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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 September 30, 2006
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
    October 31, 2006
Common stock, $1-2/3 par value   3,375,964,759

 


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
PART I          
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Item 4.       32  
             
PART II          
             
Item 1A.       29  
             
Item 2.       75  
             
Item 6.       75  
             
Signature  
 
    76  
 EXHIBIT 10.(a)
 EXHIBIT 10.(b)
 EXHIBIT 10.(c)
 EXHIBIT 10.(d)
 EXHIBIT 10.(e)
 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     Sept. 30, 2006 from     Nine months ended        
    Sept. 30 ,   June 30 ,   Sept. 30 ,   June 30 ,   Sept. 30 ,   Sept. 30 ,   Sept. 30 ,   %  
($ in millions, except per share amounts)   2006     2006     2005     2006     2005     2006     2005     Change  
 

For the Period
                                                               

Net income
  $ 2,194     $ 2,089     $ 1,975       5 %     11 %   $ 6,301     $ 5,741       10 %
Diluted earnings per common share
    0.64       0.61       0.58       5       10       1.85       1.68       10  

Profitability ratios (annualized)
                                                               
Net income to average total assets (ROA)
    1.76 %     1.71 %     1.75 %     3       1       1.73 %     1.75 %     (1 )
Net income to average stockholders’ equity (ROE)
    20.00       19.76       19.72       1       1       19.89       19.70       1  

Efficiency ratio (1)
    56.9       58.9       57.5       (3 )     (1 )     58.3       57.8       1  

Total revenue
  $ 8,934     $ 8,789     $ 8,503       2       5     $ 26,278     $ 24,457       7  

Dividends declared per common share
          0.54       0.26       (100 )     (100 )     0.80       0.74       8  

Average common shares outstanding
    3,371.9       3,363.8       3,373.5                   3,364.6       3,379.8        
Diluted average common shares outstanding
    3,416.0       3,404.4       3,410.6                   3,405.5       3,418.7        

Average loans
  $ 303,980     $ 300,388     $ 295,611       1       3     $ 305,141     $ 292,874       4  
Average assets
    494,679       491,456       448,159       1       10       487,182       438,143       11  
Average core deposits (2)
    260,430       257,695       247,187       1       5       257,402       239,171       8  
Average retail core deposits (3)
    212,440       213,588       205,078       (1 )     4       212,980       198,881       7  

Net interest margin
    4.79 %     4.76 %     4.86 %     1       (1 )     4.80 %     4.87 %     (1 )

At Period End
                                                               
Securities available for sale
  $ 52,635     $ 71,420     $ 34,480       (26 )     53     $ 52,635     $ 34,480       53  
Loans
    307,491       300,622       296,189       2       4       307,491       296,189       4  
Allowance for loan losses
    3,799       3,851       3,886       (1 )     (2 )     3,799       3,886       (2 )
Goodwill
    11,192       11,091       10,776       1       4       11,192       10,776       4  
Assets
    483,441       499,516       453,494       (3 )     7       483,441       453,494       7  
Core deposits (2)
    260,793       260,427       248,384             5       260,793       248,384       5  
Stockholders’ equity
    44,862       41,894       39,835       7       13       44,862       39,835       13  
Tier 1 capital (4)
    35,551       33,344       30,996       7       15       35,551       30,996       15  
Total capital (4)
    50,197       47,202       43,925       6       14       50,197       43,925       14  

Capital ratios
                                                               
Stockholders’ equity to assets
    9.28 %     8.39 %     8.78 %     11       6       9.28 %     8.78 %     6  
Risk-based capital (4)
                                                               
Tier 1 capital
    8.74       8.35       8.35       5       5       8.74       8.35       5  
Total capital
    12.34       11.82       11.84       4       4       12.34       11.84       4  
Tier 1 leverage (4)
    7.41       6.99       7.16       6       3       7.41       7.16       3  

Book value per common share
  $ 13.30     $ 12.46     $ 11.86       7       12     $ 13.30     $ 11.86       12  

Team members (active, full-time equivalent)
    156,400       154,300       151,300       1       3       156,400       151,300       3  

Common Stock Price
                                                               
High
  $ 36.89     $ 34.86     $ 31.44       6       17     $ 36.89     $ 31.44       17  
Low
    33.36       31.90       29.00       5       15       30.31       28.89       5  
Period end
    36.18       33.54       29.29       8       24       36.18       29.29       24  
 
(1)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates and market rate and other savings.
(3)   Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(4)   See Note 18 (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 September 30, 2006, 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. We identify some of the forward-looking statements contained in this Report in the “Risk Factors” section. 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, 2005 (2005 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 $483 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 September 30, 2006. 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 third quarter 2006, we achieved record diluted earnings per share of $0.64, up 10% from a year ago, and record net income of $2.19 billion, up 11% from a year ago. All common share and per share disclosures in this Report reflect the two-for-one stock split in the form of a 100% stock dividend distributed August 11, 2006. Our results were driven by solid revenue growth, with revenue in businesses other than Wells Fargo Home Mortgage (Home Mortgage) up a combined 13% from last year, and positive operating leverage, and once again demonstrated the advantage of our diversified business model. Despite the uncertain economic and interest rate environment, our diverse group of more than 80 businesses once again produced double-digit earnings growth, led by particular strength in regional banking and wholesale/commercial banking. We continued to have strong performance on numerous financial measures, including a wider net interest margin, improved operating efficiency and, at 20%, the highest return on equity since first quarter 2004. We continued to have the widest net interest margin among large bank holding companies. The relative stability of our margin, despite the persistently challenging yield curve, reflected our discipline around managing our loan and securities portfolios for high long-term yield, as well as continued growth in our large base of core deposits while maintaining disciplined deposit pricing.
Our vision is to satisfy all the financial needs of our customers, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products 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 5.1 products with us and our average Wholesale Banking customer has 5.9 products. Our goal is eight

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products per customer, which is currently half of our estimate of potential demand. Our core products in third quarter 2006 grew from a year ago, with average loans up 3%, even with the sales of lower-yielding adjustable rate mortgages (ARMs) through second quarter 2006, average core deposits up 5% and assets managed and administered up 17%. Our owned mortgage loan servicing portfolio was a record $1.33 trillion at September 30, 2006, including the $140 billion mortgage servicing portfolio acquired from Washington Mutual, Inc. in July 2006.
We believe it is important to maintain a well-controlled environment as we continue to grow our businesses. We manage our credit risk by maintaining prudent credit policies for underwriting and effective procedures for monitoring and review. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. Our stockholder value has increased over time due to customer satisfaction, strong financial results, investment in our businesses and the prudent way we attempt to manage our business risks.
Our financial results included the following:
Net income for third quarter 2006 increased 11% to $2.19 billion from $1.98 billion for third quarter 2005. Diluted earnings per share for third quarter 2006 increased 10% to $0.64 from $0.58 for third quarter 2005. Return on average assets (ROA) was 1.76% and return on average common equity (ROE) was 20.00% for third quarter 2006, and 1.75% and 19.72%, respectively, for third quarter 2005.
Net income for the first nine months of 2006 was $6.30 billion, or $1.85 per share, compared with $5.74 billion, or $1.68 per share, for the first nine months of 2005. ROA was 1.73% in the first nine months of 2006, compared with 1.75% for the first nine months of 2005. ROE was 19.89% in the first nine months of 2006, compared with 19.70% for the first nine months of 2005.
Net interest income on a taxable-equivalent basis increased 8% to $5.08 billion for third quarter 2006 on 9% earning assets growth from $4.70 billion for third quarter 2005. Solid growth in net interest income again was driven by continued growth in high-quality earning assets and solid core deposit growth. With short-term interest rates now above 5%, our cumulative sales of lower-yielding ARMs and debt securities over the last two years continued to add to net interest income.
Noninterest income increased $60 million, or 2%, to $3.89 billion in third quarter 2006 from $3.83 billion in third quarter 2005. Excluding mortgage banking, noninterest income for third quarter 2006 increased 10% from third quarter 2005, reflecting strong growth in deposit service charges (up 8%), trust and investment fees (up 8%), debit and credit card fees (up 23%) and insurance fees (up 26%).
Mortgage banking noninterest income declined $259 million in third quarter 2006 from a year ago, largely due to the change in mortgage servicing rights (MSRs) valuation. In third quarter 2005 – a quarter in which long-term mortgage interest rates increased 51 basis points – the difference between MSRs impairment reserve release (income) and hedging losses was a net gain of $296 million. In third quarter 2006 – a quarter in which mortgage rates declined 48 basis points – the reduction in the value of MSRs net of hedging gains was a net loss of $86 million.

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Revenue, the sum of net interest income and noninterest income, grew $431 million, or 5%, to $8.93 billion in third quarter 2006 from $8.50 billion in third quarter 2005. Home Mortgage revenue declined $502 million to $923 million from $1.4 billion in third quarter 2005, largely due to the $356 million mortgage servicing rights valuation reserve release (income) partly offset by $60 million of hedging losses recorded in third quarter 2005. Combined revenue of businesses other than Home Mortgage grew 13% from third quarter 2005. Businesses with double-digit, year-over-year revenue growth included business direct, regional banking, merchant card services, credit cards, debit cards, corporate trust, asset-based lending, Eastdil Secured, commercial banking, insurance, international, commercial real estate, specialized financial services and consumer finance.
Noninterest expense was $5.08 billion for third quarter 2006, up 4% from $4.89 billion for the same period of 2005. Noninterest expense included $28 million in stock option expense. We continued to invest in our businesses during the quarter. In the last 12 months, we opened 119 new regional banking stores, including 27 stores this quarter. We grew our sales and service force by adding 5,100 team members (full-time equivalents), including 667 retail bankers in third quarter 2006. As a result of continued positive operating leverage, our efficiency ratio improved to 56.9%, the lowest since first quarter 2004.
Net charge-offs for third quarter 2006 were $663 million (0.86% of average total loans, annualized), compared with $541 million (0.73%) during third quarter 2005. During the first nine months of 2006, net charge-offs were $1,528 million (0.67%), compared with $1,580 million (0.72%), for the first nine months of 2005, which included $163 million (0.11%) related to changes in loss recognition rules at Wells Fargo Financial to conform to Federal Financial Institutions Examination Council (FFIEC) bank standards for recognizing credit losses. Our wholesale businesses continued to show little or no loss and historically low levels of nonperforming assets. However, we saw an increase in loss rates in consumer loans to 1.17% in third quarter 2006 from 0.91% in third quarter 2005 due primarily to higher losses in other revolving credit and installment loans. Third quarter 2006 loan losses in other consumer loan categories were comparable to, or better than, loss rates in third quarter 2005, and were well within a range of acceptable expected losses.
Consumer auto loan losses increased $150 million from second quarter 2006, accounting for 65% of the total increase in consolidated net charge-offs of $231 million for the same period. The increase in consumer auto loan losses in part was due to growth and expected seasoning in the portfolio. In addition, loss rates in this portfolio increased in third quarter 2006 in large part due to collection capacity constraints experienced by Wells Fargo Financial and restrictive payment extension practices in the spring of 2006 while Wells Fargo Financial began integrating the prime and non-prime auto loan businesses. During third quarter 2006, Wells Fargo Financial adopted collection practices and standards appropriate for the combined portfolio, began reducing higher risk new auto loans and hired additional collectors and managers, which have now been increased by almost 1,000, or 60%, since the beginning of the year. We believe we will see improvement in collections by early 2007, but losses will remain above normal through at least the fourth quarter given the limits to how fast the increased collection capability produces effective results. Loans 90 days or more past due and still accruing for other revolving credit and installment consumer loans increased $85 million to $516 million at September 30, 2006, from June 30, 2006, with approximately half of the increase due to the auto portfolio.

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The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $3.98 billion (1.29% of total loans) at September 30, 2006, compared with $4.06 billion (1.31%) at December 31, 2005, and $4.06 billion (1.37%) at September 30, 2005. In third quarter 2005, we provided $100 million for estimated credit losses related to Hurricane Katrina. Since that time, we have identified and recorded approximately $50 million of Katrina-related losses. Because we do not anticipate any further credit losses attributable to Katrina, we released the remaining $50 million balance in third quarter 2006. We consider the allowance for credit losses of $3.98 billion adequate to cover losses inherent in the loan portfolio at September 30, 2006.
Total nonaccrual loans were $1.49 billion (0.48% of total loans) at September 30, 2006, compared with $1.34 billion (0.43%) at December 31, 2005, and $1.30 billion (0.44%) at September 30, 2005. Total nonperforming assets were $2.10 billion (0.68% of total loans) at September 30, 2006, compared with $1.53 billion (0.49%) at December 31, 2005, and $1.49 billion (0.50%) at September 30, 2005. Foreclosed assets were $608 million at September 30, 2006, compared with $191 million at December 31, 2005, and $187 million at September 30, 2005. Foreclosed assets, a component of total nonperforming assets, included an additional $266 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loans at September 30, 2006, due to a change in regulatory reporting requirements effective January 1, 2006. The GNMA foreclosed real estate of $266 million represented 9 basis points of the ratio of nonperforming assets to loans at September 30, 2006. These assets are fully collectible because the corresponding GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.
The ratio of stockholders’ equity to total assets was 9.28% at September 30, 2006, 8.44% at December 31, 2005, and 8.78% at September 30, 2005. Our total risk-based capital (RBC) ratio at September 30, 2006, was 12.34% and our Tier 1 RBC ratio was 8.74%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at September 30, 2005, were 11.84% and 8.35%, respectively. Our Tier 1 leverage ratios were 7.41% and 7.16% at September 30, 2006 and 2005, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
Current Accounting Developments
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. 48, Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), by defining the threshold for recognizing tax benefits in the financial statements as “more-likely-than-not” to be sustained by the applicable taxing authority. The benefit recognized for a tax position that meets the “more-likely-than-not” criterion is measured based on the largest benefit that is more than 50% likely to be realized, taking into consideration the amounts and probabilities of the outcomes upon settlement. We will adopt FIN 48 on January 1, 2007, as required. Any necessary adjustment must be recorded directly to the beginning balance of retained earnings in the period of adoption and reported as a change in accounting principle. We are currently in the process of identifying the impact of this guidance on our consolidated financial statements.
Also on July 13, 2006, the FASB issued Staff Position 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Related to Income Taxes Generated by a

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Leveraged Lease Transaction (FSP 13-2). 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). While we have not made investments in a broad class of transactions that the IRS commonly refers as “Lease-In, Lease-Out” (LILO) transactions, we have previously invested in certain leveraged lease transactions that the IRS labels as “Sale-In Lease-Out” (SILO) transactions. We have paid the IRS the income tax associated with our SILO transactions. However, we are continuing to vigorously defend our initial filing position as to the timing of the tax benefits associated with these transactions. We will adopt FSP 13-2 on January 1, 2007, as required. We estimate that the cumulative effect of change in accounting principle upon adoption of the FSP will require a reduction of the beginning balance of retained earnings by approximately $75 million after tax ($115 million pre tax). This amount will be recognized back into income over the remaining terms of the affected leases.
On February 16, 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial Instruments, which amends FAS 133, Accounting for Derivatives and Hedging Activities, and FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid financial instruments are single financial instruments that contain an embedded derivative. Under FAS 155, entities can elect to record certain hybrid financial instruments at fair value as individual financial instruments. Prior to this amendment, certain hybrid financial instruments were required to be separated into two instruments – a derivative and host – and generally only the derivative was recorded at fair value. FAS 155 also requires that beneficial interests in securitized assets be evaluated for either freestanding or embedded derivatives. FAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. FAS 155 will have no effect on our consolidated financial statements on the date of adoption.
On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. FAS 157 is effective for the year beginning January 1, 2008, with early adoption permitted on January 1, 2007. We are currently evaluating if we will choose to adopt FAS 157 early, on January 1, 2007. We do not expect that the adoption of FAS 157 will have a material effect on our consolidated financial statements.
On September 29, 2006, the FASB issued FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans An Amendment of FASB Statements No. 87, 88, 106, and 132R, requiring an employer to recognize on its balance sheet the funded status of pension and other postretirement plans, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and recognize changes in a plan’s funded status in the year in which the changes occur in comprehensive income. The requirement to recognize the funded status of our plans is effective December 31, 2006. The funded status will be determined by comparing the fair value of plan assets and the projected benefit obligation or accumulated postretirement benefit obligation, as applicable, including actuarial gains and losses, prior service cost, and any remaining transition amounts. To the extent the fair value of plan assets is larger, the plan is considered overfunded and an asset is recorded. Any previously recorded prepaid pension asset would be adjusted to reflect the funded status of the plan with the

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offset to accumulated other comprehensive income. Conversely, if a plan is underfunded, a liability would be reported. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We do not expect adoption of FAS 158 to have a material impact on our consolidated balance sheet.
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 MSRs and pension accounting. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee. Policies covering the allowance for credit losses and pension accounting are described in “Financial Review – Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2005 Form 10-K. Due to adoption of FAS 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, our accounting policy covering the valuation of residential mortgage servicing rights has been updated and is described below.
VALUATION OF RESIDENTIAL MORTGAGE SERVICING RIGHTS
We recognize as assets the rights to service mortgage loans for others, or mortgage servicing rights (MSRs), whether we purchase the servicing rights, or the servicing rights result from the sale or securitization of loans we originate (asset transfers). Effective January 1, 2006, under FAS 156, we elected to initially measure and carry our MSRs related to residential mortgage loans (residential MSRs) using the fair value measurement method. Under this method, purchased MSRs and MSRs from asset transfers are capitalized and carried at fair value. Prior to the adoption of FAS 156, we capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the relative fair value of the servicing right and the residential mortgage loan at the time of sale, and carried both purchased MSRs and MSRs from asset transfers at the lower of cost or market. Effective January 1, 2006, upon the remeasurement of our residential MSRs at fair value, we recorded a cumulative-effect adjustment to the 2006 beginning balance of retained earnings of $101 million after tax ($158 million pre tax) in our Statement of Changes in Stockholders’ Equity.
At the end of each quarter, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income and late fees. The valuation of MSRs is discussed further in this section and in Note 1 (Summary of Significant Accounting Policies) and Note 15 (Mortgage Banking Activities) to Financial Statements in this Report and in Note 20 (Securitizations and Variable Interest Entities) and Note 21 (Mortgage Banking Activities) to Financial Statements in our 2005 Form 10-K.

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To reduce the sensitivity of earnings to interest rate and market value fluctuations, we may use securities available for sale and free-standing derivatives (economic hedges) to hedge the risk of changes in the fair value of MSRs, with the resulting gains or losses reflected in income. Changes in the fair value of the MSRs from changing mortgage interest rates are generally offset by gains or losses in the fair value of the derivatives depending on the amount of MSRs we hedge. We may choose not to fully hedge MSRs, partly because origination volume tends to act as a “natural hedge.” For example, as interest rates decline, servicing values decrease and fees from origination volume tend to increase. Conversely, as interest rates increase, the fair value of the MSRs increases, while fees from origination volume tend to decline. See “Risk Management – Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate Risk” in this Report for discussion of the timing of the effect of changes in mortgage interest rates.
Net servicing income, a component of mortgage banking noninterest income, includes the changes from period to period in fair value of both our residential MSRs and the free-standing derivatives (economic hedges) used to hedge our residential MSRs. Changes in the fair value of residential MSRs from period to period result from (1) changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates) and (2) other changes, representing changes due to collection/realization of expected cash flows over time. Prior to the adoption of FAS 156, we carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net servicing income.
We use a dynamic and sophisticated model to estimate the value of our MSRs. The model is validated by an independent internal model validation group operating in accordance with Company policies. Senior management reviews all significant assumptions quarterly. Mortgage loan prepayment speed – a key assumption in the model – is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate used to determine the present value of estimated future net servicing income – another key assumption in the model – is the required rate of return investors in the market would expect for an asset with similar risk. To determine the discount rate, we consider the risk premium for uncertainties from servicing operations (e.g., possible changes in future servicing costs, ancillary income and earnings on escrow accounts). Both assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. For example, an increase in either the prepayment speed or discount rate assumption results in a decrease in the fair value of the MSRs, while a decrease in either assumption would result in an increase in the fair value of the MSRs. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and the discount rate. These fluctuations can be rapid and may be significant in the future. Therefore, estimating prepayment speeds within a range that market participants would use in determining the fair value of MSRs requires significant management judgment.
These key economic assumptions and the sensitivity of the fair value of MSRs to an immediate adverse change in those assumptions are shown in Note 20 (Securitizations and Variable Interest Entities) to Financial Statements in our 2005 Form 10-K.

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EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
                                                 
   
    Quarter ended September 30 ,
    2006     2005  
                    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
  $ 4,247       5.00 %   $ 53     $ 5,647       3.17 %   $ 45  
Trading assets
    3,880       5.19       51       4,782       3.68       44  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    912       4.42       10       1,042       3.70       10  
Securities of U.S. states and political subdivisions
    3,240       7.99       63       3,321       8.12       63  
Mortgage-backed securities:
                                               
Federal agencies
    47,009       6.09       716       17,815       6.08       264  
Private collateralized mortgage obligations
    7,696       6.78       129       4,245       5.63       59  
 
                                     
Total mortgage-backed securities
    54,705       6.19       845       22,060       5.99       323  
Other debt securities (4)
    6,865       6.80       116       3,888       7.21       68  
 
                                     
Total debt securities available for sale (4)
    65,722       6.31       1,034       30,311       6.29       464  
Mortgages held for sale (3)
    42,369       6.63       702       47,510       5.68       674  
Loans held for sale (3)
    622       7.73       12       626       5.86       9  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    66,216       8.36       1,395       59,434       6.83       1,023  
Other real estate mortgage
    29,851       7.47       562       28,614       6.42       464  
Real estate construction
    15,073       8.13       309       12,259       6.64       204  
Lease financing
    5,385       5.65       76       5,252       5.74       75  
 
                                     
Total commercial and commercial real estate
    116,525       7.98       2,342       105,559       6.64       1,766  
Consumer:
                                               
Real estate 1-4 family first mortgage
    50,138       7.54       951       72,479       6.60       1,201  
Real estate 1-4 family junior lien mortgage
    65,991       8.14       1,353       56,412       6.71       954  
Credit card
    12,810       13.45       431       10,867       12.38       336  
Other revolving credit and installment
    51,988       9.75       1,278       45,380       8.72       998  
 
                                     
Total consumer
    180,927       8.81       4,013       185,138       7.49       3,489  
Foreign
    6,528       12.42       204       4,914       13.35       164  
 
                                     
Total loans (5)
    303,980       8.57       6,559       295,611       7.29       5,419  
Other
    1,348       5.12       18       1,511       3.83       16  
 
                                     
Total earning assets
  $ 422,168       7.95       8,429     $ 385,998       6.89       6,671  
 
                                     

FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 4,370       3.24       36     $ 3,698       1.50       13  
Market rate and other savings
    132,906       2.55       854       129,390       1.57       513  
Savings certificates
    33,909       4.03       344       23,434       2.98       176  
Other time deposits
    36,920       5.27       491       22,204       3.48       196  
Deposits in foreign offices
    22,303       4.84       272       12,359       3.28       102  
 
                                     
Total interest-bearing deposits
    230,408       3.44       1,997       191,085       2.08       1,000  
Short-term borrowings
    21,539       4.99       271       22,797       3.28       189  
Long-term debt
    84,112       5.13       1,084       82,840       3.75       780  
 
                                     
Total interest-bearing liabilities
    336,059       3.96       3,352       296,722       2.64       1,969  
Portion of noninterest-bearing funding sources
    86,109                   89,276              
 
                                       
Total funding sources
  $ 422,168       3.16       3,352       $385,998       2.03       1,969  
 
                                     
Net interest margin and net interest income on a taxable-equivalent basis(6)
            4.79 %   $ 5,077               4.86 %   $ 4,702  
 
                                       

NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 12,159                     $ 13,100                  
Goodwill
    11,156                       10,736                  
Other
    49,196                       38,325                  
 
                                           
Total noninterest-earning assets
  $ 72,511                     $ 62,161                  
 
                                           

NONINTEREST-BEARING FUNDING SOURCES
                                               
Deposits
  $ 89,245                     $ 90,665                  
Other liabilities
    25,839                       21,074                  
Stockholders’ equity
    43,536                       39,698                  
Noninterest-bearing funding sources used to fund earning assets
    (86,109 )                     (89,276 )                
 
                                           
Net noninterest-bearing funding sources
  $ 72,511                     $ 62,161                  
 
                                           

TOTAL ASSETS
  $ 494,679                     $ 448,159                  
 
                                           
 
(1)   Our average prime rate was 8.25% and 6.42% for the quarters ended September 30, 2006 and 2005, respectively, and 7.86% and 5.93% for the nine months ended September 30, 2006 and 2005, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.43% and 3.77% for the quarters ended September 30, 2006 and 2005, respectively, and 5.14% and 3.30% for the nine months ended September 30, 2006 and 2005, 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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    Nine months ended September 30 ,
    2006     2005  
                    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
  $ 4,761       4.58 %   $ 163     $ 5,546       2.81 %   $ 117  
Trading assets
    5,298       4.91       195       5,529       3.43       142  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    905       4.38       30       979       3.78       28  
Securities of U.S. states and political subdivisions
    3,120       8.11       183       3,441       8.28       202  
Mortgage-backed securities:
                                               
Federal agencies
    38,366       5.99       1,723       18,495       6.06       815  
Private collateralized mortgage obligations
    7,149       6.65       352       4,140       5.55       169  
 
                                     
Total mortgage-backed securities
    45,515       6.10       2,075       22,635       5.97       984  
Other debt securities (4)
    6,136       7.06       324       3,511       7.25       184  
 
                                     
Total debt securities available for sale (4)
    55,676       6.28       2,612       30,566       6.30       1,398  
Mortgages held for sale (3)
    44,533       6.34       2,119       37,958       5.57       1,585  
Loans held for sale (3)
    619       7.33       34       3,617       5.02       136  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    64,816       8.07       3,914       57,469       6.55       2,816  
Other real estate mortgage
    29,162       7.26       1,585       29,325       6.14       1,347  
Real estate construction
    14,485       7.89       854       10,428       6.43       501  
Lease financing
    5,416       5.74       233       5,185       5.97       232  
 
                                     
Total commercial and commercial real estate
    113,879       7.73       6,586       102,407       6.39       4,896  
Consumer:
                                               
Real estate 1-4 family first mortgage
    59,758       7.20       3,221       78,822       6.31       3,725  
Real estate 1-4 family junior lien mortgage
    62,923       7.91       3,723       54,760       6.38       2,612  
Credit card
    12,178       13.29       1,213       10,439       12.16       952  
Other revolving credit and installment
    50,152       9.57       3,592       41,926       8.68       2,723  
 
                                     
Total consumer
    185,011       8.49       11,749       185,947       7.19       10,012  
Foreign
    6,251       12.53       587       4,520       13.66       462  
 
                                     
Total loans (5)
    305,141       8.29       18,922       292,874       7.01       15,370  
Other
    1,366       4.90       50       1,637       4.30       52  
 
                                     
Total earning assets
  $ 417,394       7.72       24,095     $ 377,727       6.66       18,800  
 
                                     

FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 4,243       2.77       88     $ 3,543       1.29       34  
Market rate and other savings
    133,767       2.31       2,307       128,364       1.31       1,255  
Savings certificates
    30,997       3.75       868       21,299       2.74       437  
Other time deposits
    36,324       4.94       1,343       25,775       2.95       569  
Deposits in foreign offices
    19,477       4.58       667       10,450       2.85       222  
 
                                     
Total interest-bearing deposits
    224,808       3.14       5,273       189,431       1.78       2,517  
Short-term borrowings
    24,168       4.59       830       23,629       2.84       502  
Long-term debt
    83,437       4.81       3,004       79,126       3.43       2,034  
 
                                     
Total interest-bearing liabilities
    332,413       3.66       9,107       292,186       2.31       5,053  
Portion of noninterest-bearing funding sources
    84,981                   85,541              
 
                                     
Total funding sources
  $ 417,394       2.92       9,107     $ 377,727       1.79       5,053  
 
                                     
Net interest margin and net interest income on a taxable-equivalent basis(6)
            4.80 %   $ 14,988               4.87 %   $ 13,747  
 
                                     

NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 12,495                     $ 13,060                  
Goodwill
    11,066                       10,680                  
Other
    46,227                       36,676                  
 
                                           
Total noninterest-earning assets
  $ 69,788                     $ 60,416                  
 
                                           

NONINTEREST-BEARING FUNDING SOURCES
                                               
Deposits
  $ 88,395                     $ 85,965                  
Other liabilities
    24,007                       21,055                  
Stockholders’ equity
    42,367                       38,937                  
Noninterest-bearing funding sources used to fund earning assets
    (84,981 )                     (85,541 )                
 
                                           
Net noninterest-bearing funding sources
  $ 69,788                     $ 60,416                  
 
                                           

TOTAL ASSETS
  $ 487,182                     $ 438,143                  
 
                                           
 
(1)   Our average prime rate was 8.25% and 6.42% for the quarters ended September 30, 2006 and 2005, respectively, and 7.86% and 5.93% for the nine months ended September 30, 2006 and 2005, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 5.43% and 3.77% for the quarters ended September 30, 2006 and 2005, respectively, and 5.14% and 3.30% for the nine months ended September 30, 2006 and 2005, 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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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 pages 10 and 11 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 8% to $5.08 billion in third quarter 2006 from $4.70 billion in third quarter 2005, primarily driven by a 9% growth in average earning assets and purchases of securities in the last year.
Our net interest margin has remained relatively stable since the Federal Reserve began raising short-term interest rates in mid 2004, increasing 3 basis points from second quarter 2006 to 4.79% in third quarter 2006, and down only 7 basis points from third quarter 2005. The relative stability of our net interest margin in the face of a 4.25 percentage point increase in the federal funds rate and flattening of the yield curve since June 2004 is the result of our continued growth in low-cost transaction and savings deposits as well as the cumulative effect of selling our lower-yielding ARMs and debt securities during the past two years.
Average earning assets increased $36.2 billion to $422.2 billion in third quarter 2006 from $386.0 billion in third quarter 2005, due to an increase in average loans and mortgage-backed securities. Loans averaged $304.0 billion in third quarter 2006, compared with $295.6 billion in third quarter 2005. The increase was primarily due to an increase in commercial and commercial real estate loans, real estate 1-4 family junior lien mortgages, and other revolving credit and installment loans, partly offset by the sale of lower-yielding ARMs through second quarter 2006.
Average mortgages held for sale decreased to $42.4 billion in third quarter 2006 from $47.5 billion in third quarter 2005, due to the sale of lower-yielding ARMs completed in second quarter 2006, partly offset by an increase in loan originations. Debt securities available for sale averaged $65.7 billion during third quarter 2006 and $30.3 billion in third quarter 2005.
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 5% from a year ago. Average core deposits were $260.4 billion and $247.2 billion in third quarter 2006 and 2005, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, for third quarter 2006 grew $7.4 billion, or 4%, from a year ago. Average mortgage escrow deposits were $19.4 billion for third quarter 2006, up $367 million from a year ago. Savings certificates of deposits increased on average to $33.9 billion in third quarter 2006 from $23.4 billion in third quarter 2005 and noninterest-bearing checking accounts and other core deposit categories increased on average to $226.5 billion in third quarter 2006 from $223.8 billion in third quarter 2005. Total average interest-bearing deposits increased to $230.4 billion in third quarter 2006 from $191.1 billion in third quarter 2005.

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NONINTEREST INCOME
                                                 
   
    Quarter             Nine months        
    ended Sept. 30 ,   %     ended Sept. 30 ,   %  
(in millions)   2006     2005     Change     2006     2005     Change  
 

Service charges on deposit accounts
  $ 707     $ 654       8 %   $ 1,995     $ 1,857       7 %

Trust and investment fees:
                                               
Trust, investment and IRA fees
    508       473       7       1,508       1,374       10  
Commissions and all other fees
    156       141       11       494       439       13  
 
                                       
Total trust and investment fees
    664       614       8       2,002       1,813       10  

Card fees
    464       377       23       1,266       1,064       19  

Other fees:
                                               
Cash network fees
    48       45       7       140       135       4  
Charges and fees on loans
    244       280       (13 )     735       785       (6 )
All other
    217       195       11       632       531       19  
 
                                       
Total other fees
    509       520       (2 )     1,507       1,451       4  

Mortgage banking:
                                               
Servicing income, net
    188       373       (50 )     579       730       (21 )
Net gains on mortgage loan origination/ sales activities
    179       273       (34 )     811       816       (1 )
All other
    117       97       21       244       248       (2 )
 
                                       
Total mortgage banking
    484       743       (35 )     1,634       1,794       (9 )

Operating leases
    192       202       (5 )     593       612       (3 )
Insurance
    313       248       26       1,041       943       10  
Trading assets
    106       184       (42 )     331       391       (15 )
Net gains (losses) on debt securities available for sale
    121       (31 )           (70 )     4       --  
Net gains from equity investments
    159       146       9       482       418       15  
Net gains on sales of loans
    2       3       (33 )     7       3       133  
All other
    166       167       (1 )     589       442       33  
 
                                       

Total
  $ 3,887     $ 3,827       2     $ 11,377     $ 10,792       5  
 
                                       
 
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 September 30, 2006, these assets totaled $868 billion, up 17% from $744 billion at September 30, 2005. Generally, trust, investment and IRA fees are based on the market value of the assets that are managed, administered, or both. The increase from third quarter 2005 was due to continued strong momentum in growth of managed investment accounts for institutional customers and our successful efforts to grow the business.
Also, we receive commissions and other fees for providing services to full-service and discount brokerage customers. At September 30, 2006 and 2005, brokerage balances were $110 billion and $94 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. The increase from third quarter 2005 was primarily due to continued growth in asset-based fees.

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Card fees increased 23% from third quarter 2005, due to growth in distribution of debit and credit cards to our customers and increased usage. Purchase volume on debit and credit cards was up 21% from a year ago and average card balances were up 18%.
Mortgage banking noninterest income was $484 million and $1,634 million in the third quarter and first nine months of 2006, respectively, compared with $743 million and $1,794 million in the same periods of 2005. The decrease of $259 million from third quarter 2005 to third quarter 2006 was largely due to the change in MSRs valuation. With the adoption of FAS 156 in first quarter 2006 and measuring our residential MSRs at fair value, net servicing income includes both changes in the fair value of MSRs during the period as well as changes in derivatives (economic hedges) used to hedge the MSRs. Prior to adoption of FAS 156, servicing income included net derivative gains and losses (primarily the ineffective portion of the change in value of derivatives used to hedge MSRs under FAS 133), amortization and MSRs impairment, which are all influenced by both the level and direction of mortgage interest rates.
Net gains on mortgage loan origination/sales activities decreased $94 million to $179 million for third quarter 2006, from $273 million for third quarter 2005, largely due to lower investor demand for ARMs loans. Third quarter 2006 results included a $48 million loss due to the impact of interest rate volatility on ARMs spreads, reflecting changes in the value of ARMs production held for sale not fully offset by Treasury and LIBOR-indexed economic hedging activity. Net gains on mortgage loan origination/sales activities of $811 million for the first nine months of 2006 were comparable to the same period a year ago. Mortgage originations in third quarter 2006 totaled $104 billion, compared with $103 billion a year ago. Mortgage originations included $27 billion and $11 billion of co-issue volume in third quarter 2006 and 2005, respectively. Under co-issue arrangements, we become the servicer when the correspondent securitizes the related loans. The application pipeline at quarter end was $55 billion, down from $66 billion a year ago.
Servicing fees grew to $947 million in third quarter 2006 from $619 million in third quarter 2005 largely due to a 52% increase in the portfolio of mortgage loans serviced for others, which was $1.24 trillion at September 30, 2006, up from $815 billion a year ago. In July 2006, we acquired a $140 billion mortgage servicing portfolio from Washington Mutual, Inc. The change in the value of MSRs net of economic hedging results in third quarter 2006 – a quarter in which interest rates declined – was a loss of $86 million. The interest rate-related effect (impairment reserve release net of hedging results) in third quarter 2005 – a quarter in which interest rates increased – was a gain of $296 million.
Insurance income increased 26% from third quarter 2005 primarily due to an increase in premium volume.
Net gains (losses) on debt securities available for sale were $121 million and $(70) million in the third quarter and first nine months of 2006, respectively, compared with $(31) million and $4 million in the same periods of 2005. Gains in third quarter 2006 included $106 million related to securities previously held on the balance sheet as economic hedges of mortgage banking activities. Third quarter 2006 other noninterest income includes a $38 million loss on certain forward sales contracts related to these securities. Net gains from equity investments were $159 million and $482 million in the third quarter and first nine months of 2006, respectively, and $146 million and $418 million in the same periods of 2005.

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We routinely review our investment portfolios and recognize impairment write-downs based primarily on issuer-specific factors and results, and our intent to hold such securities. We also consider general economic and market conditions, including industries in which venture capital investments are made, and adverse changes affecting the availability of venture capital. We determine impairment based on all of the information available at the time of the assessment, but new information or economic developments in the future could result in recognition of additional impairment.
NONINTEREST EXPENSE
                                                 
   
    Quarter             Nine months        
    ended Sept. 30 ,   %     ended Sept. 30 ,   %  
(in millions)   2006     2005     Change     2006     2005     Change  
 

Salaries
  $ 1,769     $ 1,571       13 %   $ 5,195     $ 4,602       13 %
Incentive compensation
    710       676       5       2,092       1,703       23  
Employee benefits
    458       467       (2 )     1,534       1,446       6  
Equipment
    294       306       (4 )     913       939       (3 )
Net occupancy
    357       354       1       1,038       1,068       (3 )
Operating leases
    155       159       (3 )     473       474        
Outside professional services
    240       230       4       669       582       15  
Contract services
    143       163       (12 )     414       443       (7 )
Travel and entertainment
    132       120       10       401       347       16  
Outside data processing
    111       114       (3 )     324       341       (5 )
Advertising and promotion
    123       128       (4 )     354       334       6  
Postage
    75       72       4       235       212       11  
Telecommunications
    70       74       (5 )     213       213        
Insurance
    43       17       153       218       196       11  
Stationery and supplies
    57       48       19       163       148       10  
Operating losses
    33       52       (37 )     140       156       (10 )
Security
    43       42       2       130       125       4  
Core deposit intangibles
    28       30       (7 )     85       93       (9 )
Charitable donations
    15       8       88       51       48       6  
Net gains from debt extinguishment
    (2 )     (1 )     100       (6 )     (1 )     500  
All other
    227       259       (12 )     695       666       4  
 
                                       

Total
  $ 5,081     $ 4,889       4     $ 15,331     $ 14,135       8  
 
                                       
 
The 4% increase in noninterest expense to $5.08 billion in third quarter 2006 from third quarter 2005 was due to the increase in salary and incentive compensation from an additional 5,100 team members (full-time equivalent), largely sales people, across our businesses. We recognized stock option expense, included in incentive compensation, of $28 million in third quarter 2006 and $108 million in the first nine months of 2006, which included $33 million in first quarter 2006 for the immediate expensing of stock options for retirement-eligible team members. We continued to invest in our businesses during the quarter. In the last 12 months, we opened 119 new regional banking stores, including 27 stores this quarter.
INCOME TAX EXPENSE
Our effective income tax rate was 32.28% for third quarter 2006, down from 33.57% for third quarter 2005, largely reflecting the benefits associated with tax-advantaged investments and favorable resolution of disputed positions with taxing jurisdictions. For the first nine months of 2006, our effective tax rate was 33.45% compared with 33.57% in the same period of 2005.

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OPERATING SEGMENT RESULTS
Our lines of business for management reporting are 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.
Segment results for prior periods have been revised due to the realignment of our insurance business into Wholesale Banking in first quarter 2006, designed to leverage the expertise, systems and resources of the existing businesses.
Community Banking’s net income decreased 1% to $1.47 billion in third quarter 2006 from $1.49 billion in third quarter 2005. Net income decreased 2% to $4.02 billion in the first nine months of 2006 from $4.09 billion in the first nine months of 2005. Net interest income increased 3% to $3.29 billion, and 5% to $9.87 billion in the third quarter and first nine months of 2006, respectively, from the same periods of 2005, primarily due to growth in earning assets and deposits. Average loans were $172.5 billion in third quarter 2006, down 6% from a year ago, predominantly due to sales of ARMs. Excluding real estate 1-4 family mortgages – the loan category affected by the sales of ARMs – total average loans grew by $13.8 billion, or 11%. Core deposits averaged $231.2 billion in third quarter 2006, up 3% over the prior year. Noninterest income of $2.49 billion in third quarter 2006 decreased $127 million, or 5%, from third quarter 2005, predominantly due to a $356 million MSRs valuation reserve release (income) recorded in third quarter 2005, partially offset by gains of $106 million on the sale of debt securities in third quarter 2006. Noninterest income for the first nine months of 2006 increased by $47 million from the same period of 2005. Noninterest expense increased $42 million and $628 million in the third quarter and first nine months of 2006, respectively, from the same periods of 2005, primarily due to an increase in the number of sales and service team members, as well as investments in new banking stores, ATMs and online banking.
Wholesale Banking’s net income increased 31% to $527 million in third quarter 2006 from $403 million in third quarter 2005. Net income increased 17% to $1.58 billion in the first nine months of 2006 from $1.34 billion in the first nine months of 2005. Revenue was $1.78 billion in third quarter 2006, up 20% from $1.49 billion in third quarter 2005, primarily due to strong asset management, insurance and capital markets revenue, along with the acquisition of Secured Capital Corp in January 2006 and Reilly Mortgage in July 2006. Average loans increased 14% and average core deposits grew 23% from third quarter 2005. Noninterest income for the third quarter and first nine months of 2006 increased by $140 million and $365 million, respectively, from the same periods of 2005. Wholesale Banking recorded no provision for credit losses in third quarter 2006 or third quarter 2005. Noninterest expense increased 12% to $999 million and 15% to $3.01 billion in the third quarter and first nine months of 2006, respectively, from the same periods of 2005, due to higher personnel related expenses and additional expenses from the Secured Capital Corp and Reilly Mortgage acquisitions.
Wells Fargo Financial’s net income increased 146% to $194 million in third quarter 2006 from $79 million in third quarter 2005. For the first nine months of 2006, net income was $704 million, compared with $311 million for the same period a year ago, which included a first quarter $163 million pre-tax charge to conform Wells Fargo Financial’s charge-off practices with FFIEC guidelines. Net income for third quarter 2006 included a $50 million (pre tax) release of provision for credit losses reversing the remaining portion of the $100 million (pre tax) provision

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for credit losses related to Hurricane Katrina recorded in third quarter 2005. Total revenue rose 15% in third quarter 2006, reaching $1.37 billion, compared with $1.18 billion in third quarter 2005. Net interest income increased $135 million, or 16%, to $1.0 billion in third quarter 2006 from $869 million in third quarter 2005, due to growth in average loans. Average real estate secured receivables increased 21% to $21.0 billion and average auto finance receivables rose 34% to $26.4 billion from third quarter 2005. Noninterest expense increased 7% to $690 million in third quarter 2006, primarily due to additional investments in the collections, underwriting and service teams as a result of the growth of the business.
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 September 30, 2006, we held $51.8 billion of debt securities available for sale, compared with $40.9 billion at December 31, 2005, with a net unrealized gain of $733 million and $591 million for the same periods, respectively. The $18.8 billion decline in debt securities from $70.6 billion at June 30, 2006, was primarily due to sales of debt securities related to securities held on the balance sheet as economic hedges of mortgage banking activities. We also held $829 million of marketable equity securities available for sale at September 30, 2006, and $900 million at December 31, 2005, with a net unrealized gain of $232 million and $342 million for the same periods, respectively.
The weighted-average expected maturity of debt securities available for sale was 5.2 years at September 30, 2006. Since 79% 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 September 30, 2006
    $ 41.0     $ 0.6     4.3yrs

At September 30, 2006, assuming a 200 basis point:
                       
Increase in interest rates
    37.7       (2.7 )   6.9yrs
Decrease in interest rates
    41.8       1.4     1.1yrs
 
See Note 4 (Securities Available for Sale) to Financial Statements for securities available for sale by security type.

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LOAN PORTFOLIO
A discussion of average loan balances is included in “Earnings Performance – Net Interest Income” on page 12 and a comparative schedule of average loan balances is included in the table on page 10; quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.
Total loans at September 30, 2006, were $307.5 billion, compared with $296.2 billion at September 30, 2005. Real estate 1-4 family first mortgage loans decreased $19.5 billion to $49.8 billion at September 30, 2006, from $69.3 billion at September 30, 2005, due to the sale of lower-yielding ARMs earlier this year. This was offset by an increase of $9.7 billion in real estate 1-4 family junior lien mortgage loans to $67.2 billion from $57.5 billion for the same periods. Commercial and commercial real estate loans increased $10.6 billion to $117.6 billion from September 30, 2005. Mortgages held for sale decreased to $39.9 billion at September 30, 2006, from $46.1 billion a year ago.
DEPOSITS
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Noninterest-bearing
  $ 86,849     $ 87,712     $ 89,304  
Interest-bearing checking
    3,279       3,324       2,992  
Market rate and other savings
    135,837       134,811       130,829  
Savings certificates
    34,828       27,494       25,259  
 
                 
Core deposits
    260,793       253,341       248,384  
Other time deposits
    32,185       46,488       26,718  
Deposits in foreign offices
    21,341       14,621       13,927  
 
                 
Total deposits
  $ 314,319     $ 314,450     $ 289,029  
 
                 
 
Average core deposits increased $13.2 billion to $260.4 billion in third quarter 2006 from third quarter 2005, predominantly due to growth in market rate and other savings, and savings certificates, partially offset by a decrease in non-interest bearing deposits.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
In the ordinary course of business, we engage in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. We also enter into certain contractual obligations. For additional information on off-balance sheet arrangements and other contractual obligations see “Financial Review – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations” in our 2005 Form 10-K and Note 17 (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,

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frequent and detailed risk measurement and modeling, extensive credit training programs and a continual loan audit review process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.
Nonaccrual Loans and Other Assets
The table 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) 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 2005 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER ASSETS
                                 
   
    Sept. 30 ,   June 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2006     2005     2005  
 
Nonaccrual loans:
                               
Commercial and commercial real estate:
                               
Commercial
  $ 256     $ 253     $ 286     $ 293  
Other real estate mortgage
    116       137       165       197  
Real estate construction
    90       31       31       43  
Lease financing
    27       26       45       68  
 
                       
Total commercial and commercial real estate
    489       447       527       601  
Consumer:
                               
Real estate 1-4 family first mortgage
    595       585       471       409  
Real estate 1-4 family junior lien mortgage
    200       179       144       119  
Other revolving credit and installment
    167       139       171       149  
 
                       
Total consumer
    962       903       786       677  
Foreign
    38       45       25       23  
 
                       
Total nonaccrual loans (1)
    1,489       1,395       1,338       1,301  
As a percentage of total loans
    0.48 %     0.46 %     0.43 %     0.44 %

Foreclosed assets:
                               
GNMA loans (2)
    266       238              
Other
    342       275       191       187  
Real estate and other nonaccrual investments (3)
    3       9       2       2  
 
                       
Total nonaccrual loans and other assets
  $ 2,100     $ 1,917     $ 1,531     $ 1,490  
 
                       
As a percentage of total loans
    0.68 %     0.64 %     0.49 %     0.50 %
 
                       
 
(1)   Includes impaired loans of $192 million, $138 million, $190 million and $240 million at September 30, 2006, June 30, 2006, December 31, 2005, and September 30, 2005, respectively. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2005 Form 10-K for further information on impaired loans.
(2)   As a result of a change in regulatory reporting requirements effective January 1, 2006, foreclosed real estate securing GNMA loans has been classified as nonperforming. These assets are fully collectible because the corresponding GNMA loans are insured by the FHA or guaranteed by the Department of Veterans Affairs.
(3)   Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans.
About half of the $67 million increase in other foreclosed assets from June 30, 2006, to September 30, 2006, related to consumer auto 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

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affected by external factors, such as economic conditions, or factors particular to a borrower, such as actions of a borrower’s management.
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 $3,664 million, $3,343 million, $3,606 million and $2,955 million at September 30, 2006, June 30, 2006, December 31, 2005, and September 30, 2005, respectively. At September 30, 2006, June 30, 2006, December 31, 2005, and September 30, 2005, the total included $2,689 million, $2,526 million, $2,923 million and $2,328 million, 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)
                                 
   
    Sept. 30 ,   June 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2006     2005     2005  
 

Commercial and commercial real estate:
                               
Commercial
  $ 20     $ 11     $ 18     $ 19  
Other real estate mortgage
    8       2       13       3  
Real estate construction
    4       10       9       3  
 
                       
Total commercial and commercial real estate
    32       23       40       25  

Consumer:
                               
Real estate 1-4 family first mortgage
    123       107       103       100  
Real estate 1-4 family junior lien mortgage
    50       39       50       41  
Credit card
    213       181       159       145  
Other revolving credit and installment
    516       431       290       272  
 
                       
Total consumer
    902       758       602       558  

Foreign
    41       36       41       44  
 
                       
Total
  $ 975     $ 817     $ 683     $ 627  
 
                       
 
Approximately half of the $85 million increase in other revolving credit and installment loans from June 30, 2006, to September 30, 2006, related to consumer auto loans.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. We assume that our allowance for credit losses as a percentage of charge-offs and nonaccrual loans will change at different points in time based on credit performance, loan mix and collateral values. The detail of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements.

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In third quarter 2005, we provided $100 million for estimated credit losses related to Hurricane Katrina. Since that time, we have identified and recorded approximately $50 million of Katrina-related losses. Because we do not anticipate any further credit losses attributable to Katrina, we released the remaining $50 million balance in third quarter 2006.
We consider the allowance for credit losses of $3.98 billion adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at September 30, 2006. 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 2005 Form 10-K.) Therefore, we cannot provide assurance that, in any particular period, we will not have sizeable credit losses in relation to the amount reserved. We may need to significantly adjust the allowance for credit losses, considering current factors at the time, including economic conditions and ongoing internal and external examination processes. Our process for determining the adequacy of the allowance for credit losses is discussed in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2005 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 – Community Banking (including Mortgage Banking), Wholesale Banking and Wells Fargo Financial – have individual asset/liability management committees and processes linked to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:
    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).

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Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the value of MSRs, the value of the pension liability and other sources of 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 September 30, 2006, our most recent simulation indicated estimated earnings at risk of less than 1% of our most likely earnings plan over the next 12 months to either a scenario in which the federal funds rate declines 275 basis points to 2.50% and the Constant Maturity Treasury bond yield declines 125 basis points to 3.75%, or a scenario in which the federal funds rate rises 175 basis points to 7.00% and the Constant Maturity Treasury bond yield rises 225 basis points to 7.25%, 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 twelve month simulation period, depending on the path of interest rates and on our MSRs hedging strategies. 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 September 30, 2006, and December 31, 2005, are presented in Note 19 (Derivatives) to Financial Statements. We use derivatives for asset/liability management in three ways:
    to convert a major portion of our long-term fixed-rate debt, which we issue to finance the Company, from fixed-rate payments to floating-rate payments by entering into receive-fixed swaps;
    to convert the cash flows from selected asset and/or liability instruments/portfolios from fixed-rate payments to floating-rate payments or vice versa; and
    to hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest rate swaps, swaptions, futures, forwards and options.
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 have held originated ARMs in 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 and the associated income and loss reflected in mortgage banking noninterest income, the income

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and expense associated with instruments (economic hedges) used to hedge changes in the fair value of MSRs, 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 156, which we adopted January 1, 2006, we have elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the initial measurement of fair value of MSRs at the time we sell or securitize is recorded as a component of net gains on mortgage loan origination/sales activities. The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs. 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.
We hedge the risk of changes in the fair value of residential MSRs with market-based free-standing derivative instruments (economic hedges), such as swaps, swaptions, Treasury futures and options, Eurodollar futures and options, and forward contracts, and we also use securities available for sale. Changes in the fair value of these free-standing derivatives, based on quoted market prices, as well as changes in the fair value of MSRs determined by our valuation model, are both included in net servicing income. Changes in fair value of securities available for sale (unrealized gains and losses) are not included in net servicing income, but are reported in cumulative other comprehensive income (net of tax) or, upon sale or determination that any impairment is other than temporary, are reported in gains (losses) on debt securities available for sale.
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 may provide a partial “natural business hedge.” In a rising rate period, when the MSRs may not be fully hedged with free-standing derivatives, the change in the fair value of the MSRs that can be recaptured into income will typically – although

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not always – exceed the losses on any free-standing derivatives hedging the MSRs. In third quarter 2006, the decrease in the fair value of our MSRs exceeded the gains on derivatives used to hedge the MSRs by $86 million. In the first nine months of 2006, the decrease in the fair value of our MSRs and losses on free-standing derivatives used to hedge the MSRs totaled $253 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 in any accounting period.
    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. For example, given the relatively high level of refinancing activity in recent years and the increase in interest rates during the same period, any significant increase in refinancing activity would likely occur only if rates drop substantially from year-end 2005 levels.
    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-rate 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 value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs.
The total carrying value of our residential and commercial MSRs was $18.0 billion at September 30, 2006, and $12.5 billion, net of a valuation allowance of $1.2 billion, at December 31, 2005. The weighted-average note rate on the owned servicing portfolio was 5.86% at September 30, 2006, and 5.72% at December 31, 2005. Our total MSRs were 1.46% of mortgage loans serviced for others at September 30, 2006, compared with 1.44% at December 31, 2005.
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. Under FAS 133, these derivative loan commitments are

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recognized at fair value on the balance sheet with changes in their fair values recorded as part of mortgage banking noninterest income. Consistent with Emerging Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, and SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments, 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 that loan is affected primarily by changes in interest rates and the passage of time. The value of the MSRs is recognized only after the servicing asset has been contractually separated from the underlying loan by sale or securitization.
Outstanding derivative loan commitments expose us to the risk that the price of the loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To minimize this risk, we utilize Treasury futures, forwards and options, Eurodollar futures and forward 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 – transacted with customers or used to hedge capital market transactions with customers – are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at September 30, 2006, and December 31, 2005, are included in Note 19 (Derivatives) to Financial Statements. Open, “at risk” positions for all trading business are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities is the value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and prices over the past 250 days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout third quarter 2006 was $19.6 million, with a lower bound of $10.2 million and an upper bound of $35.1 million.

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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 reviews business developments, key risks and historical returns for the private equity investments at least annually. Management reviews these investments at least quarterly and assesses them for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Private equity investments totaled $1.65 billion at September 30, 2006, compared with $1.54 billion at December 31, 2005.
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, to a lesser degree, 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 $829 million and cost was $597 million at September 30, 2006, compared with $900 million and $558 million, respectively, at December 31, 2005.
Changes in equity market prices may also indirectly affect our net income (1) by affecting the value of third party assets under management and, hence, fee income, (2) by affecting particular borrowers, whose ability to repay principal and/or interest may be affected by the stock market, or (3) by affecting brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.
Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available for sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks, federal funds sold, securities

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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. The remaining assets were funded by long-term debt, deposits in foreign offices, short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings) and trust preferred securities.
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding by issuing registered debt, private placements and asset-backed secured funding. In September 2003, Moody’s Investors Service rated Wells Fargo Bank, N.A. as “Aaa,” its highest investment grade, and rated the Company’s senior debt as “Aa1.” In August 2006, Standard & Poor’s raised Wells Fargo Bank, N.A.’s rating to “AA+” from “AA,” and raised the Company’s senior debt rating to “AA” from “AA-.” Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings.
Parent. Under SEC rules effective December 1, 2005, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. 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 $20 billion in outstanding short-term debt and $90 billion in outstanding long-term debt, subject to a total outstanding debt limit of $100 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 nine months of 2006, the Parent issued a total of $8.9 billion of registered senior notes, including $0.9 billion (denominated in pounds sterling) sold primarily in the United Kingdom and $2.0 billion (denominated in euros) sold primarily in Europe. Also, in the first nine months of 2006, the Parent issued $0.5 billion 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 nine months of 2006 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 outstanding short-term senior notes and $30 billion in long-term senior notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. During the first nine months of 2006, Wells Fargo Bank, N.A. issued $3.2 billion in long-term senior and subordinated notes, which included long-term senior notes issued under the bank note program.
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

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distribution with the provincial securities exchanges in Canada $7.0 billion (Canadian) of issuance authority. During the first nine months of 2006, WFFCC issued $1.3 billion (Canadian) in senior notes. At September 30, 2006, the remaining issuance capacity for WFFCC was $5.7 billion (Canadian). WFFI issued $0.5 billion (U.S.) in private placements in the first nine months of 2006.
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 cost of doing so is perceived to be low.
From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and legal considerations. These factors can change at any time, and there can be no assurance as to the number of shares we will repurchase or when we will repurchase them.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Exchange Act including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
In 2005, the Board authorized the repurchase of up to 150 million additional shares of our outstanding common stock. In June 2006, the Board authorized the repurchase of up to 50 million additional shares of our outstanding common stock. During the first nine months of 2006, we repurchased 47 million shares of our common stock. At September 30, 2006, the total remaining common stock repurchase authority under the 2005 and 2006 authorizations was 73 million shares. (For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.)
On June 27, 2006, the Board declared a two-for-one stock split in the form of a 100% stock dividend on our common stock which was distributed August 11, 2006, to stockholders of record at the close of business August 4, 2006. We distributed one share of common stock for each share of common stock issued and outstanding or held in the treasury of the Company. Also, in June 2006, the Board declared an increase in the quarterly common stock dividend to 56 cents per share, up 4 cents, or 8%. The cash dividend was on a pre-split basis and was payable September 1, 2006, to stockholders of record at the close of business August 4, 2006.

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Our potential sources of capital include retained earnings, and issuances of common and preferred stock and subordinated debt. In the first nine months of 2006, retained earnings increased $3.5 billion, predominantly resulting from net income of $6.3 billion and $0.1 billion from the adoption of FAS 156 upon remeasurement of our residential MSRs to fair value, less dividends of $2.7 billion. In the first nine months of 2006, we issued $1.7 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 September 30, 2006, the Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. See Note 18 (Regulatory and Agency Capital Requirements) to Financial Statements for additional information.
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 about:
    our belief that we will see an improvement in early 2007 in collections relating to our consumer auto loans;
    our anticipation that we will not incur additional credit losses attributable to Hurricane Katrina;
    the expected impact of changes in interest rates on loan demand, credit losses, mortgage origination volume, the value of MSRs, and other items that may affect earnings;
    the expected time periods over which unrecognized compensation expense relating to stock options and restricted share rights will be recognized;
    the expected timing and impact of the adoption of new accounting standards and policies;
    future credit losses and nonperforming assets, including changes in the amount of nonaccrual loans due to portfolio growth, portfolio seasoning, and other factors;
    the extent to which changes in the fair value of derivative financial instruments will offset changes in the fair value of derivative loan commitments;
    future short-term and long-term interest rate levels and their impact on net interest margin, net income, liquidity and capital;
    the anticipated use of proceeds from the issuance of securities;
    how and when we intend to repurchase shares of our common stock;
    the amount and timing of future contributions to the Cash Balance Plan;
    the recovery of our investment in variable interest entities;
    future reclassification to earnings of deferred net gains on derivatives;
    expected completion dates of pending business combinations and other acquisitions; and
    the amount of contingent consideration payable in connection with certain acquisitions.
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;

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    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;
    reduced earnings because of higher credit losses generally and specifically because of higher than expected losses in our consumer auto loan portfolio because our increased collection efforts are not as effective as we expect or take longer than we expect to produce meaningful results;
    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;
    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 2005 Form 10-K, including “Risk Factors,” for information about these factors. Refer also to this Report, including the discussion below and 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 2005 Form 10-K.
Changes in interest rates could reduce the value of our mortgage servicing rights (MSRs) and earnings.
We have a sizeable portfolio of MSRs. A mortgage servicing right (MSR) is the right to service a mortgage loan – collect principal, interest, escrow amounts, etc. – for a fee. We acquire MSRs when we keep the servicing rights after we sell or securitize the loans we have originated or when we purchase the servicing rights to mortgage loans originated by other lenders. Effective January 1, 2006, upon adoption of FAS 156, we elected to initially measure and carry our residential MSRs using the fair value measurement method. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.
Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, borrowers are more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our MSRs can decrease. Each quarter we evaluate the fair value of our MSRs, and any decrease in fair value reduces earnings in the period in which the decrease occurs.
For more information, refer to “Critical Accounting Policies” and “Risk Management – Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate Risk” in the Financial Review section of this Report.

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Our mortgage banking revenue can be volatile from quarter to quarter.
We earn revenue from fees we receive for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue we receive from loan originations. At the same time, revenue from our MSRs can increase, through increases in fair value. When rates fall, mortgage originations tend to increase and the value of our MSRs tends to decline, also with some offsetting revenue effect. Even though they can act as a “natural hedge,” the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential MSRs is immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new loans would accrue over time.
We typically use derivatives and other instruments to hedge our mortgage banking interest rate risk. We generally do not hedge all of our risk, and the fact that we attempt to hedge any of the risk does not mean we will be successful. Hedging is a complex process, requiring sophisticated models and constant monitoring, and is not a perfect science. We may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or income being hedged. We could incur losses from our hedging activities. There may be periods where we elect not to use derivatives and other instruments to hedge mortgage banking interest rate risk.
For more information, refer to “Risk Management – Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate Risk” in the Financial Review section of this Report.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. For example, we are subject to regulations issued by the Office of Foreign Assets Control (OFAC) that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. Therefore, the establishment and maintenance of systems and procedures reasonably designed to ensure compliance cannot guarantee that we will be able to avoid a fine or penalty for noncompliance. For example, in April 2003 and January 2005 OFAC reported settlements with Wells Fargo Bank, N.A. in amounts of $5,500 and $42,833, respectively. These settlements related to transactions involving inadvertent acts or human error alleged to have violated OFAC regulations. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation (see “Negative publicity could damage our reputation” under “Risk Factors” in our 2005 Form 10-K) and could restrict the ability of institutional investment managers to invest in our securities.

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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 September 30, 2006, 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 September 30, 2006.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company;
    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during third quarter 2006 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 Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions, except per share amounts)   2006     2005     2006     2005  
 

INTEREST INCOME
                               
Trading assets
  $ 45     $ 44     $ 179     $ 142  
Securities available for sale
    1,014       442       2,552       1,327  
Mortgages held for sale
    702       674       2,119       1,585  
Loans held for sale
    12       9       34       136  
Loans
    6,555       5,416       18,910       15,359  
Other interest income
    71       60       214       169  
 
                       
Total interest income
    8,399       6,645       24,008       18,718  
 
                       

INTEREST EXPENSE
                               
Deposits
    1,997       1,000       5,273       2,517  
Short-term borrowings
    271       189       830       502  
Long-term debt
    1,084       780       3,004       2,034  
 
                       
Total interest expense
    3,352       1,969       9,107       5,053  
 
                       

NET INTEREST INCOME
    5,047       4,676       14,901       13,665  
Provision for credit losses
    613       641       1,478       1,680  
 
                       
Net interest income after provision for credit losses
    4,434       4,035       13,423       11,985  
 
                       

NONINTEREST INCOME
                               
Service charges on deposit accounts
    707       654       1,995       1,857  
Trust and investment fees
    664       614       2,002       1,813  
Card fees
    464       377       1,266       1,064  
Other fees
    509       520       1,507       1,451  
Mortgage banking
    484       743       1,634       1,794  
Operating leases
    192       202       593       612  
Insurance
    313       248       1,041       943  
Net gains (losses) on debt securities available for sale
    121       (31 )     (70 )     4  
Net gains from equity investments
    159       146       482       418  
Other
    274       354       927       836  
 
                       
Total noninterest income
    3,887       3,827       11,377       10,792  
 
                       

NONINTEREST EXPENSE
                               
Salaries
    1,769       1,571       5,195       4,602  
Incentive compensation
    710       676       2,092       1,703  
Employee benefits
    458       467       1,534       1,446  
Equipment
    294       306       913       939  
Net occupancy
    357       354       1,038       1,068  
Operating leases
    155       159       473       474  
Other
    1,338       1,356       4,086       3,903  
 
                       
Total noninterest expense
    5,081       4,889       15,331       14,135  
 
                       

INCOME BEFORE INCOME TAX EXPENSE
    3,240       2,973       9,469       8,642  
Income tax expense
    1,046       998       3,168       2,901  
 
                       

NET INCOME
  $ 2,194     $ 1,975     $ 6,301     $ 5,741  
 
                       

EARNINGS PER COMMON SHARE
  $ 0.65     $ 0.59     $ 1.87     $ 1.70  

DILUTED EARNINGS PER COMMON SHARE
  $ 0.64     $ 0.58     $ 1.85     $ 1.68  

DIVIDENDS DECLARED PER COMMON SHARE
  $     $ 0.26     $ 0.80     $ 0.74  

Average common shares outstanding
    3,371.9       3,373.5       3,364.6       3,379.8  
Diluted average common shares outstanding
    3,416.0       3,410.6       3,405.5       3,418.7  
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
                         
   
    September 30 ,   December 31 ,   September 30 ,
(in millions, except shares)   2006     2005     2005  
 

ASSETS
                       
Cash and due from banks
  $ 12,591     $ 15,397     $ 13,931  
Federal funds sold, securities purchased under resale agreements and other short-term investments
    4,079       5,306       5,861  
Trading assets
    5,300       10,905       8,477  
Securities available for sale
    52,635       41,834       34,480  
Mortgages held for sale
    39,913       40,534       46,119  
Loans held for sale
    617       612       629  

Loans
    307,491       310,837       296,189  
Allowance for loan losses
    (3,799 )     (3,871 )     (3,886 )
 
                 
Net loans
    303,692       306,966       292,303  
 
                 

Mortgage servicing rights:
                       
Measured at fair value (residential MSRs beginning 2006)
    17,712              
Amortized
    328       12,511       10,711  
Premises and equipment, net
    4,645       4,417       4,223  
Goodwill
    11,192       10,787       10,776  
Other assets
    30,737       32,472       25,984  
 
                 

Total assets
  $ 483,441     $ 481,741     $ 453,494  
 
                 

LIABILITIES
                       
Noninterest-bearing deposits
  $ 86,849     $ 87,712     $ 89,304  
Interest-bearing deposits
    227,470       226,738       199,725  
 
                 
Total deposits
    314,319       314,450       289,029  
Short-term borrowings
    13,800       23,892       23,243  
Accrued expenses and other liabilities
    26,369       23,071       22,795  
Long-term debt
    84,091       79,668       78,592  
 
                 

Total liabilities
    438,579       441,081       413,659  
 
                 

STOCKHOLDERS’ EQUITY
                       
Preferred stock
    465       325       389  
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
    7,667       7,040       6,984  
Retained earnings
    34,080       30,580       29,636  
Cumulative other comprehensive income
    633       665       721  
Treasury stock – 100,057,636 shares, 117,595,986 shares and 114,421,240 shares
    (3,273 )     (3,390 )     (3,267 )
Unearned ESOP shares
    (498 )     (348 )     (416 )
 
                 

Total stockholders’ equity
    44,862       40,660       39,835  
 
                 

Total liabilities and stockholders’ equity
  $ 483,441     $ 481,741     $ 453,494  
 
                 
   
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     stock     shares     equity  
 

BALANCE DECEMBER 31, 2004
    3,389,183,274     $ 270     $ 5,788     $ 6,912     $ 26,482     $ 950     $ (2,247 )   $ (289 )   $ 37,866  
 
                                                     
Comprehensive income:
                                                                       
Net income
                                    5,741                               5,741  
Other comprehensive income, net of tax:
                                                                       
Translation adjustments
                                            6                       6  
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $96 million of net gains included in net income
                                            (316 )                     (316 )
Net unrealized gains on derivatives and hedging activities, net of reclassification of $39 million of net losses on cash flow hedges included in net income
                                            81                       81  
 
                                                                     
Total comprehensive income
                                                                    5,512  
Common stock issued
    35,491,748                       (44 )     (82 )             984               858  
Common stock issued for acquisitions
    3,909,004                       12                       110               122  
Common stock repurchased
    (78,367,178 )                                             (2,343 )             (2,343 )
Preferred stock (363,000) issued to ESOP
            363               24                               (387 )      
Preferred stock released to ESOP
                            (16 )                             260       244  
Preferred stock (243,669) converted to common shares
    8,123,962       (244 )             16                       228                
Common stock dividends
                                    (2,505 )                             (2,505 )
Tax benefit upon exercise of stock options
                            80                                       80  
Other, net
                                                    1               1  
 
                                                     
Net change
    (30,842,464 )     119             72       3,154       (229 )     (1,020 )     (127 )     1,969  
 
                                                     

BALANCE SEPTEMBER 30, 2005
    3,358,340,810     $ 389     $ 5,788     $ 6,984     $ 29,636     $ 721     $ (3,267 )   $ (416 )   $ 39,835  
 
                                                     

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
                                    6,301                               6,301  
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 $87 million of net gains included in net income
                                            (6 )                     (6 )
Net unrealized losses on derivatives and hedging activities, net of reclassification of $71 million of net gains on cash flow hedges included in net income
                                            (27 )                     (27 )
 
                                                                     
Total comprehensive income
                                                                    6,269  
Common stock issued
    56,859,649                       (48 )     (207 )             1,674               1,419  
Common stock repurchased
    (47,488,608 )                                             (1,566 )             (1,566 )
Preferred stock (414,000) issued to ESOP
            414               29                               (443 )      
Preferred stock released to ESOP
                            (19 )                             293       274  
Preferred stock (274,457) converted to common shares
    8,167,309       (274 )             31                       243                
Common stock dividends
                                    (2,695 )                             (2,695 )
Tax benefit upon exercise of stock options
                            179                                       179  
Stock option compensation expense
                            108                                       108  
Net change in deferred compensation and related plans
                            39                       (23 )             16  
Reclassification of share-based plans
                            308                       (211 )             97  
 
                                                     
Net change
    17,538,350       140             627       3,399       (32 )     117       (150 )     4,101  
 
                                                     

BALANCE SEPTEMBER 30, 2006
    3,372,704,414     $ 465     $ 5,788     $ 7,667     $ 34,080     $ 633     $ (3,273 )   $ (498 )   $ 44,862  
 
                                                     
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                 
   
    Nine months ended September 30 ,
(in millions)   2006     2005  
 

Cash flows from operating activities:
               
Net income
  $ 6,301     $ 5,741  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    1,478       1,680  
Provision for MSRs in excess of fair value
          (323 )
Change in fair value of residential MSRs
    (1,736 )      
Depreciation and amortization
    2,250       3,002  
Net gains on securities available for sale
    (117 )     (138 )
Net losses (gains) on mortgage loan origination/sales activities
    811       (816 )
Other net gains
    (200 )     (29 )
Preferred shares released to ESOP
    274       244  
Stock option compensation expense
    108        
Excess tax benefits related to stock option payments
    (179 )      
Net decrease in trading assets
    5,582       523  
Net increase in deferred income taxes
    877       214  
Net increase in accrued interest receivable
    (265 )     (500 )
Net increase in accrued interest payable
    358       271  
Originations of mortgages held for sale
    (180,739 )     (170,005 )
Proceeds from sales of mortgages originated for sale
    175,655       150,456  
Principal collected on mortgages originated for sale
    1,762       923  
Net increase (decrease) in loans originated for sale
    (5 )     666  
Other assets, net
    2,949       (353 )
Other accrued expenses and liabilities, net
    3,136       2,680  
 
           

Net cash provided (used) by operating activities
    18,300       (5,764 )
 
           

Cash flows from investing activities:
               
Securities available for sale:
               
Sales proceeds
    43,896       7,343  
Prepayments and maturities
    5,757       5,295  
Purchases
    (61,347 )     (10,578 )
Net cash acquired from (paid for) acquisitions
    (526 )     54  
Increase in banking subsidiaries’ loan originations, net of collections
    (26,503 )     (25,867 )
Proceeds from sales (including participations) of loans by banking subsidiaries
    35,637       35,141  
Purchases (including participations) of loans by banking subsidiaries
    (4,136 )     (5,611 )
Principal collected on nonbank entities’ loans
    18,130       16,679  
Loans originated by nonbank entities
    (19,956 )     (24,503 )
Proceeds from sales of foreclosed assets
    376       331  
Net decrease (increase) in federal funds sold, securities purchased under resale agreements and other short-term investments
    1,282       (836 )
Net increase in MSRs
    (1,655 )     (2,922 )
Other, net
    (3,287 )     (3,528 )
 
           

Net cash used by investing activities
    (12,332 )     (9,002 )
 
           

Cash flows from financing activities:
               
Net increase (decrease) in deposits
    (376 )     13,540  
Net increase (decrease) in short-term borrowings
    (10,139 )     1,230  
Proceeds from issuance of long-term debt
    14,987       22,285  
Long-term debt repayment
    (10,632 )     (17,470 )
Proceeds from issuance of common stock
    1,419       859  
Common stock repurchased
    (1,566 )     (2,343 )
Cash dividends paid on common stock
    (2,695 )     (2,505 )
Excess tax benefits related to stock option payments
    179        
Other, net
    49       198  
 
           

Net cash provided (used) by financing activities
    (8,774 )     15,794  
 
           

Net change in cash and due from banks
    (2,806 )     1,028  

Cash and due from banks at beginning of period
    15,397       12,903  
 
           

Cash and due from banks at end of period
  $ 12,591     $ 13,931  
 
           

Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 8,749     $ 5,324  
Income taxes
    1,423       1,564  
Noncash investing and financing activities:
               
Net transfers from loans to mortgages held for sale
  $ 32,381     $ 34,906  
Net transfers from loans held for sale to loans
          7,444  
Transfers from loans to foreclosed assets
    1,243       416  
Transfers from mortgages held for sale to securities held for sale
          3,382  
   
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, 2005 (2005 Form 10-K).
In the Financial Statements and related Notes, all common share and per share disclosures reflect the two-for-one stock split in the form of a 100% stock dividend distributed August 11, 2006.
Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2005 Form 10-K. There have been no significant changes to these policies, except as discussed below for transfers and servicing of financial assets and stock-based compensation.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
We account for a transfer of financial assets as a sale when we surrender control of the transferred assets. Effective January 1, 2006, upon adoption of Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140 (FAS 156), servicing rights resulting from the sale or securitization of loans we originate and purchase (asset transfers), are initially measured at fair value at the date of transfer. We recognize the rights to service mortgage loans for others, or mortgage servicing rights (MSRs), as assets whether we purchase the MSRs or the MSRs result from an asset transfer. We determine the fair value of servicing rights at the date of transfer using the present value of estimated future net servicing income, using assumptions that market participants use in their estimates of values. We use quoted market prices when available to determine the value of other interests held. Gain or loss on sale of loans depends on (a) net proceeds received (including cash proceeds and the value of any servicing asset recorded) and (b) the previous carrying

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amount of the financial assets transferred and any interests we continue to hold (such as interest-only strips) based on relative fair value at the date of transfer.
To determine the fair value of MSRs, we use a valuation model that calculates the present value of estimated future net servicing income. We use assumptions in the valuation model that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income and late fees. This model is validated by an independent internal model validation group operating in accordance with a model valuation policy approved by the Corporate Asset/Liability Management Committee.
MSRs Measured at Fair Value
Effective January 1, 2006, upon adoption of FAS 156, we elected to initially measure and subsequently carry our MSRs related to residential mortgage loans (residential MSRs) using the fair value method. Under the fair value method, residential MSRs are carried on the balance sheet at fair value and the changes in fair value, primarily due to changes in valuation inputs and assumptions and to the collection/realization of expected cash flows, are reported in earnings in the period in which the change occurs.
Effective January 1, 2006, upon the remeasurement of our residential MSRs at fair value, we recorded a cumulative-effect adjustment to the 2006 beginning balance of retained earnings of $101 million after tax ($158 million pre tax) in our Statement of Changes in Stockholders’ Equity.
Amortized MSRs
Amortized MSRs, which include commercial MSRs and, prior to January 1, 2006, residential MSRs, are carried at the lower of cost or market. These MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs is analyzed monthly and is adjusted to reflect changes in prepayment speeds, as well as other factors.
STOCK-BASED COMPENSATION
We have several stock-based employee compensation plans, which are more fully discussed in Note 10. Prior to January 1, 2006, we accounted for stock options and stock awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, as permitted by FAS 123, Accounting for Stock-Based Compensation. Under this guidance, no stock option expense was recognized in our income statement for periods prior to January 1, 2006, as all options granted under our plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted FAS 123(R), Share-Based Payment, using the modified-prospective transition method. Accordingly, compensation cost recognized in the first nine months of 2006 includes; (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with FAS 123, and (2) compensation cost for all share-based awards granted on or after January 1, 2006, including cost for retirement-eligible team members, which is immediately expensed upon grant, based on the grant date fair value estimated in accordance with FAS 123(R). Results for prior periods have not been restated. In calculating the common stock equivalents for purposes of diluted earnings per share, we selected the transition

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method provided by FASB Staff Position FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.
As a result of adopting FAS 123(R), as required, on January 1, 2006, our income before income taxes of $3,240 million and net income of $2,194 million for the third quarter of 2006 was $28 million and $17 million lower, respectively, and our income before income taxes of $9,469 million and net income of $6,301 million for the first nine months of 2006 was $108 million and $67 million lower, respectively, than if we had continued to account for share-based compensation under APB 25. Earnings per share and diluted earnings per share for the third quarter of 2006 of $0.65 and $0.64, respectively, were both less than $0.01 per share lower than if we had not adopted FAS 123(R). Earnings per share and diluted earnings per share for the first nine months of 2006 of $1.87 and $1.85, respectively, were both $0.02 per share lower than if we had not adopted FAS 123(R).
Prior to the adoption of FAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123(R) requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $179 million excess tax benefit for the first nine months of 2006 classified as a financing cash inflow would have been classified as an operating cash inflow under APB 25.
Pro forma net income and earnings per common share information are provided in the table below as if we accounted for employee stock option plans under the fair value method of FAS 123 in the third quarter and first nine months of 2005.
                     
   
        Quarter ended     Nine months ended  
(in millions, except per share amounts)   Sept. 30, 2005     Sept. 30, 2005  
 

Net income, as reported
  $ 1,975     $ 5,741  
Add:
  Stock-based employee compensation expense                
 
  included in reported net income, net of tax     1       1  
Less:
  Total stock-based employee compensation                
 
  expense under the fair value method for                
 
  all awards, net of tax     (19 )     (167 )
 
               
Net income, pro forma   $ 1,957     $ 5,575  
 
               

Earnings per common share
               
As reported
  $ 0.59     $ 1.70  
Pro forma
    0.58       1.65  
Diluted earnings per common share                
As reported
  $ 0.58     $ 1.68  
Pro forma
    0.57       1.63  
   
Stock options granted in our February 2005 grant, under our Long-Term Incentive Compensation Plan, fully vested upon grant, resulting in full recognition of stock-based compensation expense under the fair value method in the table above.

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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 nine months of 2006 were:
                 
   
(in millions)   Date     Assets  
 
Secured Capital Corp / Secured Capital LLC, Los Angeles, California
  January 18   $ 132  
Martinius Corporation, Rogers, Minnesota
  March 1     91  
Commerce Funding Corporation, Vienna, Virginia
  April 17     82  
Fremont National Bank of Canon City / Centennial Bank of Pueblo, Canon City and Pueblo, Colorado
  June 7     201  
Certain assets of the Reilly Mortgage Companies, McLean, Virginia
  August 1     303  
Other (1)
  Various     19  
 
             

 
          $ 828  
 
             
   
(1)   Consists of six acquisitions of insurance brokerage businesses.
At September 30, 2006, we had one pending business combination with assets of approximately $8 million. We expect to complete this transaction in fourth quarter 2006.
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.
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Federal funds sold and securities purchased under resale agreements
  $ 2,768     $ 3,789     $ 3,854  
Interest-earning deposits
    629       847       1,289  
Other short-term investments
    682       670       718  
 
                 

Total
  $ 4,079     $ 5,306     $ 5,861  
 
                 
   

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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.
                                                 
   
    Sept. 30, 2006     Dec. 31, 2005     Sept. 30, 2005  
            Estimated             Estimated             Estimated  
            fair             fair             fair  
(in millions)   Cost     value     Cost     value     Cost     value  
 

Securities of U.S. Treasury and federal agencies
  $ 892     $ 886     $ 845     $ 839     $ 1,061     $ 1,058  
Securities of U.S. states and political subdivisions
    3,241       3,388       3,048       3,191       3,129       3,291  
Mortgage-backed securities:
                                               
Federal agencies
    35,549       36,045       25,304       25,616       17,803       18,155  
Private collateralized mortgage obligations (1)
    4,842       4,912       6,628       6,750       6,118       6,194  
 
                                   
Total mortgage-backed securities
    40,391       40,957       31,932       32,366       23,921       24,349  
Other
    6,549       6,575       4,518       4,538       4,915       4,965  
 
                                   
Total debt securities
    51,073       51,806       40,343       40,934       33,026       33,663  
Marketable equity securities
    597       829       558       900       553       817  
 
                                   

Total
  $ 51,670     $ 52,635     $ 40,901     $ 41,834     $ 33,579     $ 34,480  
 
                                   
   
(1)   Most of the private collateralized mortgage obligations are AAA-rated bonds collateralized by 1-4 family residential first mortgages.
The following table provides the components of the estimated unrealized net gains on securities available for sale. The estimated unrealized net gains and losses on securities available for sale are reported on an after-tax basis as a component of cumulative other comprehensive income.
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Estimated unrealized gross gains
  $ 1,050     $ 1,041     $ 1,021  
Estimated unrealized gross losses
    (85 )     (108 )     (120 )
 
                 
Estimated unrealized net gains
  $ 965     $ 933     $ 901  
 
                 
   
The following table shows the realized net gains (losses) on the sales of securities from the securities available for sale portfolio, including marketable equity securities.
                                 
   
    Quarter     Nine months  
    ended Sept. 30 ,   ended Sept. 30 ,
(in millions)   2006     2005     2006     2005  
 

Realized gross gains
  $ 143     $ 29     $ 390     $ 316  
Realized gross losses (1)
    (15 )     (61 )     (273 )     (178 )
 
                       
Realized net gains (losses)
  $ 128     $ (32 )   $ 117     $ 138  
 
                       
   
(1)   Includes other-than-temporary impairment of $4 million and $17 million for the third quarter and first nine months of 2006, respectively, and $27 million and $42 million for the third quarter and first nine months of 2005, respectively.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of the major categories of loans outstanding is shown in the following table. Outstanding loan balances reflect unearned income, net deferred loan fees, and unamortized discount and premium totaling $3,050 million, $3,918 million and $3,586 million, at September 30, 2006, December 31, 2005, and September 30, 2005, respectively.
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Commercial and commercial real estate:
                       
Commercial
  $ 66,797     $ 61,552     $ 60,588  
Other real estate mortgage
    29,914       28,545       28,571  
Real estate construction
    15,397       13,406       12,587  
Lease financing
    5,443       5,400       5,244  
 
                 
Total commercial and commercial real estate
    117,551       108,903       106,990  
Consumer:
                       
Real estate 1-4 family first mortgage
    49,765       77,768       69,259  
Real estate 1-4 family junior lien mortgage
    67,185       59,143       57,491  
Credit card
    13,343       12,009       11,060  
Other revolving credit and installment
    53,080       47,462       46,201  
 
                 
Total consumer
    183,373       196,382       184,011  
Foreign
    6,567       5,552       5,188  
 
                 

Total loans
  $ 307,491     $ 310,837     $ 296,189  
 
                 
   
The recorded investment in impaired loans and the methodology used to measure impairment was:
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Impairment measurement based on:
                       
Collateral value method
  $ 121     $ 115     $ 132  
Discounted cash flow method
    71       75       108  
 
                 
Total (1)
  $ 192     $ 190     $ 240  
 
                 
   
(1)   Includes $61 million, $56 million and $41 million of impaired loans with a related allowance of $8 million, $10 million and $9 million at September 30, 2006, December 31, 2005, and September 30, 2005, respectively.
The average recorded investment in impaired loans was $168 million and $252 million during third quarter 2006 and 2005, respectively, and $159 million and $278 million in the first nine months of 2006 and 2005, respectively.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
                                 
   
    Quarter     Nine months  
    ended Sept. 30 ,   ended Sept. 30 ,
(in millions)   2006     2005     2006     2005  
 

Balance, beginning of period
  $ 4,035     $ 3,944     $ 4,057     $ 3,950  

Provision for credit losses
    613       641       1,478       1,680  

Loan charge-offs:
                               
Commercial and commercial real estate:
                               
Commercial
    (103 )     (95 )     (275 )     (271 )
Other real estate mortgage
    (1 )     (1 )     (3 )     (6 )
Real estate construction
    (1 )     (1 )     (1 )     (6 )
Lease financing
    (6 )     (7 )     (22 )     (27 )
 
                       
Total commercial and commercial real estate
    (111 )     (104 )     (301 )     (310 )
Consumer:
                               
Real estate 1-4 family first mortgage
    (30 )     (24 )     (81 )     (83 )
Real estate 1-4 family junior lien mortgage
    (36 )     (37 )     (98 )     (100 )
Credit card
    (133 )     (128 )     (351 )     (389 )
Other revolving credit and installment
    (501 )     (369 )     (1,172 )     (1,015 )
 
                       
Total consumer
    (700 )     (558 )     (1,702 )     (1,587 )
Foreign
    (74 )     (72 )     (222 )     (216 )
 
                       
Total loan charge-offs
    (885 )     (734 )     (2,225 )     (2,113 )
 
                       

Loan recoveries:
                               
Commercial and commercial real estate:
                               
Commercial
    26       35       84       102  
Other real estate mortgage
    8       4       14       13  
Real estate construction
                2       7  
Lease financing
    4       5       16       16  
 
                       
Total commercial and commercial real estate
    38       44       116       138  
Consumer:
                               
Real estate 1-4 family first mortgage
    8       6       20       15  
Real estate 1-4 family junior lien mortgage
    9       8       27       22  
Credit card
    23       20       72       64  
Other revolving credit and installment
    124       97       401       250  
 
                       
Total consumer
    164       131       520       351  
Foreign
    20       18       61       44  
 
                       
Total loan recoveries
    222       193       697       533  
 
                       
Net loan charge-offs
    (663 )     (541 )     (1,528 )     (1,580 )
 
                       

Other
    (7 )     13       (29 )     7  
 
                       

Balance, end of period
  $ 3,978     $ 4,057     $ 3,978     $ 4,057  
 
                       

Components:
                               
Allowance for loan losses
  $ 3,799     $ 3,886     $ 3,799     $ 3,886  
Reserve for unfunded credit commitments
    179       171       179       171  
 
                       
Allowance for credit losses
  $ 3,978     $ 4,057     $ 3,978     $ 4,057  
 
                       

Net loan charge-offs (annualized) as a percentage of average total loans
    0.86 %     0.73 %     0.67 %     0.72 %

Allowance for loan losses as a percentage of total loans
    1.24 %     1.31 %     1.24 %     1.31 %
Allowance for credit losses as a percentage of total loans
    1.29       1.37       1.29       1.37  
   

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6. OTHER ASSETS
The components of other assets were:
                         
   
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,
(in millions)   2006     2005     2005  
 

Nonmarketable equity investments:
                       
Private equity investments
  $ 1,654     $ 1,537     $ 1,500  
Federal bank stock
    1,338       1,402       1,423  
All other
    2,084       2,151       2,106  
 
                 
Total nonmarketable equity investments (1)
    5,076       5,090       5,029  

Operating lease assets
    3,120       3,414       3,425  
Accounts receivable
    7,048       11,606       3,777  
Interest receivable
    2,544       2,279       1,983  
Core deposit intangibles
    410       489       519  
Foreclosed assets:
                       
GNMA loans (2)
    266              
Other
    342       191       187  
Due from customers on acceptances
    140       104       133  
Other
    11,791       9,299       10,931  
 
                 
Total other assets
  $ 30,737     $ 32,472     $ 25,984  
 
                 
   
(1)   At September 30, 2006, December 31, 2005, and September 30, 2005, $4.4 billion, $3.1 billion and $3.1 billion, respectively, of nonmarketable equity investments, including all federal bank stock, were accounted for at cost.
 
(2)   As a result of a change in regulatory reporting requirements effective January 1, 2006, foreclosed assets included foreclosed real estate securing Government National Mortgage Association (GNMA) loans. These assets are fully collectible because the corresponding GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Such assets were included in accounts receivable at December 31, 2005, and September 30, 2005.
Income related to nonmarketable equity investments was:
                                 
   
    Quarter     Nine months  
    ended Sept. 30 ,   ended Sept. 30 ,
(in millions)   2006     2005     2006     2005  
 

Net gains from private equity investments
  $ 152     $ 147     $ 295     $ 284  
Net gains (losses) from all other nonmarketable equity investments
    8       22       (11 )     15  
 
                       
Net gains from nonmarketable equity investments
  $ 160     $ 169     $ 284     $ 299  
 
                       
   

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7. INTANGIBLE ASSETS
The gross carrying amount of intangible assets and accumulated amortization was:
                                 
   
    September 30 ,
    2006     2005  
    Gross     Accumulated     Gross     Accumulated  
(in millions)   carrying amount     amortization     carrying amount     amortization  
 

Amortized intangible assets:
                               
MSRs, before valuation allowance (1):
                               
Residential
  $     $     $ 22,748     $ 10,902  
Commercial
    396       68       147       40  
Core deposit intangibles
    2,374       1,964       2,432       1,913  
Credit card and other intangibles
    576       370       562       301  
 
                       
Total intangible assets
  $ 3,346     $ 2,402     $ 25,889     $ 13,156  
 
                       

MSRs (fair value) (1)
  $ 17,712             $          
Trademark
    14               14          
   
(1)   Prior to 2006, amortized intangible assets included both residential and commercial MSRs. Effective January 1, 2006, upon adoption of FAS 156, residential MSRs are measured at fair value and are no longer amortized. See Note 15 for additional information on MSRs.
As of September 30, 2006, the current year and estimated future amortization expense for intangible assets was:
                         
   
    Core              
    deposit              
(in millions)   intangibles     Other(1)     Total  
 

Nine months ended September 30, 2006 (actual)
  $ 85     $ 77     $ 162  
 
                 

Estimate for year ended December 31,
                       
2006
  $ 112     $ 99     $ 211  
2007
    102       78       180  
2008
    94       72       166  
2009
    86       66       152  
2010
    77       62       139  
2011
    19       53       72  
   
(1)   Includes amortized commercial MSRs and credit card and other intangibles.
We based the projections of amortization expense for core deposit intangibles shown above on existing asset balances at September 30, 2006. Future amortization expense may vary based on additional core deposit 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, 2004
  $ 7,291     $ 3,037     $ 353     $ 10,681  

Reduction in goodwill related to divested business
    (31 )     (3 )           (34 )
Goodwill from business combinations
    125       2             127  
Realignment of automobile financing business
    (11 )           11        
Foreign currency translation adjustments
                2       2  
 
                       
September 30, 2005
  $ 7,374     $ 3,036     $ 366     $ 10,776  
 
                       

December 31, 2005
  $ 7,374     $ 3,047     $ 366     $ 10,787  

Goodwill from business combinations (including contingent payments)
    30       373             403  
Foreign currency translation adjustments
                2       2  
Realignment of businesses (primarily insurance)
    (19 )     19             --  
 
                       
September 30, 2006
  $ 7,385     $ 3,439     $ 368     $ 11,192  
 
                       
   
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  
 

September 30, 2005
  $ 3,516     $ 1,097     $ 366     $ 5,797     $ 10,776  

September 30, 2006
    3,538       1,489       368       5,797       11,192  
   

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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  
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   dividends rate  
    2006     2005     2005     2006     2005     2005     Minimum     Maximum  

ESOP Preferred Stock (1):
                                                               

2006
    162,493                 $ 162     $     $       10.75 %     11.75 %

2005
    89,984       102,184       135,845       90       102       136       9.75       10.75  

2004
    71,280       74,880       81,180       71       75       81       8.50       9.50  

2003
    49,843       52,643       57,243       50       53       57       8.50       9.50  

2002
    37,774       39,754       44,554       38       40       45       10.50       11.50  

2001
    27,003       28,263       32,863       27       28       33       10.50       11.50  

2000
    18,542       19,282       23,482       19       19       24       11.50       12.50  

1999
    6,094       6,368       8,368       6       6       8       10.30       11.30  

1998
    1,863       1,953       2,853       2       2       3       10.75       11.75  

1997
    130       136       2,136                   2       9.50       10.50  

1996
                370                         8.50       9.50  
 
                                                   

Total ESOP Preferred Stock
    465,006       325,463       388,894     $ 465     $ 325     $ 389                  
 
                                                   

Unearned ESOP shares (2)
                          $ (498 )   $ (348 )   $ (416 )                
 
                                                         
   
(1)   Liquidation preference $1,000.
(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. COMMON STOCK PLANS
We offer several stock-based employee compensation plans, which are described below. Effective January 1, 2006, we adopted FAS 123(R), Share-Based Payment, using the “modified prospective” transition method. FAS 123(R) requires that we measure the cost of employee services received in exchange for an award of equity instruments, such as stock options or restricted share rights (RSRs), based on the fair value of the award on the grant date. The cost is normally recognized in our income statement over the vesting period of the award; awards with graded vesting are expensed on a straight-line method. Awards to retirement-eligible employees are subject to immediate expensing upon grant. Total stock option compensation expense was $108 million in the first nine months of 2006, with a related recognized tax benefit of $41 million. Stock option expense is based on the fair value of the awards at the date of grant and includes expense for awards granted in 2006 and expense for the unvested portion of awards granted prior to January 1, 2006. Prior to January 1, 2006, we did not record any compensation expense for stock options.
EMPLOYEE STOCK PLANS
Long-Term Incentive Compensation Plans Our stock incentive plans provide for awards of incentive and nonqualified stock options, stock appreciation rights, restricted shares, RSRs, performance awards and stock awards without restrictions. Options must have an exercise price at or above fair market value (as defined in the plan) of the stock at the date of grant (except for substitute or replacement options granted in connection with mergers or other acquisitions) and a term of no more than 10 years. Options granted in 2003 and prior generally become exercisable over three years from the date of grant. Options granted in 2004 and the beginning of 2005 generally were fully vested upon grant. Options granted in 2006 generally become exercisable over three years from the date of grant. Except as otherwise permitted under the plan, if employment is ended for reasons other than retirement, permanent disability or death, the option period is reduced or the options are canceled.
Options granted prior to 2004 may include the right to acquire a “reload” stock option. If an option contains the reload feature and if a participant pays all or part of the exercise price of the option with shares of stock purchased in the market or held by the participant for at least six months, upon exercise of the option, the participant is granted a new option to purchase, at the fair market value of the stock as of the date of the reload, the number of shares of stock equal to the sum of the number of shares used in payment of the exercise price and a number of shares with respect to related statutory minimum withholding taxes. Reload grants are fully vested upon grant and are expensed immediately under FAS 123(R) beginning in 2006.
Holders of RSRs are entitled to the related shares of common stock at no cost generally over three to five years after the RSRs were granted. Holders of RSRs generally are entitled to receive cash payments equal to the cash dividends that would have been paid had the RSRs been issued and outstanding shares of common stock. Except in limited circumstances, RSRs are canceled when employment ends.
The compensation expense for RSRs equals the quoted market price of the related stock at the date of grant and is accrued over the vesting period. Total compensation expense for RSRs was not significant in the first nine months of 2006 and 2005.

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For various acquisitions and mergers, we converted employee and director stock options of acquired or merged companies into stock options to purchase our common stock based on the terms of the original stock option plan and the agreed-upon exchange ratio.
Broad-Based Plans In 1996, we adopted the PartnerShares® Stock Option Plan, a broad-based employee stock option plan. It covers full- and part-time employees who generally were not included in the long-term incentive compensation plans described above. At September 30, 2006, there were 9,125,030 shares available for grant. The exercise date of options granted to date under the PartnerShares Plan is the earlier of (1) five years after the date of grant or (2) when the quoted market price of the stock reaches a predetermined price. These options generally expire 10 years after the date of grant. No options have been granted under the PartnerShares Plans since 2002. Because the exercise price of each PartnerShares grant has been equal to or higher than the quoted market price of our common stock at the date of grant, we did not recognize any compensation expense in 2005 and prior years. In 2006, under FAS 123(R), we began to recognize expense related to these grants, based on the remaining vesting period.
DIRECTOR PLANS
We provide a stock award to non-employee directors as part of their annual retainer under our director plans. We also provide annual grants of options to purchase common stock to each non-employee director elected or re-elected at the annual meeting of stockholders. The options can be exercised after six months and through the tenth anniversary of the grant date.

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The table below summarizes stock option activity and related information for the first nine months of 2006.
                                 
   
                    Weighted-        
            Weighted-     average        
            average     remaining     Aggregate  
            exercise     contractual     intrinsic value  
    Number     price     term (in yrs.)     (in millions)  
   

Long-Term Incentive Compensation Plans
                               

Options outstanding as of December 31, 2005
    221,182,224     $ 24.82                  
First nine months of 2006:
                               
Granted
    43,933,400       32.55                  
Canceled or forfeited
    (861,988 )     30.88                  
Exercised
    (34,744,922 )     22.80                  
 
                             
Options outstanding as of September 30, 2006
    229,508,714       26.59       6.1     $ 2,202  
 
                             

As of September 30, 2006:
                               
Options exercisable and expected to be exercisable (1)
    227,906,580       26.55       6.1       2,196  
Options exercisable
    191,130,236       25.50       5.4       2,042  

Broad-Based Plans
                               

Options outstanding as of December 31, 2005
    48,985,522     $ 22.75                  
First nine months of 2006:
                               
Canceled or forfeited
    (1,785,224 )     24.79                  
Exercised
    (7,848,848 )     20.31                  
 
                             
Options outstanding as of September 30, 2006
    39,351,450       23.15       4.3     $ 513  
 
                             

As of September 30, 2006:
                               
Options exercisable and expected to be exercisable (1)
    39,191,022       23.14       4.3       511  
Options exercisable
    21,166,000       21.38       3.3       313  

Director Plans
                               

Options outstanding as of December 31, 2005
    779,028     $ 24.33                  
First nine months of 2006:
                               
Granted
    91,219       32.69                  
Exercised
    (55,440 )     15.43                  
 
                             
Options outstanding as of September 30, 2006
    814,807       25.88       5.8     $ 8  
 
                             

As of September 30, 2006:
                               
Options exercisable and expected to be exercisable (1)
    814,807       25.88       5.8       8  
Options exercisable
    724,748       25.03       5.3       8  
   
(1)   Adjusted for estimated forfeitures.
As of September 30, 2006, there was $105 million of unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.3 years.
The total intrinsic value of options exercised during the first nine months of 2006 and 2005 was $485 million and $213 million, respectively.
Cash received from the exercise of options for the first nine months of 2006 and 2005 was $893 million and $418 million, respectively. The actual tax benefit recognized in stockholders’

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equity for the tax deductions from the exercise of options totaled $179 million and $80 million for the first nine months of 2006 and 2005, respectively.
We do not have a specific policy on repurchasing shares to satisfy share option exercises. Rather, we have a general policy on repurchasing shares to meet common stock issuance requirements for our benefit plans (including share option exercises), conversion of our convertible securities, acquisitions, and other corporate purposes. 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.
Effective with the adoption of FAS 123(R), the fair value of each option award granted on or after January 1, 2006, is estimated using a Black-Scholes valuation model. The expected term of options granted is generally based on the historical exercise behavior of full-term options. Our expected volatilities are based on a combination of the historical volatility of our common stock and implied volatilities for traded options on our common stock. The risk-free rate is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. Both expected volatility and the risk-free rates are based on a period commensurate with our expected term. The expected dividend is based on the current dividend, our historical pattern of dividend increases and the current market price of our stock.
Prior to the adoption of FAS 123(R), we also used a Black-Scholes valuation model to estimate the fair value of options granted for the pro forma disclosures of net income and earnings per common share that were required by FAS 123.
Effective with the adoption of FAS 123(R), we changed our method of estimating our volatility assumption. Prior to 2006, we used a volatility based on historical stock price changes. Effective January 1, 2006, we used a volatility based on a combination of historical stock price changes and implied volatilities of traded options as both volatilities are relevant in estimating our expected volatility.
The following table presents the weighted-average per share fair value of options granted and the assumptions used, based on a Black-Scholes valuation model.
                 
   
    Nine months ended Sept. 30 ,
    2006     2005  
   
Per share fair value of options granted:
               
Long-Term Incentive Compensation Plans
  $ 4.06     $ 3.77  
Director Plans
    4.66       3.13  
Expected volatility
    16.2 %     16.3 %
Expected dividends
    3.4       3.4  
Expected term (in years)
    4.4       4.4  
Risk-free interest rate
    4.4 %     4.0 %
   

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A summary of the status of our RSRs at September 30, 2006, and changes during the first nine months of 2006 is in the following table:
                 
   
            Weighted-average grant-date  
    Number     fair value  
   
Nonvested at January 1, 2006
    212,366       $26.92  
Granted
    15,200       32.93  
Vested
    (91,800 )     24.75  
 
             

Nonvested at September 30, 2006
    135,766       29.05  
 
             
   
The weighted-average grant-date fair value of RSRs granted during the first nine months of 2005 was $30.74. At September 30, 2006, there was $2 million of total unrecognized compensation cost related to nonvested RSRs. The cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of RSRs that vested during the first nine months of 2006 and 2005 was $3 million and $4 million, respectively.

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11. 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 expect that we will not be required to make a minimum contribution in 2006 for the Cash Balance Plan. We are currently assessing how much to contribute, if any, to the Cash Balance Plan this year. Our decision depends on several factors, including the actual investment performance of plan assets. We cannot at this time reliably estimate the amount that we will contribute in 2006 to the Cash Balance Plan.
The net periodic benefit cost for the third quarter and first nine months of 2006 and 2005 was:
                                                 
   
    Pension benefits             Pension benefits          
            Non-     Other             Non-     Other  
(in millions)   Qualified     qualified     benefits     Qualified     qualified     benefits  
Quarter ended September 30,   2006     2005  

Service cost
  $ 62     $ 4     $ 4     $ 51     $ 6     $ 5  
Interest cost
    56       4       10       55       3       11  
Expected return on plan assets
    (105 )           (8 )     (98 )           (6 )
Recognized net actuarial loss (1)
    14       2       1       17       1       2  
Amortization of prior service cost
                (1 )     (1 )     (1 )      
 
                                   
Net periodic benefit cost
  $ 27     $ 10     $ 6     $ 24     $ 9     $ 12  
 
                                   

Nine months ended September 30,
                                               

Service cost
  $ 186     $ 12     $ 12     $ 155     $ 16     $ 15  
Interest cost
    168       12       30       165       10       33  
Expected return on plan assets
    (315 )           (24 )     (294 )           (19 )
Recognized net actuarial loss (1)
    42       6       4       51       3       7  
Amortization of prior service cost
                (3 )     (3 )     (2 )     (1 )
Special termination benefits
    2                                
Curtailment gain
                (9 )                  
 
                                   
Net periodic benefit cost
  $ 83     $ 30     $ 10     $ 74     $ 27     $ 35  
 
                                   
   
(1)   Net actuarial loss is generally amortized over five years.

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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     Nine months  
    ended Sept. 30 ,   ended Sept. 30 ,
(in millions, except per share amounts)   2006     2005     2006     2005  
   

Net income (numerator)
  $ 2,194     $ 1,975     $ 6,301     $ 5,741  
 
                       

EARNINGS PER COMMON SHARE
                               
Average common shares outstanding (denominator)
    3,371.9       3,373.5       3,364.6       3,379.8  
 
                       

Per share
  $ 0.65     $ 0.59     $ 1.87     $ 1.70  
 
                       

DILUTED EARNINGS PER COMMON SHARE
                               
Average common shares outstanding
    3,371.9       3,373.5       3,364.6       3,379.8  
Add:     Stock options
    44.0       36.5       40.8       38.3  
Restricted share rights
    0.1       0.6       0.1       0.6  
 
                       
Diluted average common shares outstanding (denominator)
    3,416.0       3,410.6       3,405.5       3,418.7  
 
                       

Per share
  $ 0.64     $ 0.58     $ 1.85     $ 1.68  
 
                       
   
In third quarter 2006 and 2005, options to purchase 4.4 million and 8.8 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 the realignment of our insurance business into Wholesale Banking in first quarter 2006, 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 and equity 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

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and 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, Latin America, the Caribbean 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.
                                                                 
   
(income/expense in millions,   Community     Wholesale     Wells Fargo     Consolidated  
average balances in billions)   Banking     Banking     Financial     Company  
Quarter ended September 30,   2006     2005     2006     2005     2006     2005     2006     2005  

Net interest income (1)
  $ 3,292     $ 3,209     $ 751     $ 598     $ 1,004     $ 869     $ 5,047     $ 4,676  
Provision for credit losses
    236       226                   377       415       613       641  
Noninterest income
    2,492       2,619       1,033       893       362       315       3,887       3,827  
Noninterest expense
    3,392       3,350       999       895       690       644       5,081       4,889  
 
                                               
Income before income tax expense
    2,156       2,252       785       596       299       125       3,240       2,973  
Income tax expense
    683       759       258       193       105       46       1,046       998  
 
                                               
Net income
  $ 1,473     $ 1,493     $ 527     $ 403     $ 194     $ 79     $ 2,194     $ 1,975  
 
                                               

Average loans
  $ 172.5     $ 184.4     $ 72.3     $ 63.3     $ 59.2     $ 47.9     $ 304.0     $ 295.6  
Average assets (2)
    326.7       298.8       97.5       90.1       64.7       53.5       494.7       448.2  
Average core deposits
    231.2       223.5       29.1       23.6       0.1       0.1       260.4       247.2  

Nine months ended September 30,
                                                               

 
                                                               
Net interest income (1)
  $ 9,869     $ 9,421     $ 2,137     $ 1,755     $ 2,895     $ 2,489     $ 14,901     $ 13,665  
Provision (reversal of provision) for credit losses
    612       610       (9 )     (6 )     875       1,076       1,478       1,680  
Noninterest income
    7,033       6,986       3,214       2,849       1,130       957       11,377       10,792  
Noninterest expense
    10,264       9,636       3,009       2,611       2,058       1,888       15,331       14,135  
 
                                               
Income before income tax expense
    6,026       6,161       2,351       1,999       1,092       482       9,469       8,642  
Income tax expense
    2,007       2,075       773       655       388       171       3,168       2,901  
 
                                               
Net income
  $ 4,019     $ 4,086     $ 1,578     $ 1,344     $ 704     $ 311     $ 6,301     $ 5,741  
 
                                               

Average loans
  $ 178.8     $ 186.0     $ 70.1     $ 61.3     $ 56.2     $ 45.6     $ 305.1     $ 292.9  
Average assets (2)
    322.9       292.7       96.9       88.1       61.6       51.5       487.2       438.1  
Average core deposits
    230.0       214.9       27.3       24.3       0.1             257.4       239.2  
   
(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 $3.2 billion and $2.5 billion in total assets at September 30, 2006, and December 31, 2005, 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 $2.8 billion and $2.9 billion in total assets at September 30, 2006, and December 31, 2005, 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 $820 million and $870 million at September 30, 2006, and December 31, 2005, respectively, predominantly 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 the 2006 beginning balance of retained earnings in our Statement of Changes in Stockholders’ Equity. The table below reconciles the December 31, 2005, and January 1, 2006, balance of MSRs.
                         
   
    Residential     Commercial     Total  
(in millions)   MSRs     MSRs     MSRs  
   

Balance at December 31, 2005
  $ 12,389     $ 122     $ 12,511  
Remeasurement upon adoption of FAS 156
    158             158  
 
                 

Balance at January 1, 2006
  $ 12,547     $ 122     $ 12,669  
 
                 
   
The changes in residential MSRs measured using the fair value method were:
                 
   
    Quarter ended     Nine months ended  
(in millions)   Sept. 30, 2006     Sept. 30, 2006  
   

Fair value, beginning of period
  $ 15,650     $ 12,547  
Purchases
    2,907       3,637  
Servicing from securitizations or asset transfers
    965       3,264  

Changes in fair value:
               
Due to changes in valuation model inputs or assumptions (1)
    (1,147 )     (75 )
Other changes in fair value (2)
    (663 )     (1,661 )
 
           

Fair value, end of period
  $ 17,712     $ 17,712  
 
           
   
(1)   Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.
(2)   Represents changes due to collection/realization of expected cash flows over time.

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The changes in amortized MSRs were:
                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions)   2006     2005     2006     2005  
   

Balance, beginning of period
  $ 175     $ 10,096     $ 122     $ 9,466  
Purchases (1)
    161       783       225       1,771  
Servicing from securitizations or asset transfers (1)
    2       850       2       1,764  
Amortization
    (10 )     (542 )     (21 )     (1,505 )
Other (includes changes due to hedging)
          766             457  
 
                       
Balance, end of period
  $ 328     $ 11,953     $ 328     $ 11,953  
 
                       

Valuation allowance:
                               
Balance, beginning of period
  $     $ 1,598     $     $ 1,565  
Reversal of provision for MSRs in excess of fair value
          (356 )           (323 )
 
                       
Balance, end of period
  $     $ 1,242     $     $ 1,242  
 
                       

Amortized MSRs, net
  $ 328     $ 10,711     $ 328     $ 10,711  
 
                       

Fair value of amortized MSRs:
                               
Beginning of period
  $ 252     $ 8,517     $ 146     $ 7,913  
End of period
    440       10,845       440       10,845  
   
(1)   Based on September 30, 2006, assumptions, the weighted-average amortization period for MSRs added during the third quarter and first nine months of 2006 was approximately 18.0 years and 16.2 years, respectively.
The components of our managed servicing portfolio were:
                 
   
    September 30 ,
(in billions)   2006     2005  
   

Loans serviced for others (1)
  $ 1,235     $ 815  
Owned loans serviced (2)
    90       115  
 
           
Total owned servicing
    1,325       930  
Sub-servicing
    20       29  
 
           
Total managed servicing portfolio
  $ 1,345     $ 959  
 
           

Ratio of MSRs to related loans serviced for others
    1.46 %     1.31 %
   
(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.

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The components of mortgage banking noninterest income were:
                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions)   2006     2005     2006     2005  
   

Servicing income, net:
                               
Servicing fees (1)
  $ 947     $ 619     $ 2,514     $ 1,782  
Changes in fair value of residential MSRs:
                               
Due to changes in valuation model inputs or assumptions (2)
    (1,147 )           (75 )      
Other changes in fair value (3)
    (663 )           (1,661 )     --  
Amortization
    (10 )     (542 )     (21 )     (1,505 )
Reversal of provision for MSRs in excess of fair value
          356             323  
Net derivative gains (losses):
                               
Fair value accounting hedges (4)
          (60 )           130  
Economic hedges (5)
    1,061             (178 )      
 
                       
Total servicing income, net
    188       373       579       730  
Net gains on mortgage loan origination/sales activities
    179       273       811       816  
All other
    117       97       244       248  
 
                       
Total mortgage banking noninterest income
  $ 484     $ 743     $ 1,634     $ 1,794  
 
                       

Market-related valuation changes to MSRs, net of hedge results (2) + (5)
  $ (86 )           $ (253 )        
 
                           
   
(1)   Includes contractually specified servicing fees, late charges and other ancillary revenues.
(2)   Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.
(3)   Represents changes due to collection/realization of expected cash flows over time.
(4)   Results related to MSRs fair value hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities (as amended), consist of gains and losses excluded from the evaluation of hedge effectiveness and the ineffective portion of the change in the value of these derivatives. Gains and losses excluded from the evaluation of hedge effectiveness are those caused by market conditions (volatility) and the spread between spot and forward rates priced into the derivative contracts (the passage of time). See Note 19 – Fair Value Hedges for additional discussion and detail.
(5)   Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 19 – Free-Standing Derivatives for additional discussion and detail.

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16. 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 September 30, 2006  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   

Dividends from subsidiaries:
                                       
Bank
  $ 637     $     $     $ (637 )   $  
Nonbank
    45                   (45 )      
Interest income from loans
          1,336       5,231       (12 )     6,555  
Interest income from subsidiaries
    862                   (862 )      
Other interest income
    27       26       1,794       (3 )     1,844  
 
                             
Total interest income
    1,571       1,362       7,025       (1,559 )     8,399  
 
                             

Deposits
                1,997             1,997  
Short-term borrowings
    139       96       288       (252 )     271  
Long-term debt
    834       457       180       (387 )     1,084  
 
                             
Total interest expense
    973       553       2,465       (639 )     3,352  
 
                             

NET INTEREST INCOME
    598       809       4,560       (920 )     5,047  
Provision for credit losses
          362       251             613  
 
                             
Net interest income after provision for credit losses
    598       447       4,309       (920 )     4,434  
 
                             
NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          76       2,268             2,344  
Other
    85       48       1,417       (7 )     1,543  
 
                             
Total noninterest income
    85       124       3,685       (7 )     3,887  
 
                             

NONINTEREST EXPENSE
                                       
Salaries and benefits
    5       280       2,652             2,937  
Other
    13       217       2,159       (245 )     2,144  
 
                             
Total noninterest expense
    18       497       4,811       (245 )     5,081  
 
                             

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
    665       74       3,183       (682 )     3,240  
Income tax expense (benefit)
    (54 )     27       1,073             1,046  
Equity in undistributed income of subsidiaries
    1,475                   (1,475 )      
 
                             
 
                             
NET INCOME
  $ 2,194     $ 47     $ 2,110     $ (2,157 )   $ 2,194  
 
                             
   

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Condensed Consolidating Statement of Income
                                         
   
    Quarter ended September 30, 2005  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   

Dividends from subsidiaries:
                                       
Bank
  $ 900     $     $     $ (900 )   $  
Nonbank
    566                   (566 )      
Interest income from loans
          1,154       4,270       (8 )     5,416  
Interest income from subsidiaries
    598                   (598 )      
Other interest income
    25       21       1,183             1,229  
 
                             
Total interest income
    2,089       1,175       5,453       (2,072 )     6,645  
 
                             

Deposits
                1,000             1,000  
Short-term borrowings
    60       62       228       (161 )     189  
Long-term debt
    554       350       161       (285 )     780  
 
                             
Total interest expense
    614       412       1,389       (446 )     1,969  
 
                             

NET INTEREST INCOME
    1,475       763       4,064       (1,626 )     4,676  
Provision for credit losses
          486       155             641  
 
                             
Net interest income after provision for credit losses
    1,475       277       3,909       (1,626 )     4,035  
 
                             

NONINTEREST INCOME
                                       
Fee income – nonaffiliates
          61       2,104             2,165  
Other
    62       90       1,539       (29 )     1,662  
 
                             
Total noninterest income
    62       151       3,643       (29 )     3,827  
 
                             

NONINTEREST EXPENSE
                                       
Salaries and benefits
    43       249       2,422             2,714  
Other
    31       227       2,105       (188 )     2,175  
 
                             
Total noninterest expense
    74       476       4,527       (188 )     4,889  
 
                             

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
    1,463       (48 )     3,025       (1,467 )     2,973  
Income tax expense (benefit)
    (50 )     (18 )     1,066             998  
Equity in undistributed income of subsidiaries
    462                   (462 )      
 
                             
 
                             
NET INCOME
  $ 1,975     $ (30 )   $ 1,959     $ (1,929 )   $ 1,975  
 
                             
   

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

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

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

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

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

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

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
    1,522       643       8,994       (1,690 )     9,469  
Income tax expense (benefit)
    (114 )     228       3,054             3,168  
Equity in undistributed income of subsidiaries
    4,665                   (4,665 )      
 
                             
 
                             
NET INCOME
  $ 6,301     $ 415     $ 5,940     $ (6,355 )   $ 6,301  
 
                             
   

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Condensed Consolidating Statement of Income
                                         
   
    Nine months ended September 30, 2005  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   

Dividends from subsidiaries:
                                       
Bank
  $ 3,824     $     $     $ (3,824 )   $  
Nonbank
    751                   (751 )      
Interest income from loans
          3,221       12,146       (8 )     15,359  
Interest income from subsidiaries
    1,553                   (1,553 )      
Other interest income
    78       79       3,202             3,359  
 
                             
Total interest income
    6,206       3,300       15,348       (6,136 )     18,718  
 
                             

Deposits
                2,517             2,517  
Short-term borrowings
    171       135       623       (427 )     502  
Long-term debt
    1,380       990       446       (782 )     2,034  
 
                             
Total interest expense
    1,551       1,125       3,586       (1,209 )     5,053  
 
                             

NET INTEREST INCOME
    4,655       2,175       11,762       (4,927 )     13,665  
Provision for credit losses
          1,123       557             1,680  
 
                             
Net interest income after provision for credit losses
    4,655       1,052       11,205       (4,927 )     11,985  
 
                             

NONINTEREST INCOME
                                       
Fee income — nonaffiliates
          169       6,016             6,185  
Other
    133       203       4,366       (95 )     4,607  
 
                             
Total noninterest income
    133       372       10,382       (95 )     10,792  
 
                             

NONINTEREST EXPENSE
                                       
Salaries and benefits
    55       731       6,965             7,751  
Other
    36       571       6,223       (446 )     6,384  
 
                             
Total noninterest expense
    91       1,302       13,188       (446 )     14,135  
 
                             

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
    4,697       122       8,399       (4,576 )     8,642  
Income tax expense (benefit)
    (52 )     40       2,913             2,901  
Equity in undistributed income of subsidiaries
    992                   (992 )      
 
                             
 
                             
NET INCOME
  $ 5,741     $ 82     $ 5,486     $ (5,568 )   $ 5,741  
 
                             
   

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

ASSETS
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 11,879     $ 232     $     $ (12,111 )   $  
Nonaffiliates
    77       195       16,398             16,670  
Securities available for sale
    986       1,798       49,857       (6 )     52,635  
Mortgages and loans held for sale
          29       40,501             40,530  

Loans
          47,174       261,213       (896 )     307,491  
Loans to subsidiaries:
                                       
Bank
    3,400                   (3,400 )      
Nonbank
    46,369       63             (46,432 )      
Allowance for loan losses
          (1,147 )     (2,652 )           (3,799 )
 
                             
Net loans
    49,769       46,090       258,561       (50,728 )     303,692  
 
                             
Investments in subsidiaries:
                                       
Bank
    41,335                   (41,335 )      
Nonbank
    5,168                   (5,168 )      
Other assets
    5,817       1,456       64,148       (1,507 )     69,914  
 
                             

Total assets
  $ 115,031     $ 49,800     $ 429,465     $ (110,855 )   $ 483,441  
 
                             

LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Deposits
  $     $     $ 326,430     $ (12,111 )   $ 314,319  
Short-term borrowings
    18       7,909       19,072       (13,199 )     13,800  
Accrued expenses and other liabilities
    3,359       1,018       24,038       (2,046 )     26,369  
Long-term debt
    61,817       37,944       16,447       (32,117 )     84,091  
Indebtedness to subsidiaries
    4,975                   (4,975 )      
 
                             
Total liabilities
    70,169       46,871       385,987       (64,448 )     438,579  
Stockholders’ equity
    44,862       2,929       43,478       (46,407 )     44,862  
 
                             

Total liabilities and stockholders’ equity
  $ 115,031     $ 49,800     $ 429,465     $ (110,855 )   $ 483,441  
 
                             
   

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Condensed Consolidating Balance Sheet
                                         
   
    September 30, 2005  
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
   

ASSETS
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 10,888     $ 263     $ 28     $ (11,179 )   $  
Nonaffiliates
    235       343       19,214             19,792  
Securities available for sale
    1,239       1,771       31,475       (5 )     34,480  
Mortgages and loans held for sale
          25       46,723             46,748  

Loans
    1       41,507       255,570       (889 )     296,189  
Loans to subsidiaries:
                                       
Bank
    2,300                   (2,300 )      
Nonbank
    43,556       949             (44,505 )      
Allowance for loan losses
          (1,200 )     (2,686 )           (3,886 )
 
                             
Net loans
    45,857       41,256       252,884       (47,694 )     292,303  
 
                             
Investments in subsidiaries:
                                       
Bank
    36,364                   (36,364 )      
Nonbank
    4,140                   (4,140 )      
Other assets
    6,343       1,149       54,729       (2,050 )     60,171  
 
                             

Total assets
  $ 105,066     $ 44,807     $ 405,053     $ (101,432 )   $ 453,494  
 
                             

LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Deposits
  $     $     $ 300,207     $ (11,178 )   $ 289,029  
Short-term borrowings
    82       8,567       29,004       (14,410 )     23,243  
Accrued expenses and other liabilities
    4,056       1,262       20,289       (2,812 )     22,795  
Long-term debt
    57,236       32,501       17,627       (28,772 )     78,592  
Indebtedness to subsidiaries
    3,857                   (3,857 )      
 
                             
Total liabilities
    65,231       42,330       367,127       (61,029 )     413,659  
Stockholders’ equity
    39,835       2,477       37,926       (40,403 )     39,835  
 
                             

Total liabilities and stockholders’ equity
  $ 105,066     $ 44,807     $ 405,053     $ (101,432 )   $ 453,494  
 
                             
   

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

Cash flows from operating activities:
                               
Net cash provided by operating activities
  $ 2,235     $ 714     $ 15,351     $ 18,300  
 
                       

Cash flows from investing activities:
                               
Securities available for sale:
                               
Sales proceeds
    188       443       43,265       43,896  
Prepayments and maturities
    4       172       5,581       5,757  
Purchases
    (265 )     (646 )     (60,436 )     (61,347 )
Net cash paid for acquisitions
                (526 )     (526 )
Increase in banking subsidiaries’ loan originations, net of collections
          (1,448 )     (25,055 )     (26,503 )
Proceeds from sales (including participations) of loans by banking subsidiaries
          50       35,587       35,637  
Purchases (including participations) of loans by banking subsidiaries
          (202 )     (3,934 )     (4,136 )
Principal collected on nonbank entities’ loans
          15,092       3,038       18,130  
Loans originated by nonbank entities
          (16,638 )     (3,318 )     (19,956 )
Net repayments from (advances to) nonbank entities
    (54 )           54        
Capital notes and term