Wells Fargo & Company F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

| About: Wells Fargo (WFC)

Wells Fargo & Company (NYSE:WFC)

F1Q08 Earnings Call

April 16, 2008 8:30 am ET


Bob Stickland – Director, Investor Relations

Howard Atkins – Chief Financial Officer

Bob Stickland

Hello, this is Bob Strickland. Thank you for calling into the Wells Fargo First Quarter 2008 Earnings Review Pre-recorded Call. Before we talk about 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 future results of operations and financial conditions, including statements about future credit quality and losses generally and specifically that we expect loss rates in the first mortgage portfolio to increase if housing prices continue to decline.

Based on the current interest rate environment most of our adjustable rate mortgages at Wells Fargo Financial scheduled to reset during the remainder of 2008 will reset at or below their current rate, and that we expect the performance of the liquidating home equity portfolio to continue to deteriorate until real estate markets begin to stabilize or until we manage through the most distressed customer segments. Forward looking statements give our expectations about the future. They are not guarantees, and results may differ from expectations. Forward looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date.

For a discussion of some of the factors that may cause actual results to differ from expectations refer to our SEC filings including the 8-K filed today, which includes the press release announcing our first quarter results, and to our most recent annual report on Form 10-K filed with the SEC and to the information incorporated into those documents. Now I will turn the review over to our Chief Financial Officer, Howard Atkins.

Howard Atkins

Wells Fargo earned $2 billion after tax or $0.60 a share in the first quarter despite a $2 billion pre-tax provision for credit losses, which included an additional $500 million credit reserve build. Our ability to earn through these higher credit costs reflected the benefit of our diversified business model as well as attractive growth opportunities we have taken advantage of in these challenging markets. We continued to steadily and profitably grow the franchise without compromising our operating margins.

In fact, key operating margins actually widened in the quarter, while at the same time we continued to fortify our strong balance sheet. In terms of business growth, we achieved record sales in consumer banking, record cross sell in both our retail and commercial businesses, double digit growth in earning assets and loans. Near double digit growth in deposits and fee income, all of which contributed to producing 12% top line growth year over year.

Double digit revenue growth, once again was broad based across our 80 plus businesses, with commercial banking, asset based lending, insurance, international, wealth management, regional banking, debit and credit cards, business direct, SBA lending, business payroll and mortgage banking all posting double digit year over year revenue growth. Despite the slump in housing and the periodic dislocations in the secondary mortgage capital markets, Wells Fargo Home Mortgage applications rose 45% from the fourth quarter to $132 billion the highest quarterly mortgage application volume since the height of the refi boom in the fall of 2003.

Operating margins remained strong and actually widened in first quarter. Operating leverage, the difference between revenue growth which was up 12% and expense growth which was down 1% was very positive and continued to improve, reflecting the combination of strong revenue growth with expense discipline. Our net interest margin, at 4.69% remained one of the best among large US banks. The seven basis point increase in the net interest margin from fourth quarter to first quarter, reflects the benefit of having correctly positioned, since early 2007, for the decline in short-term rates that has now ensued along with continued good growth in core deposits and disciplined deposit pricing.

Even with the higher credit costs incurred in the quarter our return on assets at 1.4% and our return on equity at 16.9% remained among the top of our peers. Pre-tax pre-provision profit, in other words, revenue less non-interest expense, grew 30% from first quarter 2007 to $5.1 billion, a quarterly record driven in large part by 21% growth in average earning assets since last year. Most of the growth in earning assets came from steady commercial and consumer loan growth along with selective purchases of very high quality, mostly AAA, securities at very attractive yields as credit and liquidity spreads continued to widen in the past few quarters.

As you recall, in past years our assets did not grow appreciably as we believed and said all asset classes were significantly overvalued and were not adequately priced for risk. This has now totally changed with many asset classes now undervalued affording us the opportunity to buy assets at very attractive risk adjusted spreads. At the same time we have exited, scaled back, run-off, priced-up or tightened terms on riskier segments within all of our loan portfolios.

With the growth in higher quality assets and the run-off in older, lower quality assets, the composition of our portfolio has steadily shifted towards less risky loans and securities or assets with better risk-return characteristics. During the quarter we charged-off $1.5 billion of loans and further bolstered the allowance for loan losses with a $500 million credit reserve build, in other words, provision exceeding charge-offs. Liquidity remained strong, in part due to our continued growth in core deposits from both retail and business customers.

During the quarter investor demand for our debt securities remained strong, and we successfully bolstered liquidity by issuing $6 billion of new term debt and $1.6 billion of tax deductible capital securities. At quarter end we had significant remaining capacity to issue lower cost capital securities if necessary to keep capital growing in line with attractive asset growth. With that summary of the great combination of growth, profitability, and risk reduction, let me now describe the results of our major business lines in some detail.

I’ll start with our commercial businesses. Our Wholesale and Commercial Banking Group, which serves primarily middle market customers and select niches in the large corporate market, had double digit loan and double digit deposit growth. Revenue grew $80 million, or 4% from first quarter 2007. Higher trust and investment fees, deposit service charges, foreign exchange income, institutional brokerage and insurance revenue were offset by a lower level of commercial real estate brokerage fees, which were very high a year ago, and a lower level of capital markets activity. We achieved record cross sell of 6.2 products per wholesale relationship and 7.7 products per middle market commercial banking relationship.

Almost one of every three of our commercial banking offices had more than 8 products per customer relationship. The Wholesale Banking Group’s average loans grew 29% year over year as a result of new customers and opportunistic, attractively priced acquisitions of high quality assets. Asset based lending, middle market lending, international, commercial real estate and specialized financial services, which include our capital markets activities and relationships with Fortune 500 companies, all continued to experience double digit loan growth.

Throughout the market dislocations of the past three quarters, we have been very clear with our business relationships that we are open for business and we have been actively meeting the financing needs of our wholesale customers resulting in increased market share while maintaining our conservative underwriting standards. Wholesale Banking Group’s average core deposits were up $15 billion or 29% from first quarter 2007.

The growth came primarily from large corporate and middle market relationships, international and correspondent banking customers and from higher institutional sweep and liquidity balances from our Asset Management customers. The Insurance Services group had double digit revenue growth. Wells Fargo Insurance, Inc., our consumer and small business insurance group grew revenue by 17% from first quarter 2007 driven by sales of identity theft protection, debt cancellation and crop insurance products.

Wells Fargo Insurance Services, Inc., our middle market commercial insurance broker, achieved 16% revenue growth adding seven new insurance brokerage businesses across the country last year.

Despite the 7% decline in the S&P 500 index from a year ago, Wells Fargo Advantage Funds, our mutual fund business, grew average assets by 28% from a year ago and ended the quarter with $156 billion in fund balances, becoming the second largest fund manager among US banks.

This growth was driven by strong demand for our Money Market Mutual Fund products. Fifty three % of the Wells Fargo Advantage Funds were in the top two Lipper performance quintiles for the past three year period. Wholesale net income this quarter was only minimally impacted by the capital markets dislocation that has resulted in billions of dollars of write downs at other financial services companies.

During the first quarter, $39 million in expenses were recorded for a previously disclosed capital support agreement provided to our AAA rated non government money market mutual funds, which had a small investment in one third party SIV that required some credit write downs. Wells Fargo does not act as a sponsor for any SIV’s. We also took $63 million of net write downs in our Commercial Mortgage held for sale portfolio as a result of widening credit spreads.

At the same time, the continued market volatility in the first quarter created opportunities for our financial products group to expand customer sales volume and earn higher spreads. While equity capital gains declined from a year ago, sales and revenue of equity, commodities, interest rate and brokerage fixed income products reached quarterly records.

Now I’ll shift to the Community Banking Group. The Community Banking Group, which includes regional banking, wealth management, home equity, mortgage banking and retail internet, had double digit revenue growth, up 16% from first quarter 2007, driven by double digit fee and loan growth and strong deposit growth. Net income declined $72 million from a year ago, and included a pre-tax credit reserve build of $385 million.

During the first quarter, regional banking achieved record core product sales of 5.8 million, up 17% from first quarter 2007. For the first time ever we provided over 2 million solutions to customers in a single month. These exceptionally strong sales results continued to be driven by customer demand, improved store based service levels, higher productivity, and deeper customer penetration. Our sales growth benefited from greater banker productivity. We continued to invest in adding more sales people, with platform banker FTE’s up 7% from a year ago, but sales grew at almost two and a half times that rate.

We measure this increased productivity through core sales per platform banker FTE per day. In the first quarter core sales per platform banker FTE was a record 5.64 per day, up from 5.08 per day a year ago, an 11% increase. Once again, Regional Banking achieved record cross sell. The average retail bank household had 5.6 products with Wells Fargo, up from 5.3 products a year ago and up from around three products 10 years ago.

To put this in perspective, in order to increase cross sell from 5.3 to 5.6, regional banking had to increase the total number of products our customers own by nearly three times the rate we grew the number of our retail bank households. Six of our 32 regions now have an average retail bank household cross sell of over six. Twenty three % of our retail customers had over eight products with us. Our long term goal, nearly double the amount of customers who bought eight products five years ago, and in our top region, 32% of our customers had over eight products with us.

We have had strong growth across many product lines including Wells Fargo Packages, which include a checking account and at least three other products such as a debit card, credit card, or savings account. Package sales were up 32% from first quarter 2007, purchased by 72% of new checking account customers. Total card fees, including credit and debit card, were up 19% from first quarter 2007. At quarter end, 38% of our retail bank consumer households had a Wells Fargo credit card, up from 36% a year ago and up from 27% five years ago.

Purchase volume on consumer bank cards was up 18% from first quarter 2007 and average balances were up 30%. Ninety one percent of our consumer checking account customers had a debit card, up from 86% five years ago, and debit card purchase volume increased by 11% from first quarter 2007. Deposit fees from both consumer and commercial customers continued to grow, up 9% from a year ago. This growth was driven by volume, not price increases.

Average core deposits of $317 billion grew 9% from a year ago and 3% annualized on a linked quarter basis. Average mortgage escrow deposits were down $205 million from first quarter 2007 and up $572 million from fourth quarter 2007. Excluding mortgage escrow balances, average core deposits grew 10% from first quarter 2007 and 3% annualized on a linked quarter basis. Average retail core deposits, which exclude wholesale banking and mortgage escrow deposits, were up 5% from a year ago and 4% annualized on a linked quarter basis.

The average balance per retail account continued to decline slightly. We continued to be disciplined in our deposit pricing. The average rate on our interest bearing core deposits declined 70 basis points from fourth quarter. Despite the lower rates, we continued to have good account growth with consumer checking accounts up a net 4.9% and small business checking accounts up a net 2.8% from last year.

California continued to be our fastest growing market, with new consumer checking accounts up a net 5.7%. This was the eleventh consecutive quarter where net new accounts in California exceeded the average across our footprint.

Better serving our small business customers resulted in store based business solutions increasing 9% from first quarter 2007. Sales of Wells Fargo Business Services Packages, which include a business checking account and at least three other business products such as a business debit card, credit card, or business loan or line of credit, were up 24% from first quarter 2007 and were purchased by 47% of new business checking account customers.

Loans to small businesses, loans primarily less than $100,000 on our business direct platform, grew 14% from first quarter 2007. These strong sales results increased business banking household cross sell to 3.6 products, up from 3.4 a year ago. The Wealth Management Group achieved double digit revenue and net income growth by continuing to meet the needs of existing customers and gaining new customers who are seeking a trusted institution during these challenging economic times.

The Wealth Management Group grew revenues by 12% and net income by 21% from first quarter 2007. These strong results were driven by double digit loan and deposit growth. WellsTrade, our on-line brokerage service, had double digit revenue and net income growth and continued to attract and retain customers with account levels up 14% and assets up over 20% from first quarter 2007. Also driving growth was the introduction during the first quarter of the Family Wealth Group, serving ultra wealthy families who manage their wealth across generations with at least $50 million in net worth.

The Family Wealth Group, part of The Private Bank, combines superior investment management and risk management capabilities with a broad view of wealth management that includes family enterprise governance and legacy planning. We have a long history of helping families manage their wealth and have a significant presence in the ultra high net worth market segment. The Family Wealth Group currently has $7 billion of assets under management.

Internet sales are an important channel for overall sales growth with consumer product sales up 10% from first quarter 2007. We had over 10 million active online consumers, up 13% from a year ago with 66% of all Wells Fargo consumer checking account customers are now active online customers. We now have over one million active online small business customers, up 18% from a year ago. We continued to build our physical distribution to better serve our retail and small business customers, opening 11 banking stores and converting 18 retail stores from Greater Bay Bancorp.

We are now serving our retail customers through our 3,321 stores in 23 states. We also added to our ATM network, adding 16 webATM machines and converting 136 to Envelope Free webATM machines.

I’ll shift to Mortgage Banking. Despite the continued downturn in the economy and in home prices in the first quarter and despite the dislocation in the secondary mortgage capital markets, first quarter was one of the best quarters ever for our mortgage business. Mortgage retail originations increased $8 billion, or 31%, from a year ago even though we continued to tighten pricing and underwriting standards throughout 2007 and into early 2008.

During the last year the industry has seen a meaningful shift from nonconforming mortgage originations to proportionately more agency conforming and federally guaranteed mortgages, both of which are traditional Wells Fargo origination strengths. We have picked up substantial origination market share in these core mortgage products. Mortgage applications grew 17% from a year ago and were up 45% un-annualized from fourth quarter.

About 62% of these applications were for refinancing. The $132 billion in applications taken this quarter were the highest since third quarter 2003 and we ended first quarter with an unclosed pipeline of $61 billion, up 42% from the start of the quarter. Our owned servicing portfolio grew 10% from a year ago, somewhat more moderate growth than in prior periods because lower mortgage rates caused more mortgage payoffs and we have been much more selective in the type of servicing we are buying, shifting much more to higher quality loan pools and substantially less sub-prime and Alt-A servicing rights.

First quarter turned out to be one of the more challenging quarters for hedging the accounting risk in mortgage servicing rights, with significantly more pronounced and more frequent changes in interest rates and mortgage credit spreads throughout the quarter, yet our MSR hedging process continued to operate effectively. First quarter net servicing income included a net MSR gain of $94 million consisting of a $1.8 billion reduction in the fair value of MSR’s offset by a corresponding $1.9 billion gain in the value of the economic hedge.

In addition, as rates dropped significantly at one point in the quarter, we realized $323 million in gains by selling $13 billion of MBS securities that were hedging the MSR, ultimately replacing these securities largely with off balance sheet hedges when rates moved back up in the quarter. At the end of the quarter, the ratio of capitalized MSRs to the total amount of mortgages loans serviced for others was 1.08% the lowest ratio in four years and a 12 basis point decline from fourth quarter.

The decline in the ratio was driven by lower market rates as well as sales in mid 2007 of a portion our excess servicing to improve the risk profile of the servicing asset and take advantage of market conditions for excess servicing at that time. Over 90% of the mortgage loans we service are for prime customers. Delinquencies in our residential mortgage servicing portfolio were down on a linked quarter basis due to expected seasonality, with customers benefiting from tax rebates, annual bonuses and lower post holiday spending.

The weak housing market, however, resulted in higher delinquencies from first quarter 2007 and foreclosures were up both linked quarter and year over year. While the foreclosure rate continued to increase, to 1.02% at quarter end, we believe it was still better than the industry average. We continued to work closely with our customers to keep them in their homes. For example, we work across our portfolios when a home equity loan becomes delinquent and Wells Fargo services the first mortgage.

With one point of contact for both loans, we are able to better serve our customers and investors. Loan modifications and workouts continued to increase in the first quarter and were up significantly from last year. We are also working with Washington on the proposed rescue plans providing input on both the positive and negative implications of the proposed plans. Net gains on mortgage loan origination and sales activities for the first quarter benefited from the actions we took during 2007 and first quarter 2008 to reduce risk by tightening credit standards and by eliminating certain distribution channels and loan products.

However, net gains on mortgage loan origination sales activity was negatively impacted by the illiquidity in the secondary mortgage market for nonconforming and adjustable rate mortgages and resulted in $108 million in write downs during the quarter to reflect the decline in the fair value of the mortgage warehouse and pipeline for these prime products. Unlike the third and fourth quarter of 2007, we chose not to securitize and retain in our investment portfolio a significant portion of nonconforming originations in the first quarter, primarily because yields were lower in first quarter.

In addition, mortgage origination gains were reduced by $107 million primarily to reflect a write down of repurchased mortgage loans and an increase in the repurchase reserve. The net gain on mortgage loan origination sales activities also included a $48 million reduction in fair value of servicing associated with mortgage loans in the pipeline and warehouse.

Now I’ll talk about credit quality. The credit environment remained challenging this quarter. Net charge offs in the first quarter were $1.5 billion, or 1.6% of loans annualized, up from $1.2 billion in the fourth quarter. The majority of the increase was in our consumer loan portfolios as our customers continued to be negatively impacted by the downturns in residential real estate and the general economy. In the commercial portfolios the increase in charge offs was primarily from loans originated through Business Direct, while loss levels in our commercial loans to mid sized and large corporations remained modest.

Total nonperforming assets were $4.5 billion, or 1.16%, of loans in the first quarter compared with $3.9 billion, or 1.01%, of loans in the fourth quarter. The majority of the increase in nonperforming assets was concentrated in portfolios affected by residential real estate, consistent with the rise in foreclosure rates in many markets. Due to market conditions, we continued to hold more foreclosed properties than we have historically.

Loans 90 days or more past due and still accruing, excluding insured and guaranteed GNMA and similar loan balances, increased by $72 million from fourth quarter, a substantial reduction from the $296 million linked quarter increase in the fourth quarter from the third quarter. The modest first quarter increase was positively impacted by improvement in the auto portfolio and a more modest increase in consumer real estate secured portfolios and credit cards.

Let me review the individual loan portfolios in detail, and I will begin by focusing on our exposure to the residential real estate market. Reflecting the continued downturn in housing, the $73 billion first mortgage portfolio had somewhat higher losses with first quarter annualized charge offs of 0.41%, that is only $75 million in total losses on the entire $73 billion first mortgage portfolio for the quarter, up $41 million from fourth quarter.

This increase was expected, and if housing prices continue to decline we would expect loss rates to increase further. However, our loss rates remained within expected ranges and also remained lower than industry levels because we never offered and never portfolioed the more problematic first mortgage products that are hurting others in the industry. Our first mortgage portfolio consisted of $24 billion of real estate secured loans held at Wells Fargo Financial, $12 billion of home equity loans in the first mortgage position, and $37 billion of mostly prime customer relationship based first mortgages held at Wells Fargo Home Mortgage, regional banking, and our Wealth Management Group.

As we continued to tighten our underwriting standards in the first quarter, growth in this portfolio slowed. We once again adjusted our maximum LTV’s based on local market conditions, increased our minimum credit scores and further adjusted our risk based pricing. At quarter end, Wells Fargo Financial had $28 billion in real estate secured loans. The majority of this amount, a total of $25 billion, was debt consolidation loans that were originated through Financials US retail stores.

Let me give you some additional characteristics of this $25 billion debt consolidation portfolio. Ninety six percent was in the first lien position. This customer portfolio was originated by Wells Fargo Financial team members and does not include interest only, stated income, option ARM or negative amortizing loans. New real estate customers primarily come from outbound calling to customers with an existing Wells Fargo relationship where we can clearly demonstrate a tangible benefit for our customers by improving their financial situations through debt consolidation.

We conservatively underwrite these loans with full documentation and require income verification. Sixty two percent of this portfolio had a FICO score above 620. The average LTV was 78%. The average loan size was $131,000. Approximately 51% of the portfolio was fixed rate loans. The remaining loans were 3/27 adjustable rate mortgages with a fixed payment for the first three years of the loan. These loans were underwritten to the fully indexed rate and do not contain teaser rates.

Based on the current interest rate environment, starting in the second quarter most of our adjustable rate mortgages that reset throughout the rest of 2008 will reset at the same rate or below their current rate, which will actually reduce customer monthly payments. Like other real estate secured portfolios, delinquencies and charge offs have increased due to the weak housing market, yet total first quarter losses were still a very low $34 million on the entire $25 billion portfolio, a 0.56% annualized loss rate.

The credit performance for this portfolio has continued to perform better than published industry rates for non-prime mortgage portfolios. Our National Home Equity Group manages an $84 billion home equity loan portfolio whose balances are relatively flat from year end. As we previously disclosed, we segregated $12 billion of higher loss content home equity loans, primarily sourced through third party originators into a liquidating portfolio.

The first quarter annualized loss rate in the liquidating portfolio was 5.58%. This portfolio accounted for 37% of home equity charge offs in the first quarter despite making up only 14% of total home equity balances. Since 63% of the liquidating portfolio had a combined loan to value of greater than 90% at quarter end, based on updated home values as of December 31, 2007 where available, our expectation is that this portfolio’s performance will continue to show high losses until real estate markets begin to stabilize or until we manage through the most distressed customer segments.

Losses in the liquidating portfolio produced $47.6 million in net charge offs for the month of December and produced $163 million in the first quarter 2008. While 38% of the liquidating portfolio’s balances related to properties located in California, only 2% was located in Central California, a region which has experienced some of the highest loss rates. The core home equity portfolio had an outstanding balance of $72 billion, relatively flat from year end. This core portfolio had a first quarter annualized loss rate of 1.56 %. Declines in home prices and economic weakness contributed to this loss rate.

Approximately two thirds of this portfolio was either in a first position or a second behind a Wells Fargo first. Ninety eight percent were retail originated which have performed better than loans originated through third party channels. Thirty percent had an updated combined loan to value greater than 90%. This portfolio is very geographically diverse. Within the core portfolio the Central California region representing about 2% of the portfolio and Florida representing about 4% have experienced weak performance.

However, Minnesota representing 6% and Texas representing 4% have remained relatively stable.

In this challenging real estate market it is necessary to have more time to work with our customers to identify ways to help resolve their financial difficulties and keep them in their homes. In order to provide this additional time to assist our customers, beginning April 1, we changed our home equity charge off policy from 120 days to 180 days, consistent with FFIEC guidelines.

Credit losses in the Wells Fargo Financial $28 billion auto portfolio, which included $2.5 billion in auto leases, declined $6 million from fourth quarter due to seasonality and increased only slightly, $31 million over first quarter 2007. Both total delinquencies and 90 days past due and still accruing declined 25% on a linked quarter basis. Delinquencies were down 4% and 90 days past due were down 21% from first quarter 2007.

Over 70 % of the auto portfolio had a FICO score above 620. The size of our auto portfolio declined 16% annualized from last quarter and 9% from last year reflecting a tightening of account acquisition strategies to reduce loan volume in higher risk tiers and tiers with unacceptable returns. We are very pleased with the reduced risk in our loan portfolio which reflects the tangible progress we have made under a new management team after having installed new collections and underwriting systems a year ago, along with tighter underwriting and pricing.

Two other retail portfolios that are important to our credit performance are credit card and business direct. The $12 billion Community Banking credit card portfolio is primarily issued to our banking customers within our banking states. While losses are increasing from historically low levels as a result of higher bankruptcy rates, seasoning of the portfolio, and continuing economic pressure on consumers, they were within our normal expected range.

We continue to proactively manage these accounts. For example, we are tightening our new underwriting standards, which are reducing new customer growth, but resulting in higher quality new customers. We are increasing rates on our higher risk accounts and reducing lines and closing accounts where appropriate. Since the vast majority of our bank card customers have other relationships with Wells Fargo, we also monitor customer behavior with other products and manage these accounts accordingly.

Wells Fargo Financial has a $7.4 billion credit card portfolio which was down 3% from fourth quarter 2007. These cards are primarily sold to existing Wells Fargo Financial customers and through retailers and manufacturers with large dealer networks, not through mass mailing campaigns. Losses in this portfolio have increased; however, we have made significant investments in default management, continue to tighten underwriting standards, and appropriately price for risk.

Our $11.7 billion business direct portfolio consists primarily of unsecured small loans and lines of credit to small business owners nationwide with an average balance of less than $20,000. These loans are included in our commercial loan totals, but have tended to perform in a manner similar to credit cards and unsecured consumer loans. We have been in this business since the early 90’s and while losses are increasing, they were within our long range expectations.

The increase in losses has primarily occurred in certain metropolitan areas within California, Nevada and Florida and appear to be concentrated in industries related to real estate or where the business owner may be experiencing difficulty with a home loan. Similar to our credit card portfolios, we continued to tighten our underwriting standards, including reducing line limits where appropriate. Our remaining commercial and commercial real estate portfolios continued to produce good credit performance.

While losses have increased from historical lows, they were still below average. Losses in commercial lending are lumpy by nature, but we continued to benefit from our focus on deep and long term relationships. At the end of first quarter, we had approximately $6 billion in residential one to four family construction and land development loans, which was only about 1.5% of total loans. While losses in this portfolio increased due to the decline in the residential real estate market, losses remained minimal because we maintained our credit discipline during the boom times of the real estate market.

Our commercial real estate management team has been together for over 20 years. They have successfully managed our commercial real estate portfolio through numerous cycles and their experience is invaluable. With the additional $500 million of loan loss provision above charge offs this quarter, our allowance for credit losses was $6 billion, up from $4 billion a year ago. We believe the allowance was adequate for losses inherent in the loan portfolio at March 31, 2008.

In summary, credit losses continued to increase in the home equity and small business portfolios, losses in other portfolios also increased but at a much more moderate rate and within expectations. Just as we have continued to tighten our new customer underwriting where we feel it is important to do so, we continue to actively manage our portfolio of existing relationships for long-term value. We work closely with our existing customers and adjust accounts as needed through line size, pricing, frequency of customer service outreach, and general terms and conditions.

It is always important to remember, that even in challenging times, the vast majority of our customers are paying on time and performing very well. Of course, any actions we take must strike a balance between reducing risk and maintaining long term relationships.

We continued to have a strong capital position with shareholders equity of $48 billion at March 31, up $2.1 billion from a year ago. Our leverage, tier I capital, and total capital ratios were 7.04%, 7.87%, and 10.95% respectively, all up from year end levels even with our very strong asset growth. During the first quarter we issued $1.6 billion of tax deductible capital securities. This was the largest retail hybrid we have ever issued, at one of the lowest spreads among recent capital securities issued by other financial institutions, reflecting the strong demand for Wells Fargo securities despite difficult market conditions.

To summarize, first quarter results clearly reflected the underlying strength of the Wells Fargo franchise and our ability to grow profitably during challenging markets. During a quarter with weak financial and housing markets, we achieved double digit revenue and loan growth. While many of our competitors struggled, our strong capital and financial strength enabled us to add lower risk assets at better prices and increase wallet and market share to drive our future growth.

Thank you for listening. If you have any questions, please call Bob Strickland, Director of Investor Relations.

Question-and-Answer Session

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