10-Q 1 f53200e10vq.htm FORM 10-Q FORM 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware
(State of incorporation)
  No. 41-0449260
(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     
Yes þ
  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
         
Large accelerated filer
  þ   Accelerated filer o
 
       
Non-accelerated filer
  o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares Outstanding
    July 31, 2009
Common stock, $1-2/3 par value
    4,671,609,008  

 


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
 
PART I          
Item 1.  
Financial Statements
  Page  
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        136  
   
 
       
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
       
        2  
        3  
        15  
        17  
        25  
        28  
        31  
        49  
   
 
       
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
    42  
   
 
       
Item 4.       55  
   
 
       
PART II          
Item 1.       137  
   
 
       
Item 1A.       137  
   
 
       
Item 2.       137  
   
 
       
Item 4.       137  
   
 
       
Item 6.       139  
   
 
       
Signature  
 
    139  
   
 
       
Exhibit Index   140  
 
 EX-4(b)
 EX-10(a)
 EX-12(a)
 EX-12(b)
 EX-31(a)
 EX-31(b)
 EX-32(a)
 EX-32(b)
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA (1)(2)
                                         
 
    Quarter ended   Six months ended
    June 30,   March 31,   June 30,   June 30,   June 30,
($ in millions, except per share amounts)   2009   2009   2008   2009   2008
 
For the Period
                                       
Wells Fargo net income
  $ 3,172       3,045       1,753       6,217       3,752  
Wells Fargo net income applicable to common stock
    2,575       2,384       1,753       4,959       3,752  
Diluted earnings per common share
    0.57       0.56       0.53       1.13       1.13  
Profitability ratios (annualized):
                                       
Wells Fargo net income to average assets (ROA)
    1.00 %     0.96       1.19       0.98       1.29  
Net income to average assets
    1.02       0.97       1.20       1.00       1.30  
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
    13.70       14.49       14.58       14.07       15.71  
Net income to average total equity
    11.56       11.97       14.62       11.76       15.77  
Efficiency ratio (3)
    56.4       56.2       51.0       56.3       51.2  
Total revenue
  $ 22,507       21,017       11,460       43,524       22,023  
Pre-tax pre-provision profit (4)
    9,810       9,199       5,615       19,009       10,736  
Dividends declared per common share
    0.05       0.34       0.31       0.39       0.62  
Average common shares outstanding
    4,483.1       4,247.4       3,309.8       4,365.9       3,306.1  
Diluted average common shares outstanding
    4,501.6       4,249.3       3,321.4       4,375.1       3,319.6  
Average loans
  $ 833,945       855,591       391,545       844,708       387,732  
Average assets
    1,274,926       1,289,716       594,749       1,282,280       584,871  
Average core deposits (5)
    765,697       753,928       318,377       759,845       317,827  
Average retail core deposits (6)
    596,648       590,502       230,365       593,592       229,315  
Net interest margin
    4.30 %     4.16       4.92       4.23       4.81  
At Period End
                                       
Securities available for sale
  $ 206,795       178,468       91,331       206,795       91,331  
Loans
    821,614       843,579       399,237       821,614       399,237  
Allowance for loan losses
    23,035       22,281       7,375       23,035       7,375  
Goodwill
    24,619       23,825       13,191       24,619       13,191  
Assets
    1,284,176       1,285,891       609,074       1,284,176       609,074  
Core deposits (5)
    761,122       756,183       310,410       761,122       310,410  
Wells Fargo stockholders’ equity
    114,623       100,295       47,964       114,623       47,964  
Total equity
    121,382       107,057       48,265       121,382       48,265  
Tier 1 capital (7)
    102,721       88,977       42,471       102,721       42,471  
Total capital (7)
    144,984       131,820       57,909       144,984       57,909  
                                         
Capital ratios:
                                       
Wells Fargo common stockholders’ equity to assets
    6.51 %     5.40       7.87       6.51       7.87  
Total equity to assets
    9.45       8.33       7.92       9.45       7.92  
Average Wells Fargo common stockholders’ equity to average assets
    5.92       5.17       8.13       5.54       8.21  
Average total equity to average assets
    8.85       8.11       8.18       8.48       8.26  
Risk-based capital (7)
                                       
Tier 1 capital
    9.80       8.30       8.24       9.80       8.24  
Total capital
    13.84       12.30       11.23       13.84       11.23  
Tier 1 leverage (7)
    8.32       7.09       7.35       8.32       7.35  
                                         
Book value per common share   $ 17.91       16.28       14.48       17.91       14.48  
Team members (active, full-time equivalent)
    269,900       272,800       160,500       269,900       160,500  
Common stock price:
                                       
High
  $ 28.45       30.47       32.40       30.47       34.56  
Low
    13.65       7.80       23.46       7.80       23.46  
Period end
    24.26       14.24       23.75       24.26       23.75  
 
 
(1)   Wells Fargo & Company (Wells Fargo) acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008.
 
(2)   On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 , on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity.
 
(3)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
 
(4)   Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle. Federal banking regulators used a similar measure, pre-provision net revenue, in connection with the Supervisory Capital Assessment Program (SCAP) “stress test” to assess the capital adequacy of certain financial institutions. Under the SCAP guidelines, pre-provision net revenue is PTPP adjusted for certain items.
 
(5)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
 
(6)   Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
 
(7)   See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

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This Report on Form 10-Q for the quarter ended June 30, 2009, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ materially 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 our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (First Quarter 2009 Form 10-Q), and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 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 $1.3 trillion diversified financial services company providing banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia (D.C.) and in other countries. We ranked fourth in assets and second in the market value of our common stock among our peers at June 30, 2009. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia).
Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses. We continued to earn more of our customers’ business in 2009 in both our retail and commercial banking businesses and in our equally customer-centric securities brokerage and investment banking businesses.
Wells Fargo net income was a record $3.2 billion in second quarter 2009, with net income applicable to common stock of $2.6 billion. Diluted earnings per common share were $0.57, after a $700 million credit reserve build ($0.10 per common share), a Federal Deposit Insurance Corporation (FDIC) special assessment of $565 million ($0.08 per common share) and merger-related and restructuring expenses of $244 million ($0.03 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the acquisition was completed at the end of 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in 2008 averages.
On January 1, 2009, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.

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Despite the continuing turmoil in the credit markets, Wells Fargo remains one of the largest providers of credit to the U.S. economy. We have extended more than $471 billion of loans to creditworthy customers since October 2008, including $206 billion in new loan commitments and originations this quarter. The fundamentals of our time-tested business model are as sound as ever. Our cross-sell at legacy Wells Fargo set records for the tenth consecutive year — an average of 5.84 Wells Fargo products for retail banking households and an average of 6.4 products for wholesale and commercial customers. One of every four of our legacy Wells Fargo retail banking households has eight or more Wells Fargo products and our average middle-market commercial banking customer has almost eight products. We believe there is potentially significant opportunity for growth as we increase the Wachovia retail bank household cross-sell. For example, while Wachovia has a similar number of retail banking stores and about 10 million retail bank households, Wachovia’s retail bank household cross-sell of Wachovia products is currently 4.55 compared with legacy Wells Fargo retail bank cross-sell of Wells Fargo products of 5.84. Business banking household cross-sell offers another potential opportunity for growth, with a cross-sell of 3.69 products at legacy Wells Fargo. Our goal is eight products per customer, which is approximately half of our estimate of potential demand.
We continue to experience strong deposit growth, with average checking and savings deposits up 20% (annualized) from first quarter 2009, which contributed to the improvement in our net interest margin to 4.30% and provided increased funding diversity and stability. In addition to macro-economic factors such as money supply growth and higher consumer savings rates that are driving deposit growth industry-wide, we continue to see strong core deposit growth across all customer segments as we gain new customers, deepen our market penetration and expand relationships with existing customers. Average core deposits were $765.7 billion for second quarter 2009, up from $753.9 billion for first quarter 2009.
We took many actions to further strengthen our balance sheet, including building the allowance for credit losses to $23.5 billion, increasing Tier 1 common equity to $47.1 billion, or 4.49% of risk-weighted assets, and building Tier 1 capital to 9.80% of risk-weighted assets. While the Supervisory Capital Assessment Program (SCAP) will not be completed until after the end of the third quarter, we have already generated $14.2 billion from market and internal sources toward the $13.7 billion capital buffer required by the Federal Reserve. We expect to internally generate additional capital in third quarter 2009. See the “Capital Management” section in this Report for more information.
We are seeing some signs of moderation in the growth of consumer and small business credit losses, largely due to our efforts over the last two years to modify and restructure loans for our customers, our successful efforts to reduce high risk loan portfolios and the purchase accounting write-downs we have already taken in Wachovia’s loan portfolios. The Wachovia integration remains on schedule, with business and revenue synergies already exceeding our expectations. We are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration. We further expect additional efficiency initiatives to lower expenses over the rest of 2009.
We have stated in the past that to consistently grow over the long term, successful companies must invest in their core businesses and maintain strong balance sheets. In second quarter 2009, we opened 12 banking stores throughout the combined company for a retail network total of 6,668 stores. Conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this year.
We believe it is important to maintain a well-controlled environment as we integrate the Wachovia businesses and grow the combined company. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.

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Wachovia Merger
On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Wachovia’s assets and liabilities were included in the December 31, 2008, consolidated balance sheet at their respective fair values on the acquisition date. Because the acquisition was completed on December 31, 2008, Wachovia’s results of operations were not included in our 2008 income statement. Beginning in 2009, our consolidated results and associated metrics, as well as our consolidated average balances, include Wachovia. The Wachovia acquisition was material to us, and the inclusion of results from Wachovia’s businesses in our 2009 financial statements is a material factor in the changes in our results compared with prior year periods.
Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on preliminary data as of an interim period with estimates through year end. We have validated and, where necessary, refined our December 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of these refinements was recorded as an adjustment to goodwill in the first half of 2009. Based on the purchase price of $23.1 billion and the $12.4 billion fair value of net assets acquired, inclusive of refinements identified in the first half of 2009, the transaction resulted in goodwill of $10.7 billion.
The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. As of December 31, 2008, certain of the loans acquired from Wachovia had evidence of credit deterioration since origination, and it was probable that we would not collect all contractually required principal and interest payments. Such loans identified at the time of the acquisition are accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.
Loans subject to SOP 03-3 were written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3 are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due.
As a result of the application of SOP 03-3 accounting to Wachovia’s loan portfolios, certain credit-related ratios of the Company, including, for example, the growth rate in nonperforming assets since December 31, 2008, may not necessarily be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. As noted above, SOP 03-3 loans were reclassified to accrual status in purchase accounting, and one effect of the elimination of nonaccrual loans is that, as certain non-SOP 03-3 loans begin to migrate to nonaccrual status, the percentage increase in nonaccrual loans can be higher because there are minimal loans transferring out of nonaccrual status. For further detail on the merger see the “Loan Portfolio” section and Note 2 (Business Combinations) to Financial Statements in this Report.

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Summary Results
Wells Fargo net income in second quarter 2009 was $3.2 billion ($0.57 per share), compared with $1.8 billion ($0.53 per share) in second quarter 2008. Net income for the first half of 2009 was $6.2 billion ($1.13 per share), compared with $3.8 billion ($1.13 per share) for the first half of 2008. Wells Fargo return on average total assets (ROA) was 1.00% and return on average common Wells Fargo stockholders’ equity (ROE) was 13.70% in second quarter 2009, compared with 1.19% and 14.58%, respectively, in second quarter 2008. ROA was 0.98% and ROE was 14.07% for the first half of 2009, and 1.29% and 15.71%, respectively, for the first half of 2008.
Revenue, the sum of net interest income and noninterest income, of $22.5 billion in second quarter 2009 included another quarter of record, double-digit revenue growth at legacy Wells Fargo, up 19% year over year, as well as a strong contribution from Wachovia, which accounted for 39% of combined revenue. Year-to-date revenue was $43.5 billion, almost double legacy Wells Fargo’s revenue for the comparable period last year. Our results also reflected growth at legacy Wells Fargo in both net interest income and fee income resulting from our diversified business model. The breadth and depth of our business model resulted in strong and balanced growth in loans, deposits and fee-based products. The vast majority of our more than 80 businesses grew revenue again this quarter, including the following diverse businesses that all achieved greater than 8% (annualized) growth from first quarter 2009: regional banking, mortgage banking, investment banking, asset-based lending, auto lending, student lending, debit card, merchant card, wealth management, securities brokerage, retirement and international.
We believe our balance sheet is well positioned given the current economic environment. Our allowance for credit losses was $23.5 billion at June 30, 2009, compared with $21.7 billion at December 31, 2008. Our allowance covers expected consumer loan losses for approximately the next 12 months and inherent commercial and commercial real estate loan losses expected to emerge over approximately the next 24 months. We continued to reduce the higher risk assets on our balance sheet, with higher-risk loan portfolios (home equity loans originated through third party channels and indirect auto at legacy Wells Fargo, Pick-a-Pay and commercial real estate at Wachovia) down by $6.3 billion and trading assets down by $6.4 billion in the quarter. We recorded $979 million of other-than-temporary impairment (OTTI) on securities in the first half of 2009.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.9 billion in second quarter 2009, up from $6.3 billion in second quarter 2008, reflecting a strong combined net interest margin on average earning assets of $1.1 trillion. Average earning assets were up $1.3 billion in second quarter 2009 from first quarter 2009, with an increase of $30.7 billion in securities and mortgage loans held for sale. This increase was partially offset by a reduction of $3.7 billion in average trading assets and a reduction of $21.6 billion in average loans, including $6.3 billion in the higher-risk loan portfolios that we are exiting. At 4.30% in second quarter 2009, our net interest margin remained strong and the highest among our large bank peers. The net interest margin reflected the benefit of continued growth in core customer deposits, with about 80% of our core deposits now in checking and savings deposits.
Noninterest income reached $10.7 billion in second quarter 2009, up from $5.2 billion a year ago, largely driven by the Wachovia acquisition, as well as continued success in satisfying customers’ financial needs and the combined company’s expanded breadth of products and services. Noninterest income included:
  Mortgage banking noninterest income of $3.0 billion in second quarter 2009:
    $2.2 billion in revenue from mortgage loan originations/sales activities on $129 billion in new originations, including net write-downs of the mortgage warehouse for spread and other liquidity-related valuation adjustments

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    Mortgage applications of $194 billion, one of our highest quarters, with an unclosed application pipeline of $90 billion at quarter end
 
    $1.0 billion mortgage servicing rights (MSRs) mark-to-market gains, net of hedge results, reflecting a $2.3 billion increase in the fair value of the MSRs offset by a $1.3 billion economic hedge loss in the quarter, with the net difference largely due to hedge carry income reflecting low short-term rates, which are likely to continue; MSRs as a percentage of loans serviced of 0.91%
  Trust and investment fees of $2.4 billion primarily reflected equity and bond origination fees and higher brokerage commissions as we continued to build our retail securities brokerage business; client assets in Wealth, Brokerage and Retirement were up 8% from first quarter 2009 driven largely by market value appreciation
  Card and other fees of $1.9 billion reflected seasonally higher purchase volumes and higher customer penetration rates
  Service charges on deposit accounts of $1.4 billion driven by continued strong checking account growth
  Trading revenue of $749 million, with approximately two-thirds from customer transactions
  Net losses on debt and equity securities totaling $38 million, including $463 million of OTTI write-downs. Net losses on debt securities of $78 million included OTTI of $308 million net of realized gains of $230 million. Net gains on equity securities totaled $40 million after $155 million of OTTI write-downs.
Net unrealized losses on securities available for sale declined to $400 million at June 30, 2009, from $9.9 billion at December 31, 2008. In second quarter 2009, the net unrealized losses were virtually eliminated as credit spreads narrowed during the quarter and as unrealized gains emerged on new mortgage-backed securities (MBS) purchased during the quarter at the peak in MBS yields.
Noninterest expense was $12.7 billion in second quarter 2009, up from $5.8 billion in second quarter 2008, largely attributable to the Wachovia acquisition, as well as the FDIC special assessment of $565 million and higher variable compensation in mortgage, brokerage and investment banking related to increased customer sales. Noninterest expense also reflected $244 million of merger-related costs. We continued to hire new sales professionals in the quarter in our regional bank and retail securities brokerage business while improving sales force productivity. In addition, we opened 12 banking stores during the quarter. Even though we continue to invest appropriately in our business for long-term revenue growth, expenses were relatively flat overall reflecting the benefit of the consolidation of the two companies, and ongoing expense management initiatives. Including the FDIC special assessment and merger costs, which together represented 6% of total noninterest expense during the quarter, the efficiency ratio was 56.4%, flat from first quarter’s 56.2%.
Net charge-offs in second quarter 2009 were $4.4 billion (2.11% of average total loans outstanding, annualized), compared with $3.3 billion (1.54%) in first quarter 2009 and $1.5 billion (1.55%) in second quarter 2008. Legacy Wells Fargo net charge-offs were $3.4 billion compared with $2.9 billion in first quarter 2009 and Wachovia net charge-offs totaled $984 million, including $103 million related to SOP 03-3 loans, compared with $371 million in first quarter 2009. Wachovia loans accounted for under SOP 03-3 were written down to fair value at December 31, 2008, and, accordingly, charge-offs on that portfolio will only occur if the portfolio deteriorates subsequent to the acquisition.
Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment in the quarter. We expect credit losses and nonperforming assets to increase further, although we are beginning to see some moderation in the growth rate of losses in a number of consumer portfolios, as evidenced by some stabilization in early stage delinquencies. This moderation is largely the result of actions we and Wachovia have taken over the last two years to reduce risk. While credit losses rose in

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second quarter 2009, the level of losses remained below the SCAP adverse scenario projections made by both the Company and the Federal Reserve.
Commercial and commercial real estate losses increased in the quarter as the effects of the current economic cycle challenged more of our commercial customers. Loss levels increased from prior periods, driven by losses from loans to customers whose businesses rely on the residential real estate industry and consumer goods and services. We expect this trend to continue until the economy improves. We believe our losses will be moderated by the effect of our long standing underwriting discipline and relationship-centric business strategy. Approximately one third of the commercial losses were generated from our legacy Wells Fargo Business Direct channel. This channel consists of small lines of credit to small business customers. Losses from Business Direct decreased slightly from first quarter 2009, and delinquency levels showed moderate signs of improvement during the quarter, indicating possible stabilization in this portfolio. Losses in our consumer portfolios increased as expected, as more of our customers were affected by unemployment and the prolonged residential real estate down cycle. In line with our first quarter trends, our consumer real estate and credit card portfolio losses increased, while losses in our auto secured portfolios improved as a result of vintage aging and price improvement in used car markets.
We continue to take actions to reduce risk in the portfolio and invest in loss mitigation activities. At year-end, we took significant write-downs in certain Wachovia loan portfolios in purchase accounting and we have exited several higher risk non-strategic businesses and are liquidating these portfolios, such as Pick-a-Pay, legacy Wells Fargo indirect auto and third party originated home equity portfolios. We continue to monitor credit standards to improve the credit quality of new loans, all in an effort to reduce the risk in the portfolio while continuing to originate appropriately priced new business for our customers. Even with the challenges that remain, our teams are effectively working together to manage the risk, and the Wells Fargo credit culture is being implemented across the combined company.
The provision for credit losses was $5.1 billion and $9.6 billion in the second quarter and first half of 2009, respectively, compared with $3.0 billion and $5.0 billion, respectively, in the same periods a year ago. The provision in the second quarter and first half of 2009 included $700 million and $2.0 billion, respectively, of credit reserve build due to higher credit losses inherent in the loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $23.5 billion (2.86% of total loans) at June 30, 2009, compared with $21.7 billion (2.51%) at December 31, 2008.
Total nonaccrual loans were $15.8 billion (1.92% of total loans) at June 30, 2009, compared with $10.5 billion (1.25%) at March 31, 2009. Nonaccrual loans exclude loans acquired from Wachovia accounted for under SOP 03-3 since these loans were written down in purchase accounting as of December 31, 2008, to an amount expected to be collectible. The increase in nonaccrual loans represented increases in both the commercial and consumer portfolios, with $3.2 billion related to Wachovia in second quarter 2009. The increases in nonaccrual loans were concentrated in portfolios secured by real estate or with borrowers dependent on the housing industry. Total nonperforming assets (NPAs) were $18.3 billion (2.23% of total loans) at June 30, 2009, compared with $12.6 billion (1.50%) at March 31, 2009.
The increase in nonaccrual loans in both first and second quarter 2009 was in part a consequence of purchase accounting. Typically, changes to nonaccrual loans from period to period represent inflows for loans that reach a specified past due status, net of any reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they return to accrual status. Substantially all of Wachovia’s nonaccrual loans were accounted for under SOP 03-3 in purchase accounting and, as a result, were reclassified to accrual status on December 31, 2008. As

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certain Wachovia non-SOP 03-3 loans reached the past due threshold to be classified as nonaccrual during second quarter 2009, there were minimal offsetting Wachovia loans already in nonaccrual status transferring out of nonaccrual status. The effect of this was a higher dollar and percentage increase in nonaccrual loans in the quarter due to the application of SOP 03-3.
The increase in nonaccrual loans is also attributable to other factors, including deterioration in certain portfolios, particularly commercial and consumer real estate, and an increase in restructured loans, which accelerates loss recognition and results in loans remaining in nonaccrual status for a longer period of time.
The Company and each of its subsidiary banks continued to remain well-capitalized. Our total risk-based capital (RBC) ratio at June 30, 2009, was 13.84% and our Tier 1 RBC ratio was 9.80%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our total RBC ratio was 11.83% and our Tier 1 RBC ratio was 7.84% at December 31, 2008. Our Tier 1 leverage ratio was 8.32% and 14.52% at June 30, 2009, and December 31, 2008, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
We continued to build capital in second quarter 2009. As a percentage of total risk-weighted assets, Tier 1 capital and Tier 1 common equity increased to 9.80% and 4.49%, respectively, at June 30, 2009, up from 8.30% and 3.12%, respectively, at March 31, 2009. As previously stated, the Federal Reserve asked us to generate a $13.7 billion regulatory capital buffer by November 9, 2009, based on their revenue assumptions in the adverse case scenario. At June 30, 2009, with over a quarter to go before the SCAP plan is completed, we have exceeded this requirement by $500 million. We accomplished this through an $8.6 billion equity raise and internally generated capital including $2.4 billion of pre-provision net revenue (pre-tax pre-provision profit plus certain SCAP adjustments) in excess of the Federal Reserve’s estimate, $2.7 billion realization of deferred tax assets and $500 million of other internally generated sources of capital, including core deposit intangible amortization. We expect to realize additional internally generated SCAP-qualifying capital in third quarter 2009, including additional deferred tax asset realization, which will add to the amount already generated in the second quarter. See footnote 4 on page 2 and the “Capital Management” section in this Report for more information.

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Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
  FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133;
  FAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51;
  FAS 141R (revised 2007), Business Combinations;
  FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly;
  FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments; and
  FSP Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
In second quarter 2009, we adopted the following new accounting pronouncements:
  FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments; and
  FAS 165, Subsequent Events.
In addition, the following accounting pronouncements were issued by the FASB, but are not yet effective:
  FAS 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162;
  FAS 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140;
  FAS 167, Amendments to FASB Interpretation No. 46(R); and
  FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets.
Each of these pronouncements is described in more detail below.
FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 11 (Derivatives) to Financial Statements in this Report for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.

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We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information, see the “Contractual Obligations” section in our 2008 Form 10-K. In connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. Under the terms of the original agreement under which the joint venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. On December 4, 2008, Prudential publicly announced its intention to exercise its option to put its noncontrolling interest to us at the end of the lookback period, as defined (January 1, 2010). As a result of the issuance of FAS 160 and related interpretive guidance, along with this stated intention, on January 1, 2009, we increased the carrying value of Prudential’s noncontrolling interest in the joint venture to the estimated maximum redemption amount, with the offset recorded to additional paid-in capital.
FAS 141R requires an acquirer in a business combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R is applicable prospectively to business combinations completed on or after January 1, 2009.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including Wells Fargo, to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to normal conditions and therefore could have increased frequency of transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly.
For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices; however, it does provide guidance for determining how much weight to give transaction or quoted prices. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be considered in determining fair value, with the weight given based upon the facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly.
The provisions of FSP FAS 157-4 are effective for second quarter 2009; however, as permitted under the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an increase in the valuation of securities available for sale in first quarter 2009 of $4.5 billion ($2.8 billion after tax), which was included in other comprehensive income, and trading assets of $18 million, which was reflected in earnings. See the “Critical Accounting Policies” section in this Report for more information.

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FSP FAS 115-2 and FAS 124-2 states that an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is more likely than not that it will not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective for second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to cumulative other comprehensive income for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSP been effective for those periods.
FSP EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128, Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption required. The adoption of FSP EITF 03-6-1 did not have a material effect on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. The FSP also requires disclosure of the methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. We adopted this pronouncement in second quarter 2009. See Note 12 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information. Because the FSP amends only the disclosure requirements related to the fair value of financial instruments, the adoption of this FSP does not affect our consolidated financial statements.
FAS 165 describes two types of subsequent events that previously were addressed in the auditing literature, one that requires post-period end adjustment to the financial statements being issued, and one that requires footnote disclosure only. FAS 165 also requires a company to disclose the date through which management has evaluated subsequent events, which for public companies is the date that financial statements are issued. FAS 165 is effective in second quarter 2009 with prospective application. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for our discussion of subsequent events. Our adoption of this standard did not have a material impact on our consolidated financial statements.
FAS 168 establishes the FASB Accounting Standards CodificationTM (Codification) as the source of authoritative generally accepted accounting principles (GAAP) in the United States for companies to use in the preparation of their financial statements. SEC rules and interpretive releases are also authoritative GAAP for SEC registrants. The Codification includes guidance that has been issued by the FASB, EITF and the SEC. All guidance contained in the Codification carries the same level of authority and will supersede all existing non-SEC accounting and reporting standards. Any accounting literature that is non-SEC and has not been grandfathered will become nonauthoritative. FAS 168 is effective for us in third quarter 2009. This standard will change our disclosures as references to existing accounting literature will be updated to reflect the Codification. However, the adoption of FAS 168 will not affect our consolidated financial statements.

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In June 2009, the FASB issued FAS 166 and FAS 167, which will require us, effective January 1, 2010, to consolidate certain qualifying special purpose entities (QSPEs) and variable interest entities (VIEs) that are not currently included in our consolidated financial statements.
FAS 166 modifies the guidance in FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This standard eliminates the concept of QSPEs and provides additional criteria transferors must use to evaluate transfers of financial assets. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. A transferor must consider all arrangements or agreements made or contemplated at the time of transfer before reaching a conclusion on whether control has been relinquished. FAS 166 addresses situations in which a portion of a financial asset is transferred. In such instances the transfer can only be accounted for as a sale when the transferred portion is considered to be a participating interest. FAS 166 also requires that any assets or liabilities retained from a transfer accounted for as a sale be initially recognized at fair value. This standard is effective for us as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date.
FAS 167 amends several key provisions contained in FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FIN 46(R)). First, the scope of FAS 167 includes entities that were formerly designated as QSPEs under FAS 140. Second, FAS 167 changes the approach companies use to identify the VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under FIN 46(R), the primary beneficiary is the entity that absorbs the majority of a VIE’s losses and receives the majority of the VIE’s returns. The guidance in FAS 167 identifies a VIE’s primary beneficiary as the entity that has the power to direct the VIE’s significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Third, FAS 167 requires companies to continually reassess whether they are the primary beneficiary of a VIE. Existing rules only require companies to reconsider primary beneficiary conclusions when certain triggering events have occurred. FAS 167 is effective for us as of January 1, 2010, and applies to all existing QSPEs and VIEs, and VIEs created after the effective date.
Application of FAS 166 and FAS 167 will result in the January 1, 2010, consolidation of certain QSPEs and VIEs that are not currently included in our consolidated financial statements. We have performed a preliminary analysis of these accounting standards with respect to QSPE and VIE structures currently applicable to us and have identified the following items that may potentially be consolidated.
                 
 
    Incremental     Incremental  
    GAAP     risk-weighted  
(in billions)   assets     assets  
 
Residential mortgage loans — nonconforming (1) (2)
  $ 87       42  
Other consumer loans
    6       3  
Commercial paper conduit
    6        
Investment funds
    8       5  
Other
    2       (4 )
 
Total
  $ 109       46  
 
 
(1)   Represents certain of our residential mortgage loans that are not guaranteed by government-sponsored entities (“nonconforming”). We have concluded that $1.1 trillion of conforming residential mortgage loans involved in securitizations are not subject to consolidation under FAS 166 and FAS 167.
 
(2)   We are actively exploring the sale of certain interests we hold in securitized residential mortgage loans, which would reduce the amount of residential mortgage loans subject to consolidation under FAS 166 and FAS 167 by approximately $37 billion ($18 billion of risk-weighted assets). There is no assurance that we will be able to execute such sales prior to adoption of these accounting standards, although it is our intent to do so.

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FAS 166 and 167 are principles based and limited interpretive guidance is currently available. We will continue to evaluate QSPE and VIE structures applicable to us, monitor interpretive guidance, and work with our external auditors and other appropriate interested parties to properly implement these standards. Accordingly, the amount of assets that actually become consolidated on our financial statements upon implementation of these standards on January 1, 2010, may differ materially from our preliminary analysis presented in the previous table.
FSP FAS 132 (R)-1 requires new disclosures about plan assets that are applicable to the plan assets of our Cash Balance Plan and other postretirement benefit plans. The objectives of the new disclosures are to provide an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value, the effect of fair value measurements using significant unobservable inputs on the changes in plan assets and significant concentrations of risk within plan assets. The new disclosures under FSP FAS 132 (R)-1 will be provided for fiscal years ending after December 15, 2009, and disclosures are not required for earlier periods presented for comparative purposes.

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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities, and our financial results. Six 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;
  acquired loans accounted for under SOP 03-3;
  the valuation of residential mortgage servicing rights (MSRs);
  the fair valuation of financial instruments;
  pension accounting; and
  income taxes.
With respect to pension accounting, on April 28, 2009, the Board of Directors (the Board) approved amendments to freeze the benefits earned under the Wells Fargo qualified and supplemental cash balance plans and Wachovia’s cash balance pension plan, and to merge Wachovia’s plan into the Wells Fargo cash balance plan. These actions became effective on July 1, 2009. This will have the effect of reducing pension expense in future periods. See Note 14 (Employee Benefits) to Financial Statements in this Report for additional information.
Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee of the Board. These policies are described in the “Financial Review — Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K. Due to the adoption of FSP FAS 157-4, which affects the measurement of fair value of certain assets, principally securities and trading assets, we have updated the policy on the fair value of financial instruments, as described below.

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FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments and to develop fair value disclosures. See our 2008 Form 10-K for the complete critical accounting policy related to fair value of financial instruments.
In connection with the adoption of FSP FAS 157-4, we developed policies and procedures to determine when the level and volume of activity for our assets and liabilities requiring fair value measurements have declined significantly relative to normal conditions. For items that use price quotes, such as certain security classes within securities available for sale, the degree of market inactivity and distressed transactions is estimated to determine the appropriate adjustment to the price quotes from an external broker or pricing service. The methodology we use to adjust the quotes generally involves weighting the price quotes and results of internal pricing techniques, such as the net present value of future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require to arrive at the fair value. The more active and orderly markets for particular security classes are determined to be, the more weighting we assign to price quotes. The less active and the orderly markets are determined to be, the less weighting we assign to price quotes.
Approximately 24% of total assets ($313.3 billion) at June 30, 2009, and 19% of total assets ($247.5 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Assets for which fair values were measured using significant Level 3 inputs (before derivative netting adjustments) represented approximately 20% of these financial instruments (5% of total assets) at June 30, 2009, and approximately 22% (4% of total assets) at December 31, 2008. The fair value of the remaining assets was measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
Approximately 2% of total liabilities ($21.0 billion) at June 30, 2009, and 2% ($18.8 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements (before derivative netting adjustments) were $8.7 billion and $9.3 billion at June 30, 2009, and December 31, 2008, respectively.

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EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits, short-term borrowings and long-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 on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income was $11.8 billion in second quarter 2009, with approximately 39% contributed by Wachovia, and $6.3 billion in second quarter 2008. Net interest income reflected a strong combined net interest margin of 4.30%, and the benefit of continued growth in core deposits.
Average earning assets increased to $1.1 trillion in second quarter 2009 from $515.8 billion in second quarter 2008. Average loans increased to $833.9 billion in second quarter 2009 from $391.5 billion a year ago. Average mortgages held for sale increased to $43.2 billion in second quarter 2009 from $28.0 billion a year ago. Average debt securities available for sale increased to $179.0 billion in second quarter 2009 from $84.7 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to growth in net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $765.7 billion in second quarter 2009 from $318.4 billion in second quarter 2008, with over half of the increase from Wachovia, and funded 92% and 81% of average loans in second quarter 2009 and 2008, respectively. About 80% of our core deposits are now in checking and savings deposits, one of the highest percentages in the industry. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew to $596.6 billion for second quarter 2009 from $230.4 billion a year ago. Average mortgage escrow deposits were $32.0 billion, compared with $22.7 billion a year ago. Average certificates of deposits increased to $152.4 billion in second quarter 2009 from $37.6 billion a year ago and average checking and savings deposits increased to $613.3 billion in second quarter 2009 from $280.7 billion a year ago. Total average interest-bearing deposits increased to $638.0 billion in second quarter 2009 from $262.5 billion a year ago.
The following table presents the individual components of net interest income and the net interest margin.

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AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
                                                 
 
    Quarter ended June 30,  
    2009     2008  
                    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
  $ 20,889       0.66 %   $ 34       3,853       2.32 %   $ 22  
Trading assets
    18,464       4.61       213       4,915       3.24       39  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,102       3.45       17       1,050       3.77       10  
Securities of U.S. states and political subdivisions
    12,189       6.47       206       7,038       6.62       118  
Mortgage-backed securities:
                                               
Federal agencies
    92,550       5.36       1,203       40,630       5.92       588  
Residential and commercial
    41,257       9.03       1,044       22,419       5.87       340  
                           
Total mortgage-backed securities
    133,807       6.60       2,247       63,049       5.90       928  
Other debt securities (4)
    30,901       7.23       572       13,600       6.30       226  
                           
Total debt securities available for sale (4)
    178,999       6.67       3,042       84,737       6.00       1,282  
Mortgages held for sale (5)
    43,177       5.05       545       28,004       6.04       423  
Loans held for sale (5)
    7,188       2.83       50       734       5.63       10  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    187,501       4.11       1,922       95,263       6.09       1,444  
Other real estate mortgage
    104,297       3.46       900       39,977       5.77       573  
Real estate construction
    33,857       2.69       227       19,213       5.01       240  
Lease financing
    14,750       9.22       340       7,087       5.64       100  
                           
Total commercial and commercial real estate
    340,405       3.99       3,389       161,540       5.86       2,357  
                           
Consumer:
                                               
Real estate 1-4 family first mortgage
    240,798       5.53       3,328       73,663       6.79       1,250  
Real estate 1-4 family junior lien mortgage
    108,422       4.77       1,290       75,018       6.68       1,246  
Credit card
    22,963       12.74       731       19,037       11.81       561  
Other revolving credit and installment
    90,729       6.64       1,502       54,842       8.78       1,198  
                           
Total consumer
    462,912       5.93       6,851       222,560       7.67       4,255  
                           
Foreign
    30,628       4.06       310       7,445       10.61       197  
                           
Total loans (5)
    833,945       5.07       10,550       391,545       6.98       6,809  
Other
    6,079       2.91       45       2,033       4.47       24  
                           
Total earning assets
  $ 1,108,741       5.21 %   $ 14,479       515,821       6.69 %   $ 8,609  
                           
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 79,955       0.13 %   $ 26       5,487       1.18 %   $ 16  
Market rate and other savings
    334,067       0.40       336       161,760       1.21       486  
Savings certificates
    152,444       1.19       451       37,634       3.06       287  
Other time deposits
    21,660       2.00       108       5,773       2.72       38  
Deposits in foreign offices
    49,885       0.29       36       51,884       1.83       236  
                           
Total interest-bearing deposits
    638,011       0.60       957       262,538       1.63       1,063  
Short-term borrowings
    59,844       0.39       58       66,537       2.16       357  
Long-term debt
    235,590       2.52       1,484       100,552       3.41       856  
Other liabilities
    4,604       3.45       40                    
                           
Total interest-bearing liabilities
    938,049       1.08       2,539       429,627       2.13       2,276  
Portion of noninterest-bearing funding sources
    170,692                   86,194              
                           
Total funding sources
  $ 1,108,741       0.91       2,539       515,821       1.77       2,276  
 
                                       
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.30 %   $ 11,940               4.92 %   $ 6,333  
                         
Noninterest-earning assets
                                               
Cash and due from banks
  $ 19,340                       10,875                  
Goodwill
    24,261                       13,171                  
Other
    122,584                       54,882                  
                 
Total noninterest-earning assets
  $ 166,185                       78,928                  
                 
Noninterest-bearing funding sources
                                               
Deposits
  $ 174,529                       88,041                  
Other liabilities
    49,570                       28,434                  
Total equity
    112,778                       48,647                  
Noninterest-bearing funding sources used to fund earning assets
    (170,692 )                     (86,194 )                
                 
Net noninterest-bearing funding sources
  $ 166,185                       78,928                  
                 
Total assets
  $ 1,274,926                       594,749                  
                 
 
 
(1)   Our average prime rate was 3.25% and 5.08% for the quarters ended June 30, 2009 and 2008, respectively, and 3.25% and 5.65% for the first half of 2009 and 2008, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.84% and 2.75% for the quarters ended June 30, 2009 and 2008, respectively, and 1.04% and 3.02% for the first half of 2009 and 2008, respectively.
 
(2)   Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
 
(3)   Yields are based on amortized cost balances computed on a settlement date basis.
 
(4)   Includes certain preferred securities.
 
(5)   Nonaccrual loans and related income are included in their respective loan categories.
 
(6)   Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.

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    Six months ended June 30,  
    2009     2008  
                    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
  $ 22,472       0.75 %   $ 84       3,870       2.81 %   $ 54  
Trading assets
    20,323       4.81       488       5,022       3.49       87  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,498       2.00       24       1,012       3.81       19  
Securities of U.S. states and political subdivisions
    12,201       6.45       419       6,664       7.00       238  
Mortgage-backed securities:
                                               
Federal agencies
    84,592       5.51       2,271       38,364       6.00       1,123  
Residential and commercial
    39,980       8.80       2,061       21,706       5.97       664  
                           
Total mortgage-backed securities
    124,572       6.71       4,332       60,070       5.99       1,787  
Other debt securities (4)
    30,493       7.02       1,123       12,213       6.58       422  
                           
Total debt securities available for sale (4)
    169,764       6.68       5,898       79,959       6.14       2,466  
Mortgages held for sale (5)
    37,151       5.17       960       27,138       6.02       817  
Loans held for sale (5)
    7,567       3.13       117       691       6.52       22  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    192,186       3.99       3,806       93,174       6.50       3,013  
Other real estate mortgage
    104,283       3.47       1,794       38,701       6.09       1,173  
Real estate construction
    34,174       2.86       485       19,073       5.53       525  
Lease financing
    15,277       8.99       687       6,956       5.71       198  
                           
Total commercial and commercial real estate
    345,920       3.94       6,772       157,904       6.25       4,909  
                           
Consumer:
                                               
Real estate 1-4 family first mortgage
    243,133       5.59       6,772       72,985       6.84       2,496  
Real estate 1-4 family junior lien mortgage
    109,270       4.91       2,665       75,140       6.99       2,614  
Credit card
    23,128       12.42       1,435       18,907       12.06       1,140  
Other revolving credit and installment
    91,770       6.66       3,029       55,376       8.94       2,462  
                           
Total consumer
    467,301       5.98       13,901       222,408       7.86       8,712  
                           
Foreign
    31,487       4.22       659       7,420       10.94       404  
                           
Total loans (5)
    844,708       5.08       21,332       387,732       7.26       14,025  
Other
    6,110       2.89       88       1,930       4.50       44  
                           
Total earning assets
  $ 1,108,095       5.22 %   $ 28,967       506,342       6.94 %   $ 17,515  
                           
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 80,173       0.14 %   $ 56       5,357       1.54 %   $ 41  
Market rate and other savings
    323,813       0.47       755       160,812       1.59       1,270  
Savings certificates
    161,234       1.05       838       39,774       3.54       700  
Other time deposits
    23,597       1.98       232       5,269       3.09       80  
Deposits in foreign offices
    47,901       0.32       75       49,262       2.31       566  
                           
Total interest-bearing deposits
    636,718       0.62       1,956       260,474       2.05       2,657  
Short-term borrowings
    67,911       0.54       181       59,754       2.63       782  
Long-term debt
    247,209       2.65       3,267       100,619       3.85       1,933  
Other liabilities
    4,194       3.64       76                    
                           
Total interest-bearing liabilities
    956,032       1.15       5,480       420,847       2.56       5,372  
Portion of noninterest-bearing funding sources
    152,063                   85,495              
                           
Total funding sources
  $ 1,108,095       0.99       5,480       506,342       2.13       5,372  
 
                                     
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.23 %   $ 23,487               4.81 %   $ 12,143  
                         
Noninterest-earning assets
                                               
Cash and due from banks
  $ 19,795                       11,262                  
Goodwill
    23,725                       13,166                  
Other
    130,665                       54,101                  
                 
Total noninterest-earning assets
  $ 174,185                       78,529                  
                 
Noninterest-bearing funding sources
                                               
Deposits
  $ 167,458                       86,464                  
Other liabilities
    50,064                       29,246                  
Total equity
    108,726                       48,314                  
Noninterest-bearing funding sources used to fund earning assets
    (152,063 )                     (85,495 )                
                 
Net noninterest-bearing funding sources
  $ 174,185                       78,529                  
                 
Total assets
  $ 1,282,280                       584,871                  
                 
 

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NONINTEREST INCOME
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Service charges on deposit accounts
  $ 1,448       800       2,842       1,548  
Trust and investment fees:
                               
Trust, investment and IRA fees
    839       566       1,561       1,125  
Commissions and all other fees
    1,574       196       3,067       400  
 
Total trust and investment fees
    2,413       762       4,628       1,525  
 
Card fees
    923       588       1,776       1,146  
Other fees:
                               
Cash network fees
    58       47       116       95  
Charges and fees on loans
    440       251       873       499  
All other fees
    465       213       875       416  
 
Total other fees
    963       511       1,864       1,010  
 
Mortgage banking:
                               
Servicing income, net
    753       221       1,596       494  
Net gains on mortgage loan origination/sales activities
    2,203       876       3,785       1,143  
All other
    90       100       169       191  
 
Total mortgage banking
    3,046       1,197       5,550       1,828  
 
Insurance
    595       550       1,176       1,054  
Net gains from trading activities
    749       516       1,536       619  
Net gains (losses) on debt securities available for sale
    (78 )     (91 )     (197 )     232  
Net gains (losses) from equity investments
    40       47       (117 )     360  
Operating leases
    168       120       298       263  
All other
    476       182       1,028       400  
 
Total
  $ 10,743       5,182       20,384       9,985  
 
We earn trust, investment and IRA fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At June 30, 2009, these assets totaled $1.7 trillion, including $497 billion from Wachovia, up from $1.1 trillion at June 30, 2008. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $839 million in second quarter 2009 from $566 million a year ago.
We receive commissions and other fees for providing services to full-service and discount brokerage customers. These fees increased to $1.6 billion in second quarter 2009 from $196 million a year ago. These fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, and asset-based fees, which are based on the market value of the customer’s assets. At June 30, 2009, client assets totaled $986 billion, including $880 billion from Wachovia, compared with $129 billion at June 30, 2008. Commissions and other fees also include fees from investment banking activities including equity and bond underwriting.
Card fees increased to $923 million in second quarter 2009 from $588 million a year ago, predominantly due to $320 million in card fees from the Wachovia portfolio.
Mortgage banking noninterest income was $3.0 billion in second quarter 2009, compared with $1.2 billion a year ago. Net gains on mortgage loan origination/sales activities of $2.2 billion in second quarter 2009 were up from $876 million a year ago. Business performance was strong in second quarter 2009, reflecting strong refinance activity due to a low interest rate environment, with residential real estate originations of $129 billion compared with $63 billion a year ago. The 1-4 family first mortgage unclosed pipeline was $90 billion at June 30, 2009, $71 billion at December 31, 2008, and $47 billion at June 30, 2008. For additional detail, see the “Asset/Liability and Market Risk Management — Mortgage

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Banking Interest Rate and Market Risk,” section and Note 8 (Mortgage Banking Activities) and Note 12 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include additions to the mortgage repurchase reserve. Mortgage loans are repurchased based on standard representations and warranties. A $104 million increase in the repurchase reserve in second quarter 2009 from March 31, 2009, was due to higher defaults and loss severities and overall deterioration in the market. To the extent the housing market does not recover, the residential mortgage business could continue to have increased investor repurchase requests and loss severity on repurchases, causing future increases in the repurchase reserve.
Within mortgage banking noninterest income, servicing income includes both changes in the fair value of MSRs during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income in second quarter 2009 included a $1.03 billion net MSRs valuation gain recorded in earnings ($2.32 billion increase in the fair value of the MSRs offset by $1.29 billion hedge loss) and in second quarter 2008 included a $65 million net MSRs valuation loss ($4.13 billion increase in the fair value of MSRs offset by $4.20 billion hedge loss). The net gain in the current quarter is largely due to hedge carry income reflecting lower short-term rates, which are likely to continue. Our portfolio of loans serviced for others was $1.86 trillion at both June 30, 2009, and December 31, 2008. At June 30, 2009, the ratio of MSRs to related loans serviced for others was 0.91%.
Insurance revenue was $595 million in second quarter 2009, up from $550 million a year ago, primarily due to the addition of Wachovia.
Income from trading activities was $749 million and $1.5 billion in the second quarter and first half of 2009, respectively, up from $516 million and $619 million, respectively, a year ago.
Net investment losses (debt and equity) totaled $38 million and $314 million in the second quarter and first half of 2009, respectively, and included OTTI write-downs of $463 million and $979 million, respectively. Net investment losses of $44 million for second quarter 2008 and gains of $592 million for the first half of 2008 included $129 million and $202 million, respectively, of OTTI write-downs.
Net losses on debt securities available for sale were $78 million and $197 million in the second quarter and first half of 2009, compared with net losses of $91 million and net gains of $232 million, respectively, a year ago. Net gains from equity investments were $40 million in second quarter 2009, compared with $47 million a year ago, which reflected the $334 million gain from our ownership interest in Visa, which completed its initial public offering in March 2008. Net losses from equity investments were $117 million in the first half of 2009 compared with net gains of $360 million in the first half of 2008.

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NONINTEREST EXPENSE
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Salaries
  $ 3,438       2,030       6,824       4,014  
Commission and incentive compensation
    2,060       806       3,884       1,450  
Employee benefits
    1,227       593       2,511       1,180  
Equipment
    575       305       1,262       653  
Net occupancy
    783       400       1,579       799  
Core deposit and other intangibles
    646       46       1,293       92  
FDIC and other deposit assessments
    981       18       1,319       26  
Outside professional services
    451       212       861       383  
Insurance
    259       206       526       367  
Postage, stationery and supplies
    240       138       490       279  
Outside data processing
    282       122       494       231  
Travel and entertainment
    131       112       236       217  
Foreclosed assets
    187       92       435       199  
Contract services
    256       104       472       212  
Operating leases
    61       102       131       218  
Advertising and promotion
    111       104       236       189  
Telecommunications
    164       82       322       160  
Operating losses (reduction in losses)
    159       56       331       (17 )
All other
    686       317       1,309       635  
 
Total
  $ 12,697       5,845       24,515       11,287  
 
Noninterest expense more than doubled to $12.7 billion in second quarter 2009 from a year ago, primarily due to the acquisition of Wachovia, which resulted in an expanded geographic platform and capabilities in businesses such as retail brokerage, asset management and investment banking, which, like mortgage banking, typically include higher revenue-based incentive expense than the more traditional banking businesses. Noninterest expense included $244 million and $450 million of merger-related costs for the second quarter and first half of 2009, respectively. FDIC and other deposit assessments increased to $981 million in second quarter 2009 due to additional assessments related to the FDIC Transaction Account Guarantee Program and the FDIC special assessment of $565 million. See the “Liquidity and Funding” section in this Report for additional information. Second quarter 2009 included a reduction in pension cost of approximately $125 million, which included $67 million of one-time curtailment gains, related to the freezing of the Wells Fargo and Wachovia pension plans. These actions are expected to reduce pension cost in the second half of 2009 by approximately $375 million. See Note 14 (Employee Benefits) to Financial Statements in this Report for additional information. Noninterest expense included $84 million and $206 million of additional insurance reserve at our captive mortgage reinsurance operation for the second quarter and first half of 2009, respectively.
INCOME TAX EXPENSE
Our effective income tax rate was 31.8% in second quarter 2009, down from 32.2% in second quarter 2008, and 32.8% for the first half of 2009, compared with 33.7% for the first half of 2008. The decrease is primarily attributable to higher tax-exempt income, tax credits and tax settlements, partially offset by increased tax expense (with a comparable increase in interest income) associated with the purchase accounting for leveraged leases.
Effective January 1, 2009, we adopted FAS 160, which changes the way noncontrolling interests are presented in the income statement such that the consolidated income statement includes amounts from both Wells Fargo interests and the noncontrolling interests. As a result, our effective tax rate is calculated by dividing income tax expense by income before income tax expense less the net income from noncontrolling interests.

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OPERATING SEGMENT RESULTS
Wells Fargo defines its operating segments by product type and customer segment. As a result of the combination of Wells Fargo and Wachovia, in first quarter 2009 management realigned its business segments into the following three lines of business: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. Our 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 revised prior period information to reflect the first quarter 2009 realignment of our operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are not included in the income statement or in average balances for periods prior to 2009. The Wachovia acquisition was material to us, and the inclusion of results from Wachovia’s businesses in our 2009 financial statements is a material factor in the changes in our results compared with prior year periods. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 16 (Operating Segments) to Financial Statements in this Report.
Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. Wachovia added expanded product capability as well as expanded channels to better serve our customers. In addition, Community Banking includes Wells Fargo Financial.
Community Banking net income increased to $2.0 billion in second quarter 2009 from $1.2 billion a year ago. Net income increased to $3.8 billion for the first half of 2009, up from $2.7 billion a year ago. The growth in net income and average assets for Community Banking was largely due to the addition of Wachovia businesses, as well as double-digit growth in legacy Wells Fargo businesses, driven by strong balance sheet growth and mortgage banking income. Revenue increased to $14.8 billion and $28.8 billion in the second quarter and first half of 2009, respectively, from $8.9 billion and $17.1 billion for the same periods a year ago. Net interest income increased to $8.8 billion in second quarter 2009 from $5.2 billion a year ago. Average loans increased to $540.7 billion in second quarter 2009 from $283.2 billion a year ago. Average core deposits increased to $543.9 billion in second quarter 2009 from $251.1 billion a year ago due to Wachovia, as well as double-digit growth in legacy Wells Fargo. Noninterest income increased to $6.0 billion in second quarter 2009 from $3.6 billion a year ago. Noninterest expense increased to $7.7 billion in second quarter 2009 from $4.3 billion a year ago. The provision for credit losses increased to $4.3 billion in second quarter 2009 from $2.8 billion a year ago.
Wholesale Banking provides financial solutions to businesses across the United States with annual sales generally in excess of $10 million and to financial institutions globally. Products include middle market banking, corporate banking, commercial real estate, treasury management, asset-based lending, insurance brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment finance, corporate trust, investment banking, capital markets, and asset management. Wachovia added expanded product capabilities across the segment, including investment banking, mergers and acquisitions, equity trading, equity structured products, fixed-income sales and trading, and equity and fixed income research.
Wholesale Banking net income increased to $1.1 billion in second quarter 2009 from $576 million a year ago. Net income increased to $2.2 billion for the first half of 2009, up from $1.1 billion a year ago. Growth in net income and average assets for Wholesale Banking was largely due to the addition of Wachovia businesses. Revenue increased to $5.2 billion and $10.1 billion in the second quarter and first half of 2009, respectively, from $2.4 billion and $4.6 billion for the same periods a year ago. Net interest income increased to $2.5 billion in second quarter 2009 from $1.0 billion a year ago. Average loans

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increased to $263.5 billion in second quarter 2009 from $107.7 billion a year ago. Average core deposits increased to $138.1 billion in second quarter 2009 from $64.8 billion a year ago. Noninterest income increased to $2.8 billion in second quarter 2009 from $1.4 billion a year ago. Noninterest expense increased to $2.8 billion in second quarter 2009 from $1.4 billion a year ago. The provision for credit losses increased to $738 million in second quarter 2009 from $246 million a year ago.
Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients. Wealth Management provides affluent and high-net-worth clients with a complete range of wealth management solutions including financial planning, private banking, credit, investment management, trust and estate services, business succession planning and charitable services along with bank-based brokerage services through Wells Fargo Advisors and Wells Fargo Investments, LLC. Family Wealth provides family-office services to ultra-high-net-worth clients and is one of the largest multi-family financial office practices in the United States. Retail Brokerage’s financial advisors serve customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement provides retirement services for individual investors and is a national leader in 401(k) and pension record keeping. The addition of Wachovia in first quarter 2009 added the following businesses to this operating segment: Wachovia Securities (retail brokerage), Wachovia Wealth Management, including its family wealth business and Wachovia’s retirement and reinsurance business.
Wealth, Brokerage and Retirement net income was $363 million in second quarter 2009, up from $111 million a year ago. Net income increased to $622 million for the first half of 2009, up from $204 million a year ago. Growth in net income and average assets for the segment was due to the addition of Wachovia businesses. Revenue increased to $3.0 billion and $5.6 billion in the second quarter and first half of 2009, respectively, from $680 million and $1.3 billion for the same periods a year ago. Net interest income increased to $764 million in second quarter 2009 from $199 million a year ago. Average loans increased to $45.9 billion in second quarter 2009 from $14.8 billion a year ago. The provision for credit losses was $115 million in second quarter 2009, up from $4 million a year ago. Noninterest income increased to $2.2 billion in second quarter 2009 from $481 million a year ago. Noninterest expense increased to $2.3 billion in second quarter 2009 from $497 million a year ago.

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BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high-quality federal agency debt and privately issued mortgage-backed securities. At June 30, 2009, we held $200.9 billion of debt securities available for sale, with net unrealized losses of $818 million, compared with $145.4 billion at December 31, 2008, with net unrealized losses of $9.8 billion. We also held $5.9 billion of marketable equity securities available for sale at June 30, 2009, with net unrealized gains of $418 million, compared with $6.1 billion at December 31, 2008, with net unrealized losses of $160 million. Following application of purchase accounting to the Wachovia portfolio, the net unrealized losses in cumulative other comprehensive income, a component of common equity, at December 31, 2008, related entirely to the legacy Wells Fargo portfolio.
At June 30, 2009, the net unrealized losses on securities available for sale were only $400 million, down from net unrealized losses of $9.9 billion at December 31, 2008. The net unrealized losses were virtually eliminated in second quarter 2009 as credit spreads narrowed during the quarter and as unrealized gains emerged on new MBS purchased during the quarter at the peak in MBS yields.
We analyze securities for OTTI on a quarterly basis, or more often if a potential loss-triggering event occurs. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions within its industry, and whether it is more likely than not that we will be required to sell the security before a recovery in value.
For marketable equity securities, in addition to the above factors, we also consider the issuer’s financial condition, capital strength and near-term prospects. For debt securities and for certain perpetual preferred securities that are treated as debt securities for the purpose of OTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, any change in agency ratings at evaluation date from acquisition date and any likely imminent action. For asset-backed securities, we consider the credit performance of the underlying collateral, including delinquency rates, cumulative losses to date, and any remaining credit enhancement compared to expected credit losses of the security.
For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and it is more likely than not we will not be required to sell prior to recovery of our amortized cost basis, we recognize OTTI in accordance with FSP FAS 115-2 and FAS 124-2, which we early adopted on January 1, 2009. Under this FSP, we separate the amount of the OTTI into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
Of the second quarter 2009 OTTI write-downs of $463 million, $308 million related to debt securities and $155 million to equity securities. Of the OTTI write-downs of $979 million in the first half of 2009, $577 million related to debt securities and $402 million related to equity securities.

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At June 30, 2009, we had approximately $7 billion of securities, primarily municipal bonds that are guaranteed against loss by bond insurers. These securities are almost exclusively investment grade and were generally underwritten consistent with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee. These securities will continue to be monitored as part of our ongoing impairment analysis of our securities available for sale, but are expected to perform, even if the rating agencies reduce the credit ratings of the bond insurers.
The weighted-average expected maturity of debt securities available for sale was 4.5 years at June 30, 2009. Since 78% of this portfolio is 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 is shown below.
MORTGAGE-BACKED SECURITIES
 
                         
                    Expected  
    Fair     Net unrealized     remaining  
(in billions)   value     gain (loss)     maturity  
 
At June 30, 2009
  $ 157.6       (0.9 )   3.4 yrs.
At June 30, 2009, assuming a 200 basis point:
                       
Increase in interest rates
    144.6       (13.9 )   4.9 yrs.
Decrease in interest rates
    166.3       7.8     2.1 yrs.
 
 
See Note 4 (Securities Available for Sale) to Financial Statements in this Report 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 17 and a comparative schedule of average loan balances is included in the table on page 18.
The major categories of loans outstanding including those subject to SOP 03-3 are presented in the following table.
 
                                                 
    June 30, 2009     Dec. 31, 2008  
            All                     All        
    SOP 03-3     other             SOP 03-3     other        
(in millions)   loans     loans     Total     loans     loans     Total  
 
Commercial and commercial real estate:
                                               
Commercial
  $ 2,667       179,370       182,037       4,580       197,889       202,469  
Other real estate mortgage
    5,826       97,828       103,654       7,762       95,346       103,108  
Real estate construction
    4,295       28,943       33,238       4,503       30,173       34,676  
Lease financing
          14,555       14,555             15,829       15,829  
 
Total commercial and commercial real estate
    12,788       320,696       333,484       16,845       339,237       356,082  
 
Consumer:
                                               
Real estate 1-4 family first mortgage
    40,471       196,818       237,289       39,214       208,680       247,894  
Real estate 1-4 family junior lien mortgage
    398       106,626       107,024       728       109,436       110,164  
Credit card
          23,069       23,069             23,555       23,555  
Other revolving credit and installment
          90,654       90,654       151       93,102       93,253  
 
Total consumer
    40,869       417,167       458,036       40,093       434,773       474,866  
 
Foreign
    1,554       28,540       30,094       1,859       32,023       33,882  
 
Total loans
  $ 55,211       766,403       821,614       58,797       806,033       864,830  
 
In the first half of 2009, we refined certain of our preliminary purchase accounting adjustments based on additional information as of December 31, 2008. This additional information resulted in a net increase to the unpaid principal balance of SOP 03-3 loans of $2.3 billion, consisting of a $1.7 billion decrease in commercial and commercial real estate loans and a $4.0 billion increase in consumer loans ($2.7 billion of which related to Pick-a-Pay loans).
The refinements resulted in a net increase to the nonaccretable difference of $3.8 billion and a net increase to the accretable yield, which is a premium, of $1.9 billion. Of the net increase in the nonaccretable difference, $300 million related to commercial and commercial real estate loans, and $3.5 billion to consumer loans ($2.2 billion of which related to Pick-a-Pay loans). Of the net increase in the accretable yield, which reflects changes in the amount and timing of estimated cash flows, the discount related to commercial and commercial real estate loans increased by $191 million, and the premium related to consumer loans increased by $2.1 billion ($2.0 billion of which related to Pick-a-Pay loans). The effect on goodwill of these adjustments amounted to a net increase in goodwill of $1.9 billion (pre tax).
The nonaccretable difference we established in purchase accounting for SOP 03-3 loans absorbs losses that otherwise would be recorded as charge-offs. The amount absorbed by the nonaccretable difference in the first half of 2009 was $2.2 billion for commercial and commercial real estate loans, and $5.1 billion for consumer loans (including $3.8 billion for Pick-a-Pay loans). These amounts do not affect our income statement or the allowance for credit losses.
For further detail on SOP 03-3 loans, see Note 1 (Summary of Significant Accounting Policies — Loans) to Financial Statements in the 2008 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

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DEPOSITS
 
                 
    June 30,     Dec. 31,  
(in millions)   2009     2008  
 
Noninterest-bearing
  $ 173,149       150,837  
Interest-bearing checking
    59,396       72,828  
Market rate and other savings
    360,963       306,255  
Savings certificates
    143,151       182,043  
Foreign deposits (1)
    24,463       33,469  
 
Core deposits
    761,122       745,432  
Other time deposits
    19,904       28,498  
Other foreign deposits
    32,709       7,472  
 
Total deposits
  $ 813,735       781,402  
 
(1)   Reflects Eurodollar sweep balances included in core deposits.
Deposits at June 30, 2009, totaled $813.7 billion, compared with $781.4 billion at December 31, 2008. Comparative detail of average deposit balances is provided on pages 18 and 19 of this Report. Total core deposits were $761.1 billion at June 30, 2009, up $15.7 billion from December 31, 2008. High-rate certificates of deposit (CDs) of $24 billion at Wachovia matured in second quarter 2009 and were replaced by $14 billion in checking, savings or lower-cost CDs. We continue to see strong core deposit growth across all customer segments as we gain new customers, deepen our market penetration and expand relationships with existing customers.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital. These are described below as off-balance sheet transactions with unconsolidated entities, and as guarantees and certain contingent arrangements. See discussion of FAS 166 and FAS 167 in the “Current Accounting Developments” section in this Report.
OFF-BALANCE SHEET TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Historically, the majority of SPEs were formed in connection with securitization transactions. In a securitization transaction, assets from our balance sheet are transferred to an SPE, which then issues to investors various forms of interests in those assets and may also enter into derivative transactions. In a securitization transaction, we typically receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in certain transactions, we may retain the right to service the transferred receivables and to repurchase those receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables.

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In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
  underwriting securities issued by SPEs and subsequently making markets in those securities;
 
  providing liquidity to support short-term obligations of SPEs issued to third party investors;
 
  providing credit enhancement to securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
 
  entering into other derivative contracts with SPEs;
 
  holding senior or subordinated interests in SPEs;
 
  acting as servicer or investment manager for SPEs; and
 
  providing administrative or trustee services to SPEs.
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an entity must be passive and must adhere to significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with fluctuations in the fair value of the VIE’s net assets.

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The following table presents our significant continuing involvement with QSPEs and unconsolidated VIEs.
QUALIFYING SPECIAL PURPOSE ENTITIES AND UNCONSOLIDATED VARIABLE INTEREST ENTITIES
 
                                                 
    June 30, 2009     Dec. 31, 2008  
    Total             Maximum     Total             Maximum  
    entity     Carrying     exposure     entity     Carrying     exposure  
(in millions)   assets     value     to loss     assets     value     to loss  
 
QSPEs
                                               
Residential mortgage loan securitizations:
                                               
Conforming(1)
  $ 1,072,883       23,513       25,720       1,008,824       22,072       22,569  
Other/nonconforming
    296,104       10,514       10,869       135,951       7,867       8,869  
Commercial mortgage securitizations
    417,345       2,788       6,189       355,267       3,060       6,376  
Student loan securitizations
    2,719       215       215       2,765       133       133  
Auto loan securitizations
    3,236       135       135       4,133       115       115  
Other
    9,488       11       48       11,877       71       1,576  
 
Total QSPEs
  $ 1,801,775       37,176       43,176       1,518,817       33,318       39,638  
 
Unconsolidated VIEs
                                               
CDOs
  $ 63,325       14,449       17,741       48,802       15,133       20,443  
Wachovia administered ABCP (2) conduit
    7,617             7,769       10,767             15,824  
Asset-based finance structures
    18,471       10,677       11,294       11,614       9,096       9,482  
Tax credit structures
    27,804       3,805       4,570       22,882       3,850       4,926  
CLOs
    23,551       3,676       4,196       23,339       3,326       3,881  
Investment funds
    93,044       2,566       3,182       105,808       3,543       3,690  
Credit-linked note structures
    1,878       1,290       2,069       12,993       1,522       2,303  
Money market funds (3)
    30,412       24       84       31,843       60       101  
Other
    7,350       3,929       4,161       1,832       3,806       4,699  
 
Total unconsolidated VIEs
  $ 273,452       40,416       55,066       269,880       40,336       65,349  
 
(1)   Conforming residential mortgage loan securitizations are those that are guaranteed by government-sponsored entites. We have concluded that conforming mortgages are not subject to consolidation under FAS 166 and FAS 167. See the “Current Accounting Developments” section in this Report for our estimate of the nonconforming mortgages that may potentially be consolidated under FAS 166 and FAS 167.
 
(2)   Asset-backed commercial paper.
 
(3)   Excludes previously supported money market funds, to which the Company no longer provides non-contractual financial support.
The table above does not include SPEs and unconsolidated VIEs where our only involvement is in the form of investments in trading securities, investments in securities available for sale or loans underwritten by third parties, or administrative or trustee services. Also not included are investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method and investments accounted for under the equity method.
In the table above, the columns titled “Total entity assets” represent the total assets of unconsolidated SPEs. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated SPEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities is a required disclosure under GAAP and represents the estimated loss that would be incurred under an assumed, although we believe extremely remote, hypothetical circumstance where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

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RISK MANAGEMENT
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified.
We believe our underwriting process is well controlled and appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans. We only approve applications and make loans if we believe the customer has the ability to repay the loan or line of credit according to all its terms. We have significantly tightened our bank-selected reduced documentation requirements as a precautionary measure and substantially reduced third party originations due to the negative loss trends experienced in these channels. Appraisals or automated valuation models (AVMs) are used to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time. AVMs estimate property values based on processing large volumes of market data including market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. Generally, AVMs are only used for properties with a loan amount under $250,000.

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Commercial Real Estate
Commercial real estate lending is originated and held in the three business segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. As part of the Wachovia acquisition we acquired significant commercial real estate assets, which doubled the size of the portfolio. As part of our purchase accounting activities in fourth quarter 2008, we individually identified a population of these loans with evidence of deterioration of credit quality since origination for which it was probable that the investor would be unable to collect all contractually required payments receivable and accounted for them under SOP 03-3. This population of impaired loans is managed by an independent and dedicated team of real estate professionals.
The commercial real estate portfolio consists of both permanent commercial mortgage loans and construction loans. The combined loans outstanding totaled $136.9 billion at June 30, 2009, which represented 17% of total loans. Construction loans totaled $33.2 billion at June 30, 2009, or 4% of total loans, and had an annualized quarterly loss rate of 2.76%. Other commercial real estate loans totaled $103.7 billion at June 30, 2009, or 13% of total loans, and had an annualized quarterly loss rate of 0.56%. The portfolio is diversified both geographically and by product type. The largest geographic concentrations are found in California and Florida, which represented 21% and 11% of the total commercial real estate portfolio, respectively. By product type, the largest concentrations are owner-occupied and office buildings, which represented 23% and 15% of the population, respectively. The business strategy at legacy Wells Fargo is to maintain a high level of surveillance and regular customer interaction to understand and manage the risks associated with these assets, including regular loan reviews and appraisal updates. As issues are identified, management is engaged and dedicated workout groups are in place to manage problem assets.
At December 31, 2008, $19.3 billion of Wachovia’s commercial real estate loans were impaired under SOP 03-3, and we recorded an impairment write-down of $7.0 billion as of that date in purchase accounting, representing a 37% write-down of SOP 03-3 commercial real estate loans. In the first half of 2009, we recorded $83 million of charge-offs on SOP 03-3 commercial real estate loans indicating that, generally, losses in this portfolio were within management’s expectations.

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Real Estate 1-4 Family Mortgage Loans
As part of the Wachovia acquisition, we acquired residential first and home equity loans that are very similar to the Wells Fargo core originated portfolio. We also acquired the Pick-a-Pay option adjustable-rate mortgage (ARM) first mortgage portfolio. The nature of this product creates a potential opportunity for negative amortization. Under purchase accounting for the Wachovia acquisition, the option ARM loans with the highest probability of default were subject to SOP 03-3. See the “Pick-a-Pay Portfolio” section in this Report for additional detail.
The deterioration in specific segments of the Home Equity portfolio required a targeted approach to managing these assets. In fourth quarter 2007 a liquidating portfolio was identified, consisting of home equity loans generated through third party wholesale channels not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents. While the $9.3 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at June 30, 2009, these loans represented some of the highest risk in the $126.8 billion Home Equity portfolio, with a loss rate of 11.29% compared with 3.25% for the core portfolio. The loans in the liquidating portfolio are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. The core portfolio was $117.5 billion at June 30, 2009, of which 97% was originated through the retail channel and approximately 16% of the outstanding balance was in a first lien position. The table below includes the credit attributes of these two portfolios.
HOME EQUITY PORTFOLIO (1)
 
                                                 
                    % of loans        
                    two payments     Annualized loss rate  
    Outstanding balances     or more past due     for quarter ended  
    June 30,     Dec. 31,     June 30,     Dec. 31,     June 30,     Dec. 31,  
(in millions)   2009     2008     2009     2008     2009     2008 (2)  
 
Core portfolio (3)
                                               
California
  $ 31,479       31,544       3.63 %     2.95       5.36       3.94  
Florida
    11,697       11,781       3.91       3.36       4.55       4.39  
New Jersey
    8,224       7,888       1.70       1.41       1.37       0.78  
Virginia
    5,805       5,688       1.26       1.50       0.99       1.56  
Pennsylvania
    5,048       5,043       1.46       1.10       1.29       0.52  
Other
    55,248       56,415       2.22       1.97       2.46       1.59  
                                 
Total
    117,501       118,359       2.65       2.27       3.25       2.39  
                                 
Liquidating portfolio
                                               
California
    3,616       4,008       8.16       6.69       17.13       12.32  
Florida
    460       513       9.14       8.41       18.11       13.60  
Arizona
    219       244       8.16       7.40       18.13       13.19  
Texas
    169       191       1.13       1.27       2.96       1.67  
Minnesota
    117       127       3.88       3.79       7.41       5.25  
Other
    4,764       5,226       4.00       3.28       6.25       4.73  
                                 
Total
    9,345       10,309       5.91       4.93       11.29       8.27  
                                 
Total core and liquidating portfolios
  $ 126,846       128,668       2.89       2.48       3.85       2.87  
                                 
 
 
(1)   Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real estate from all groups, excluding SOP 03-3 loans.
 
(2)   Loss rates for 2008 for the core portfolio reflect results for Wachovia (not included in the Wells Fargo reported results) and Wells Fargo. For fourth quarter 2008, the Wells Fargo core portfolio on a stand-alone basis, outstanding balances and related annualized loss rates were $29,399 million (3.81%) for California, $2,677 million (6.87%) for Florida, $1,925 million (1.29%) for New Jersey, $1,827 million (1.26%) for Virginia, $1,073 million (1.17%) for Pennsylvania, $38,934 million (1.77%) for all other states, and $75,835 million (2.71%) in total.
 
(3)   Includes equity lines of credit and closed-end second liens associated with the Pick-a-Pay portfolio totaling $2.0 billion at June 30, 2009, and $2.1 billion at December 31, 2008.

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Pick-a-Pay Portfolio
Our Pick-a-Pay portfolio, which we acquired in the Wachovia merger, had an unpaid principal balance of $111.0 billion and a carrying value of $90.4 billion at June 30, 2009. Included in the Pick-a-Pay portfolio are loans accounted for under SOP 03-3 with an unpaid principal balance of $59.6 billion and a carrying value of $38.9 billion at June 30, 2009. The carrying value is net of $20.7 billion of purchase accounting net write-downs to reflect SOP 03-3 loans at fair value and a $0.1 billion increase to reflect all other loans at a market rate of interest. Equity lines of credit and closed-end second liens associated with Pick-a-Pay loans are reported in the home equity portfolio. The Pick-a-Pay portfolio is a liquidating portfolio as Wachovia ceased originating new Pick-a-Pay loans in 2008. The Pick-a-Pay portfolio carrying balance declined $2.8 billion from March 31, 2009, due to paid in full loans, loss mitigation efforts and because we are not originating new Pick-a-Pay product. At December 31, 2008, we recorded a $22.2 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired under SOP 03-3. This amount was refined to $22.4 billion in the first half of 2009. Losses on this portfolio are in line with management’s expectations.
Pick-a-Pay loans are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment. Approximately 73% of the Pick-a-Pay portfolio has payment options calculated using a monthly adjustable interest rate; the rest of the portfolio is fixed rate.
The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount usually cannot increase by more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” Total deferred interest of $4.2 billion at June 30, 2009, was down from $4.4 billion at March 31, 2009.
Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. There exists a small population of Pick-a-Pay loans for which recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
Due to the terms of the Pick-a-Pay portfolio, there is little recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $2 million in the remaining half of 2009, $8 million in 2010, $8 million in 2011 and $22 million in 2012. In second quarter 2009, the amount of loans recast based on reaching the principal cap was minimal. In addition, we would expect the following balances of ARM loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset: $14 million in the remaining two quarters of 2009, $46 million in 2010, $58 million in 2011 and $103 million in 2012. In second quarter 2009, the amount

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of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was not significant.
The table below reflects the geographic distribution of the Pick-a-Pay portfolio broken out between SOP 03-3 loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a key metric in predicting future loan performance, including potential charge-offs. Because SOP 03-3 loans are carried at fair value, the ratio of the carrying value to the current collateral value for an SOP 03-3 loan will be lower as compared to the LTV based on the unpaid principal. For informational purposes, we have included both ratios in the following table.
PICK-A-PAY PORTFOLIO
 
                                                         
    June 30, 2009  
    SOP 03-3 loans     All other loans  
                            Ratio of                    
                            carrying                    
    Unpaid     Current             value to     Unpaid     Current        
    principal     LTV     Carrying     current     principal     LTV     Carrying  
(in millions)   balance     ratio (1)     value (2)     value     balance     ratio (1)     value (2)  
 
California
  $ 40,657       146 %   $ 26,177       95 %   $ 25,117       90 %   $ 25,170  
Florida
    6,117       130       3,903       84       5,276       96       5,287  
New Jersey
    1,717       99       1,226       71       3,162       80       3,169  
Texas
    466       80       341       59       2,108       66       2,112  
Arizona
    1,553       148       1,001       96       1,195       99       1,197  
Other states
    9,041       108       6,227       75       14,607       83       14,640  
                                           
Total Pick-a-Pay loans
  $ 59,551             $ 38,875             $ 51,465             $ 51,575  
                                           
 
 
(1)   The current LTV ratio is calculated as the outstanding loan balance plus the outstanding balance of any equity lines of credit that share common collateral divided by the collateral value. Collateral values are determined using automated valuation models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.
 
(2)   Carrying value, which does not reflect the allowance for loan losses, includes purchase accounting adjustments, which, for SOP 03-3 loans, were a deduction of $24.5 billion nonaccretable difference and an addition of $3.8 billion accretable yield at June 30, 2009, and for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs.
To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years, interest rate reductions, to charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. In second quarter 2009, we completed 22,200 loan modifications, up from 11,000 in first quarter 2009. The majority of the loan modifications was concentrated in our impaired loan portfolio and eliminates the negative amortization feature. We continually reassess our loss mitigation strategies and may adopt additional or different strategies in the future.

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Wells Fargo Financial
Wells Fargo Financial originates real estate secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $28.0 billion and $29.1 billion in real estate secured loans at June 30, 2009, and December 31, 2008, respectively. Of this portfolio, $1.7 billion and $1.8 billion, respectively, was considered prime based on secondary market standards and has been priced to the customer accordingly. The remaining portfolio is non-prime but has been originated with standards to reduce credit risk. These loans were originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to prime portfolios in the industry with overall loss rates in the first half of 2009 of 2.74% on the entire portfolio. Of the portfolio, $9.2 billion at June 30, 2009, was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and debt-to-income ratios to limit the credit risk.
Wells Fargo Financial also had $19.8 billion and $23.6 billion in auto secured loans and leases at June 30, 2009, and December 31, 2008, respectively, of which $5.3 billion and $6.3 billion, respectively, were originated with customer FICO scores below 620. Loss rates in this portfolio in the second quarter and first half of 2009 were 4.72% and 5.03%, respectively, for FICO scores of 620 and above, and 5.98% and 6.66%, respectively, for FICO scores below 620. These loans were priced based on relative risk. Of this portfolio, $14.5 billion represented loans and leases originated through its indirect auto business, a channel Wells Fargo Financial ceased using near the end of 2008.
Wells Fargo Financial had $7.8 billion and $8.4 billion in unsecured loans and credit card receivables at June 30, 2009, and December 31, 2008, respectively, of which $1.1 billion and $1.3 billion, respectively, was originated with customer FICO scores below 620. Net loss rates in this portfolio in the second quarter and first half of 2009 were 14.13% and 13.81%, respectively, for FICO scores of 620 and above, and 21.28% and 21.63%, respectively, for FICO scores below 620. Wells Fargo Financial has been actively tightening credit policies and managing credit lines to reduce exposure given current economic conditions.

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Nonaccrual Loans and Other Nonperforming Assets
The following table shows the comparative data for nonaccrual loans and other nonperforming assets. We generally place loans on nonaccrual status when:
  the full and timely collection of interest or principal becomes uncertain;
  they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages and auto loans) past due for interest or principal (unless both well-secured and in the process of collection); or
  part of the principal balance has been charged off.
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS (1)
 
                                         
    June 30, 2009              
    Legacy                              
    Wells                     Mar. 31,     Dec. 31,  
(in millions)   Fargo     Wachovia     Total     2009     2008  
 
Nonaccrual loans:
                                       
Commercial and commercial real estate:
                                       
Commercial
  $ 2,100       810       2,910       1,696       1,253  
Other real estate mortgage
    1,057       1,286       2,343       1,324       594  
Real estate construction
    1,991       219       2,210       1,371       989  
Lease financing
    112       18       130       114       92  
 
Total commercial and commercial real estate
    5,260       2,333       7,593       4,505       2,928  
 
Consumer:
                                       
Real estate 1-4 family first mortgage (2)
    3,975       2,025       6,000       4,218       2,648  
Real estate 1-4 family junior lien mortgage (2)
    1,415       237       1,652       1,418       894  
Other revolving credit and installment
    297       30       327       300       273  
 
Total consumer
    5,687       2,292       7,979       5,936       3,815  
 
Foreign
    67       159       226       75       57  
 
Total nonaccrual loans (3)
    11,014       4,784       15,798       10,516       6,800  
 
As a percentage of total loans
                    1.92 %     1.25       0.79  
Foreclosed assets:
                                       
GNMA loans (4)
    932             932       768       667  
Other
    809       783       1,592       1,294       1,526  
Real estate and other nonaccrual investments (5)
    20             20       34       16  
 
Total nonaccrual loans and other nonperforming assets
  $ 12,775       5,567       18,342       12,612       9,009  
 
As a percentage of total loans
                    2.23 %     1.50       1.04  
 
 
(1)   Excludes loans acquired from Wachovia that are accounted for under SOP 03-3.
 
(2)   Includes nonaccrual mortgages held for sale.
 
(3)   Includes $5.7 billion and $3.6 billion at June 30, 2009, and December 31, 2008, respectively, of loans classified as impaired under FAS 114, where the scope of FAS 114 encompasses nonaccrual commercial loans greater than $5 million and all consumer TDRs that are nonaccrual. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 Form 10-K for further information on impaired loans.
 
(4)   Consistent with regulatory reporting requirements, foreclosed real estate securing Government National Mortgage Association (GNMA) loans is classified as nonperforming. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).
 
(5)   Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans.
Total nonperforming assets were $18.3 billion (2.23% of total loans) at June 30, 2009, and included $2.5 billion of foreclosed assets and repossessed vehicles, which have already been written down and are well secured, as well as $15.8 billion of nonaccrual loans. Of the $15.8 billion of nonaccrual loans, a total of $4.9 billion are nonaccrual loans that have already been written down through charge-offs during first quarter 2009, or previous quarters. These particular nonaccrual loans have now been written down by approximately 33%. Additionally, nonaccrual loans include $3.0 billion of commercial and commercial real estate loans and $0.8 billion of consumer troubled debt restructured loans (TDRs), none of which have had prior charge-offs, and on which we collectively have specific FAS 114 reserves of $0.8 billion. Reserves under FAS 114, Accounting by Creditors for Impairment of a Loan — an Amendment of FASB Statement No. 5 and 15, which are part of the allowance for loan losses, reflect the total expected losses on the related loans. The remaining $7.1 billion of nonaccrual loans have reserves that are established as part of our ongoing allowance for loan losses process.

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Nonaccrual loans increased $5.3 billion from March 31, 2009, with increases in both the commercial and consumer portfolios. The increase in nonaccrual loans is attributable to a number of factors, including deterioration in certain portfolios, particularly commercial and consumer real estate, and an increase in loan modifications and restructurings to assist homeowners and other borrowers in these challenging times. Consumer nonaccrual loans that have been modified remain in nonaccrual status until a borrower has made six contractual payments. Commercial and commercial real estate nonaccrual loans amounted to $7.6 billion at June 30, 2009, compared with $4.5 billion at March 31, 2009, and $2.9 billion at December 31, 2008. Of the $7.6 billion in nonaccrual loans at June 30, 2009, net charge-offs totaling $1.4 billion have already been recorded to date on $2.4 billion of those nonaccrual loans. We record charge-offs when circumstances confirm that a loss has occurred. Of the total commercial and commercial real estate nonaccrual loans, 92% were secured, with 62% secured by real estate, and the remainder secured by other assets such as receivables, inventory and equipment.
Consumer nonaccrual loans amounted to $8.0 billion at June 30, 2009, compared with $5.9 billion at March 31, 2009, and $3.8 billion at December 31, 2008. The $4.2 billion increase in nonaccrual consumer loans from December 31, 2008, represented an increase of $3.4 billion in 1-4 family first mortgage loans (including $2.0 billion from Wachovia) and $758 million in 1-4 family junior liens (including $213 million from Wachovia). Of the $8.0 billion of consumer nonaccrual loans, charge-offs totaling $1.0 billion have already been recorded to date on $2.5 billion of those nonaccrual loans. The consumer nonaccrual loans were 99% secured, with 95% secured by real estate. Consumer loans secured by real estate are charged-off to the appraised value of the underlying collateral when these loans reach 180 days delinquent.
Total consumer TDRs amounted to $5.6 billion at June 30, 2009, compared with $3.5 billion at March 31, 2009. Of the TDRs, $1.2 billion at June 30, 2009, and $868 million at March 31, 2009, were classified as nonaccrual. When a loan is restructured in a TDR, a reserve is established in accordance with FAS 114.
Nonperforming assets at June 30, 2009, included $932 million of loans that are FHA insured or VA guaranteed, which have little to no loss content, and $1.6 billion of foreclosed assets, which have been written down to the value of the underlying collateral.
In addition to the factors discussed above, the increase was in part a consequence of purchase accounting. Nonaccrual loans from Wachovia grew to $4.8 billion at June 30, 2009, from a low $97 million at year-end 2008. Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, somewhat offset by reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they return to accrual status. Substantially all of Wachovia’s nonaccrual loans were accounted for under SOP 03-3 in purchase accounting and, as a result, were reclassified to accrual status on December 31, 2008, because they were written down to an amount we expect to fully collect. Accordingly, only $97 million in loans from Wachovia were on nonaccrual status at December 31, 2008. As certain Wachovia non-SOP 03-3 loans reach the past due threshold to be classified as nonaccrual, there are minimal Wachovia loans transferring out of nonaccrual status. The effect of this can be higher growth in nonaccrual loans in the first several quarters following application of SOP 03-3.

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We expect nonperforming asset balances to continue to grow, reflecting an environment where retaining these assets is the most viable economic option, as well as our efforts to modify more real estate loans to reduce foreclosures and keep customers in their homes. We remain focused on proactively identifying problem credits, moving them to nonperforming status and recording the loss content in a timely manner. We have increased and will continue to increase staffing in our workout and collection organizations to ensure these troubled borrowers receive the attention and help they need. See the “Allowance for Credit Losses” section in this Report for additional discussion. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower.
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. Loans acquired from Wachovia that are subject to SOP 03-3 are excluded from the disclosure of loans 90 days or more past due and still accruing interest. Even though certain of them are 90 days or more contractually past due, they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield in purchase accounting under the SOP and not to contractual interest payments.
The total of loans 90 days or more past due and still accruing was $16,657 million at June 30, 2009, and $11,830 million at December 31, 2008. The total included $10,651 million and $8,184 million for the same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar loans whose repayments are insured by the FHA or guaranteed by the VA.
The table below reflects loans 90 days or more past due and still accruing excluding the insured/guaranteed GNMA advances.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
 
                 
    June 30,     Dec. 31,  
(in millions)   2009     2008 (1)  
 
Commercial and commercial real estate:
               
Commercial
  $ 415       218  
Other real estate mortgage
    702       88  
Real estate construction
    860       232  
 
Total commercial and commercial real estate
    1,977       538  
 
Consumer:
               
Real estate 1-4 family first mortgage (2)
    1,497       883  
Real estate 1-4 family junior lien mortgage
    660       457  
Credit card
    680       687  
Other revolving credit and installment
    1,160       1,047  
 
Total consumer
    3,997       3,074  
 
Foreign
    32       34  
 
Total
  $ 6,006       3,646  
 
 
(1)   The amount of real estate 1-4 family first and junior lien mortgage loan delinquencies as originally reported at December 31, 2008, included certain SOP 03-3 loans previously classified as nonaccrual by Wachovia. The December 31, 2008, amounts have been revised to exclude those loans.
 
(2)   Includes mortgage loans held for sale 90 days or more past due and still accruing.

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Net Charge-offs
Net charge-offs in second quarter 2009 were $4.4 billion (2.11% of average total loans outstanding, annualized), including $984 million in the Wachovia portfolio, compared with $3.3 billion (1.54%) in first quarter 2009 and $1.5 billion (1.55%) in second quarter 2008. Commercial and commercial real estate losses increased during the quarter as expected due to the challenging economy impacting loans to customers who are tied to the residential real estate industry and to consumer products and services. Increases in our residential real estate and credit card portfolios were expected as rising unemployment impacted loan performance. Losses in the auto loan portfolios fell modestly in the quarter as a large portion of the poorer-performing vintages have run off and used car pricing improved.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $758 million in second quarter 2009. These results included $410 million from legacy Wells Fargo, which increased $100 million from first quarter 2009. Our relatively high-quality 1-4 family first mortgage portfolio continued to reflect relatively low loss rates although until housing prices fully stabilize, these credit results will continue to deteriorate. Credit card charge-offs increased $82 million from first quarter 2009 to $664 million in second quarter 2009, including $11 million relating to the $2.6 billion Wachovia portfolio. We continued to see increases in delinquency and loss levels in the consumer unsecured loan portfolios as a result of higher unemployment.
Net charge-offs in the real estate 1-4 family junior lien portfolio of $1.2 billion in second quarter 2009 included $991 million in the legacy Wells Fargo portfolio, which increased $190 million from first quarter 2009 as residential real estate values continued to be depressed. Additionally the rise in unemployment levels is increasing the frequency of loss. More information about the Home Equity portfolio is available on page 33.
Commercial and commercial real estate net charge-offs of $1.1 billion in second quarter 2009 included $897 million in the legacy Wells Fargo portfolio, up $230 million from first quarter 2009. The increase from first quarter 2009 was offset by an $11 million decrease relating to our legacy Wells Fargo Business Direct portfolio. Wholesale credit results continued to deteriorate. Commercial lending requests slowed during second quarter 2009 as borrowers continued to reduce their receivable and inventory levels to conserve cash.
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 and excludes loans carried at fair value. 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 the “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” section in our 2008 Form 10-K for additional information.
We apply a consistent methodology to determine the allowance for credit losses, using both historical and forecasted loss trends, adjusted for underlying economic and market conditions. For individually graded (typically commercial) portfolios, we generally use loan-level credit quality ratings, which are based on borrower information and strength of collateral, combined with historically-based grade specific loss factors. The allowance for individually-rated nonaccruing loans with an outstanding balance of $5 million or greater is determined through an individual impairment analysis consistent with FAS 114 guidance. For statistically managed portfolios (typically consumer), we generally leverage models which

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use credit-related characteristics such as credit rating scores, delinquency migration rates, vintages, and portfolio concentrations to estimate loss content. Additionally, the allowance for consumer TDRs is based on the risk characteristics of the modified loans. While the allowance is determined using product and business segment estimates, it is available to absorb losses in the entire loan portfolio.
At June 30, 2009, the allowance for loan losses totaled $23.0 billion (2.80% of total loans), compared with $21.0 billion (2.43%) at December 31, 2008. The allowance for credit losses was $23.5 billion (2.86%) at June 30, 2009, compared with $21.7 billion (2.51%) at December 31, 2008. The allowance for credit losses at June 30, 2009, included $49 million related to credit-impaired loans acquired from Wachovia accounted for under SOP 03-3. The reserve for unfunded credit commitments was $495 million at June 30, 2009, compared with $698 million at December 31, 2008.
Total provision expense in the second quarter and first half of 2009 was $5.1 billion and $9.6 billion, respectively, and included a credit reserve build of $700 million and $2.0 billion, respectively. The reserve builds were primarily driven by two factors: (1) deterioration in economic conditions that increased projected losses in our statistically managed portfolios, and (2) increases in specific reserves under FAS 114 for both commercial loans and TDRs. The increase in reserves for TDRs is associated with loan modification programs designed to avoid foreclosure and keep qualifying borrowers in their homes. We anticipate further increases in TDR volumes as we continue to utilize government-sponsored programs and other methods to minimize foreclosures and associated credit losses.
The application of SOP 03-3 to loans acquired from Wachovia affects reported net charge-offs and nonaccrual loans as described on page 5 in this Report and, therefore, the allowance ratios associated with these measures should not be considered when evaluating the adequacy of the allowance or for comparison with other peer banks because the information may not be directly comparable.
The ratio of the allowance for credit losses to total nonaccrual loans was 149% and 319% at June 30, 2009, and December 31, 2008, respectively. The decrease in this ratio was due to the expected increase in nonaccrual loans.
The ratio of the allowance for credit losses to annualized net charge-offs was 134% and 173% for the quarters ended June 30, 2009, and March 31, 2009, respectively. The decrease from March 31, 2009, was directly related to the increased Wachovia charge-offs as the non-SOP 03-3 portfolio matures and the effect of the SOP 03-3 accounting began to dissipate. Reported loan losses for the quarter excluded those losses from SOP 03-3 loans as these loans were reduced to their fair value at the time of acquisition.
We believe the allowance for credit losses of $23.5 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at June 30, 2009. The allowance for credit losses is subject to change and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic environment, it is possible that unanticipated economic deterioration would create incremental credit losses not anticipated as of the balance sheet date. Our process for determining the adequacy of the allowance for credit losses is discussed in the “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 Form 10-K.

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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 – consists of senior financial and business executives. Each of our principal business groups has individual asset/liability management committees and processes linked to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:
  assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, earnings will initially decline);
  assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates);
  short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may affect new loan yields and funding costs differently); or
  the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available-for-sale portfolio may prepay significantly earlier than anticipated – which could reduce portfolio income).
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, as of June 30, 2009, our most recent simulation indicated estimated earnings at risk of approximately 9% of our most likely earnings plan using a scenario in which the federal funds rate rises to 4.0% and the 10-year Constant Maturity Treasury bond yield rises to 5.3% by June 2010. Simulation estimates depend on, and will change with, the size and mix of our actual and projected balance sheet at the time of each simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter could be higher than the average earnings at risk over the 12-month simulation period, depending on the path of interest rates and on our hedging strategies for MSRs. See the “Mortgage Banking Interest Rate and Market Risk” section in this Report.
We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate exposures. The notional or contractual amount and fair values of these derivatives as of June 30, 2009, and December 31, 2008, are presented in Note 11 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in three main 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, MSRs and other interests held using interest rate swaps, swaptions, futures, forwards and options.

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Mortgage Banking Interest Rate and Market Risk
We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. Based on market conditions and other factors, we reduce credit and liquidity risks by selling or securitizing some or all of the long-term fixed-rate mortgage loans we originate and most of the ARMs we originate, except for the Pick-a-Pay portfolio. On the other hand, we may hold originated ARMs and fixed-rate mortgage loans in our loan portfolio as an investment for our growing base of core deposits. We determine whether the loans will be held for investment or held for sale at the time of commitment. We may subsequently change our intent to hold loans for investment and sell some or all of our ARMs or fixed-rate mortgages as part of our corporate asset/liability management. We may also acquire and add to our securities available for sale a portion of the securities issued at the time we securitize mortgages held for sale (MHFS).
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity in the nonconforming secondary markets, our mortgage banking revenue growth continued to be positive, reflecting the complementary origination and servicing strengths of the business. The secondary market for agency-conforming mortgages functioned well during the quarter.
Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination and servicing fees, the value of our residential MSRs measured at fair value, the value of MHFS and the associated income and loss reflected in mortgage banking noninterest income, the income and expense associated with instruments (economic hedges) used to hedge changes in the fair value of MSRs and MHFS, and the value of derivative loan commitments (interest rate “locks”) extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in servicing fee income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment, and securitizing and selling the loan, interest rate changes will impact origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed and duration of the change in interest rates.
Under FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, we elected to measure MHFS at fair value prospectively for new prime MHFS originations for which an active secondary market and readily available market prices existed to reliably support fair value pricing models used for these loans. At December 31, 2008, we elected to measure at fair value similar MHFS acquired from Wachovia. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs and fees are recognized when incurred. We also elected to measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe that the election for new prime MHFS and other interests held, which are now hedged with free-standing derivatives (economic hedges) along with our MSRs, reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. During 2008 and the first half of 2009, in response to continued secondary market illiquidity, we continued to originate certain prime non-agency loans to be held for investment for the foreseeable future rather than to be held for sale.
Under FAS 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair

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value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and periodically benchmark our estimates to independent appraisals. 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 significant assumptions included in the periodic valuation of MSRs, including prepayment speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements.
A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction in fair value causes a charge to income, net of any gains on free-standing derivatives (economic hedges) used to hedge MSRs. We may choose not to fully hedge all of the potential decline in the value of our MSRs resulting from a decline in interest rates because the potential increase in origination/servicing fees in that scenario provides a partial “natural business hedge.” An increase in interest rates generally reduces the propensity for refinancing, extends the expected duration of the servicing portfolio and therefore increases the estimated fair value of the MSRs. However, an increase in interest rates can also reduce mortgage loan demand and therefore reduce origination income. In second quarter 2009, a $2.3 billion increase in the fair value of our MSRs and $1.3 billion of losses on free-standing derivatives used to hedge the MSRs resulted in a net gain of $1.0 billion. This net gain is largely due to hedge carry income reflecting low short-term rates.
Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires sophisticated modeling and constant monitoring. While we attempt to balance these various aspects of the mortgage business, there are several potential risks to earnings:
  MSRs valuation changes associated with interest rate changes are recorded in earnings immediately within the accounting period in which those interest rate changes occur, whereas the impact of those same changes in interest rates on origination and servicing fees occur with a lag and over time. Thus, the mortgage business could be protected from adverse changes in interest rates over a period of time on a cumulative basis but still display large variations in income from one accounting period to the next.
  The degree to which the “natural business hedge” offsets changes in MSRs valuations is imperfect, varies at different points in the interest rate cycle, and depends not just on the direction of interest rates but on the pattern of quarterly interest rate changes.
  Origination volumes, the valuation of MSRs and hedging results and associated costs are also impacted by many factors. Such factors include the mix of new business between ARMs and fixed-rated mortgages, the relationship between short-term and long-term interest rates, the degree of volatility in interest rates, the relationship between mortgage interest rates and other interest rate markets, and other interest rate factors. Many of these factors are hard to predict and we may not be able to directly or perfectly hedge their effect.
  While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs. Additionally, the hedge carry income we earn on our economic hedges for the MSRs may not continue if the spread between short-term and long-term rates decreases.

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The total carrying value of our residential and commercial MSRs was $16.9 billion at June 30, 2009, and $16.2 billion at December 31, 2008. The weighted-average note rate on the owned servicing portfolio was 5.74% at June 30, 2009, and 5.92% at December 31, 2008. Our total MSRs were 0.91% of mortgage loans serviced for others at June 30, 2009, compared with 0.87% at December 31, 2008.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. These loan commitments are derivative loan commitments if the loans that will result from the exercise of the commitments will be held for sale. These derivative loan commitments are recognized at fair value in the balance sheet with changes in their fair values recorded as part of mortgage banking noninterest income. We were required by Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings, to include at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of derivative loan commitments. Changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment, referred to as a fall-out factor. The value of the underlying loan commitment is affected primarily by changes in interest rates and the passage of time.
Outstanding derivative loan commitments expose us to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To minimize this risk, we utilize forwards and options, Eurodollar futures and options, and Treasury futures, forwards and option contracts as economic hedges against the potential decreases in the values of the loans. We expect that these derivative financial instruments will experience changes in fair value that will either fully or partially offset the changes in fair value of the derivative loan commitments. However, changes in investor demand, such as concerns about credit risk, can also cause changes in the spread relationships between underlying loan value and the derivative financial instruments that cannot be hedged.
Market Risk – Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The primary purpose of our trading businesses is to accommodate customers in the management of their market price risks. Also, we take positions based on market expectations or to benefit from price differences between financial instruments and markets, subject to risk limits established and monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions and derivatives used in our trading businesses are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at June 30, 2009, and December 31, 2008, are included in Note 11 (Derivatives) to Financial Statements in this Report. 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 consists of 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 trading days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout second quarter 2009 was $59 million, with a lower bound of $38 million and an upper bound of $82 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. The Board’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews the valuations of 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. Nonmarketable investments included private equity investments of $2.8 billion at June 30, 2009, and $2.7 billion at December 31, 2008, and principal investments of $1.3 billion at both period ends. Private equity investments are carried at cost subject to other-than-temporary impairment. Principal investments are carried at fair value with net unrealized gains and losses reported in noninterest income.
We also have marketable equity securities in the securities available-for-sale 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 periodically include other-than-temporary impairment charges. The fair value and cost of marketable equity securities was $5.9 billion and $5.5 billion, respectively, at June 30, 2009, and $6.1 billion and $6.3 billion, respectively, at December 31, 2008.
Changes in equity market prices may also indirectly affect our net income by affecting (1) the value of third party assets under management and, hence, fee income, (2) particular borrowers whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.

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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 and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Banks, the Federal Reserve Banks or the United States Department of the Treasury (Treasury Department).
Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding through issuances of registered debt securities, private placements and asset-backed secured funding. Investors in the long-term capital markets generally will consider, among other factors, a company’s debt rating in making investment decisions. Wells Fargo Bank, N.A. is rated “Aa2,” by Moody’s Investors Service, and “AA,” by Standard & Poor’s Rating Services. 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. Material changes in these factors could result in a different debt rating; however, a change in debt rating would not cause us to violate any of our debt covenants.
Wells Fargo participates in the FDIC’s Temporary Liquidity Guarantee Program (TLGP). The TLGP has two components: the Debt Guarantee Program, which provides a temporary guarantee of newly issued senior unsecured debt issued by eligible entities; and the Transaction Account Guarantee Program, which provides a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions. Under the Debt Guarantee Program, we had $88.2 billion of remaining capacity to issue guaranteed debt as of June 30, 2009. Eligible entities are assessed fees payable to the FDIC for coverage under the program. This assessment is in addition to risk-based deposit insurance assessments currently imposed under FDIC rules and regulations.
Parent. Under SEC rules, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with a public float of common equity of at least $700 million or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. In June 2009, the Parent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. This registration statement replaces a registration statement for the issuance of similar securities that expired in June 2009. The Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is

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currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt, subject to a total outstanding debt limit of $230 billion. At June 30, 2009, the Parent had outstanding short-term, long-term and total debt under these authorities of $17.5 billion, $127.8 billion and $145.3 billion, respectively. During the first half of 2009, the Parent issued a total of $3.5 billion in registered senior notes guaranteed by the FDIC. We used the proceeds from securities issued in the first half of 2009 for general corporate purposes and expect that the proceeds from securities issued 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 $100 billion in outstanding short-term debt and $50 billion in outstanding long-term debt. In December 2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes. During the first half of 2009, Wells Fargo Bank, N.A. issued $14.5 billion in short-term notes. At June 30, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $46.0 billion in short-term senior notes and $48.5 billion in long-term senior or subordinated notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations.
Wachovia Bank, N.A. Wachovia Bank, N.A. had $49.0 billion available for issuance under a global note program at June 30, 2009. Wachovia Bank, N.A. also has a $25 billion Euro medium-term note program (EMTN) under which it may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in the U.S. without applicable exemptions from registration. Under the EMTN, Wachovia Bank, N.A. had up to $22.4 billion available for issuance at June 30, 2009. In addition, Wachovia Bank, N.A. has an A$10 billion Australian medium-term note program (AMTN), under which it may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in the U.S. without applicable exemptions from registration. Up to A$8.5 billion was available for issuance at June 30, 2009.
Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in Canada. At June 30, 2009, CAD$6.5 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Dallas, the Federal Home Loan Bank of Des Moines, the Federal Home Loan Bank of San Francisco and the Federal Home Loan Bank of Seattle (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.

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CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase our shares. Our objective is to produce above-market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when such costs are 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.
In 2008, the Board authorized the repurchase of up to 25 million additional shares. During the first half of 2009, we repurchased approximately 3 million shares of our common stock. At June 30, 2009, the total remaining common stock repurchase authority was approximately 12 million shares. For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities 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.
Our potential sources of capital include retained earnings and issuances of common and preferred stock. In the first half of 2009, retained earnings increased $2.6 billion, a major portion from Wells Fargo net income of $6.2 billion, less common and preferred dividends and accretion of $2.7 billion. In the first half of 2009, we issued approximately 442 million shares, or $9.3 billion, of common stock, including 392 million shares ($8.6 billion) in a common stock offering and 2 million shares from time to time during the period under various employee benefit and director plans (including our ESOP plan) and under our dividend reinvestment and direct stock purchase programs.
In October 2008, we issued to the Treasury Department under its Capital Purchase Program (CPP) 25,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. We pay cumulative dividends on the preferred securities at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The preferred securities are generally non-voting. As part of its purchase of the preferred securities, the Treasury Department also received warrants to purchase 110,261,688 shares of our common stock at an initial per share exercise price of $34.01, subject to customary anti-dilution provisions. The warrants expire ten years from the issuance date. Both the preferred securities and warrants are treated as Tier 1 capital.
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required for us to increase our common stock dividend (currently, $.05 per share per quarter) or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in our CPP purchase agreement. In addition, so long as the preferred securities remain outstanding, we are subject to restrictions on certain forms of, and limits on the tax deductibility of compensation we pay our executive officers and certain other highly-compensated employees under provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) and related Treasury Department regulations.
Under the CPP purchase agreement entered into with the Treasury Department in connection with the issuance of the preferred securities and the warrants, we were not permitted to redeem the preferred securities and repurchase the warrants during the first three years after issuance except with the proceeds from a “qualifying equity offering.” Under the ARRA and related Treasury Department and Federal Reserve regulatory guidance, these limitations have been superseded, and we may redeem the preferred securities at par value plus accrued and unpaid dividends in minimum increments of 25% of the preferred securities issue price, subject to the approval of the Federal Reserve and our compliance with existing regulatory procedures for redeeming capital instruments. We may also repurchase the warrants at their appraised fair market value upon our redemption of all outstanding preferred securities, following an appraisal procedure established by the Treasury Department and under the CPP purchase agreement. On June 1, 2009, the Federal Reserve issued regulatory criteria applicable to the 19 bank holding companies, including the Company, that participated in SCAP and who wish to redeem preferred stock issued to the Treasury Department under its CPP. In order to redeem the preferred securities, we must, among other criteria, demonstrate our ability to obtain long-term debt funding without reliance on the FDIC’s TGLP, as well as successfully access the public equity markets.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In conjunction with the stress test, the Company agreed with the Federal Reserve, under SCAP, to generate a $13.7 billion regulatory capital buffer by November 9, 2009. At June 30, 2009, with over a quarter to go before the SCAP plan is completed, we exceeded this requirement by $500 million and we expect to internally generate additional capital in third quarter 2009 beyond the $500 million excess. We accomplished this through an $8.6 billion (gross proceeds) common stock offering, pre-provision net revenue (pre-tax pre-provision profit plus certain SCAP adjustments) in excess of the Federal Reserve’s estimates, realization of deferred tax assets, and other internally generated sources, including core deposit intangible amortization.
On May 13, 2009, we issued 392 million shares of common stock in an offering to the public valued at $8.6 billion. The common stock offering was in response to the Federal Reserve’s requirement for us to generate a $13.7 billion regulatory capital buffer as a result of the SCAP stress test discussed above.
We strengthened our capital position in second quarter 2009. Tier 1 common equity was $47.1 billion at June 30, 2009, an increase of $13.7 billion from March 31, 2009. Tier 1 common equity was 4.49% of risk-weighted assets. At June 30, 2009, the Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. For additional information see Note 18 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

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TIER 1 COMMON EQUITY (1)
 
                 
    June 30,     Mar. 31,  
(in billions)   2009     2009  
 
Total equity
  $ 121.4       107.1  
Less: Noncontrolling interests
    (6.8 )     (6.8 )
 
Total Wells Fargo stockholders’ equity
    114.6       100.3  
 
Less: Preferred equity
    (31.0 )     (30.9 )
Goodwill and intangible assets (other than MSRs)
    (38.7 )     (38.5 )
Applicable deferred assets
    5.5       5.7  
Deferred tax asset limitation
    (2.0 )     (4.7 )
MSRs over specified limitations
    (1.6 )     (1.3 )
Cumulative other comprehensive income
    0.6       3.6  
Other
    (0.3 )     (0.8 )
 
Tier 1 common equity
(A) $ 47.1       33.4  
 
Total risk-weighted assets (2)
(B) $ 1,047.7       1,071.5  
 
Tier 1 common equity to total risk-weighted assets
(A)/(B)   4.49 %     3.12  
 
 
(1)   Tier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies, including the Federal Reserve in the SCAP, to assess the capital position of financial services companies. Tier 1 common equity includes total Wells Fargo stockholders’ equity, less preferred equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, adjusted for specified Tier 1 regulatory capital limitations covering deferred taxes, MSRs, and cumulative other comprehensive income. Management reviews Tier 1 common equity along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.
 
(2)   Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.
Prudential Joint Venture
As described in the “Contractual Obligations” section in our 2008 Form 10-K, we own a controlling interest in a retail securities brokerage joint venture, which Wachovia entered into with Prudential Financial, Inc. (Prudential) in 2003. See also the “Current Accounting Developments” section in this Report for additional information. On October 1, 2007, Wachovia completed its acquisition of A.G. Edwards, Inc. and on January 1, 2008, contributed the retail securities brokerage business of A.G. Edwards to the joint venture. In connection with Wachovia’s contribution of A.G. Edwards to the joint venture, Prudential elected to exercise its “lookback” option under the joint venture agreements, which permits Prudential to delay until January 1, 2010, its decision whether to make payments to avoid dilution of its pre-contribution 38% ownership interest in the joint venture or, alternatively, to “put” its joint venture interests to Wells Fargo based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of January 1, 2008. On December 4, 2008, Prudential announced its intention to exercise its rights under the “lookback” option to put its interests in the joint venture to Wells Fargo at the end of the “lookback” period and, on June 17, 2009, Prudential provided written notice to Wells Fargo of its exercise of this “lookback” option. Under the terms of the joint venture agreements, we expect the closing of the “put” transaction to occur on or about January 1, 2010. In connection with determining the amount to be paid to Prudential for its minority interest, Wells Fargo and Prudential are currently establishing processes for appraising the value of the joint venture as of a date immediately prior to the A.G. Edwards contribution. The estimated value of the investment is included in noncontrolling interests and therefore has already been deducted from Tier 1 common equity.

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RISK FACTORS
An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss in this Report, as well as in other documents we file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in the Company. We refer you to the Financial Review section and Financial Statements (and related Notes, including Note 10 (Guarantees and Legal Actions)) in this Report for more information about credit, interest rate, market and litigation risks, to the “Risk Factors” and “Regulation and Supervision” sections and Note 15 (Guarantees and Legal Actions) to Financial Statements in our 2008 Form 10-K for a detailed discussion of risk factors, and to the discussions below and in our First Quarter 2009 Form 10-Q that supplement the “Risk Factors” section of the 2008 Form 10-K. Any factor described in this Report, our 2008 Form 10-K or our First Quarter 2009 Form 10-Q could by itself, or together with other factors, adversely affect our financial results and condition. There are factors not discussed below or elsewhere in this Report that could adversely affect our financial results and condition.
In accordance with the Private Securities Litigation Reform Act of 1995, we caution you that one or more of these same risk factors could cause actual results to differ materially from projections or forecasts of our financial results and condition and expectations for our operations and business that we make in forward-looking statements in this Report and in presentations and other Company communications. We make forward-looking statements when we use words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “forecast,” “will,” “may,” “can” and similar expressions. Do not unduly rely on forward-looking statements, as actual results could differ materially. Forward-looking statements speak only as of the date made, and we do not undertake to update them to reflect changes or events that occur after that date that may affect whether those forecasts and expectations continue to reflect management’s beliefs or the likelihood that the forecasts and expectations will be realized.
In this Report we make forward-looking statements, including, among others, that:
  we expect to internally generate additional SCAP-qualifying capital in third quarter 2009;
 
  we are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration;
 
  we expect additional efficiency initiatives to lower expenses over the remainder of 2009;
 
  we currently project, based on preliminary estimates, to add assets to our consolidated financial statements following the January 1, 2010 implementation of FAS 166 and FAS 167;
 
  conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this year;
 
  we believe our balance sheet is well-positioned given the current economic environment;
 
  our allowance for credit losses at June 30, 2009, was adequate to cover expected consumer losses for approximately the next 12 months and inherent commercial and commercial real estate loan losses expected to emerge over approximately the next 24 months;
 
  short-term rates, for purposes of hedge carry income, are likely to continue;
 
  we expect credit losses and nonperforming assets to increase;
 
  we expect increased commercial and commercial real estate credit losses until the economy improves;
 
  we believe commercial and commercial real estate losses will be moderated by the effect of our underwriting discipline and relationship-centric business strategy;
 
  to the extent the housing market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve;
 
  we expect certain specified Pick-a-Pay loan balances to recast and/or start fully amortizing in the remaining half of 2009 and through 2012;
 
  we will continue to hold more nonperforming assets on our balance sheet until conditions improve in the residential real estate and liquidity markets;

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  we expect nonperforming asset balances to continue to grow;
 
  until housing prices fully stabilize, credit performance of the 1-4 family first mortgage portfolio will continue to deteriorate;
 
  we expect the closing of the Prudential put transaction to occur on or about January 1, 2010;
 
  we expect further increases in the volume of TDRs as we continue to utilize government-sponsored programs and other methods to minimize foreclosures and associated credit losses;
 
  charge-offs on Wachovia loans accounted for under SOP 03-3 are not expected to reduce income in future periods to the extent the original estimates used to determine the purchase accounting adjustments continue to be accurate;
 
  we expect to recover the entire amortized cost basis of certain specified securities;
 
  we expect changes in the fair value of derivative financial instruments used to hedge outstanding derivative loan commitments will fully or partially offset the changes in fair value of the commitments;
 
  we believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income;
 
  we believe the carrying value of our liability under certain specified guarantees is more representative of our exposure to loss than the maximum exposure to loss;
 
  we believe the eventual outcome of certain legal actions against us will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations;
 
  we expect that $125 million of deferred net loss on derivatives in other comprehensive income at June 30, 2009, will be reclassified as earnings during the next twelve months;
 
  we expect actions taken with respect to the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan will reduce pension cost in the second half of 2009 by approximately $375 million; and
 
  we do not expect that we will be required to make a minimum contribution in 2009 for the Cash Balance Plan.
 
 
    Several factors could cause actual results to differ materially from expectations including:
 
  current and future economic and market conditions, including credit markets, housing prices and unemployment;
 
  our capital requirements, including the SCAP capital buffer requirement, and ability to raise capital on favorable terms;
 
  the terms of capital investments or other financial assistance provided by the U.S. government;
 
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
 
  our ability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits;
 
  our ability to realize the efficiency initiatives to lower expenses when and in the amount expected;
 
  the adequacy of our allowance for credit losses;
 
  recognition of OTTI on securities held in our available-for-sale portfolio;
 
  the effect of changes in interest rates on our net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
 
  hedging gains or losses;
 
  disruptions in the capital markets and reduced investor demand for mortgages loans;
 
  our ability to sell more products to our customers;
 
  the effect of the economic recession on the demand for our products and services;
 
  the effect of the fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;

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  our election to provide support to our mutual funds for structured credit products they may hold;
 
  changes in the value of our venture capital investments;
 
  changes in our accounting policies or in accounting standards or in how accounting standards are to be applied, including interpretive guidance;
 
  mergers, acquisitions and divestitures;
 
  federal and state regulations;
 
  reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations;
 
  the loss of checking and saving account deposits to other investments such as the stock market, and the resulting increase in our funding costs and impact on our net interest margin; and
 
  fiscal and monetary policies of the Federal Reserve Board.
There is no assurance that our allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not stabilize. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition. There is no assurance that we will meet the SCAP capital requirement on the November 9, 2009, deadline established by the Federal Reserve. Although we exceeded the requirement at June 30, 2009, our SCAP-qualifying capital could decline before the deadline. Failure to meet the requirement could result in the issuance of equity securities or the conversion of preferred securities into common stock resulting in dilution to existing stockholders. There is no assurance that our preliminary interpretation of FAS 166 and FAS 167 will be the final interpretation of those standards when they are implemented on January 1, 2010. If our preliminary interpretation of FAS 166 and FAS 167 is not consistent with the final interpretation of those standards upon implementation, we may have to consolidate more or less assets in our consolidated financial statements than those in our preliminary analysis, which difference may be material.

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CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of June 30, 2009, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009.
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 second quarter 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions, except per share amounts)   2009     2008     2009     2008  
 
Interest income
                               
Trading assets
  $ 206       38       472       85  
Securities available for sale
    2,887       1,224       5,596       2,356  
Mortgages held for sale
    545       423       960       817  
Loans held for sale
    50       10       117       22  
Loans
    10,532       6,806       21,297       14,018  
Other interest income
    81       46       172       98  
 
Total interest income
    14,301       8,547       28,614       17,396  
 
Interest expense
                               
Deposits
    957       1,063       1,956       2,657  
Short-term borrowings
    55       357       178       782  
Long-term debt
    1,485       849       3,264       1,919  
Other interest expense
    40             76        
 
Total interest expense
    2,537       2,269       5,474       5,358  
 
Net interest income
    11,764       6,278       23,140       12,038  
Provision for credit losses
    5,086       3,012       9,644       5,040  
 
Net interest income after provision for credit losses
    6,678       3,266       13,496       6,998  
 
Noninterest income
                               
Service charges on deposit accounts
    1,448       800       2,842       1,548  
Trust and investment fees
    2,413       762       4,628       1,525  
Card fees
    923       588       1,776       1,146  
Other fees
    963       511       1,864       1,010  
Mortgage banking
    3,046       1,197       5,550       1,828  
Insurance
    595       550       1,176       1,054  
Net gains (losses) on debt securities available for sale (includes impairment losses of $308 and $577, consisting of $972 and $1,575 of total other-than-temporary impairment losses, net of $664 and $998 recognized in other comprehensive income, for the quarter and six months ended June 30, 2009, respectively)
    (78 )     (91 )     (197 )     232  
Net gains (losses) from equity investments
    40       47       (117 )     360  
Other
    1,393       818       2,862       1,282  
 
Total noninterest income
    10,743       5,182       20,384       9,985  
 
Noninterest expense
                               
Salaries
    3,438       2,030       6,824       4,014  
Commission and incentive compensation
    2,060       806       3,884       1,450  
Employee benefits
    1,227       593       2,511       1,180  
Equipment
    575       305       1,262       653  
Net occupancy
    783       400       1,579       799  
Core deposit and other intangibles
    646       46       1,293       92  
FDIC and other deposit assessments
    981       18       1,319       26  
Other
    2,987       1,647       5,843       3,073  
 
Total noninterest expense
    12,697       5,845       24,515       11,287  
 
Income before income tax expense
    4,724       2,603       9,365       5,696  
Income tax expense
    1,475       834       3,027       1,908  
 
Net income before noncontrolling interests
    3,249       1,769       6,338       3,788  
Less: Net income from noncontrolling interests
    77       16       121       36  
 
Wells Fargo net income
  $ 3,172       1,753       6,217       3,752  
 
Wells Fargo net income applicable to common stock
  $ 2,575       1,753       4,959       3,752  
 
Per share information
                               
Earnings per common share
  $ 0.58       0.53       1.14       1.13  
Diluted earnings per common share
    0.57       0.53       1.13       1.13  
Dividends declared per common share
    0.05       0.31       0.39       0.62  
Average common shares outstanding
    4,483.1       3,309.8       4,365.9       3,306.1  
Diluted average common shares outstanding
    4,501.6       3,321.4       4,375.1       3,319.6  
 
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 
                 
    June 30,     December 31,  
(in millions, except shares)   2009     2008  
 
Assets
               
Cash and due from banks
  $ 20,632       23,763  
Federal funds sold, securities purchased under resale agreements and other short-term investments
    15,976       49,433  
Trading assets
    40,110       54,884  
Securities available for sale
    206,795       151,569  
Mortgages held for sale (includes $40,190 and $18,754 carried at fair value)
    41,991       20,088  
Loans held for sale (includes $141 and $398 carried at fair value)
    5,413       6,228  
 
               
Loans
    821,614       864,830  
Allowance for loan losses
    (23,035 )     (21,013 )
 
Net loans
    798,579       843,817  
 
Mortgage servicing rights:
               
Measured at fair value (residential MSRs)
    15,690       14,714  
Amortized
    1,205       1,446  
Premises and equipment, net
    11,151       11,269  
Goodwill
    24,619       22,627  
Other assets
    102,015       109,801  
 
Total assets
  $ 1,284,176       1,309,639  
 
Liabilities
               
Noninterest-bearing deposits
  $ 173,149       150,837  
Interest-bearing deposits
    640,586       630,565  
 
Total deposits
    813,735       781,402  
Short-term borrowings
    55,483       108,074  
Accrued expenses and other liabilities
    64,160       50,689  
Long-term debt
    229,416       267,158  
 
Total liabilities
    1,162,794       1,207,323  
 
Equity
               
Wells Fargo stockholders’ equity:
               
Preferred stock
    31,497       31,332  
Common stock — $1-2/3 par value, authorized 6,000,000,000 shares; issued 4,756,071,429 shares and 4,363,921,429 shares
    7,927       7,273  
Additional paid-in capital
    40,270       36,026  
Retained earnings
    39,165       36,543  
Cumulative other comprehensive income (loss)
    (590 )     (6,869 )
Treasury stock - 87,923,034 shares and 135,290,540 shares
    (3,126 )     (4,666 )
Unearned ESOP shares
    (520 )     (555 )
 
Total Wells Fargo stockholders’ equity
    114,623       99,084  
Noncontrolling interests
    6,759       3,232  
 
Total equity
    121,382       102,316  
 
Total liabilities and equity
  $ 1,284,176       1,309,639  
 
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
 
                                 
    Preferred stock     Common stock  
(in millions, except shares)   Shares     Amount     Shares     Amount  
 
Balance December 31, 2007
    449,804     $ 450       3,297,102,208     $ 5,788  
 
Cumulative effect of adoption of EITF 06-4 and EITF 06-10
                               
FAS 158 change of measurement date
                               
 
Balance January 1, 2008
    449,804       450       3,297,102,208       5,788  
 
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Net unrealized losses on securities available for sale, net of reclassification of $141 million of net gains included in net income
                               
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
                               
Unamortized gains under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    22,714,143          
Common stock repurchased
                    (17,141,540 )        
Preferred stock issued to ESOP
    520,500       521                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (246,983 )     (248 )     9,285,888          
Common stock dividends
                               
Tax benefit upon exercise of stock options
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
Other
                               
 
Net change
    273,517       273       14,858,491        
 
Balance June 30, 2008
    723,321     $ 723       3,311,960,699     $ 5,788  
 
 
                               
Balance December 31, 2008
    10,111,821     $ 31,332       4,228,630,889     $ 7,273  
 
Cumulative effect of adoption of FSP FAS 115-2 and FAS 124-2
                               
Effect of adoption of FAS 160, as amended and interpreted
                               
 
Balance January 1, 2009
    10,111,821       31,332       4,228,630,889       7,273  
 
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Securities available for sale:
                               
Unrealized losses related to factors other than credit
                               
All other net unrealized gains, net of reclassification of $5 million of net losses included in net income
                               
Net unrealized losses on derivatives and hedging activities, net of reclassification of $175 million of net gains on cash flow hedges included in net income
                               
Unamortized gains under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    439,968,781       654  
Common stock repurchased
                    (2,731,755 )        
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (32,703 )     (33 )     2,280,480          
Common stock dividends
                               
Preferred stock dividends and accretion
            198                  
Tax benefit upon exercise of stock options
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
 
Net change
    (32,703 )     165       439,517,506       654  
 
Balance June 30, 2009
    10,079,118     $ 31,497       4,668,148,395     $ 7,927  
 
The accompanying notes are an integral part of these statements.

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Wells Fargo stockholders’ equity              
                    Cumulative                     Total              
    Additional             other             Unearned     Wells Fargo              
    paid-in     Retained     comprensive     Treasury     ESOP     stockholders’     Noncontrolling     Total  
    capital     earnings     income     stock     shares     equity     interests     equity  
 
 
    8,212       38,970       725       (6,035 )     (482 )     47,628       286     $ 47,914  
 
 
            (20 )                             (20 )             (20 )
 
            (8 )                             (8 )             (8 )
 
 
    8,212       38,942       725       (6,035 )     (482 )     47,600       286       47,886  
 
 
                                                               
 
            3,752                               3,752       36       3,788  
 
                                                               
 
                    (6 )                     (6 )             (6 )
 
 
 
                    (1,732 )                     (1,732 )             (1,732 )
 
 
 
                    (49 )                     (49 )             (49 )
 
                    2                       2               2  
 
 
                                            1,967       36       2,003  
 
                                                  (21 )     (21 )
 
    (25 )     (110 )             743               608               608  
 
                            (520 )             (520 )             (520 )
 
    30                               (551 )                    
 
    (14 )                             262       248               248  
 
    (56 )                     304                              
 
            (2,050 )                             (2,050 )             (2,050 )
 
    19                                       19               19  
 
    103                                       103               103  
 
    18                       (8 )             10               10  
 
    (21 )                                     (21 )             (21 )
 
 
    54       1,592       (1,785 )     519       (289 )     364       15       379  
 
 
    8,266       40,534       (1,060 )     (5,516 )     (771 )     47,964       301     $ 48,265  
 
 
                                                               
 
    36,026       36,543       (6,869 )     (4,666 )     (555 )     99,084       3,232     $ 102,316  
 
 
            53       (53 )                                        
 
    (3,716 )                                     (3,716 )     3,716        
 
 
    32,310       36,596       (6,922 )     (4,666 )     (555 )     95,368       6,948       102,316  
 
 
                                                               
 
            6,217                               6,217       121       6,338  
 
                                                               
 
                    35                       35       (4 )     31  
 
                                                               
 
                    (628 )                     (628 )             (628 )
 
 
                    6,667                       6,667       34       6,701  
 
 
 
                    (300 )                     (300 )             (300 )
 
 
                    558                       558               558  
 
 
                                            12,549       151       12,700  
 
    (5 )                                     (5 )     (340 )     (345 )
 
    7,845       (733 )             1,542               9,308               9,308  
 
                            (63 )             (63 )             (63 )
 
    (2 )                             35       33               33  
 
    (40 )                     73                              
 
            (1,657 )                             (1,657 )             (1,657 )
 
            (1,258 )                             (1,060 )             (1,060 )
 
    3                                       3               3  
 
    138                                       138               138  
 
    21                       (12 )             9               9  
 
 
    7,960       2,569       6,332       1,540       35       19,255       (189 )     19,066  
 
 
    40,270       39,165       (590 )     (3,126 )     (520 )     114,623       6,759     $ 121,382  
 

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 
                 
    Six months ended June 30,  
(in millions)   2009     2008  
 
Cash flows from operating activities:
               
Net income before noncontrolling interests
  $ 6,338       3,788  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    9,644       5,040  
Changes in fair value of MSRs (residential) and MHFS carried at fair value
    201       (1,763 )
Depreciation and amortization
    1,540       748  
Other net gains
    (4,028 )     (588 )
Preferred shares released to ESOP
    33       248  
Stock option compensation expense
    138       103  
Excess tax benefits related to stock option payments
    (3 )     (19 )
Originations of MHFS
    (226,452 )     (116,407 )
Proceeds from sales of and principal collected on mortgages originated for sale
    207,006       118,478  
Originations of LHFS
    (5,403 )      
Proceeds from sales of LHFS
    13,264        
Purchases of LHFS
    (6,478 )      
Net change in:
               
Trading assets
    14,592       (1,954 )
Deferred income taxes
    3,289       205  
Accrued interest receivable
    284       183  
Accrued interest payable
    (631 )     (205 )
Other assets, net
    (336 )     2,330  
Other accrued expenses and liabilities, net
    4,851       2,590  
 
Net cash provided by operating activities
    17,849       12,777  
 
Cash flows from investing activities:
               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    33,457       (1,334 )
Securities available for sale:
               
Sales proceeds
    18,871       21,106  
Prepayments and maturities
    18,484       10,427  
Purchases
    (80,923 )     (52,197 )
Loans:
               
Decrease (increase) in banking subsidiaries’ loan originations, net of collections
    28,470       (17,592 )
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    3,179       1,556  
Purchases (including participations) of loans by banking subsidiaries
    (1,563 )     (5,956 )
Principal collected on nonbank entities’ loans
    6,471       11,727  
Loans originated by nonbank entities
    (4,319 )     (10,127 )
Net cash paid for acquisitions
    (132 )     (386 )
Proceeds from sales of foreclosed assets
    1,813       877  
Changes in MSRs from purchases and sales
    (9 )     130  
Net change in noncontrolling interests
    (315 )     (21 )
Other, net
    683       (259 )
 
Net cash provided (used) by investing activities
    24,167       (42,049 )
 
Cash flows from financing activities:
               
Net change in:
               
Deposits
    32,192       (5,336 )
Short-term borrowings
    (52,591 )     32,884  
Long-term debt:
               
Proceeds from issuance
    3,876       12,483  
Repayment
    (35,162 )     (9,963 )
Preferred stock:
               
Cash dividends paid
    (1,053 )      
Common stock:
               
Proceeds from issuance
    9,308       608  
Repurchased
    (63 )     (520 )
Cash dividends paid
    (1,657 )     (2,050 )
Excess tax benefits related to stock option payments
    3       19  
 
Net cash provided (used) by financing activities
    (45,147 )     28,125  
Net change in cash and due from banks
    (3,131 )     (1,147 )
Cash and due from banks at beginning of period
    23,763       14,757  
 
Cash and due from banks at end of period
  $ 20,632       13,610  
 
Supplemental cash flow disclosures:
               
Cash paid for interest
  $ 6,105       5,563  
Cash paid for income taxes
    1,062       2,385  
 
The accompanying notes are an integral part of these statements. See Note 1 for noncash investing and financing activities.

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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, investment banking, retail banking, brokerage, and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in other countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “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. We also hold a majority interest in a retail brokerage subsidiary and a real estate investment trust, which has publicly traded preferred stock outstanding.
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 based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2009 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including the evaluation of other-than-temporary impairment on investment securities (Note 4), allowance for credit losses and loans accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) (Note 5), valuing residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 12), pension accounting (Note 14) and income taxes. Actual results could differ from those estimates. Among other effects, such changes could result in future impairments of investment securities, increases to the allowance for loan losses, as well as increased future pension expense.
On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). Because the acquisition was completed at the end of 2008, Wachovia’s results of operations are included in the income statement and average balances beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008. The accounting policies of Wachovia have been conformed to those of Wells Fargo as described herein.
On January 1, 2009, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.

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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, 2008 (2008 Form 10-K).
Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
  FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133;
  FAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51;
  FAS 141R (revised 2007), Business Combinations;
  FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly;
  FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments; and
  FSP Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
In second quarter 2009, we adopted the following new accounting pronouncements:
  FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments; and
  FAS 165, Subsequent Events.
FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 11 for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information, see the “Contractual Obligations” section in our 2008 Form 10-K. In connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity.

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Under the terms of the original agreement under which the joint venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. On December 4, 2008, Prudential publicly announced its intention to exercise its option to put its noncontrolling interest to us at the end of the lookback period, as defined (January 1, 2010). As a result of the issuance of FAS 160 and related interpretive guidance, along with this stated intention, on January 1, 2009, we increased the carrying value of Prudential’s noncontrolling interest in the joint venture to the estimated maximum redemption amount, with the offset recorded to additional paid-in capital.
FAS 141R requires an acquirer in a business combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R is applicable prospectively to business combinations completed on or after January 1, 2009.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including Wells Fargo, to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to normal conditions and therefore could have increased frequency of transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly.
For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices; however, it does provide guidance for determining how much weight to give transaction or quoted prices. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be considered in determining fair value, with the weight given based upon the facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly.
The provisions of FSP FAS 157-4 are effective for second quarter 2009; however, as permitted under the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an increase in the valuation of securities available for sale in first quarter 2009 of $4.5 billion ($2.8 billion after tax), which was included in other comprehensive income, and trading assets of $18 million, which was reflected in earnings. See the “Critical Accounting Policies” section in this Report for more information.
FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the

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security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is more likely than not that it will not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective for second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to cumulative other comprehensive income for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSP been effective for those periods.
FSP EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128, Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption required. The adoption of FSP EITF 03-6-1 did not have a material effect on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. The FSP also requires disclosure of the methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. We adopted this pronouncement in second quarter 2009. See Note 12 for additional information. Because the FSP amends only the disclosure requirements related to the fair value of financial instruments, the adoption of this FSP does not affect our consolidated financial statements.
FAS 165 describes two types of subsequent events that previously were addressed in the auditing literature, one that requires post-period end adjustment to the financial statements being issued, and one that requires footnote disclosure only. FAS 165 also requires a company to disclose the date through which management has evaluated subsequent events, which for public companies is the date that financial statements are issued. FAS 165 is effective in second quarter 2009 with prospective application. Our adoption of this standard did not have a material impact on our consolidated financial statements.

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Supplemental Cash Flow Information
Noncash investing and financing activities are presented below, including information on transfers impacting mortgages held for sale (MHFS), loans held for sale (LHFS), and mortgage servicing rights (MSRs).
 
                 
    Six months ended June 30,  
(in millions)   2009     2008  
 
Transfers from trading assets to securities available for sale
  $ 845        
Transfers from MHFS to trading assets
    663        
Transfers from MHFS to securities available for sale
          268  
Transfers from MHFS to MSRs
    3,550       1,800  
Transfers from MHFS to foreclosed assets
    87        
Net transfers from loans to MHFS
    45       (235 )  
Net transfers from loans to LHFS
    16       (412 )  
Transfers from loans to foreclosed assets
    3,307       1,403  
 
 
Subsequent Events
We have evaluated the effects of subsequent events that have occurred subsequent to period end June 30, 2009, and through August 7, 2009, which is the date we issued our financial statements. During this period, there have been no material events that would require recognition in our second quarter 2009 consolidated financial statements or disclosure in the Notes to the financial statements.

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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.
In the first half of 2009, we completed the acquisitions of a factoring business with total assets of $74 million and four insurance brokerage businesses with total assets of $32 million. At June 30, 2009, we had no pending business combinations.
On December 31, 2008, we acquired all outstanding shares of Wachovia common stock in a stock-for-stock transaction. Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we have re-validated and, where necessary, have refined our purchase accounting adjustments. We will continue to update the fair value of net assets acquired for a period of up to one year from the date of the acquisition as we further refine acquisition date fair values. The impact of all changes were recorded to goodwill and increased goodwill by $1.9 billion in the first half of 2009. This acquisition was nontaxable and, as a result, there is no tax basis in goodwill. Accordingly, none of the goodwill associated with the Wachovia acquisition is deductible for tax purposes.
The refined allocation of the purchase price at December 31, 2008, is presented in the following table.
Purchase Price and Goodwill
 
                         
    Dec. 31,                
    2008             Dec. 31,  
(in millions)   (refined)     Refinements     2008  
 
Purchase price:
                       
Value of common shares
  $ 14,621             14,621  
Value of preferred shares
    8,409             8,409  
Other (value of share-based awards and direct acquisition costs)
    62             62  
 
Total purchase price
    23,092             23,092  
Allocation of the purchase price:
                       
Wachovia tangible stockholders’ equity, less prior purchase accounting adjustments and other basis adjustments eliminated in purchase accounting
    19,386       (8 )     19,394  
Adjustments to reflect assets acquired and liabilities assumed at fair value:
                       
Loans and leases, net
    (17,961 )     (1,564 )     (16,397 )
Premises and equipment, net
    (680 )     (224 )     (456 )
Intangible assets
    14,589       (151 )     14,740  
Other assets
    (3,869 )     (425 )     (3,444 )
Deposits
    (4,575 )     (141 )     (4,434 )
Accrued expenses and other liabilities (exit, termination and other liabilities)
    (2,404 )     (805 )     (1,599 )
Long-term debt
    (226 )     (36 )     (190 )
Deferred taxes
    8,104       1,428       6,676  
 
Fair value of net assets acquired
    12,364       (1,926 )     14,290  
 
Goodwill resulting from the merger
  $ 10,728       1,926       8,802  
 
 

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The increase in goodwill includes the recognition of additional types of costs associated with involuntary employee termination, contract terminations and closing duplicate facilities and have been allocated to the purchase price. These costs will be recorded throughout 2009 as part of the further integration of Wachovia’s employees, locations and operations with Wells Fargo as management finalizes integration plans. The following table summarizes exit reserves associated with the Wachovia acquisition:
 
                                 
    Employee     Contract     Facilities        
(in millions)   termination     termination     related     Total  
 
Balance, December 31, 2008
  $ 57       13       129       199  
Purchase accounting adjustments
    100       200       60       360  
Cash payments / utilization
    (50 )           (8 )     (58 )
 
Balance, March 31, 2009
    107       213       181       501  
 
Purchase accounting adjustments
    165       16       (75 )     106  
Cash payments / utilization
    (46 )           (41 )     (87 )
 
Balance, June 30, 2009
  $ 226       229       65       520  
 
 
3.   FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
 
                 
    June 30,     Dec. 31,  
(in millions)   2009     2008  
 
Federal funds sold and securities purchased under resale agreements
  $ 12,071       8,439  
Interest-earning deposits
    2,876       39,890  
Other short-term investments
    1,029       1,104  
 
Total
  $ 15,976       49,433  
 
 

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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. The net unrealized gains (losses) are reported on an after-tax basis as a component of cumulative other comprehensive income. There were no securities classified as held to maturity as of the periods presented.
 
                                 
            Gross     Gross        
            unrealized     unrealized     Fair  
(in millions)   Cost     gains     losses     value  
 
December 31, 2008
                               
Securities of U.S. Treasury and federal agencies
  $ 3,187       62             3,249  
Securities of U.S. states and political subdivisions
    14,062       116       (1,520 )     12,658  
Mortgage-backed securities:
                               
Federal agencies
    64,726       1,711       (3 )     66,434  
Residential
    29,536       11       (4,717 )     24,830  
Commercial
    12,305       51       (3,878 )     8,478  
 
Total mortgage-backed securities
    106,567       1,773       (8,598 )     99,742  
 
Corporate debt securities
    7,382       81       (539 )     6,924  
Collateralized debt obligations
    2,634       21       (570 )     2,085  
Other (1) (2)
    21,363       14       (602 )     20,775  
 
Total debt securities
    155,195       2,067       (11,829 )     145,433  
 
Marketable equity securities:
                               
Perpetual preferred securities
    5,040       13       (327 )     4,726  
Other marketable equity securities
    1,256       181       (27 )     1,410  
 
Total marketable equity securities
    6,296       194       (354 )     6,136  
 
Total
  $ 161,491       2,261       (12,183 )     151,569  
 
 
                               
June 30, 2009
                               
Securities of U.S. Treasury and federal agencies
  $ 2,482       48       (13 )     2,517  
Securities of U.S. states and political subdivisions
    12,802       354       (778 )     12,378  
Mortgage-backed securities:
                               
Federal agencies
    112,049       2,833       (38 )     114,844  
Residential (2)
    34,022       1,523       (3,021 )     32,524  
Commercial
    12,418       410       (2,605 )     10,223  
 
Total mortgage-backed securities
    158,489       4,766       (5,664 )     157,591  
 
Corporate debt securities
    8,575       501       (263 )     8,813  
Collateralized debt obligations
    3,048       229       (529 )     2,748  
Other (1)
    16,308       858       (327 )     16,839  
 
Total debt securities
    201,704       6,756       (7,574 )     200,886  
 
Marketable equity securities:
                               
Perpetual preferred securities
    4,136       201       (274 )     4,063  
Other marketable equity securities
    1,355       532       (41 )     1,846  
 
Total marketable equity securities
    5,491       733       (315 )     5,909  
 
Total
  $ 207,195       7,489       (7,889 )     206,795  
 
 
 
(1)   The “Other” category includes certain asset-backed securities collateralized by auto leases with a cost basis and fair value of $8,962 million and $9,201 million, respectively, at June 30, 2009, and $8,310 million and $7,852 million, respectively, at December 31, 2008.
 
(2)   Foreign residential mortgage-backed securities with a fair value of $3.4 billion are included in residential mortgage-backed securities at June 30, 2009. These instruments were included in other debt securities at December 31, 2008, and had a fair value of $6.3 billion.

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Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on which we have taken only credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.
 
                                                 
    Less than 12 months     12 months or more     Total  
    Gross             Gross             Gross        
    unrealized     Fair     unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value     losses     value  
 
December 31, 2008
                                               
Securities of U.S. Treasury and federal agencies
  $                                
Securities of U.S. states and political subdivisions
    (745 )     3,483       (775 )     1,702       (1,520 )     5,185  
Mortgage-backed securities:
                                               
Federal agencies
    (3 )     83                   (3 )     83  
Residential
    (4,471 )     9,960       (246 )     238       (4,717 )     10,198  
Commercial
    (1,726 )     4,152       (2,152 )     2,302       (3,878 )     6,454  
 
Total mortgage-backed securities
    (6,200 )     14,195       (2,398 )     2,540       (8,598 )     16,735  
 
Corporate debt securities
    (285 )     1,056       (254 )     469       (539 )     1,525  
Collateralized debt obligations
    (113 )     215       (457 )     180       (570 )     395  
Other
    (554 )     8,638       (48 )     38       (602 )     8,676  
 
Total debt securities
    (7,897 )     27,587       (3,932 )     4,929       (11,829 )     32,516  
 
Marketable equity securities:
                                               
Perpetual preferred securities
    (75 )     265       (252 )     360       (327 )     625  
Other marketable equity securities
    (23 )     72       (4 )     9       (27 )     81  
 
Total marketable equity securities
    (98 )     337       (256 )     369       (354 )     706  
 
Total
  $ (7,995 )     27,924       (4,188 )     5,298       (12,183 )     33,222  
 
 
                                               
June 30, 2009
                                               
Securities of U.S. Treasury and federal agencies
  $ (13 )     519                   (13 )     519  
Securities of U.S. states and political subdivisions
    (165 )     3,122       (613 )     3,064       (778 )     6,186  
Mortgage-backed securities:
                                               
Federal agencies
    (38 )     6,778                   (38 )     6,778  
Residential
    (604 )     7,699       (2,417 )     10,116       (3,021 )     17,815  
Commercial
    (592 )     2,904       (2,013 )     4,199       (2,605 )     7,103  
 
Total mortgage-backed securities
    (1,234 )     17,381       (4,430 )     14,315       (5,664 )     31,696  
 
Corporate debt securities
    (89 )     993       (174 )     767       (263 )     1,760  
Collateralized debt obligations
    (154 )     694       (375 )     397       (529 )     1,091  
Other
    (194 )     1,350       (133 )     78       (327 )     1,428  
 
Total debt securities
    (1,849 )     24,059       (5,725 )     18,621       (7,574 )     42,680  
 
Marketable equity securities:
                                               
Perpetual preferred securities
    (14 )     326       (260 )     615       (274 )     941  
Other marketable equity securities
    (31 )     239       (10 )     17       (41 )     256  
 
Total marketable equity securities
    (45 )     565       (270 )     632       (315 )     1,197  
 
Total
  $ (1,894 )     24,624       (5,995 )     19,253       (7,889 )     43,877  
 
For the securities in the above table, we do not have the intent to sell and have determined it is more likely than not that we will not be required to sell the security prior to recovery of the amortized cost basis. We have assessed each security for credit impairment. For debt securities, we evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities amortized cost basis. For equity securities, we consider numerous factors in determining

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whether impairment exists, including our intent and ability to hold the securities for a period of time sufficient to recover the securities’ amortized cost basis.
In determining whether a loss is temporary, we consider all relevant information including:
  The length of time and the extent to which the fair value has been less than the amortized cost basis;
 
  Adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);
  The historical and implied volatility of the fair value of the security;
  The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
  Failure of the issuer of the security to make scheduled interest or principal payments;
  Any changes to the rating of the security by a rating agency; and
  Recoveries or additional declines in fair value subsequent to the balance sheet date.
To the extent we estimate future expected cash flows, we considered all available information in developing those expected cash flows. For asset-backed securities such as residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations and other types of asset-backed securities, such information generally included:
  Remaining payment terms of the security (including as applicable, terms that require underlying obligor payments to increase in the future);
  Current delinquencies and nonperforming assets of underlying collateral;
  Expected future default rates;
  Collateral value by vintage, geographic region, industry concentration or property type; and
  Subordination levels or other credit enhancements.
Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data.
Securities of U.S. Treasury and federal agencies
The unrealized losses associated with U.S. Treasury and federal agency securities do not have any credit losses due to the guarantees provided by the United States government.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. These investments are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities.

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Federal Agency Mortgage-Backed Securities
The unrealized losses associated with federal agency mortgage-backed securities are primarily driven by changes in interest rates and not due to credit losses. These securities are issued by U.S. government or government-sponsored entities and do not have any credit losses given the explicit or implicit government guarantee.
Residential Mortgage-Backed Securities
The unrealized losses associated with private residential mortgage-backed securities are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. We estimate losses to a security by forecasting the underlying mortgage loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Commercial Mortgage-Backed Securities
The unrealized losses associated with commercial mortgage-backed securities are primarily driven by higher projected collateral losses and wider credit spreads. These investments are almost exclusively investment grade. We assess for credit impairment using a cash flow model. The key assumptions include default rates and severities. We estimate losses to a security by forecasting the underlying loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Corporate Debt Securities
The unrealized losses associated with corporate debt securities are primarily related to securities backed by commercial loans and individual issuer companies. For securities with commercial loans as the underlying collateral, we have evaluated the expected credit losses in the security and concluded that we have sufficient credit enhancement when compared with our estimate of credit losses for the individual security. For individual issuers, we evaluate the financial performance of the issuer on a quarterly basis to determine that the issuer can make all contractual principal and interest payments.
Collateralized Debt Obligations
The unrealized losses associated with collateralized debt obligations relate to securities primarily backed by commercial, residential or other consumer collateral. The losses are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.

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Other Debt Securities
The unrealized losses associated with other debt securities primarily relate to other asset-backed securities, which are primarily backed by auto, home equity and student loans. The losses are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Marketable Equity Securities
Our marketable equity securities include investments in perpetual preferred securities, which provide very attractive tax-equivalent yields and were current as to periodic distributions in accordance with their respective terms as of June 30, 2009. We evaluated these hybrid financial instruments with investment-grade ratings for impairment using an evaluation methodology similar to that used for debt securities. Perpetual preferred securities were not other-than-temporarily impaired at June 30, 2009, if there was no evidence of credit deterioration or investment rating downgrades of any issuers to below investment grade, and we expected to continue to receive full contractual payments. We will continue to evaluate the prospects for these securities for recovery in their market value in accordance with our policy for estimating OTTI. We have recorded impairment write-downs on perpetual preferred securities where there was evidence of credit deterioration.
The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the residential and commercial mortgage-backed securities or other securities deteriorate and our credit enhancement levels do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that significant OTTI may occur in the future given the current economic environment.

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The table below shows the gross unrealized losses and fair value of debt and perpetual preferred securities in the available-for-sale portfolio by those rated investment grade and those rated less than investment grade, according to their lowest credit rating by Standard & Poor’s Rating Services (S&P) or Moody’s Investors Service (Moody’s). Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by S&P or Baa3 or higher by Moody’s, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, securities rated below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade securities. We have also included securities not rated by S&P or Moody’s in the table below based on the internal credit grade of the securities (used for credit risk management purposes) equivalent to the credit rating assigned by major credit agencies. If an internal credit grade was not assigned, we categorized the security as non-investment grade.
 
                                 
    Investment grade     Non-investment grade  
    Gross             Gross        
    unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value  
 
December 31, 2008
                               
Securities of U.S. Treasury and federal agencies
  $                    
Securities of U.S. states and political subdivisions
    (1,464 )     5,028       (56 )     157  
Mortgage-backed securities:
                               
Federal agencies
    (3 )     83              
Residential
    (4,574 )     10,045       (143 )     153  
Commercial
    (3,863 )     6,427       (15 )     27  
 
Total mortgage-backed securities
    (8,440 )     16,555       (158 )     180  
Corporate debt securities
    (36 )     579       (503 )     946  
Collateralized debt obligations
    (478 )     373       (92 )     22  
Other
    (549 )     8,612       (53 )     64  
 
Total debt securities
    (10,967 )     31,147       (862 )     1,369  
Perpetual preferred securities
    (311 )     604       (16 )     21  
 
Total
  $ (11,278 )     31,751       (878 )     1,390  
 
June 30, 2009
                               
Securities of U.S. Treasury and federal agencies
  $ (13 )     519              
Securities of U.S. states and political subdivisions
    (670 )     5,856       (108 )     330  
Mortgage-backed securities:
                               
Federal agencies
    (38 )     6,778              
Residential
    (1,127 )     10,150       (1,894 )     7,665  
Commercial
    (2,558 )     6,967       (47 )     136  
 
Total mortgage-backed securities
    (3,723 )     23,895       (1,941 )     7,801  
Corporate debt securities
    (88 )     787       (175 )     973  
Collateralized debt obligations
    (194 )     652       (335 )     439  
Other
    (66 )     782       (261 )     646  
 
Total debt securities
    (4,754 )     32,491       (2,820 )     10,189  
Perpetual preferred securities
    (259 )     836       (15 )     105  
 
Total
  $ (5,013 )     33,327       (2,835 )     10,294  
 

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Realized Gains and Losses
The following table shows the gross realized gains and losses on the sales of securities from the securities available-for-sale portfolio, including marketable equity securities. Realized losses include OTTI write-downs.
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Gross realized gains
  $ 416       76       710       454  
Gross realized losses
    (348 )     (139 )     (718 )     (227 )
 
Net realized gains (losses)
  $ 68       (63 )     (8 )     227  
 
Other-Than-Temporary Impairment
The following table shows the detail of total OTTI related to debt and equity securities available for sale, and nonmarketable equity securities.
 
                 
    June 30, 2009  
    Quarter     Six months  
(in millions)   ended     ended  
 
OTTI write-downs (included in earnings)
               
Debt securities
  $ 308       577  
Equity securities:
               
Securities available for sale
    27       70  
Nonmarketable equity securities
    128       332  
 
Total equity securities
    155       402  
 
Total OTTI write-downs
  $ 463       979  
 
OTTI on debt securities
               
Recorded as part of gross realized losses:
               
Credit-related OTTI
  $ 307       570  
Securities we intend to sell
    1       7  
Recorded directly to other comprehensive income for non-credit-related impairment
    664       998  
 
Total OTTI on debt securities
  $ 972       1,575  
 
The following table provides detail of OTTI recognized in earnings for debt and equity securities available for sale by major security type.
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Debt securities
                               
U.S. states and political subdivisions
  $ 5             5        
Residential mortgage-backed securities
    214       69       392       73  
Commercial mortgage-backed securities
    1             11        
Corporate debt securities
    22       19       53       31  
Collateralized debt obligations
    46       4       96       4  
Other debt securities
    20             20        
 
Total debt securities
    308       92       577       108  
Marketable equity securities
                               
Perpetual preferred securities
    18       33       45       33  
Other marketable equity securities
    9       4       25       61  
 
Total marketable equity securities
    27       37       70       94  
 
Total OTTI losses recognized in earnings
  $ 335       129       647       202  
 

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Securities that were determined to be credit impaired during the current quarter as opposed to prior quarters, in general have experienced further degradation in expected cash flows primarily due to higher loss forecasts and slower prepayment speeds.
Other-Than-Temporarily Impaired Debt Securities
We recognize OTTI for debt securities classified as available for sale in accordance with FSP FAS 115-2 and FAS 124-2. As required by this FSP, we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as losses in the income statement, but is recognized in other comprehensive income. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income.
The table below presents a roll-forward of the credit loss component recognized in earnings (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2009. OTTI recognized in earnings in the first half of 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive or expect to receive cash flows in excess of what we previously expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were:
 
                 
    Quarter ended     Six months ended  
(in millions)   June 30, 2009     June 30, 2009  
 
Balance, beginning of period
  $ 727       471  
 
               
Additions (1):
               
Initial credit impairments
    216       413  
Subsequent credit impairments
    91       157  
 
               
Reductions:
               
For securities sold
    (16 )     (23 )
Due to change in intent to sell or requirement to sell
    (1 )     (1 )
For increases in expected cash flows
    (5 )     (5 )
 
Balance, end of period
  $ 1,012       1,012  
 
(1)   Excludes $1 million and $7 million for the quarter and six months ended June 30, 2009, respectively, of OTTI on debt securities we intend to sell.

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For asset-backed securities (e.g., residential mortgage-backed securities), we estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies and nonperforming assets, future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. The table below presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for residential mortgage-backed securities at June 30, 2009.
 
                 
    Residential MBS  
    Quarter ended     Six months ended  
    June 30, 2009     June 30, 2009  
 
Expected remaining life of loan losses (1):
               
Range (2)
    0 to 57.66 %     0 to 57.66  
Weighted average (3)
    9.95       10.35  
 
               
Current subordination levels (4):
               
Range (2)
    0 to 18.99       0 to 19.68  
Weighted average (3)
    7.66       7.49  
 
               
Prepayment speed (annual CPR (5)):
               
Range (2)
    5.42 to 18.25       5.42 to 24.64  
Weighted average (3)
    10.18       11.47  
 
 
(1)   Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
 
(2)   Represents the range of inputs/assumptions based upon the individual securities within each category.
 
(3)   Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
 
(4)


(5)
  Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.

Constant prepayment rate.

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Contractual Maturities
The following table shows the remaining contractual principal maturities and contractual yields of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were determined assuming no prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.
 
                                                                                 
                    Remaining contractual principal maturity  
            Weighted-                     After one year     After five years        
    Total     average     Within one year     through five years     through ten years     After ten years  
(in millions)   amount     yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
 
December 31, 2008
                                                                               
 
                                                                               
Securities of U.S. Treasury and federal agencies
  $ 3,249       1.54 %   $ 1,719       0.02 %   $ 1,127       3.15 %   $ 388       3.40 %   $ 15       4.79 %
Securities of U.S. states and political subdivisions
    12,658       7.54       210       5.54       784       7.36       1,163       7.39       10,501       7.61  
Mortgage-backed securities:
                                                                               
Federal agencies
    66,434       5.73       42       4.23       122       4.98       353       6.02       65,917       5.73  
Residential
    24,830       6.73                               34       8.15       24,796       6.73  
Commercial
    8,478       7.95                   5       1.57       135       8.64       8,338       7.94  
                                                                   
Total mortgage-backed securities
    99,742       6.17       42       4.23       127       4.87       522       6.83       99,051       6.17  
                                                                   
Corporate debt securities
    6,924       5.81       432       5.49       3,697       4.76       2,212       7.48       583       6.31  
Collateralized debt obligations
    2,085       4.52                   120       7.83       809       3.65       1,156       4.77  
Other
    20,775       5.17       43       3.82       8,057       7.41       1,346       4.86       11,329       3.61  
                                                                   
Total debt securities at fair value (1)
  $ 145,433       6.00 %   $ 2,446       1.60 %   $ 13,912       6.34 %   $ 6,440       6.14 %   $ 122,635       6.04 %
 
 
                                                                               
June 30, 2009
                                                                               
Securities of U.S. Treasury and federal agencies
  $ 2,517       1.83 %   $ 560       0.34 %   $ 751       3.12 %   $ 1,187       1.66 %   $ 19       5.53 %
Securities of U.S. states and political subdivisions
    12,378       6.86       81       9.02       633       7.02       1,095       6.88       10,569       6.83  
Mortgage-backed securities:
                                                                               
Federal agencies
    114,844       5.31       20       4.59       73       5.72       313       5.62       114,438       5.31  
Residential
    32,524       5.82       15       4.83       125       0.57       127       5.79       32,257       5.84  
Commercial
    10,223       6.85       80       1.19       72       5.20       201       6.43       9,870       6.92  
                                                                   
Total mortgage-backed securities
    157,591       5.51       115       2.27       270       3.20       641       5.91       156,565       5.52  
                                                                   
Corporate debt securities
    8,813       5.17       763       4.95       4,777       4.77       2,863       5.94       410       4.85  
Collateralized debt obligations
    2,748       2.34                   97       4.98       1,185       2.99       1,466       1.64  
Other
    16,839       3.83       103       4.03       9,769       5.26       1,075       3.64       5,892       1.50  
                                                                   
Total debt securities at fair value (1)
  $ 200,886       5.35 %   $ 1,622       3.32 %   $ 16,297       5.05 %   $ 8,046       4.69 %   $ 174,921       5.43 %
 
(1)   The weighted-average yield is computed using the contractual life amortization method.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The major categories of loans outstanding showing those subject to SOP 03-3 are presented in the following table. Certain loans acquired in the Wachovia acquisition are subject to SOP 03-3. These include loans where it is probable that we will not collect all contractual principal and interest. Loans within the scope of SOP 03-3 are initially recorded at fair value, and no allowance is carried over or initially recorded. Outstanding balances of all other loans are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $16,535 million at June 30, 2009, and $16,891 million, at December 31, 2008.
 
                                                 
    June 30, 2009     Dec. 31, 2008  
            All                     All        
    SOP 03-3     other             SOP 03-3     other        
(in millions)   loans     loans     Total     loans     loans     Total  
 
Commercial and commercial real estate:
                                               
Commercial
  $ 2,667       179,370       182,037       4,580       197,889       202,469  
Other real estate mortgage
    5,826       97,828       103,654       7,762       95,346       103,108  
Real estate construction
    4,295       28,943       33,238       4,503       30,173       34,676  
Lease financing
          14,555       14,555             15,829       15,829  
 
Total commercial and commercial real estate
    12,788       320,696       333,484       16,845       339,237       356,082  
 
Consumer:
                                               
Real estate 1-4 family first mortgage
    40,471       196,818       237,289       39,214       208,680       247,894  
Real estate 1-4 family junior lien mortgage
    398       106,626       107,024       728       109,436       110,164  
Credit card
          23,069       23,069             23,555       23,555  
Other revolving credit and installment
          90,654       90,654       151       93,102       93,253  
 
Total consumer
    40,869       417,167       458,036       40,093       434,773       474,866  
 
Foreign
    1,554       28,540       30,094       1,859       32,023       33,882  
 
Total loans
  $ 55,211       766,403       821,614       58,797       806,033       864,830  
 
We consider a loan to be impaired under FAS 114, Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statement No. 5 and 15, when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. We assess and account for as impaired certain nonaccrual commercial and commercial real estate loans that are over $5 million and certain consumer, commercial and commercial real estate loans whose terms have been modified in a troubled debt restructuring. The recorded investment in impaired loans and the methodology used to measure impairment was:
 
                 
    June 30,     Dec. 31,  
(in millions)   2009     2008  
 
Impairment measurement based on:
               
Collateral value method
  $ 247       88  
Discounted cash flow method (1)
    9,864       3,552  
 
Total (2)
  $ 10,111       3,640  
 
(1)   The June 30, 2009, balance includes $446 million of Government National Mortgage Association (GNMA) loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. Although both principal and interest are insured, the insured interest rate may be different than the original contractual interest rate prior to modification, resulting in interest impairment under a discounted cash flow methodology.
 
(2)   Includes $9,746 million and $3,468 million of impaired loans with a related allowance of $2,045 million and $816 million at June 30, 2009, and December 31, 2008, respectively. The remaining impaired loans do not have a related allowance.
The average recorded investment in impaired loans was $8,465 million in second quarter 2009 and $2,944 million in fourth quarter 2008. In the first half of 2009, the average recorded investment was $7,199 million.

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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 ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Balance, beginning of period
  $ 22,846       6,013       21,711       5,518  
Provision for credit losses
    5,086       3,012       9,644       5,040  
Loan charge-offs:
                               
Commercial and commercial real estate:
                               
Commercial
    (755 )     (333 )     (1,351 )     (592 )
Other real estate mortgage
    (152 )     (6 )     (183 )     (10 )
Real estate construction
    (236 )     (28 )     (341 )     (57 )
Lease financing
    (65 )     (13 )     (85 )     (25 )
 
Total commercial and commercial real estate
    (1,208 )     (380 )     (1,960 )     (684 )
 
Consumer:
                               
Real estate 1-4 family first mortgage
    (790 )     (103 )     (1,214 )     (184 )
Real estate 1-4 family junior lien mortgage
    (1,215 )     (352 )     (2,088 )     (807 )
Credit card
    (712 )     (369 )     (1,334 )     (682 )
Other revolving credit and installment
    (802 )     (488 )     (1,702 )     (1,031 )
 
Total consumer
    (3,519 )     (1,312 )     (6,338 )     (2,704 )
 
Foreign
    (56 )     (58 )     (110 )     (126 )
 
Total loan charge-offs
    (4,783 )     (1,750 )     (8,408 )     (3,514 )
 
Loan recoveries:
                               
Commercial and commercial real estate:
                               
Commercial
    51       32       91       63  
Other real estate mortgage
    6       2       16       3  
Real estate construction
    4       1       6       2  
Lease financing
    4       3       7       6  
 
Total commercial and commercial real estate
    65       38       120       74  
 
Consumer:
                               
Real estate 1-4 family first mortgage
    32       7       65       13  
Real estate 1-4 family junior lien mortgage
    44       18       70       35  
Credit card
    48       40       88       78  
Other revolving credit and installment
    198       121       402       246  
 
Total consumer
    322       186       625       372  
 
Foreign
    10       14       19       28  
 
Total loan recoveries
    397       238       764       474  
 
Net loan charge-offs (1)
    (4,386 )     (1,512 )     (7,644 )     (3,040 )
 
Allowances related to business combinations/other
    (16 )     4       (181 )     (1 )
 
Balance, end of period
  $ 23,530       7,517       23,530       7,517  
 
Components:
                               
Allowance for loan losses
  $ 23,035       7,375       23,035       7,375  
Reserve for unfunded credit commitments
    495       142       495       142  
 
Allowance for credit losses
  $ 23,530       7,517       23,530       7,517  
 
Net loan charge-offs (annualized) as a percentage of average total loans (1)
    2.11 %     1.55       1.82       1.58  
Allowance for loan losses as a percentage of total loans (2)
    2.80       1.85       2.80       1.85  
Allowance for credit losses as a percentage of total loans (2)
    2.86       1.88       2.86       1.88  
 
(1)   For loans accounted for under SOP 03-3, charge-offs are only recorded to the extend that losses exceed the purchase accounting estimates.
 
(2)   The allowance for loan losses and the allowance for credit losses include $49 million for the quarter ended June 30, 2009, and none for prior periods related to loans acquired from Wachovia that are accounted for under SOP 03-3. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.

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SOP 03-3
At June 30, 2009, and December 31, 2008, loans within the scope of SOP 03-3 had an unpaid principal balance of $87.5 billion and $96.2 billion, respectively, and a carrying value of $55.2 billion and $59.2 billion, respectively. The following table provides details on the SOP 03-3 loans acquired from Wachovia.
 
         
    Dec. 31, 2008  
(in millions)   (refined)  
 
Contractually required payments including interest
  $ 114,935  
Nonaccretable difference (1)
    (45,242 )
 
Cash flows expected to be collected (2)
    69,693  
Accretable yield
    (10,492 )
 
Fair value of loans acquired
  $ 59,201  
 
(1)   Includes $40.9 billion in principal cash flows not expected to be collected, $2.0 billion of pre-acquisition charge-offs and $2.3 billion of future interest not expected to be collected.
 
(2)   Represents undiscounted expected principal and interest cash flows.
The change in the accretable yield related to SOP 03-3 loans is presented in the following table.
 
                 
    Quarter ended     Six months ended  
(in millions)   June 30, 2009     June 30, 2009  
 
Balance, beginning of period (refined)
  $ (9,927 )     (10,492 )
Reclassified from nonaccretable difference
    (20 )     (20 )
Accretion
    495       1,060  
 
Balance, end of period
  $ (9,452 )     (9,452 )
 
In second quarter 2009, we recorded $152 million of provision for credit losses for deterioration in Wachovia’s SOP 03-3 loans that occurred subsequent to the acquisition on December 31, 2008. This included net charge-offs of $103 million and an addition to the allowance for loan losses at June 30, 2009, of $49 million. The provision for credit losses for SOP 03-3 loans in first quarter 2009, was $19 million and there was no related allowance for loan losses at March 31, 2009.

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6. OTHER ASSETS
The components of other assets were:
 
                 
    June 30,     Dec. 31,  
(in millions)   2009     2008  
 
Nonmarketable equity investments:
               
Cost method:
               
Private equity investments
  $ 2,781       3,040  
Federal bank stock
    5,997       6,106  
 
Total cost method
    8,778       9,146  
Equity method
    6,029       6,358  
Principal investments (1)
    1,250       1,278  
 
Total nonmarketable equity investments (2)
    16,057       16,782  
 
               
Operating lease assets
    2,690       2,251  
Accounts receivable
    16,181       22,493  
Interest receivable
    5,378       5,746  
Core deposit intangibles
    11,494       11,999  
Customer relationship and other intangibles
    2,591       3,516  
Foreclosed assets:
               
GNMA loans (3)
    932       667  
Other
    1,592       1,526  
Due from customers on acceptances
    615       615  
Other
    44,485       44,206  
 
Total other assets
  $ 102,015       109,801  
 
(1)   Principal investments are recorded at fair value with realized and unrealized gains (losses) included in net gains (losses) from equity investments in the income statement.
 
(2)   Certain amounts in the above table have been reclassified to conform to the current presentation.
 
(3)   Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real estate securing GNMA loans. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
Income related to nonmarketable equity investments was:
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2009     2008     2009     2008  
 
Net gains (losses) from private equity investments (1)
  $ (71 )     18       (291 )     364  
Net losses from principal investments
    (7 )           (15 )      
Net gains (losses) from all other nonmarketable equity investments
    (94 )     48       (143 )     9  
 
Net gains (losses) from nonmarketable equity investments
  $ (172 )     66       (449 )     373  
 
(1)   Net gains in 2008 include $334 million gain from our ownership in Visa, which completed its initial public offering in March 2008.

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7. SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
Involvement with SPEs
We enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs) in the normal course of business. SPEs are corporations, trusts or partnerships that are established for a limited purpose. We use SPEs to create sources of financing, liquidity and regulatory capital capacity for the Company, as well as sources of financing and liquidity, and investment products for our clients. Our use of SPEs generally consists of various securitization activities with SPEs whereby financial assets are transferred to an SPE and repackaged as securities or similar interests that are sold to investors. In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
  underwriting securities issued by SPEs and subsequently making markets in those securities;
 
  providing liquidity facilities to support short-term obligations of SPEs issued to third party investors;
 
  providing credit enhancement on securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
 
  entering into other derivative contracts with SPEs;
 
  holding senior or subordinated interests in SPEs;
 
  acting as servicer or investment manager for SPEs; and
 
  providing administrative or trustee services to SPEs.
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an entity must be passive and must adhere to significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which, under current accounting standards, is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets.

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The classifications of assets and liabilities in our balance sheet associated with our transactions with QSPEs and VIEs follow:
 
                                         
                            Transfers that        
            VIEs that we     VIEs     we account        
            do not     that we     for as secured        
(in millions)   QSPEs     consolidate (1)     consolidate     borrowings     Total  
 
December 31, 2008
                                       
 
                                       
Cash
  $             117       287       404  
Trading account assets
    1,261       5,241       71       141       6,714  
Securities (2)
    18,078       15,168       922       6,094       40,262  
Mortgages held for sale
    56                         56  
Loans (3)
          16,882       217       4,126       21,225  
MSRs
    14,106                         14,106  
Other assets
    345       5,022       2,416       55       7,838  
 
Total assets
    33,846       42,313       3,743       10,703       90,605  
 
Short-term borrowings
                307       1,440       1,747  
Accrued expenses and other liabilities
    528       1,976       330       26       2,860  
Long term debt
                1,773       7,125       8,898  
Noncontrolling interests
                121             121  
 
Total liabilities and noncontrolling interests
    528       1,976       2,531       8,591       13,626  
 
Net assets
  $ 33,318       40,337       1,212       2,112       76,979  
 
 
                                       
June 30, 2009
                                       
 
                                       
Cash
  $             157       241       398  
Trading account assets
    1,868       5,360       68       89       7,385  
Securities (2)
    20,113       15,222       1,558       6,113       43,006  
Mortgages held for sale
                             
Loans (3)
          16,834       320       3,224       20,378  
MSRs
    15,932       10                   15,942  
Other assets
    268       5,962       2,573       52       8,855  
 
Total assets
    38,181       43,388       4,676       9,719       95,964  
 
Short-term borrowings
                296       2,278       2,574  
Accrued expenses and other liabilities
    1,005       2,972       609       3,944       8,530  
Long term debt
                1,877       2,852       4,729  
Noncontrolling interests
                122             122  
 
Total liabilities and noncontrolling interests
    1,005       2,972       2,904       9,074       15,955  
 
Net assets
  $ 37,176       40,416       1,772       645       80,009  
 
(1)   Reverse repurchase agreements of $769 million are included in other assets at June 30, 2009. These instruments were included in loans at December 31, 2008, in the amount of $349 million.
 
(2)   Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA).
 
(3)   Excludes related allowance for loan losses.
The following disclosures regarding our significant continuing involvement with QSPEs and unconsolidated VIEs exclude entities where our only involvement is in the form of: (1) investments in trading securities, (2) investments in securities or loans underwritten by third parties, (3) certain derivatives such as interest rate swaps or cross currency swaps that have customary terms, and (4) administrative or trustee services. We determined these forms of involvement to be insignificant due to the temporary nature and size as well as our lack of involvement in the design or operations of VIEs or QSPEs.
Transactions with QSPEs
We use QSPEs to securitize consumer and commercial real estate loans and other types of financial assets, including student loans, auto loans and municipal bonds. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in QSPEs. We may also provide liquidity to investors in the beneficial interests and credit enhancements in the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as

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well as standard representations and warranties we make to purchasers and issuers. The amount recorded for this liability is included in other commitments and guarantees in the following table.
A summary of our involvements with QSPEs follows:
 
                                                 
                                    Other        
    Total     Debt and                     commitments        
    QSPE     equity     Servicing             and     Net  
(in millions)   assets (1)     interests (2)     assets     Derivatives     guarantees     assets  
 
December 31, 2008              
            Carr