Bob Strickland - Director, Investor Relations

For participating in the Wells Fargo first quarter 2009 earnings review pre-recorded call. Before we discuss our first quarter results, we need to make the standard securities law disclosure. In this call we will make forward-looking statements about specific income statement and balance sheet items and other measures of our future financial results and condition, including statements about future loss content of and cash flows from the legacy Wachovia impaired loan portfolios, expected credit losses and credit performance generally and in specific loan portfolios, the adequacy of our allowance for credit losses, future levels of non-performing assets, future levels of capital, the timing and amount of expected cost savings related to the Wachovia merger and other initiatives, and our ability to generate revenue growth and earnings. Forward-looking statements give our expectations and they are not guarantees of future performance. They speak only as of the date they are made and we do not undertake to update them to reflect changes that occur after that date. Actual results may differ significantly from expectations due to a number of factors, including the continued accuracy of our estimates used to determine purchase accounting adjustments on Wachovia’s loan portfolio and other assets. There is no assurance that our allowance for credit losses will be adequate to cover future credit losses especially if credit markets and unemployment do not stabilize. For discussion of factors that may cause actual results to differ from expectations, refer to our SEC filings including the Form 8-K filed today which includes the press release announcing our first quarter results and our 2008 annual report on Form 10-K both available on the SEC’s website at sec.gov. In this call, we will also discuss our tangible comment equity and tangible comment equity ratio. For more information about these measures including a reconciliation of tangible comment equity to total equity, refer to the tangible comment equity table in our first quarter earnings press release which is accessible on our website, wellsfargo.com, by clicking on About Us, then Investor Relations, then Quarterly Earnings. We have also posted on our website a first quarter 2009 credit supplement that provides performance information for specific loan portfolios. I will now turn the call over to CFO, Howard Atkins.

Thanks Bob. I would like to focus my remarks on how Wells Fargo delivered such exceptional performance in our first full quarter as a New Wells Fargo despite the challenging environment. First, let us start with all the important record results we achieved in the quarter. We earned record net income of $3.05 billion in the quarter. Profits were $767 million higher after tax than any previous quarter in our Company’s history. Profits of the quarter were a record even after $661 million in preferred dividends with net income available to common shareholders of $2.38 billion. We earned $21 billion in combined revenue driven by 16% year-over-year growth at legacy Wells Fargo to record quarterly revenue of $12.3 billion. Our organic revenue growth this quarter was driven by the same Wells Fargo business model that has consistently produced near double digit revenue growth for at least the last decade. The consistency of our revenue growth is also due to the fact that we did not participate in most of the problematic businesses and activities that have reduced the level and stability of revenue at many of our peers. As our peers are busy dealing with the problems from these activities and with replacing the loss revenue, we have been successfully gaining customers and market share that will add to revenue and earnings well into the future. Pretax pre-provision profit of $9.2 billion was a record and exceeded net charge offs by nearly $6 billion, demonstrating Wells Fargo’s capacity to produce revenue net of expenses that provide a substantial earnings and capital cushion even if credit costs remain cyclically high. Our Company continued to benefit from the very strong mortgage environment. We originated $101 billion of mortgage loans, our highest level since 2003, including a record application month of $83 billion in March. While low interest rates are stimulating mortgage demand, we are picking up mortgage market share. Our mortgage originations doubled in the first quarter from the prior quarter compared with an average increase of about half that among our large peers. We generated record sales at legacy Wells Fargo, including record regional banking core product sales of $6.7 million up 17% and growth in consumer checking accounts up a net 6.8%. This sales performance helped produce record retail cross-sell of 5.8 products and wholesale cross-sell in 6.4 products in the first quarter at legacy Wells Fargo. One of the reasons for acquiring Wachovia was to apply this cross-sell competency to Wachovia’s customer base in Wachovia’s footprint. Overall, we estimate that Wachovia’s cross-sell is currently roughly three quarters that of Wells Fargo. The revenue synergies from increasing Wachovia’s cross-sell offered huge opportunities for future revenue and profit growth. Wachovia continued to lead the industry and service quality in the first quarter. In February, Wachovia was once again recognized by the American customer satisfaction index for being number one in customer service among large peers for the eighth-year in a row. As we have said since the time of the merger announcement, this is an area where there is a great opportunity for Wells Fargo to leverage Wachovia’s proven expertise to better serve our customers throughout our franchise. We posted a net interest margin of 4.16%, the best among large bank peers which averaged 3.1%. Wells Fargo has always had among the highest net interest margins whereas Wachovia was generally closely to the industry average. Despite the expected net interest margin reduction mathematically caused by the combination of our two companies, the fact that we are still best in class is a testament to our business model and the strength of legacy Wells Fargo’s net interest margin level. Our higher margin reflects many factors but most notably is due to the sizable base of non-interest bearing and low cost checking and savings accounts in our overall deposit mix. We now have a much broader geographic footprint with the ability to attract deposits not only through our traditional banking and mortgage businesses but now through a nationwide retail brokerage platform. We aligned deposit pricing across Wells Fargo and Wachovia at the beginning of this year and we are seeing better deposit performance at Wells Fargo interest rates that we had originally assumed. During the quarter $34 billion of high rate CDs from Wachovia matured and we retained over $19 billion of these deposits in lower cost checking and savings accounts in addition to lower rate CDs. Of the Wachovia CD customers we did not retain, over half were non-relationship CD-only customers from whom we were less likely to generate future cross-sell opportunities. While we will continue to see the Wachovia high rate CDs mature, this early experience gives us greater confidence in our ability to retain balances and lower rates as well as build business with customers interested in long term relationships. We continue to manage expenses in a disciplined fashion. Our combined first quarter efficiency ratio of 56% was roughly in line with legacy Wells Fargo’s prior ratios even though the legacy Wachovia had a higher cost structure given its business mix and the effect of higher payout businesses like retail brokerage and asset management. This cost management success helps demonstrate our commitment to tight expense discipline even as we incur merger related expenses. As previously indicated, we expect to achieve $5 billion on annual run rate savings from consolidation and additional savings from expense initiatives during the remainder of 2009. The record earnings in the quarter were driven by the same factors that have consistently produced profit at Wells Fargo, a track record of profitable sales growth and industry leading operating margins. The first quarter results were great example of the power of operating a diversified business model as Wells Fargo has successfully done for many years. We have over 80 businesses pulling the stagecoach as we say. In the financial services sector, money never declines. It just moves based on customer and economic lifecycles. By successfully operating a diversified business model, we make sure that we are there to meet all of our customers’ needs as money moves through those cycles. Some examples of this in the first quarter include the following. We helped 450,000 customers to finance the mortgage. This is almost doubled the number of customers who did so with us only a quarter ago. While lower interest rates helped increase demand, a near record increase in mortgage originations was produced by thousands of Wells Fargo mortgage specialists working with homeowners across the United States, including over 5,000 operations team members hired to process the volume increase. For those customers who refinanced, they will have more money in their pocket each month which will benefit them and the overall economy. In that case, we are there to help them with transaction oriented products like credit and debit cards. While first quarter results reflected the strength in the origination side of the mortgage business in a low rate environment. The value and earnings from our $2.1 trillion servicing portfolio would normally be expected to increase if originations were to slow down in a higher rate environment. That balance is by design, not by accident. Our origination and servicing businesses tend to be natural offsets and our origination revenues and mortgage servicing rights value move accordingly as they did this quarter. During the first quarter, mortgage interest rates declined. Prepayment speeds went up and refinancing increased. As a result, we wrote down our MSR servicing asset, the ratio of loan service for others during the first quarter to 74 basis points the lowest level of capitalized servicing since the last refinancing boom in 2003. The MSR asset write down accurately reflects the market conditions and future prepayment expectations and as previously mentioned, is countercyclical to our origination business. Given the uncertainty in this economy, some consumers are spending less and saving more. Our diversified model, with its expanded national banking and retail brokerage platform helped us benefit from this shift as we increased deposits from our existing customers at legacy Wells Fargo and through new customer growth throughout our franchise, both contributing to our increase and total core deposits of $10.8 billion in the quarter. Also consumer checking accounts were up a net 6.2% for the overall Company and up a net 6.8% at legacy Wells Fargo. California continued to be the fastest growing state for legacy Wells Fargo deposits with record consumer checking accounts up a net 8.9% over 40% above the rate of which accounts grew on average across Wells Fargo’s coast-to-coast markets. Again, this demonstrates the benefit of our powerful presence in this important market and the benefit of our geographic diversification. Trading revenues this quarter were $787 million. Wells Fargo has always managed the customer centric capital markets and foreign exchange business, a business where volumes actually expand during periods of market turmoil especially for highly rated counterparties like Wells Fargo. This platform was managed very differently than larger investment banks and large commercial banks with international investment banking in capital market platform. We are not dependent on proprietary trading type activities but instead our focus on providing solutions to customers that enables us to earn fees while limiting our risk taking activities. We offer products like interest rate protection, foreign exchange services and access for capital markets all with our relationship perspective. Demand for these types of services increased during periods of market volatility as it did in the first quarter. Meeting this need has always been a core profitable activity at Wells Fargo and the addition of the capabilities in Wachovia team members and customer base only expanded this revenue opportunity, roughly two thirds of the $787 million trading revenue this quarter was for meeting those customer needs. The remaining one third related largely to position design to hedge portfolio risks and other proprietary positions many of which were unwound during the quarter. There are obviously many other examples, but the point is that our diversified model is designed to produce revenue and earnings in all economic environments as it did this quarter. The power of this diversified business model is even greater now after the Wachovia merger. With Wachovia we have doubled the customer base where we can apply the Wells Fargo model. We now serve one in three US households and we began cross-selling to Wachovia customers including mortgages in the first quarter. Wachovia’s product set also creates new opportunities for us and helps to diversify further our revenue and earnings sources. For example, trust and investment management fees in the first quarter were approximately 11% of combined total revenues compared with 5% at legacy Wells Fargo. During the first quarter as a combined Company, Wachovia has exceeded our expectations, contributing 41% of our combined revenues. Let me now turn to credit. In connection with the Wachovia merger at year end, we were required on the GAAP to identify and write down Wachovia’s high risk loan portfolios. We identified various loan portfolios that we considered impaired which initially totaled approximately $94 billion or roughly 20% of Wachovia’s loans. We initially wrote them down by $37.2 billion through purchase accounting adjustments directly to equity representing our best estimate of the losses in these portfolios over their remaining estimated lives. In general, those pools have lost probabilities of at least 70%. In the future, unless there is a future deterioration that might cause our estimates of the lost content to change, this should not be a P&L charge for credit losses on this entire portfolio since all of the estimated charge offs over the estimated life of those loans were already taken at the December 31st, 2008 close. In the first quarter of 2009 as required in the purchase accounting, we refined our preliminary purchase accounting adjustments based on additional information regarding the portfolios and their environment at year end. This review resulted in $2.8 billion increase in the estimated life of loan credit losses on the impaired portfolio due to an increase in the sizes of the pool of loans subject to purchase accounting write downs and some deterioration in the impaired portfolio. This was largely offset by $1.8 billion increase in expected cash flows on the impaired portfolio due to the increase and size of the portfolio combined with higher expected payments and earlier expected resolutions. As a result of writing down Wachovia’s higher risk portfolios and assuming no further deterioration, we believe that the remaining balance of the impaired portfolio with $58 billion in total had virtually no remaining loss content at year end. To repeat, the estimated life of loan loss content related to the designated impaired portfolio was removed from our balance sheet at year end and we are confident that as long as there is no additional deterioration, future losses have been eliminated. Lastly, by definition, the non-impaired portfolio of Wachovia loans about $375 billion in balances, represent loans with an average probability of default substantially lower than the loans that were written down at close. Any provision for charge offs in this portfolio will be expensed to the income statement as usual. While the non-impaired Wachovia loan portfolios have lower risk. They do not have zero risk of course. We expect losses in the non-impaired portfolios to increase over a period of time as new losses emerge before recoveries occur. Overall, the remainder of these non-impaired Wachovia loans should experience lower loss rates over the cycle than most broadly mixed loan portfolios because the rest of Wachovia’s loan portfolios, they were not already written down, by definition, have much lower loss content. Nonperforming loans increased $3.7 billion from year end, about half of the increase in nonperforming loans at Wells Fargo and Wachovia in the fourth quarter. The ratio of nonperforming loans to total loans increased 46 basis points from year end, about a third less than the average NPL increase of 63 basis points among our large peers. The increase from the year end was not a surprise to us and in part reflects the fact that as a result of purchase accounting write downs Wachovia’s nonperforming loans were only $97 million at year end. At March 31st, 2009, the ratio of nonperforming loans to total loans was 1.25%, the lowest ratio among our large peers. It is important to remember that not all nonperforming loans or nonperforming assets result in a loss. More than 90% of first quarter’s $12.6 billion of nonperforming assets is secured. We also create nonperforming assets when we take actions to keep people in their homes, a process ultimately beneficial to the residential real estate market. We have been at work for sometime reducing higher risk loans of both companies; approximately $119 billion of consumer loans within the combined loan portfolio represent loans where we have exited the business or are running off old portfolios. These would include legacy Wells Fargo indirect auto, a portfolio we began reducing nearly two years ago, indirect home equity which we also exited almost two years ago. Pick-a-Pay option loans which Wachovia stopped originating early last year, and which was subject to purchase accounting write downs and has benefited from our success in modifying loans. Additionally, we have focused on further reducing certain higher risk portions of Wachovia’s commercial real estate division’s portfolio. In total, these portfolios have been reduced $45 billion or about 21% since June 30th, 2008 through write downs, runoff, or modification including a $4.5 billion reduction in the first quarter. Because we have been reducing credit exposure for some of these higher risk portfolios, growth in loan losses will be more moderate and would otherwise be the case and the peak in our credit losses would be expected to occur earlier. In addition to the reduction in these higher risk non-strategic loan portfolios, trading assets were also reduced by $8.4 billion in the first quarter. The first quarter allowance for credit losses totaled $23 billion including a $1.3 billion credit reserve bill. Our $23 billion credit reserve was 2.9% of total non-impaired loans and over two times non-accrual loans. Our allowance is $10 billion higher than our first quarter charge offs annualized. The allowance covers 12 months of estimated losses for all consumer portfolios and at least 24 months of estimated losses were all commercial and commercial real state portfolios. The allowance coverage considers the current economic environment, the impact of our de-risking and the performance of the non-impaired loan balances. It also incorporates expectations on both nonperforming assets and charge offs over the coverage period being measured. So, there are two key takeaways from a credit perspective. First, the actions we took at the close of the Wachovia acquisition to write down all higher risk assets significantly improved the risk profile of the Company’s loan and securities portfolios relative to what it would have been and relative to our large bank peers as we entered 2009. Second, a $23 billion credit reserve fully took into account expected economic deterioration through March 31st, 2009 and as just stated, fully covered 12 months of projected losses on all consumer portfolios and at least 24 months on all commercial and commercial real estate portfolios for both banks. Our reserve adequacy analysis reflects estimated losses that will emerge on both performing and nonperforming loans. Let me conclude with a few important remarks about capital. Our total common equity ratio or TCE ratio at March 31st was 3.28% up from 2.86% a quarter ago. During the quarter, tangible common equity reached $41 billion up $4.5 billion from December 31st, 2008. About $1 billion of the increase was from retained earnings and $3.3 billion was from improvement in other comprehensive income, including improvements in markets as well as a $2.8 billion after tax improvement in other comprehensive income related to FSP FAS157-4. As described in our press release, FSP FAS157-4 had no material impact on earnings in the quarter. Our reported TCE of 3.28% as well as TCE to risk weighted assets of 3.83% also includes the upfront write downs charge to equity related to Wachovia’s impaired loan portfolio. The $40 billion of SOP03-3 non-accretable difference from the Wachovia merger is the equivalent of approximately 190 basis points of additional tangible common equity. It is important to recognize that purchase accounting write downs do not permanently reduced capital ratios. While capital is initially reduced, TCE will eventually rise to exactly where it would have been had the charge offs been accounted for over time instead of all upfront. Stated differently, by taking the write downs right away, earnings going forward will be higher than would have been the case if the charge offs we have provided out of earnings each quarter. The negative of purchase accounting write downs is that it reduces capital right away. The benefit is that future earnings may be higher, more reliable, and less volatile. More importantly comparing point in time capital ratios among companies is not taking to accounts the rate at which a company may be organically building capital. Stated differently, we believe the company that is building capital to retain earnings at a high and consistent rate like Wells Fargo is a more strongly capitalized bank and a bank with the same point in time capital ratios that is losing money or has volatile earnings. There are at least three significant and unique factors that drive Wells Fargo’s internal capital generation. First and foremost, our diversified business model and better operating margins have produced above-peer revenue growth. As indicated earlier, pretax pre-provision profit in the first quarter was $9.2 billion, almost $6 billion higher than quarterly charge offs. Second, the Wachovia acquisition will produce meaningful synergies that will further enhance internal capital generation. While our eyes are clearly wide open about taking on more assets at a time when the economic environment is weak. Revenue synergies are already emerging and could be substantial, just as they were up on the combination of Wells Fargo and Norwest, and we expect $5 billion of annual expense savings from the completion of the integration which will begin to emerge starting in the second quarter of this year. And finally, as previously indicated, we have already taken significant risk out of the companies combined loan portfolio and balance sheet which should moderate credit losses going forward and lead to an earlier peak than would otherwise be the case. While it is too early to call a turn in credit and indeed credit could worsen before it eventually improves. Once credit does clearly turn, the potential return of capital embedded in the allowance for credit losses could be substantial. As we have said, the best way to grow capital is to earn it and that is what we are focused on throughout the Company. With the recently announced, 85% reduction in our common stock dividend even more of our earnings will be retained starting in the second quarter. The dividend reduction itself is the equivalent of adding about $5 billion in capital each year to earnings. In summary, it has truly been a remarkable quarter for our Company. Our diversified business model drove a record $3 billion in profit for shareholders and demonstrated once again an ability to create sustainable growth through all cycles, a very much what we have been telling you throughout this credit crisis. While of course we still operate in a challenging economic environment, it is worth repeating some of our accomplishments this quarter. Record legacy Wells Fargo revenue up 16%, record pretax pre-provision profit of $9.2 billion, our best mortgage origination quarter since 2003, industry-leading net interest margin of 4.16%, 31% growth annualized in consumer checking and savings deposits, higher capital ratios and strengthened reserves and significant credit extended to US taxpayers. The New Wells Fargo is off to a very powerful start. Thank you for your interest in our Company. If you have any questions, please call Bob Strickland, Director of Investor Relations at 415-396-0523 or Jim Rowe, Associate Director at 415-396-8216.