52  
 
    143,071       2.80       1,985       134,205       2.18       1,453  
 
    39,125       4.40       854       29,517       3.58       524  
 
    6,931       5.03       173       36,020       4.77       852  
 
    30,258       4.71       707       18,041       4.41       395  
 
                                       
 
    224,290       3.41       3,798       221,962       2.98       3,276  
 
    16,308       4.96       401       25,504       4.42       559  
 
    89,984       5.16       2,312       83,094       4.64       1,920  
 
                                       
 
    330,582       3.97       6,511       330,560       3.51       5,755  
 
    89,438                   84,407              
 
                                       
 
  $ 420,020       3.13       6,511     $ 414,967       2.79       5,755  
 
                                       

 

            4.92 %   $ 10,269               4.80 %   $ 9,911  
 
                                       

 

  $ 11,758                     $ 12,666                  
 
    11,355                       11,019                  
 
    49,320                       44,719                  
 
                                           
 
 
  $ 72,433                     $ 68,404                  
 
                                           
 

 

  $ 90,020                     $ 87,963                  
 
    25,316                       23,076                  
 
    46,535                       41,772                  

 

    (89,438 )                     (84,407 )                
 
                                           
 
 
  $ 72,433                     $ 68,404                  
 
                                           

 

  $ 492,453                     $ 483,371                  
 
                                           
     

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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 8 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 4% to $5.23 billion in second quarter 2007 from $5.02 billion in second quarter 2006, primarily driven by a 2% growth in average earning assets and a 13 basis point increase in the net interest margin. The net interest margin was 4.89% in second quarter 2007, up from 4.76% in second quarter 2006. After having sold all of our lower-yielding adjustable rate mortgages (ARMs) and securities over a year ago when long-term interest rates were substantially lower than today, we increased our investments in longer-term securities late in second quarter 2007 as long-term interest rates rose, adding approximately $30 billion in securities at attractive yields — substantially higher than the yields at which we sold our lowest-yielding ARMs and long-term securities between mid-2004 and mid-2006. The additional assets are expected to increase net interest income growth, but the higher average earning assets growth is likely to reduce net interest margin in third quarter 2007.
Average earning assets increased $6.9 billion, or 2%, to $429.2 billion in second quarter 2007 from $422.3 billion in second quarter 2006. Average loans increased $31.6 billion, or 11%, to $332.0 billion in second quarter 2007 from $300.4 billion in second quarter 2006. Average mortgages held for sale decreased $15.6 billion to $36.1 billion in second quarter 2007 from $51.7 billion in second quarter 2006. Average debt securities available for sale decreased $8.0 billion to $49.5 billion in second quarter 2007 from $57.5 billion in second quarter 2006.
Average core deposits are an important contributor to growth in net interest income and the net interest margin. This low-cost source of funding rose 14% from a year ago and funded 91% and 88% of average loans for second 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). Some of these foreign deposits were previously swept into non-deposit products. Including only the growth in these funds from the date of conversion to deposits, average core deposits grew 11% year over year. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, for second quarter 2007 grew $13.1 billion, or 6%, from a year ago. Average mortgage escrow deposits were $23.4 billion for second quarter 2007, up $5.8 billion from a year ago. Average savings certificates of deposit increased to $39.7 billion in second quarter 2007 from $30.3 billion in second quarter 2006 and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $241.6 billion in second quarter 2007 from $227.4 billion in second quarter 2006. Total average interest-bearing deposits were $227.5 billion in second quarter 2007, flat compared with $228.0 billion in second quarter 2006.

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NONINTEREST INCOME
                                                 
     
    Quarter             Six months        
    ended June 30 ,   %     ended June 30 ,   %  
(in millions)   2007     2006     Change     2007     2006     Change  
   
 
Service charges on deposit accounts
  $ 740     $ 665       11 %   $ 1,425     $ 1,288       11 %
 
Trust and investment fees:
                                               
Trust, investment and IRA fees
    610       509       20       1,147       1,000       15  
Commissions and all other fees
    229       166       38       423       338       25  
 
                                       
Total trust and investment fees
    839       675       24       1,570       1,338       17  
 
Card fees
    517       418       24       987       802       23  
 
Other fees:
                                               
Cash network fees
    50       48       4       95       92       3  
Charges and fees on loans
    253       249       2       491       491        
All other fees
    335       213       57       563       415       36  
 
                                       
Total other fees
    638       510       25       1,149       998       15  
 
Mortgage banking:
                                               
Servicing income, net
    (45 )     310             171       391       (56 )
Net gains on mortgage loan origination/ sales activities
    635       359       77       1,130       632       79  
All other
    99       66       50       178       127       40  
 
                                       
Total mortgage banking
    689       735       (6 )     1,479       1,150       29  
 
Operating leases
    187       200       (7 )     379       401       (5 )
Insurance
    432       364       19       831       728       14  
Trading assets
    260       91       186       525       225       133  
Net losses on debt securities available for sale
    (42 )     (156 )     (73 )     (11 )     (191 )     (94 )
Net gains from equity investments
    242       133       82       339       323       5  
All other
    193       170       14       453       428       6  
 
                                       
 
Total
  $ 4,695     $ 3,805       23     $ 9,126     $ 7,490       22  
 
                                       
     
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 June 30, 2007, these assets totaled $1.08 trillion, up 29% from $835 billion at June 30, 2006. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of assets under management or administration. The increase in these fees in second 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 June 30, 2007 and 2006, brokerage balances were $126 billion and $105 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. In addition, we receive fees and commissions from private equity and public debt issuances, and merger and acquisition advisory services, which accounted for the majority of the increase in fees in second quarter 2007 from a year ago.

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Card fees increased 24% from second 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 18% from a year ago and average balances were up 21%.
Other fees increased 25% from second quarter 2006, primarily due to higher advisory fees from real estate debt and equity transactions in our commercial real estate brokerage business.
Mortgage banking noninterest income was $689 million in second quarter 2007, compared with $735 million in the same period of 2006. Servicing fees, included in net servicing income, increased to $1.01 billion in second quarter 2007 from $820 million in second quarter 2006, due to growth in loans serviced for others. Our portfolio of loans serviced for others was $1.35 trillion at June 30, 2007, up 32% from $1.02 trillion at June 30, 2006. Servicing income also includes both changes in the fair value of mortgage servicing rights (MSRs) during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for second quarter 2007 included a $225 million net MSRs valuation loss that was recorded to earnings ($2.01 billion fair value gain less a $2.24 billion economic hedging loss) and for second quarter 2006 included a $17 million net MSRs valuation gain ($550 million fair value gain less a $533 million economic hedging loss).
Net gains on mortgage loan origination/sales activities were $635 million in second quarter 2007, up from $359 million in second quarter 2006, reflecting higher gain on sale margins during the second quarter and a $135 million increase in the fair value of servicing associated with mortgage loans held for sale. Residential real estate originations totaled $80 billion in second quarter 2007 compared with $81 billion in second quarter 2006. Under FAS 159 we elected in 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. (For additional detail, see “Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate Risk,” and Notes 1 (Significant Accounting Policies), 15 (Mortgage Banking Activities) and 16 (Fair Values of Assets and Liabilities) to Financial Statements.) The 1-4 family first mortgage unclosed pipeline was $56 billion at June 30, 2007, $48 billion at December 31, 2006, and $63 billion at June 30, 2006.
Insurance fees were up 19% from second quarter 2006, due to growth in our insurance business and increases in premiums for insurance products, including crop insurance premiums.
Income from trading assets was $260 million and $525 million in the second quarter and first half of 2007, respectively, compared with $91 million and $225 million in the same periods of 2006, due to higher capital markets income. Net losses on debt securities available for sale of $42 million in second quarter 2007 and $156 million in second quarter 2006 were primarily due to sales of lower-yielding securities to further improve long-term earning asset yields. Net losses on debt securities available for sale were $11 million and $191 million for the first half of 2007 and 2006, respectively. Net gains from equity investments were $242 million and $339 million in the second quarter and first half of 2007, respectively, and $133 million and $323 million in the 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

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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.
NONINTEREST EXPENSE
                                                 
     
    Quarter             Six months        
    ended June 30 ,   %     ended June 30 ,   %  
(in millions)   2007     2006     Change     2007     2006     Change  
   

Salaries

  $ 1,907     $ 1,754       9 %   $ 3,774     $ 3,426       10 %
Incentive compensation
    900       714       26       1,642       1,382       19  
Employee benefits
    581       487       19       1,246       1,076       16  
Equipment
    292       284       3       629       619       2  
Net occupancy
    369       345       7       734       681       8  
Operating leases
    148       157       (6 )     301       318       (5 )
Outside professional services
    235       236             427       429        
Contract services
    113       139       (19 )     231       271       (15 )
Travel and entertainment
    118       139       (15 )     227       269       (16 )
Advertising and promotion
    113       125       (10 )     204       231       (12 )
Outside data processing
    121       109       11       232       213       9  
Postage
    85       79       8       172       160       8  
Telecommunications
    81       73       11       162       143       13  
Insurance
    148       99       49       276       175       58  
Stationery and supplies
    52       55       (5 )     105       106       (1 )
Operating losses
    57       45       27       144       107       35  
Security
    44       44             87       87        
Core deposit intangibles
    27       28       (4 )     53       57       (7 )
All other
    336       264       27       607       500       21  
 
                                       

Total

  $ 5,727     $ 5,176       11     $ 11,253     $ 10,250       10  
 
                                       
     
Noninterest expense for second quarter 2007 increased 11% from the prior year, substantially due to higher personnel costs, reflecting a 3% increase in team members (full-time equivalents, largely sales and service professionals), normal merit increases, and higher sales commissions in the insurance, wealth management, and real estate brokerage businesses, all of which had very strong revenue growth from second quarter 2006. In the last 12 months, we opened 99 banking stores, including 21 stores this quarter, and added 4,400 full-time equivalent (FTE) team members, largely sales and service professionals. Expenses also included stock option expense of $33 million and $83 million in the second quarter and first half of 2007, respectively, compared with $28 million and $80 million in the same periods of 2006. In addition, expenses included $120 million and $212 million in the second quarter and first half of 2007, respectively, 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.

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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. Our effective income tax rate was 33.8 % for second quarter 2007, down from 34.3% for second quarter 2006. For the first half of 2007, our effective tax rate was 31.9%, down from 34.1% for the first half of 2006, primarily reflecting the resolution of certain outstanding federal income tax matters in first quarter 2007. (See Note 11 (Income Taxes) to Financial Statements.) 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.
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’s net income increased 14% to $1.55 billion in second quarter 2007 from $1.36 billion in second quarter 2006, due to fee revenue growth in retail banking and investment income. Net income increased 20% to $3.11 billion in the first half of 2007 from $2.59 billion in the first half of 2006. Revenue was $6.33 billion in second quarter 2007, up 11% from $5.72 billion in second quarter 2006. Average loans were $186.6 billion in second quarter 2007, up 7% from a year ago. Core deposits averaged $250.9 billion in second quarter 2007, up 8% over the prior year. Noninterest income in second quarter 2007 increased $633 million, or 26%, from $2.40 billion in second quarter 2006, largely due to higher revenue related to brokerage, deposit service charges, consumer loans, cards and investments. Noninterest income for the first half of 2007 increased $1.34 billion from the same period of 2006. Noninterest expense increased $182 million and $435 million in the second quarter and first half of 2007, respectively, from the same periods in 2006, due to growth in personnel expenses.
Wholesale Banking’s net income increased 13% to $570 million in second quarter 2007 from $506 million in second quarter 2006. Net income increased 13% to $1.15 billion in the first half of 2007 from $1.02 billion in the first half of 2006. Revenue was $2.15 billion in second quarter 2007, up 20% from $1.79 billion in second quarter 2006, driven by strong loan and deposit growth and higher fee income. Net interest income increased 15% to $814 million in second quarter 2007 from $706 million in second quarter 2006. Average loans increased 16% and average core deposits grew 55% from second quarter 2006, with double-digit increases across nearly all wholesale lending businesses. Noninterest income for the second quarter and first half of 2007 increased by $251 million and $420 million, respectively, from the same periods in 2006, due to higher commercial real estate brokerage fees, along with year-over-year increases in capital markets activity, trust and investment income and insurance revenue. Noninterest expense

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increased 25% to $1.27 billion and 20% to $2.41 billion in the second quarter and first half of 2007, respectively, from the same periods in 2006, due to higher personnel-related costs, including additional team members and higher incentive expenses, and expenses related to higher sales volumes, investments in new offices and businesses, and acquisitions completed in the second half of 2006.
Wells Fargo Financial’s net income decreased 31% to $156 million in second quarter 2007 from $226 million in second quarter 2006. For the first half of 2007, net income was $268 million, compared with $503 million for the same period a year ago, which included a first quarter 2006 $127 million pre-tax gain on the sale of Island Finance’s operations in Puerto Rico. Total revenue rose 10% in second quarter 2007, reaching $1.41 billion, compared with $1.28 billion in second quarter 2006, due to an increase in net interest income from continued growth in the real estate and auto loan portfolios. Net interest income increased $126 million, or 13%, to $1.08 billion in second quarter 2007 from $957 million in second quarter 2006, due to growth in average loans. Average real estate secured receivables increased 23% to $24.8 billion and average auto finance receivables rose 13% to $27.7 billion from second quarter 2006. Noninterest expense increased 18% to $791 million in second quarter 2007, largely due to the additional collection capacity added in 2006 in auto, along with higher collection and repossession costs and mortgage insurance premiums.

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BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Our securities available 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 includes very liquid, high-quality federal agency debt securities. At June 30, 2007, we held $71.3 billion of debt securities available for sale, compared with $41.8 billion at December 31, 2006, with a net unrealized loss of $131 million and net unrealized gain of $722 million for the same periods, respectively. We also held $919 million of marketable equity securities available for sale at June 30, 2007, and $796 million at December 31, 2006, with net unrealized gains of $222 million and $204 million for the same periods, respectively.
The weighted-average expected maturity of debt securities available for sale was 6.6 years at June 30, 2007. Since 85% of this portfolio was mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because borrowers may have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale portfolio are shown below.
MORTGAGE-BACKED SECURITIES
                         
   
    Fair     Net unrealized     Remaining  
(in billions)   value     gain (loss)     maturity  
 

At June 30, 2007

  $ 60.6     $ (.2 )   5.8 yrs.

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

                       
Increase in interest rates
    54.7       (6.1 )   8.0 yrs.
Decrease in interest rates
    63.1       2.3     1.4 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 10 and a comparative schedule of average loan balances is included in the table on page 8; quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.
Total loans at June 30, 2007, were $342.8 billion, compared with $300.6 billion at June 30, 2006. Consumer loans increased to $202.8 billion at June 30, 2007, from $178.8 billion a year ago. Commercial and commercial real estate loans increased $17.1 billion, or 15%, from $115.4 billion a year ago. Mortgages held for sale decreased to $34.6 billion at June 30, 2007, from $39.7 billion a year ago.

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DEPOSITS
                         
     
    June 30 ,   December 31 ,   June 30 ,
(in millions)   2007     2006     2006  
   

Noninterest-bearing

  $ 89,809     $ 89,119     $ 89,448  
Interest-bearing checking
    3,795       3,540       3,399  
Market rate and other savings
    147,281       140,283       135,955  
Savings certificates
    40,271       37,282       31,625  
Foreign deposits (1)
    19,446       17,844       7,923  
 
                 
Core deposits
    300,602       288,068       268,350  
Other time deposits
    3,130       13,819       46,331  
Other foreign deposits
    21,011       8,356       11,771  
 
                 
Total deposits
  $ 324,743     $ 310,243     $ 326,452  
 
                 
     
(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 $36.4 billion, or 14%, to $300.5 billion in second quarter 2007 from second quarter 2006, predominantly 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 balances of $9,888 million, $8,888 million and $2,771 million for the quarters ended June 30, 2007, December 31, 2006, and June 30, 2006, respectively. Average core deposits increased 11% from second 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
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
   
 
Nonaccrual loans:
                       
Commercial and commercial real estate:
                       
Commercial
  $ 395     $ 331     $ 253  
Other real estate mortgage
    129       105       137  
Real estate construction
    81       78       31  
Lease financing
    29       29       26  
 
                 
Total commercial and commercial real estate
    634       543       447  
Consumer:
                       
Real estate 1-4 family first mortgage (1)
    663       688       585  
Real estate 1-4 family junior lien mortgage
    228       212       179  
Other revolving credit and installment
    155       180       139  
 
                 
Total consumer
    1,046       1,080       903  
Foreign
    53       43       45  
 
                 
Total nonaccrual loans (2)
    1,733       1,666       1,395  
As a percentage of total loans
    0.51 %     0.52 %     0.46 %
 
                       
Foreclosed assets:
                       
GNMA loans (3)
    423       322       238  
Other
    554       423       275  
Real estate and other nonaccrual investments (4)
    5       5       9  
 
                 
Total nonaccrual loans and other assets
  $ 2,715     $ 2,416     $ 1,917  
 
                 
 
As a percentage of total loans
    0.79 %     0.76 %     0.64 %
 
                 
   
(1)   Includes nonaccrual mortgages held for sale.
 
(2)   Includes impaired loans of $276 million, $230 million and $138 million at June 30, 2007, December 31, 2006, and June 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. Both principal and interest for GNMA loans secured by the foreclosed real estate are fully collectible because the 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.
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.

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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 $4,994 million, $5,073 million and $3,343 million at June 30, 2007, December 31, 2006, and June 30, 2006, respectively. The total included $3,908 million, $3,913 million and $2,526 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.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA ADVANCES)
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
   
 
                       
Commercial and commercial real estate:
                       
Commercial
  $ 21     $ 15     $ 11  
Other real estate mortgage
    2       3       2  
Real estate construction
    4       3       10  
 
                 
Total commercial and commercial real estate
    27       21       23  
Consumer:
                       
Real estate 1-4 family first mortgage (1)
    179       154       107  
Real estate 1-4 family junior lien mortgage
    76       63       39  
Credit card
    253       262       181  
Other revolving credit and installment
    515       616       431  
 
                 
Total consumer
    1,023       1,095       758  
Foreign
    36       44       36  
 
                 
Total
  $ 1,086     $ 1,160     $ 817  
 
                 
   
(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.
Home equity losses remained at higher levels during second quarter 2007 as real estate values remained weak in certain markets. We expect this trend to continue during the last half of 2007. Because of our responsible lending and risk management practices, we have not faced many of the issues others have in the mortgage industry. First, we have not retained any credit interest in any prime and nonprime securitizations. Second, we do not originate any negative amortizing mortgages, including option adjustable-rate mortgages. Third, we have minimal ARM reset risk

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across our loan portfolios. Finally, we do not portfolio any nonprime no-documentation mortgages or nonprime low-documentation mortgages.
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. 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.
We continued to see improvement in the credit performance of our $28 billion auto portfolio. While the impact of enhancements to operational controls and the tightening of account acquisition strategies have had a positive impact on the performance of this portfolio, we expect higher credit losses as the auto lending industry typically experiences seasonal declines in credit performance in the last half of the year.
We consider the allowance for credit losses of $4.01 billion adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at June 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 is 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, will closely track the level of related net charge-offs. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are uncertain. (See “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” in our 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).
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 items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve.
For example, as of June 30, 2007, our most recent simulation indicated estimated earnings at risk of less than 5% of our most likely earnings plan over the next 12 months under a scenario in which the federal funds rate rises 150 basis points to 6.75% and the Constant Maturity Treasury bond yield rises 200 basis points to 7.00% 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 June 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

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    to hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest rate swaps, swaptions, futures, forwards and options.
Mortgage Banking Interest Rate 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.
While credit and liquidity risks have historically been relatively low for mortgage banking activities, interest rate risk can be substantial. 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) carried at fair value 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.
Interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in servicing fee income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment, and securitizing and selling the loan, interest rate changes will impact origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed and duration of the change in interest rates.
Under FAS 159, 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 measure 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) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Loan origination fees are recorded when earned, and related direct loan origination costs and fees are recognized when incurred.
Under FAS 156, which we adopted January 1, 2006, we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in

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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. 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 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, if the MSRs are not 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 second quarter 2007, the increase in the fair value of our MSRs and the losses on free-standing derivatives used to hedge the MSRs resulted in a net loss of $225 million.
Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires sophisticated modeling and constant monitoring. While we attempt to balance these various aspects of the mortgage business, there are several potential risks to earnings:
    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.
    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.

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The total carrying value of our residential and commercial MSRs was $19.2 billion at June 30, 2007, and $18.0 billion at December 31, 2006. The weighted-average note rate on the owned servicing portfolio was 5.95% at June 30, 2007, and 5.92% at December 31, 2006. Our total MSRs were 1.42% of mortgage loans serviced for others at June 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 the 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 forwards and options, Eurodollar futures, and Treasury 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. 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.
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 June 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

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that are considered trading positions. The average one-day VAR throughout second quarter 2007 was $10 million, with a lower bound of $9 million and an upper bound of $12 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’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews these investments at least quarterly and assesses them for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Private equity investments totaled $1.86 billion at June 30, 2007, and $1.67 billion at December 31, 2006.
We also have marketable equity securities in the available 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 ALCO. Gains and losses on these securities are recognized in net income when realized and other-than-temporary impairment may be periodically recorded when identified. The initial indicator of impairment for marketable equity securities is a sustained decline in market price below the amount recorded for that investment. We consider a variety of factors such as: the length of time and the extent to which the market value has been less than cost; the issuer’s financial condition, capital strength, and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the stock price, if any. The fair value of marketable equity securities was $919 million and cost was $697 million at June 30, 2007, and $796 million and $592 million, respectively, at December 31, 2006.
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.

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Debt securities in the securities available for sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets through whole-loan sales and securitizations.
Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding by issuing registered debt, private placements and asset-backed secured funding. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix and level and quality of earnings. Moody’s Investors Service rates Wells Fargo Bank, N.A. as “Aaa,” its highest investment grade, and rates the Company’s senior debt as “Aa1.” Dominion Bond Rating Service rates the Company’s senior debt as “AA.” 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, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with a public float of common equity of at least $700 million or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. 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 half of 2007, the Parent issued a total of $11.6 billion of registered senior notes, including $1.5 billion (denominated in pounds sterling) sold primarily in the United Kingdom. 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 half 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 half 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 billion in outstanding short-term debt and $40 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

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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 half of 2007, Wells Fargo Bank, N.A. issued $10.7 billion in 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 CAD$7.0 billion of issuance authority. WFFI did not issue any debt in the first half of 2007. During the first half of 2007, WFFCC issued CAD$700 million in senior notes. At June 30, 2007, the remaining issuance capacity for WFFCC was CAD$4.7 billion.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase our shares. Our objective is to produce above market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when the 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 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 common stock. During the first half of 2007, we repurchased approximately 77 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 June 30, 2007, the total remaining common stock repurchase authority was approximately 60 million shares. (For additional information regarding second quarter 2007 share repurchases and repurchase authorizations, see Part II Item 2 of this Report.)

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On August 6, 2007, the Board authorized the repurchase of an additional 50 million shares. We expect to complete the acquisition of Greater Bay Bancorp in fourth quarter 2007 with the issuance of approximately 45 million shares of our common stock. 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.
Our potential sources of capital include retained earnings and issuances of common and preferred stock. In the first half of 2007, retained earnings increased $2.4 billion, predominantly resulting from net income of $4.5 billion, less dividends of $1.9 billion. In the first half of 2007, we issued $1.2 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.
At June 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.

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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 believe our nonperforming loan portfolio has relatively low loss potential due to the high percentage of consumer real estate and auto-secured loans where we take an initial write-down, if applicable, as the loan is transferred to nonperforming status;
    we do not expect the adoption of SOP 07-1 to have a material effect on our consolidated financial statements;
    we expect the growth in earning assets in second quarter 2007 is likely to increase net interest income growth, but reduce net interest margin, in third quarter 2007;
    we expect FIN 48 will cause more volatility in our effective tax rate from quarter to quarter;
    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;
    we expect home equity losses to remain at higher levels during the last half of 2007;
    we believe 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;
    we expect higher credit losses in the auto loan portfolio due to seasonal declines in credit performance typically experienced by the auto lending industry in the last half of the year;
    we believe the provision for credit losses for consumer loans, absent a significant credit event, 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 hedge derivative loan commitments will fully or partially offset changes in the fair value of such commitments;
    we expect to use the proceeds of securities issued in the future for general corporate purposes;
    we expect to complete the acquisition of Greater Bay Bancorp in fourth quarter 2007 with the issuance of approximately 45 million shares of our common stock;
    we expect to complete two pending business combination transactions in the last half of 2007;
    we do not expect to make a contribution to the Cash Balance 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

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    we expect $28 million of deferred net gains on derivatives in other comprehensive income at June 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.
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 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, 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
    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 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.

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CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of June 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 June 30, 2007.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act 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 second quarter 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
                                 
   
    Quarter ended June 30 ,   Six months ended June 30 ,
(in millions, except per share amounts)   2007     2006     2007     2006  
 

INTEREST INCOME

                               
Trading assets
  $ 47     $ 65     $ 100     $ 134  
Securities available for sale
    752       875       1,438       1,538  
Mortgages held for sale
    578       808       1,108       1,417  
Loans held for sale
    17       11       32       22  
Loans
    7,100       6,245       13,864       12,355  
Other interest income
    79       73       170       143  
 
                       
Total interest income
    8,573       8,077       16,712       15,609  
 
                       

INTEREST EXPENSE

                               
Deposits
    1,941       1,794       3,798       3,276  
Short-term borrowings
    265       289       401       559  
Long-term debt
    1,171       1,010       2,307       1,920  
 
                       
Total interest expense
    3,377       3,093       6,506       5,755  
 
                       
 
NET INTEREST INCOME
    5,196       4,984       10,206       9,854  
Provision for credit losses
    720       432       1,435       865  
 
                       
Net interest income after provision for credit losses
    4,476       4,552       8,771       8,989  
 
                       

NONINTEREST INCOME

                               
Service charges on deposit accounts
    740       665       1,425       1,288  
Trust and investment fees
    839       675       1,570       1,338  
Card fees
    517       418       987       802  
Other fees
    638       510       1,149       998  
Mortgage banking
    689       735       1,479       1,150  
Operating leases
    187       200       379       401  
Insurance
    432       364       831       728  
Net losses on debt securities available for sale
    (42 )     (156 )     (11 )     (191 )
Net gains from equity investments
    242       133       339       323  
Other
    453       261       978       653  
 
                       
Total noninterest income
    4,695       3,805       9,126       7,490  
 
                       

NONINTEREST EXPENSE

                               
Salaries
    1,907       1,754       3,774       3,426  
Incentive compensation
    900       714       1,642       1,382  
Employee benefits
    581       487       1,246       1,076  
Equipment
    292       284       629       619  
Net occupancy
    369       345       734       681  
Operating leases
    148       157       301       318  
Other
    1,530       1,435       2,927       2,748  
 
                       
Total noninterest expense
    5,727       5,176       11,253       10,250  
 
                       

INCOME BEFORE INCOME TAX EXPENSE

    3,444       3,181       6,644       6,229  
Income tax expense
    1,165       1,092       2,121       2,122  
 
                       

NET INCOME

  $ 2,279     $ 2,089     $ 4,523     $ 4,107  
 
                       

EARNINGS PER COMMON SHARE

  $ 0.68     $ 0.62     $ 1.34     $ 1.22  

DILUTED EARNINGS PER COMMON SHARE

  $ 0.67     $ 0.61     $ 1.33     $ 1.21  

DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.28     $ 0.54     $ 0.56     $ 0.80  

Average common shares outstanding

    3,351.2       3,363.8       3,363.5       3,360.9  
Diluted average common shares outstanding
    3,389.3       3,404.4       3,402.5       3,400.1  
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
                         
   
    June 30 ,   December 31 ,   June 30 ,
(in millions, except shares)   2007     2006     2006  
 

ASSETS

                       
Cash and due from banks
  $ 12,714     $ 15,028     $ 14,069  
Federal funds sold, securities purchased under resale agreements and other short-term investments
    5,163       6,078       5,367  
Trading assets
    7,289       5,607       7,344  
Securities available for sale
    72,179       42,629       71,420  
Mortgages held for sale (includes $30,175 million carried at fair value at June 30, 2007)
    34,580       33,097       39,714  
Loans held for sale
    887       721       594  

Loans

    342,800       319,116       300,622  
Allowance for loan losses
    (3,820 )     (3,764 )     (3,851 )
 
                 
Net loans
    338,980       315,352       296,771  
 
                 

Mortgage servicing rights:

                       
Measured at fair value (residential MSRs)
    18,733       17,591       15,650  
Amortized
    418       377       175  
Premises and equipment, net
    4,973       4,698       4,529  
Goodwill
    11,983       11,275       11,091  
Other assets
    31,966       29,543       32,792  
 
                 

Total assets

  $ 539,865     $ 481,996     $ 499,516  
 
                 

LIABILITIES

                       
Noninterest-bearing deposits
  $ 89,809     $ 89,119     $ 89,448  
Interest-bearing deposits
    234,934       221,124       237,004  
 
                 
Total deposits
    324,743       310,243       326,452  
Short-term borrowings
    40,838       12,829       13,619  
Accrued expenses and other liabilities
    33,153       25,903       33,794  
Long-term debt
    93,830       87,145       83,757  
 
                 

Total liabilities

    492,564       436,120       457,622  
 
                 

STOCKHOLDERS’ EQUITY

                       
Preferred stock
    637       384       548  
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  
Additional paid-in capital
    8,027       7,739       7,562  
Retained earnings
    37,665       35,277       31,964  
Cumulative other comprehensive income (loss)
    (236 )     302       155  
Treasury stock — 110,551,965 shares, 95,612,189 shares and 110,979,842 shares
    (3,898 )     (3,203 )     (3,537 )
Unearned ESOP shares
    (682 )     (411 )     (586 )
 
                 

Total stockholders’ equity

    47,301       45,876       41,894  
 
                 

Total liabilities and stockholders’ equity

  $ 539,865     $ 481,996     $ 499,516  
 
                 
   
The accompanying notes are an integral part of these statements.

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

BALANCE DECEMBER 31, 2005

    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  
 
                                                                   
BALANCE JANUARY 1, 2006
    3,355,166,064       325       5,788       7,040       30,681       665       (3,390 )     (348 )     40,761  
 
                                                     
Comprehensive income:
                                                                       
Net income
                                    4,107                               4,107  
Other comprehensive income, net of tax:
                                                                       
Translation adjustments
                                            4                       4  
Minimum pension liability adjustment
                                            (3 )                     (3 )
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $7 million of net losses included in net income
                                            (592 )                     (592 )
Net unrealized gains on derivatives and hedging activities, net of reclassification of $187 million of net gains on cash flow hedges included in net income
                                            81                       81  
 
                                                                     
Total comprehensive income
                                                                    3,597  
Common stock issued
    37,470,628                       (32 )     (132 )             1,095               931  
Common stock repurchased
    (36,721,484 )                                             (1,185 )             (1,185 )
Preferred stock (414,000) issued to ESOP
            414               29                               (443 )      
Preferred stock released to ESOP
                            (14 )                             205       191  
Preferred stock (191,684) converted to common shares
    5,867,000       (191 )             18                       173                
Common stock dividends
                                    (2,692 )                             (2,692 )
Tax benefit upon exercise of stock options
                            106                                       106  
Stock option compensation expense
                            80                                       80  
Net change in deferred compensation and related plans
                            27                       (19 )             8  
Reclassification of share-based plans
                            308                       (211 )             97  
 
                                                     
Net change
    6,616,144       223             522       1,283       (510 )     (147 )     (238 )     1,133  
 
                                                     

BALANCE JUNE 30, 2006

    3,361,782,208     $ 548     $ 5,788     $ 7,562     $ 31,964     $ 155     $ (3,537 )   $ (586 )   $ 41,894  
 
                                                     

BALANCE DECEMBER 31, 2006

    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 )
 
                                                                   
BALANCE JANUARY 1, 2007
    3,377,149,861       384       5,788       7,739       35,206       302       (3,203 )     (411 )     45,805  
 
                                                     
Comprehensive income:
                                                                       
Net income
                                    4,523                               4,523  
Other comprehensive income, net of tax:
                                                                       
Translation adjustments
                                            12                       12  
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $16 million of net gains included in net income
                                            (533 )                     (533 )
Net unrealized losses on derivatives and hedging activities, net of reclassification of $50 million of net gains on cash flow hedges included in net income
                                            (29 )                     (29 )
Defined benefit pension plans:
                                                                       
Amortization of actuarial loss and prior service cost included in net income
                                            12                       12  
 
                                                                     
Total comprehensive income
                                                                    3,985  
Common stock issued
    38,031,618                       (49 )     (179 )             1,223               995  
Common stock issued for acquisitions
    17,705,418                       65                       581               646  
Common stock repurchased
    (77,290,465 )                                             (2,689 )             (2,689 )
Preferred stock (484,000) issued to ESOP
            484               34                               (518 )     --  
Preferred stock released to ESOP
                            (16 )                             247       231  
Preferred stock (230,335) converted to common shares
    6,613,653       (231 )             15                       216               --  
Common stock dividends
                                    (1,885 )                             (1,885 )
Tax benefit upon exercise of stock options
                            127                                       127  
Stock option compensation expense
                            83                                       83  
Net change in deferred compensation and related plans
                            29                       (26 )             3  
 
                                                     
Net change
    (14,939,776 )     253             288       2,459       (538 )     (695 )     (271 )     1,496  
 
                                                     

BALANCE JUNE 30, 2007

    3,362,210,085     $ 637     $ 5,788     $ 8,027     $ 37,665     $ (236 )   $ (3,898 )   $ (682 )   $ 47,301  
 
                                                     
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                 
   
    Six months ended June 30 ,
(in millions)   2007     2006  
 

Cash flows from operating activities:

               
Net income
  $ 4,523     $ 4,107  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    1,435       865  
Changes in fair value of MSRs (residential) and MHFS carried at fair value
    (528 )     (74 )
Depreciation and amortization
    764       1,274  
Other net gains
    (1,451 )     (772 )
Preferred shares released to ESOP
    231       191  
Stock option compensation expense
    83       80  
Excess tax benefits related to stock option payments
    (117 )     (106 )
Originations of MHFS
    (121,669 )     (117,806 )
Proceeds from sales of and principal collected on mortgages originated for sale
    119,405       114,179  
Net change in:
               
Trading assets
    (1,682 )     3,580  
Loans originated for sale
    (161 )     18  
Deferred income taxes
    459       483  
Accrued interest receivable
    (259 )     (115 )
Accrued interest payable
    (90 )     278  
Other assets, net
    321       3,095  
Other accrued expenses and liabilities, net
    7,660       10,966  
 
           

Net cash provided by operating activities

    8,924       20,243  
 
           

Cash flows from investing activities:

               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    922       (6 )
Securities available for sale:
               
Sales proceeds
    8,363       26,330  
Prepayments and maturities
    4,601       2,983  
Purchases
    (43,162 )     (60,351 )
Loans:
               
Increase in banking subsidiaries’ loan originations, net of collections
    (17,430 )     (17,878 )
Proceeds from sales (including participations) of loans by banking subsidiaries
    1,640       34,832  
Purchases (including participations) of loans by banking subsidiaries
    (2,679 )     (2,981 )
Principal collected on nonbank entities’ loans
    11,711       11,842  
Loans originated by nonbank entities
    (13,171 )     (13,215 )
Net cash paid for acquisitions
    (2,825 )     (332 )
Proceeds from sales of foreclosed assets
    677       253  
Other changes in MSRs
    (812 )     (1,748 )
Other, net
    (2,222 )     (3,998 )
 
           

Net cash used by investing activities

    (54,387 )     (24,269 )
 
           

Cash flows from financing activities:

               
Net change in:
               
Deposits
    12,741       11,772  
Short-term borrowings
    27,869       (10,319 )
Long-term debt:
               
Proceeds from issuance
    14,905       11,924  
Repayment
    (8,643 )     (7,959 )
Common stock:
               
Proceeds from issuance
    995       931  
Repurchased
    (2,689 )     (1,185 )
Cash dividends paid
    (1,885 )     (2,692 )
Excess tax benefits related to stock option payments
    117       106  
Other, net
    (261 )     120  
 
           

Net cash provided by financing activities

    43,149       2,698  
 
           

Net change in cash and due from banks

    (2,314 )     (1,328 )

Cash and due from banks at beginning of period

    15,028       15,397  
 
           

Cash and due from banks at end of period

  $ 12,714     $ 14,069  
 
           

Supplemental disclosures of cash flow information:

               
Cash paid during the period for:
               
Interest
  $ 6,596     $ 5,477  
Income taxes
    1,646       959  
Noncash investing and financing activities:
               
Transfers from loans to MHFS
  $     $ 30,164  
Transfers from MHFS to loans
    1,514        
Transfers from loans to foreclosed assets
    1,225       795  
   
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”, “our” and “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

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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.
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 MHFS originations. (See Note 16.) These loans are 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 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 consolidated federal income tax return and, in certain states, combined state tax returns.
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 in the period in which they occur. Deferred income tax expense results from changes in deferred 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.

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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.
Transactions completed in the first half 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  
 
             
 
          $ 5,532  
 
             
   
At June 30, 2007, we had two pending business combinations with assets of approximately $7.4 billion. We expect to complete these transactions in the last half of 2007.
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.
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
 

Federal funds sold and securities purchased under resale agreements

  $ 3,868     $ 5,024     $ 3,744  
Interest-earning deposits
    459       413       869  
Other short-term investments
    836       641       754  
 
                 
Total
  $ 5,163     $ 6,078     $ 5,367  
 
                 
   

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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.
                                                 
   
    June 30, 2007     Dec. 31, 2006     June 30, 2006  
            Fair             Fair             Fair  
(in millions)   Cost     value     Cost     value     Cost     value  
 

Securities of U.S. Treasury and federal agencies

  $ 873     $ 859     $ 774     $ 768     $ 929     $ 912  
Securities of U.S. states and political subdivisions
    5,044       5,132       3,387       3,530       2,909       2,988  
Mortgage-backed securities:
                                               
Federal agencies
    57,101       56,893       26,981       27,463       51,960       51,543  
Private collateralized mortgage obligations (1)
    3,756       3,755       3,989       4,046       8,033       8,096  
 
                                   
Total mortgage-backed securities
    60,857       60,648       30,970       31,509       59,993       59,639  
Other
    4,617       4,621       5,980       6,026       7,080       7,081  
 
                                   
Total debt securities
    71,391       71,260       41,111       41,833       70,911       70,620  
Marketable equity securities
    697       919       592       796       558       800  
 
                                   

Total

  $ 72,088     $ 72,179     $ 41,703     $ 42,629     $ 71,469     $ 71,420  
 
                                   
   
(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 net unrealized gains (losses) on securities available for sale. The net unrealized gains (losses) on securities available for sale are reported on an after-tax basis as a component of cumulative other comprehensive income.
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
 

Gross unrealized gains

  $ 568     $ 987     $ 652  
Gross unrealized losses
    (477 )     (61 )     (701 )
 
                 
Net unrealized gains (losses)
  $ 91     $ 926     $ (49 )
 
                 
   
The following table shows the net realized gains (losses) on the sales of securities from the securities available for sale portfolio, including marketable equity securities.
                                 
   
    Quarter     Six months  
    ended June 30 ,   ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Gross realized gains
  $ 21     $ 76     $ 80     $ 247  
Gross realized losses (1)
    (47 )     (173 )     (54 )     (258 )
 
                       
Net realized gains (losses)
  $ (26 )   $ (97 )   $ 26     $ (11 )
 
                       
   
(1)   Includes other-than-temporary impairment of $4 million for the first half of 2007 and $13 million for both the second quarter and first half of 2006. No other-than-temporary impairment was recorded in second quarter 2007.

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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 $3,195 million, $3,113 million and $3,499 million, at June 30, 2007, December 31, 2006, and June 30, 2006, respectively.
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
 

Commercial and commercial real estate:

                       
Commercial
  $ 77,560     $ 70,404     $ 66,014  
Other real estate mortgage
    32,336       30,112       29,281  
Real estate construction
    16,552       15,935       14,764  
Lease financing
    5,979       5,614       5,301  
 
                 
Total commercial and commercial real estate
    132,427       122,065       115,360  
Consumer:
                       
Real estate 1-4 family first mortgage
    61,177       53,228       50,491  
Real estate 1-4 family junior lien mortgage
    72,398       68,926       64,727  
Credit card
    15,567       14,697       12,387  
Other revolving credit and installment
    53,701       53,534       51,236  
 
                 
Total consumer
    202,843       190,385       178,841  
Foreign
    7,530       6,666       6,421  
 
                 

Total loans

  $ 342,800     $ 319,116     $ 300,622  
 
                 
   
The recorded investment in impaired loans and the methodology used to measure impairment was:
                         
   
    June 30 ,   Dec. 31 ,   June 30 ,
(in millions)   2007     2006     2006  
 

Impairment measurement based on:

                       
Collateral value method
  $ 140     $ 122     $ 101  
Discounted cash flow method
    136       108       37  
 
                 
Total (1)
  $ 276     $ 230     $ 138  
 
                 
   
(1)   Includes $165 million, $146 million and $47 million of impaired loans with a related allowance of $26 million, $29 million and $12 million at June 30, 2007, December 31, 2006, and June 30, 2006, respectively.
The average recorded investment in impaired loans was $255 million and $137 million during second quarter 2007 and 2006, respectively, and $253 million and $150 million in the first half 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     Six months  
    ended June 30 ,   ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Balance, beginning of period

  $ 3,965     $ 4,025     $ 3,964     $ 4,057  

Provision for credit losses

    720       432       1,435       865  

Loan charge-offs:

                               
Commercial and commercial real estate:
                               
Commercial
    (127 )     (93 )     (253 )     (172 )
Other real estate mortgage
    (1 )     (1 )     (2 )     (2 )
Real estate construction
    (2 )           (2 )      
Lease financing
    (9 )     (7 )     (16 )     (16 )
 
                       
Total commercial and commercial real estate
    (139 )     (101 )     (273 )     (190 )
Consumer:
                               
Real estate 1-4 family first mortgage
    (25 )     (22 )     (49 )     (51 )
Real estate 1-4 family junior lien mortgage
    (107 )     (28 )     (190 )     (62 )
Credit card
    (191 )     (113 )     (374 )     (218 )
Other revolving credit and installment
    (434 )     (349 )     (908 )     (671 )
 
                       
Total consumer
    (757 )     (512 )     (1,521 )     (1,002 )
Foreign
    (64 )     (74 )     (126 )     (148 )
 
                       
Total loan charge-offs
    (960 )     (687 )     (1,920 )     (1,340 )
 
                       

Loan recoveries:

                               
Commercial and commercial real estate:
                               
Commercial
    25       31       49       58  
Other real estate mortgage
    3       5       5       6  
Real estate construction
          1       1       2  
Lease financing
    4       6       9       12  
 
                       
Total commercial and commercial real estate
    32       43       64       78  
Consumer:
                               
Real estate 1-4 family first mortgage
    6       9       12       12  
Real estate 1-4 family junior lien mortgage
    16       10       25       18  
Credit card
    30       25       61       49  
Other revolving credit and installment
    139       148       288       277  
 
                       
Total consumer
    191       192       386       356  
Foreign
    17       20       35       41  
 
                       
Total loan recoveries
    240       255       485       475  
 
                       
Net loan charge-offs
    (720 )     (432 )     (1,435 )     (865 )
 
                       

Allowances related to business combinations/other

    42       10       43       (22 )
 
                       

Balance, end of period

  $ 4,007     $ 4,035     $ 4,007     $ 4,035  
 
                       

Components:

                               
Allowance for loan losses
  $ 3,820     $ 3,851     $ 3,820     $ 3,851  
Reserve for unfunded credit commitments
    187       184       187       184  
 
                       
Allowance for credit losses
  $ 4,007     $ 4,035     $ 4,007     $ 4,035  
 
                       

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

    0.87 %     0.58 %     0.89 %     0.57 %

Allowance for loan losses as a percentage of total loans

    1.11 %     1.28 %     1.11 %     1.28 %
Allowance for credit losses as a percentage of total loans
    1.17       1.34       1.17       1.34  
   

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

Nonmarketable equity investments:

                       
Private equity investments
  $ 1,858     $ 1,671     $ 1,664  
Federal bank stock
    1,342       1,326       1,354  
All other
    2,491       2,240       2,105  
 
                 
Total nonmarketable equity investments (1)
    5,691       5,237       5,123  

Operating lease assets

    2,854       3,091       3,270  
Accounts receivable
    7,466       7,522       8,178  
Interest receivable
    2,829       2,570       2,394  
Core deposit intangibles
    390       383       437  
Foreclosed assets:
                       
GNMA loans (2)
    423       322       238  
Other
    554       423       275  
Due from customers on acceptances
    79       103       94  
Other
    11,680       9,892       12,783  
 
                 
Total other assets
  $ 31,966     $ 29,543     $ 32,792  
 
                 
   
(1)   At June 30, 2007, December 31, 2006, and June 30, 2006, $4.8 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 included foreclosed real estate securing Government National Mortgage Association (GNMA) loans. 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 or guaranteed by the Department of Veterans Affairs.
Income related to nonmarketable equity investments was:
                                 
   
    Quarter     Six months  
    ended June 30 ,   ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Net gains from private equity investments

  $ 226     $ 74     $ 302     $ 143  
Net losses from all other nonmarketable equity investments
    (4 )     (16 )     (17 )     (19 )
 
                       
Net gains from nonmarketable equity investments
  $ 222     $ 58     $ 285     $ 124  
 
                       
   

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

Amortized intangible assets:

                               
MSRs (commercial) (1)
  $ 533     $ 115     $ 233     $ 58  
Core deposit intangibles
    2,434       2,044       2,374       1,937  
Credit card and other intangibles
    641       397       573       361  
 
                       
Total intangible assets
  $ 3,608     $ 2,556     $ 3,180     $ 2,356  
 
                       

MSRs (fair value) (1)

  $ 18,733             $ 15,650          
Trademark
    14               14          
   
(1)   See Note 15 for additional information on MSRs.
The current year and estimated future amortization expense for intangible assets as of June 30, 2007, follows:
                         
   
    Core              
    deposit              
(in millions)   intangibles     Other(1)     Total  
 

Six months ended June 30, 2007 (actual)

  $ 53     $ 56     $ 109  
 
                 

Estimate for year ended December 31,

                       
2007
  $ 108     $ 111     $ 219  
2008
    104       97       201  
2009
    95       87       182  
2010
    84       79       163  
2011
    25       69       94  
2012
    7       62       69  
   
(1)   Includes amortized commercial MSRs and credit card and other intangibles.
We based the projections of amortization expense shown above on existing asset balances at June 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  
(in millions)   Banking     Banking     Financial     Company  
 

December 31, 2005

  $ 7,374     $ 3,047     $ 366     $ 10,787  
Goodwill from business combinations
    30       272             302  
Foreign currency translation adjustments
                2       2  
Realignment of businesses (primarily insurance)
    (19 )     19              
 
                       
June 30, 2006
  $ 7,385     $ 3,338     $ 368     $ 11,091  
 
                       

December 31, 2006

  $ 7,385     $ 3,524     $ 366     $ 11,275  
Goodwill from business combinations
    468       236             704  
Foreign currency translation adjustments
                4       4  
 
                       
June 30, 2007
  $ 7,853     $ 3,760     $ 370     $ 11,983  
 
                       
   
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  
 

June 30, 2006

  $ 3,538     $ 1,388     $ 368     $ 5,797     $ 11,091  

June 30, 2007

    4,006       1,810       370       5,797       11,983  
   

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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  
    June 30 ,   Dec. 31 ,   June 30 ,   June 30 ,   Dec. 31 ,   June 30 ,   dividends rate  
    2007     2006     2006     2007     2006     2006     Minimum     Maximum  
ESOP Preferred Stock (1):
                                                               

2007

    269,458                 $ 269     $     $       10.75 %     11.75 %

2006

    106,121       115,521       237,291       106       116       237       10.75       11.75  

2005

    82,184       84,284       92,584       82       84       93       9.75       10.75  

2004

    63,680       65,180       73,080       63       65       73       8.50       9.50  

2003

    43,693       44,843       51,243       44       45       51       8.50       9.50  

2002

    32,079       32,874       38,764       32       33       39       10.50       11.50  

2001

    21,823       22,303       27,633       22       22       28       10.50       11.50  

2000

    13,874       14,142       18,912       14       14       19       11.50       12.50  

1999

    4,006       4,094       6,231       4       4       6       10.30       11.30  

1998

    551       563       1,908       1       1       2       10.75       11.75  

1997

                133                         9.50       10.50  
 
                                                   

Total ESOP Preferred Stock

    637,469       383,804       547,779     $ 637     $ 384     $ 548                  
 
                                                   

Unearned ESOP shares (2)

                          $ (682 )   $ (411 )   $ (586 )                
 
                                                         
   
(1)   Liquidation preference $1,000. At June 30, 2007, December 31, 2006, and June 30, 2006, additional paid-in capital included $45 million, $27 million and $38 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.

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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 we expect that we will be required to make, a contribution to the Cash Balance Plan in 2007, because the Plan is well funded.
The net periodic benefit cost (income) was:
                                                 
   
    Pension benefits             Pension benefits        
            Non-     Other             Non-     Other  
(in millions)   Qualified     qualified     benefits     Qualified     qualified     benefits  
Quarter ended June 30,   2007     2006  

Service cost

  $ 70     $ 4     $ 4     $ 62     $ 4     $ 4  
Interest cost
    61       4       10       56       4       10  
Expected return on plan assets
    (112 )           (9 )     (105 )           (8 )
Amortization of net actuarial loss (1)
    8       3       2       14       2       1  
Amortization of prior service cost
          (1 )     (1 )                 (1 )
Special termination benefits
                      2              
Curtailment gain
                                  (9 )
 
                                   
Net periodic benefit cost (income)
  $ 27     $ 10     $ 6     $ 29     $ 10     $ (3 )
 
                                   

Six months ended June 30,

                                               

Service cost

  $ 140     $ 8     $ 8     $ 124     $ 8     $ 8  
Interest cost
    122       8       20       112       8       20  
Expected return on plan assets
    (225 )           (18 )     (210 )           (16 )
Amortization of net actuarial loss (1)
    16       6       3       28       4       3  
Amortization of prior service cost
          (1 )     (2 )                 (2 )
Special termination benefits
                      2              
Curtailment gain
                                  (9 )
 
                                   
Net periodic benefit cost
  $ 53     $ 21     $ 11     $ 56     $ 20     $ 4  
 
                                   
   
(1)   Net actuarial loss is generally amortized over five years.

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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 consolidated federal income tax return and the Company and its subsidiaries file income tax returns in various state and foreign jurisdictions. With few exceptions, we are not subject to federal income 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 for the first quarter and first six months of 2007 was impacted by a $119 million net reduction to income tax expense. The net decrease, including refund interest, was primarily due to the resolution of certain outstanding federal income tax matters for periods prior to 2002.

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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     Six months  
            ended June 30 ,   ended June 30 ,
(in millions, except per share amounts)     2007     2006     2007     2006  
 

                                       
Net income (numerator)   $ 2,279     $ 2,089     $ 4,523     $ 4,107  
 
                               

                                       
EARNINGS PER COMMON SHARE                                
Average common shares outstanding (denominator)     3,351.2       3,363.8       3,363.5       3,360.9  
 
                               

                                       
Per share   $ 0.68     $ 0.62     $ 1.34     $ 1.22  
 
                               

                                       
DILUTED EARNINGS PER COMMON SHARE                                
Average common shares outstanding     3,351.2       3,363.8       3,363.5       3,360.9  
Add:
  Stock options     38.0       40.5       38.9       39.1  
 
  Restricted share rights     0.1       0.1       0.1       0.1  
 
                               
Diluted average common shares outstanding (denominator)     3,389.3       3,404.4       3,402.5       3,400.1  
 
                               

                                       
Per share   $ 0.67     $ 0.61     $ 1.33     $ 1.21  
 
                               
   
At June 30, 2007 and 2006, options to purchase 8.2 million and 3.0 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.

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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 Group offers 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 the Wells 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 card 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 Group serves 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 sales, interest rate, commodity and equity risk management, online/electronic products such as the Commercial Electronic Office® (CEO®) portal, insurance and investment banking services. Wholesale Banking manages and administers institutional investments, employee benefit trusts and mutual funds, including the Wells 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

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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 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 Financial includes 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 Company total of average assets includes unallocated goodwill balances held at the enterprise level.

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

Net interest income (1)

  $ 3,299     $ 3,321     $ 814     $ 706     $ 1,083     $ 957     $ 5,196     $ 4,984  
Provision (reversal of provision) for credit losses
    353       187       1       (7 )     366       252       720       432  
Noninterest income
    3,031       2,398       1,336       1,085       328       322       4,695       3,805  
Noninterest expense
    3,667       3,485       1,269       1,018       791       673       5,727       5,176  
 
                                               
Income before income tax expense
    2,310       2,047       880       780       254       354       3,444       3,181  
Income tax expense
    757       690       310       274       98       128       1,165       1,092  
 
                                               
Net income
  $ 1,553     $ 1,357     $ 570     $ 506     $ 156     $ 226     $ 2,279     $ 2,089  
 
                                               

Average loans

  $ 186.6     $ 173.9     $ 81.4     $ 70.4     $ 64.0     $ 56.1     $ 332.0     $ 300.4  
Average assets (2)
    320.0       327.2       107.1       97.2       69.8       61.3       502.7       491.5  
Average core deposits
    250.9       232.0       49.6       32.0             0.1       300.5       264.1  

Six months ended June 30,

                                                               

Net interest income (1)

  $ 6,523     $ 6,577     $ 1,595     $ 1,386     $ 2,088     $ 1,891     $ 10,206     $ 9,854  
Provision (reversal of provision) for credit losses
    659       376       14       (9 )     762       498       1,435       865  
Noninterest income
    5,878       4,541       2,601       2,181       647       768       9,126       7,490  
Noninterest expense
    7,307       6,872       2,406       2,010       1,540       1,368       11,253       10,250  
 
                                               
Income before income tax expense
    4,435       3,870       1,776       1,566       433       793       6,644       6,229  
Income tax expense
    1,330       1,283       626       549       165       290       2,121       2,122  
 
                                               
Net income
  $ 3,105     $ 2,587     $ 1,150     $ 1,017     $ 268     $ 503     $ 4,523     $ 4,107  
 
                                               

Average loans

  $ 183.7     $ 182.1     $ 79.7     $ 69.0     $ 63.3     $ 54.6     $ 326.7     $ 305.7  
Average assets (2)
    313.6       321.0       104.1       96.6       69.0       60.0       492.5       483.4  
Average core deposits
    247.4       230.5       48.2       30.2             0.1       295.6       260.8  
   
(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 all periods presented.

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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 $4.0 billion and $3.4 billion in total assets at June 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 $4.3 billion and $2.9 billion in total assets at June 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 $1.6 billion and $980 million at June 30, 2007, and December 31, 2006, respectively, primarily 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.

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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 June 30 ,   Six months ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Fair value, beginning of period

  $ 17,779     $ 13,800     $ 17,591     $ 12,547  
Purchases
    142       511       301       730  
Servicing from securitizations or asset transfers
    1,029       1,310       1,857       2,299  
Sales
    (1,422 )           (1,422 )      

Changes in fair value:

                               
Due to change in valuation model inputs or assumptions (1)
    2,013       550       2,002       1,072  
Other changes in fair value (2)
    (808 )     (521 )     (1,596 )     (998 )
 
                       

Fair value, end of period

  $ 18,733     $ 15,650     $ 18,733     $ 15,650  
 
                       
   
(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 June 30 ,   Six months ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Balance, beginning of period

  $ 400     $ 142     $ 377     $ 122  
Purchases (1)
    26       39       55       64  
Servicing from securitizations or asset transfers (1)
    11             21        
Amortization
    (19 )     (6 )     (35 )     (11 )
 
                       
Balance, end of period (2)
  $ 418     $ 175     $ 418     $ 175  
 
                       

Fair value of amortized MSRs:

                               
Beginning of period
  $ 484     $ 205     $ 457     $ 146  
End of period
    561       252       561       252  
   
(1)   Based on June 30, 2007, assumptions, the weighted-average amortization period for MSRs added during the second quarter and first half of 2007 was approximately 10.5 years and 11.1 years, respectively.
(2)   There was no valuation allowance recorded for the periods presented.

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

Loans serviced for others (1)

  $ 1,347     $ 1,020  
Owned loans serviced (2)
    96       90  
 
           
Total owned servicing
    1,443       1,110  
Sub-servicing
    24       23  
 
           
Total managed servicing portfolio
  $ 1,467     $ 1,133  
 
           
Ratio of MSRs to related loans serviced for others
    1.42 %     1.55 %
   
(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 June 30 ,   Six months ended June 30 ,
(in millions)   2007     2006     2007     2006  
 

Servicing income, net:

                               
Servicing fees (1)
  $ 1,007     $ 820     $ 2,061     $ 1,567  
Changes in fair value of residential MSRs:
                               
Due to changes in valuation model inputs or assumptions (2)
    2,013       550       2,002       1,072  
Other changes in fair value (3)
    (808 )     (521 )     (1,596 )     (998 )
Amortization
    (19 )     (6 )     (35 )     (11 )
Net derivative losses from economic hedges (4)
    (2,238 )     (533 )     (2,261 )     (1,239 )
 
                       
Total servicing income, net
    (45 )     310       171       391  
Net gains on mortgage loan origination/sales activities
    635       359       1,130       632  
All other
    99       66       178       127  
 
                       
Total mortgage banking noninterest income
  $ 689     $ 735     $ 1,479     $ 1,150  
 
                       

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

  $ (225 )   $ 17     $ (259 )   $ (167 )
 
                       
   
(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.

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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 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 and federal agency securities and federal agency mortgage-backed securities, which 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, 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.

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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
                                 
   
    June 30, 2007  
(in millions)   Total     Level 1     Level 2     Level 3  
 

Trading assets

  $ 7,289     $ 1,608     $ 5,214     $ 467  
Securities available for sale
    72,179       58,619       11,546       2,014  
Mortgages held for sale
    30,175             30,175        
Mortgage servicing rights (residential)
    18,733                   18,733  
Other assets
    731       529       167       35  
 
                       
Total
  $ 129,107     $ 60,756     $ 47,102     $ 21,249  
 
                       

Other liabilities (1)

  $ (4,953 )   $ (2,470 )   $ (2,091 )   $ (392 )
 
                       
   
(1)   Derivatives represent a majority of this category.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
                                         
   
    Trading             Mortgage             Other  
    assets     Securities     servicing     Net derivative     liabilities  
    (excluding     available     rights     assets and     (excluding  
(in millions)   derivatives)     for sale     (residential)     liabilities     derivatives)  
 

Quarter ended June 30, 2007

                                       
Balance, beginning of quarter
  $ 353     $ 2,808     $ 17,779     $ (51 )   $ (249 )

Total net gains (losses) included in net income

    62             1,205       (400 )     (22 )
Purchases, sales, issuances and settlements, net
    51       (794 )     (251 )     368       (6 )
Transfer out of Level 3
                      4        
 
                             
Balance, end of quarter
  $ 466     $ 2,014     $ 18,733     $ (79 )   $ (277 )
 
                             

Net gains (losses) included in net income relating to assets and liabilities held at June 30, 2007 (1)

  $ 76  (2)   $     $ 1,810  (3)   $ (76 ) (3)   $ (28 ) (3)
 
                             

Six months ended June 30, 2007

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

Total net gains (losses) included in net income

    21             406       (383 )     (28 )
Purchases, sales, issuances and settlements, net
    85       (1,433 )     736       368       33  
Transfer out of Level 3
                      4        
 
                             
Balance, end of period
  $ 466     $ 2,014     $ 18,733     $ (79 )   $ (277 )
 
                             

Net gains (losses) included in net income relating to assets and liabilities held at June 30, 2007 (1)

  $ 51  (2)   $     $ 1,805  (3)   $ (76 ) (3)   $ (28 ) (3)
 
                             
   
(1)   Represents only net gains (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)   Included in mortgage banking in the income statement.

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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 half of 2007 that were still held in the balance sheet at June 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 June 30, 2007.
                                         
   
                                    Six months ended  
                                    June 30, 2007  
    Carrying value at June 30, 2007     Total  
(in millions)   Total     Level 1     Level 2     Level 3     losses  
 

Mortgages held for sale

  $ 2,227     $     $ 2,227     $     $ (59 )
Loans (1)
    751             751             (1,328 )
Private equity investments
    3                   3       (7 )
Foreclosed assets (2)
    319             319             (92 )
Operating lease assets
    30             30             (2 )
 
                                     
 
                                  $ (1,488 )
 
                                     
   
(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.
                         
   
    June 30, 2007  
                    Fair value  
            Aggregate     carrying amount  
    Fair value     unpaid     less aggregate  
(in millions)   carrying amount     principal     unpaid principal  
 

Mortgages held for sale reported at fair value:

                       
Total loans
  $ 30,175     $ 30,208     $ (33 )(1)
Nonaccrual loans
    5       6       (1 )
Loans 90 days or more past due and still accruing
    7       7        
   
(1)   The difference between fair value carrying amount and 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.

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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.
                                 
   
    June 30, 2007  
    Quarter ended     Six months ended  
    Mortgages     Other     Mortgages     Other  
    held     interests     held     interests  
(in millions)   for sale     held     for sale     held  
 

Changes in fair value included in net income:

                               
Mortgage banking noninterest income:
                               
Net gains (losses) on mortgage loan origination/sales activities (1)
  $ (107 )   $     $ 122     $  
Other noninterest income
          61             20  
   
(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.

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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 June 30, 2007  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
 

Dividends from subsidiaries:

                                       
Bank
  $ 1,708     $     $     $ (1,708 )   $  
Nonbank
                             
Interest income from loans
          1,441       5,670       (11 )     7,100  
Interest income from subsidiaries
    869                   (869 )      
Other interest income
    33       26       1,415       (1 )     1,473  
 
                             
Total interest income
    2,610       1,467       7,085       (2,589 )     8,573  
 
                             

Deposits

                2,031       (90 )     1,941  
Short-term borrowings
    80       116       434       (365 )     265  
Long-term debt
    922       461       214       (426 )     1,171  
 
                             
Total interest expense
    1,002       577       2,679       (881 )     3,377  
 
                             

NET INTEREST INCOME

    1,608       890       4,406       (1,708 )     5,196  
Provision (reversal of provision) for credit losses
          (84 )     804             720  
 
                             
Net interest income after provision for credit losses
    1,608       974       3,602       (1,708 )     4,476  
 
                             

NONINTEREST INCOME

                                       
Fee income – nonaffiliates
          91       2,643             2,734  
Other
    96             1,877       (12 )     1,961  
 
                             
Total noninterest income
    96       91       4,520       (12 )     4,695  
 
                             

NONINTEREST EXPENSE

                                       
Salaries and benefits
    54       318       3,016             3,388  
Other
    38       253       2,060       (12 )     2,339  
 
                             
Total noninterest expense
    92       571       5,076       (12 )     5,727  
 
                             

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

    1,612       494       3,046       (1,708 )     3,444  
Income tax expense (benefit)
    (32 )     178       1,019             1,165  
Equity in undistributed income of subsidiaries
    635                   (635 )      
 
                             

NET INCOME

  $ 2,279     $ 316     $ 2,027     $ (2,343 )   $ 2,279  
 
                             
   

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

Dividends from subsidiaries:

                                       
Bank
  $ 240     $     $     $ (240 )   $  
Nonbank
    168                   (168 )      
Interest income from loans
          1,307       4,947       (9 )     6,245  
Interest income from subsidiaries
    814                   (814 )      
Other interest income
    24       27       1,781             1,832  
 
                             
Total interest income
    1,246       1,334       6,728       (1,231 )     8,077  
 
                             

Deposits

                1,794             1,794  
Short-term borrowings
    101       84       328       (224 )     289  
Long-term debt
    793       445       146       (374 )     1,010  
 
                             
Total interest expense
    894       529       2,268       (598 )     3,093  
 
                             

NET INTEREST INCOME

    352       805       4,460       (633 )     4,984  
Provision for credit losses
          55       377             432  
 
                             
Net interest income after provision for credit losses
    352       750       4,083       (633 )     4,552  
 
                             

NONINTEREST INCOME

                                       
Fee income – nonaffiliates
          66       2,202             2,268  
Other
    (4 )     57       1,497       (13 )     1,537  
 
                             
Total noninterest income
    (4 )     123       3,699       (13 )     3,805  
 
                             

NONINTEREST EXPENSE

                                       
Salaries and benefits
    19       252       2,684             2,955  
Other
    (15 )     225       2,249       (238 )     2,221  
 
                             
Total noninterest expense
    4       477       4,933       (238 )     5,176  
 
                             

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

    344       396       2,849       (408 )     3,181  
Income tax expense (benefit)
    (26 )     137       981             1,092  
Equity in undistributed income of subsidiaries
    1,719                   (1,719 )      
 
                             

NET INCOME

  $ 2,089     $ 259     $ 1,868     $ (2,127 )   $ 2,089  
 
                             
   

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

Dividends from subsidiaries:

                                       
Bank
  $ 3,266     $     $     $ (3,266 )   $  
Nonbank
    4                   (4 )      
Interest income from loans
          2,795       11,091       (22 )     13,864  
Interest income from subsidiaries
    1,721                   (1,721 )      
Other interest income
    67       52       2,732       (3 )     2,848  
 
                             
Total interest income
    5,058       2,847       13,823       (5,016 )     16,712  
 
                             

Deposits

                4,091       (293 )     3,798  
Short-term borrowings
    139       226       652       (616 )     401  
Long-term debt
    1,819       914       411       (837 )     2,307  
 
                             
Total interest expense
    1,958       1,140       5,154       (1,746 )     6,506  
 
                             

NET INTEREST INCOME

    3,100       1,707       8,669       (3,270 )     10,206  
Provision for credit losses
          198       1,237             1,435  
 
                             
Net interest income after provision for credit losses
    3,100       1,509       7,432       (3,270 )     8,771  
 
                             

NONINTEREST INCOME

                                       
Fee income – nonaffiliates
          171       4,960             5,131  
Other
    127       77       3,815       (24 )     3,995  
 
                             
Total noninterest income
    127       248       8,775       (24 )     9,126  
 
                             

NONINTEREST EXPENSE

                                       
Salaries and benefits
    58       625       5,979             6,662  
Other
    58       565       3,992       (24 )     4,591  
 
                             
Total noninterest expense
    116       1,190       9,971       (24 )     11,253  
 
                             

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

    3,111       567       6,236       (3,270 )     6,644  
Income tax expense (benefit)
    (43 )     212       1,952             2,121  
Equity in undistributed income of subsidiaries
    1,369                   (1,369 )      
 
                             

NET INCOME

  $ 4,523     $ 355     $ 4,284     $ (4,639 )   $ 4,523  
 
                             
   

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Condensed Consolidating Statement of Income
                                         
   
    Six months ended June 30, 2006  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Comany  
 

Dividends from subsidiaries:

                                       
Bank
  $ 835     $     $     $ (835 )   $  
Nonbank
    173                   (173 )      
Interest income from loans
          2,597       9,776       (18 )     12,355  
Interest income from subsidiaries
    1,568                   (1,568 )      
Other interest income
    52       50       3,152             3,254  
 
                             
Total interest income
    2,628       2,647       12,928       (2,594 )     15,609  
 
                             

Deposits

                3,276             3,276  
Short-term borrowings
    210       178       600       (429 )     559  
Long-term debt
    1,499       853       293       (725 )     1,920  
 
                             
Total interest expense
    1,709       1,031       4,169       (1,154 )     5,755  
 
                             

NET INTEREST INCOME

    919       1,616       8,759       (1,440 )     9,854  
Provision for credit losses
          327       538             865  
 
                             
Net interest income after provision for credit losses
    919       1,289       8,221       (1,440 )     8,989  
 
                             

NONINTEREST INCOME

                                       
Fee income – nonaffiliates
          130       4,296             4,426  
Other
    (27 )     123       2,996       (28 )     3,064  
 
                             
Total noninterest income
    (27 )     253       7,292       (28 )     7,490  
 
                             

NONINTEREST EXPENSE

                                       
Salaries and benefits
    52       537       5,295             5,884  
Other
    (17 )     436       4,407       (460 )     4,366  
 
                             
Total noninterest expense
    35       973       9,702       (460 )     10,250  
 
                             

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

    857       569       5,811       (1,008 )     6,229  
Income tax expense (benefit)
    (60 )     201       1,981             2,122  
Equity in undistributed income of subsidiaries
    3,190                   (3,190 )      
 
                             

NET INCOME

  $ 4,107     $ 368     $ 3,830     $ (4,198 )   $ 4,107  
 
                             
   

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

ASSETS

                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 7,936     $ 194     $     $ (8,130 )   $  
Nonaffiliates
          144       17,733             17,877  
Securities available for sale
    1,607       1,925       68,653       (6 )     72,179  
Mortgages and loans held for sale
                35,467             35,467  

Loans

          49,888       294,210       (1,298 )     342,800  
Loans to subsidiaries:
                                       
Bank
    11,400                   (11,400 )      
Nonbank
    50,813                   (50,813 )      
Allowance for loan losses
          (879 )     (2,941 )           (3,820 )
 
                             
Net loans
    62,213       49,009       291,269       (63,511 )     338,980  
 
                             
Investments in subsidiaries:
                                       
Bank
    44,714                   (44,714 )      
Nonbank
    5,431                   (5,431 )      
Other assets
    7,387       1,702       67,745       (1,472 )     75,362  
 
                             
 
Total assets
  $ 129,288     $ 52,974     $ 480,867     $ (123,264 )   $ 539,865  
 
                             

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                       
Deposits
  $     $     $ 332,873     $ (8,130 )   $ 324,743  
Short-term borrowings
    20       9,783       54,247       (23,212 )     40,838  
Accrued expenses and other liabilities
    4,474       1,444       29,458       (2,223 )     33,153  
Long-term debt
    71,680       38,444       17,601       (33,895 )     93,830  
Indebtedness to subsidiaries
    5,813                   (5,813 )      
 
                             
Total liabilities
    81,987       49,671       434,179       (73,273 )     492,564  
Stockholders’ equity
    47,301       3,303       46,688       (49,991 )     47,301  
 
                             

Total liabilities and stockholders’ equity

  $ 129,288     $ 52,974     $ 480,867     $ (123,264 )   $ 539,865  
 
                             
   

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

ASSETS

                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 12,310     $ 201     $     $ (12,511 )   $  
Nonaffiliates
    76       274       19,086             19,436  
Securities available for sale
    885       1,789       68,752       (6 )     71,420  
Mortgages and loans held for sale
          21       40,287             40,308  

Loans

          46,148       255,371       (897 )     300,622  
Loans to subsidiaries:
                                       
Bank
    3,400                   (3,400 )      
Nonbank
    46,100       480             (46,580 )      
Allowance for loan losses
          (1,142 )     (2,709 )           (3,851 )
 
                             
Net loans
    49,500       45,486       252,662       (50,877 )     296,771  
 
                             
Investments in subsidiaries:
                                       
Bank
    39,588                   (39,588 )      
Nonbank
    4,565                   (4,565 )      
Other assets
    6,678       1,368       65,843       (2,308 )     71,581  
 
                             

Total assets

  $ 113,602     $ 49,139     $ 446,630     $ (109,855 )   $ 499,516  
 
                             

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                       
Deposits
  $     $     $ 338,963     $ (12,511 )   $ 326,452  
Short-term borrowings
    27       6,726       19,026       (12,160 )     13,619  
Accrued expenses and other liabilities
    4,619       1,026       31,225       (3,076 )     33,794  
Long-term debt
    62,395       38,533       16,215       (33,386 )     83,757  
Indebtedness to subsidiaries
    4,667                   (4,667 )      
 
                             
Total liabilities
    71,708       46,285       405,429       (65,800 )     457,622  
Stockholders’ equity
    41,894       2,854       41,201       (44,055 )     41,894  
 
                             

Total liabilities and stockholders’ equity

  $ 113,602     $ 49,139     $ 446,630     $ (109,855 )   $ 499,516  
 
                             
   

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Condensed Consolidating Statement of Cash Flows
                                 
   
    Six months ended June 30, 2007  
                    Other        
                    consolidating        
                    subsidiaries/     Consolidated  
(in millions)   Parent     WFFI     eliminations     Company  
 

Cash flows from operating activities:

                               
Net cash provided by operating activities
  $ 2,591     $ 764     $ 5,569     $ 8,924  
 
                       

Cash flows from investing activities:

                               
Securities available for sale:
                               
Sales proceeds
    1,063       264       7,036       8,363  
Prepayments and maturities
          145       4,456       4,601  
Purchases
    (1,753 )     (619 )     (40,790 )     (43,162 )
Loans:
                               
Increase in banking subsidiaries’ loan originations, net of collections
          (1,065 )     (16,365 )     (17,430 )
Proceeds from sales (including participations) of loans by banking subsidiaries
                1,640       1,640  
Purchases (including participations) of loans by banking subsidiaries
                (2,679 )     (2,679 )
Principal collected on nonbank entities’ loans
          9,754       1,957       11,711  
Loans originated by nonbank entities
          (10,558 )     (2,613 )     (13,171 )
Net repayments from (advances to) subsidiaries
    (10,186 )           10,186        
Capital notes and term loans made to subsidiaries
    (5,278 )           5,278        
Principal collected on notes/loans made to subsidiaries
    4,665             (4,665 )      
Net decrease (increase) in investment in subsidiaries
    (1,073 )           1,073        
Net cash paid for acquisitions
                (2,825 )     (2,825 )
Other, net
          (85 )     (1,350 )     (1,435 )
 
                       
Net cash used by investing activities
    (12,562 )     (2,164 )     (39,661 )     (54,387 )
 
                       

Cash flows from financing activities:

                               
Net change in:
                               
Deposits
                12,741       12,741  
Short-term borrowings
    777       1,749       25,343       27,869  
Long-term debt:
                               
Proceeds from issuance
    13,224       5,458       (3,777 )     14,905  
Repayment
    (6,839 )     (5,946 )     4,142       (8,643 )
Common stock:
                               
Proceeds from issuance
    995                   995  
Repurchased
    (2,689 )                 (2,689 )
Cash dividends paid
    (1,885 )                 (1,885 )
Excess tax benefits related to stock option payments
    117                   117  
Other, net
    (2 )     7       (266 )     (261 )
 
                       
Net cash provided by financing activities
    3,698       1,268       38,183       43,149  
 
                       

Net change in cash and due from banks

    (6,273 )     (132 )     4,091       (2,314 )

Cash and due from banks at beginning of period

    14,209       470       349       15,028  
 
                       

Cash and due from banks at end of period

  $ 7,936     $ 338     $ 4,440     $ 12,714  
 
                       
   

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Condensed Consolidating Statement of Cash Flows
                                 
   
    Six months ended June 30, 2006  
                    Other        
                    consolidating        
                    subsidiaries/     Consolidated  
(in millions)   Parent     WFFI     eliminations     Company  
 

Cash flows from operating activities:

                               
Net cash provided by operating activities
  $ 1,851     $ 331     $ 18,061     $ 20,243  
 
                       

Cash flows from investing activities:

                               
Securities available for sale:
                               
Sales proceeds
    99       260       25,971       26,330</